SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
Commission file number 0-17832
Allstate Financial Corporation
(Exact name of registrant as specified in its charter)
Virginia 54-1208450
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 S. Quincy Street, Arlington, VA 22206
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (703)931-2274
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock - No par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment tothis Form 10-KSB. X
Revenues for year ended December 31, 1996, were $12,404,561.
The aggregate market value of the common stock held by non affiliates as
of March 21, 1997 was $5,730,071 computed by reference to the closing market
price at which the stock was traded on March 21, 1997.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
2,317,919 (March 21, 1997)
DOCUMENTS INCORPORATED BY REFERENCE.
NONE.
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PART I
Item 1. Business
(a) Consolidation
This Form 10-KSB filing includes Allstate Financial Corporation and its
wholly owned subsidiaries. Other than Lifetime Options, Inc., a Viatical
Settlement Company, which has started to curtail operations, none of the
Company's subsidiaries is currently engaged in any business which could have a
material effect on the Company's and its subsidiaries' consolidated operations
or financial position. Accordingly, unless the context requires or otherwise
permits, references in this Form 10-KSB to "Company" or "Allstate" shall be
references only to Allstate Financial Corporation.
(b) Nature of Business
The Company is a specialized commercial finance company principally engaged
in providing small- to medium-sized, high risk growth and turnaround companies
with capital through the discounted purchase of their accounts receivable. The
Company also makes advances to its factoring clients collateralized by
inventory, equipment, real estate and other assets (collectively,
"Collateralized Advances"). On occasion, the Company will also provide other
specialized financing structures which satisfy the unique requirements of the
Company's clients. In addition, the Company provides financial assistance to
clients in the form of guaranties, letters of credit, credit information,
receivables monitoring, collection service and customer status information. The
Company was incorporated on July 22, 1982 under the laws of the Commonwealth of
Virginia.
The Company typically enters into an accounts receivable factoring and
security agreement with each client. When making a Collateralized Advance, the
Company enters into such additional agreements with the client and, if
appropriate, third parties, as the Company deems necessary or desirable, based
on the type(s) of collateral securing the Collateralized Advance. The Company
purchases accounts receivable from its clients at a discount from face value and
usually requires the client's customer to make payment on the receivable
directly to the Company. The Company almost always reserves the right to seek
payment from the client in the event the client's customer fails to make the
required payment. To secure all of a client's obligations to the Company, the
Company also takes a lien on all accounts receivable of the client (to the
extent not purchased by the Company) and, whenever available, blanket liens on
all of the client's other assets (some or all of which liens may be subordinate
to other liens). When making a Collateralized Advance, the Company almost always
takes a first lien on the specific collateral securing the Collateralized
Advance. The Company may on occasion make Collateralized Advances secured by a
subordinate lien position, but only if management of the Company determines that
the equity available to the Company in a subordinate position is adequate to
secure the Collateralized Advance. The Company almost always requires personal
guaranties (either unlimited or limited to the validity and collectibility of
purchased accounts receivable) from each client's principals. Although the
Company obtains as much collateral as possible and usually retains full recourse
rights against its clients, clients (and account debtors) may fail and there can
be no assurance that the
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collateral obtained and the recourse rights retained (together with personal
guaranties) will be sufficient to protect the Company against loss.
In addition to providing clients with additional working capital, the
Company believes its services enable its clients to realize improved terms on,
and broader access to, the purchase of goods and services. The Company also
believes its services benefit its clients by reducing certain of their accounts
receivable, credit, collection and bookkeeping responsibilities. The Company
believes that it can generally achieve shorter average collection times than
clients themselves and that the Company's contacts with a client's customers can
identify problems the client would not have discovered and addressed until a
later time. Through its services, the Company can help clients to be more
responsive to their customers and to manage their businesses more efficiently.
In addition, clients can devote less manpower and resources to monitoring and
collecting the accounts receivable purchased by the Company, thus allowing them
to redirect their efforts toward the management, growth and profitability of
their businesses.
Through the services it provides, the Company seeks to help its clients
achieve profitable growth, and ultimately to qualify for funding at a cost lower
than that provided by the Company. Although clients frequently "graduate" to
lower cost sources of funding, the Company believes that its role in
facilitating this transition is one of the most significant benefits it can
provide.
Lifetime Options, Inc., a Viatical Settlement Company
In 1991 the Company formed Lifetime Options, Inc., a Viatical Settlement
Company ("Lifetime Options") as a wholly owned subsidiary to provide financial
assistance to individuals facing life-threatening illnesses, by the discounted
purchase of their life insurance policies. The amount of the discount is
determined by Lifetime Options based on the size of the policy being purchased,
the maximum life expectancy of the insured individual as determined by at least
one independent medical specialist, the anticipated premiums payable with
respect to the policy and Lifetime Options' expected financing costs associated
with purchasing and carrying the policy. In general, the purchase price for a
policy is between 55% and 85% of the amount of the benefits payable under the
policy. Because most of the life insurance policies purchased by Lifetime
Options are underwritten by highly rated insurance companies (and, in many
cases, backed by state guaranty funds), Lifetime Options does not believe that
credit risk is material to its business.
Before Lifetime Options purchases a life insurance policy, the insured's
medical records are reviewed by an independent physician who provides Lifetime
Options with an opinion of the insured's life expectancy. Historically, Lifetime
Options typically required up to three independent reviews but, based on its
experience, the management of Lifetime Options no longer believes multiple
medical reviews are necessary. To date, the physician engaged by Lifetime
Options has provided life expectancies which, on average, fairly approximate
actual lifespans. However, there can be no assurance that the physician engaged
by Lifetime Options will in the future be able to perform as he has in the past.
If the physician engaged by Lifetime Options were to systematically
underestimate life expectancies or if life extending treatments (or a cure) were
found for AIDS (almost all of the life insurance policies purchased by Lifetime
Options to date have been purchased from individuals with AIDS), there would be
a material adverse effect on the earnings of
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Lifetime Options. Lifetime Options relies on its independent physician to assist
in monitoring important medical advances (and potential medical advances). In
particular, Lifetime Options' independent physician is closely monitoring the
effects of a relatively new family of drugs known as protease inhibitors. These
drugs, while not a cure for AIDS, may extend the lives of certain individuals
infected with HIV.
During 1996, Lifetime Options started to curtail its operations. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - General.
Selected Financial Data
The following table sets forth selected financial data for the Company and
its subsidiaries as of, and for each of the last five years ended:
December 31,
1996 1995 1994 1993 1992
(In Thousands, Except Per Share Data)
Total Revenue $12,405 $12,997 $12,030 $10,850 $11,538
Net Income (Loss) (1,041) 481 148 457 3,393
Net Income (Loss) per Share-F1,2 ( .45) .16 .05 .15 1.22
Finance Receivables, net 30,574 32,671 27,503 24,674 29,971
Total Assets 45,939 44,881 41,851 36,583 39,559
Shareholders' Equity F3 22,527 25,730 28,121 27,974 27,343
(c) The Company's Clients
The Company's clients are small- to medium-sized, high risk growth and
turnaround companies with annual revenues typically between $600,000 and
$75,000,000. The Company's clients do not typically qualify for traditional bank
or asset-based financing because they are either too new, too small,
undercapitalized (over-leveraged), unprofitable or otherwise unable to satisfy
the requirements of a bank or traditional asset-based lender. Accordingly, there
is a significant risk of default and client failure inherent in the Company's
business.
The following table indicates the composition of the Company's Gross
Finance Receivables (as defined below under "(d) The Company's Services") by
type of client business as of December 31, 1996 and 1995.
- --------
1 On May 7, 1992, the Company issued 950,000 shares of Common Stock in a public
offering and received net proceeds of $10,832,000.
2 Calculated based on weighted average shares outstanding of 2,328,000 in 1996,
2,966,330 in 1995, 3,102,328 in 1994, 3,116,460 in 1993, and 2,790,365 in 1992.
3 Shareholder's equity at December 31, 1995 was reduced by treasury stock valued
at $2,871,901 acquired by the Company in September 1995. Shareholder's equity at
December 31, 1996 was reduced by additional treasury stock valued at approxi-
mately $2,100,000 acquired by the Company in January 1996. See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.
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1996 1995
Gross Finance Gross Finance
Receivables Percent Receivables Percent
Business of Client (In thousands) (In thousands)
Computer components and software $9,457 25.2% $11,049 28.4%
Manufacturing 7,461 19.9 8,381 21.5
Publishing, direct mail and 3,822 10.2 4,652 11.9
advertising
Importing and distributing 639 1.7 3,923 10.0
Food and drug store industry -- -- 3,900 10.0
Insurance claims 1,324 3.5 2,786 7.1
Trucking and air freight 3,098 8.2 1,277 3.3
Construction and construction supply 3,623 9.6 1,057 2.7
Distribution 3,676 9.8 724 1.9
Graphic art -- -- 556 1.4
Engineer and health temps 233 0.6 347 0.9
Airlines -- -- 251 0.6
Recreation Facilities 3,658 9.7 -- --
Other 605 1.6 105 0.3
------- ----- ------- -----
Total $37,596 100% $39,008 100%
======= ===== ======= =====
The table above reflects the composition of the Company's Gross Finance
Receivables by client industry at the dates indicated. Because the Company's
major clients tend to change significantly over time (as more fully described
below), this table is not likely to reflect the composition of the Company's
Gross Finance Receivables by client industry at other future points in time.
From time to time, a single client or single industry may account for a
significant portion of the Company's Gross Finance Receivables. As of December
31, 1996 two clients (MGV International, Inc. and The Monroe Cable Co., Inc.
("Monroe")) each accounted for more than 10% of the Company's Gross Finance
Receivables. Computer components and software accounted for 25.2% of Gross
Finance Receivables at December 31, 1996 and 28.4% of Gross Finance Receivables
at December 31, 1995. Two companies (Monroe and MGV) each accounted for more
than 10% of the Company's total income in 1996. Although the Company carefully
monitors client and industry concentration, there can be no assurance that the
risks associated with client or industry concentration could not have a material
adverse effect on the Company.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its client would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however, because
the Company is, where necessary and appropriate, offering lower rates than it
has historically and making Collateralized Advances, it is possible that the
duration of the Company's funding relationships with its clients may be
extended. Although the Company has historically been successful in replacing
major clients, the loss of one or more major clients and an
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inability to replace those clients could have a material adverse effect on the
Company.
(d) The Company's Services
The Company offers an interrelated package of financial services that meets
a variety of the funding and business needs of its clients.
Gross Finance Receivables
The Company's principal funding activities consist of purchasing accounts
receivable ("Factored Accounts Receivable") and the making of Collateralized
Advances and Overadvances Secured by General Liens (as defined below). "Gross
Finance Receivables" consist of Factored Accounts Receivable, Collateralized
Advances, Overadvances Secured by General Liens and Non-Earning Receivables.
See (g) Asset Quality.
Factored Accounts Receivable
The Company's primary funding activity is the discounted purchase of a
client's accounts receivable, typically at an initial advance to the client
equal to 70% to 90% of the face amount of the accounts receivable purchased. The
remaining 10% to 30% of the face amount of the accounts receivable purchased is
initially allocated to: (i) earned but unpaid discount (recorded as income
simultaneous with the purchase of the account receivable); (ii) unearned
discount (recorded as income at periodic intervals after the purchase of the
account receivable depending on the timing of payment) and (iii) credit balances
of factoring clients. The credit balance with respect to a particular account
receivable is generally remitted to the client when the Company collects the
account receivable in full, but the remaining unearned discount is typically not
remitted to the client until the Company has received full payment of all
accounts receivable purchased on a specific schedule of accounts receivable. As
such, the remaining unearned discount is available to offset any uncollected
payments due on other accounts receivables purchased from the client and to
offset uncollected payments due on other types of Gross Finance Receivables or
any other amounts due from the client.
The Company's range of earned discounts on Factored Accounts Receivable
purchased is from 1.3% to 12.0%. The discount rate is based on a pre-determined
sliding scale which increases over time until a Factored Account Receivable is
paid by the client's customer or repurchased by the client. The discount rate
established for the purchase of accounts receivable from a given client depends
on various considerations, such as the length of time the accounts receivable
are expected to be outstanding, the monthly volume of accounts receivable
generated by the client, the Company's anticipated administrative costs and the
perceived level of risk. The ratio of discounts earned to Gross Finance
Receivables acquired (including Gross Finance Receivables repurchased by the
Company) was approximately 4.7% for 1996. Discounts earned include all earnings
with respect to Gross Finance Receivables. See (g) Asset Quality.
Collateralized Advances
In addition to the purchase of accounts receivable, the Company makes
Collateralized Advances. The Company has elected to more aggressively pursue the
making of Collateralized Advances as it perceives the need by its targeted
customers for such advances and such funding is not available from many of the
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Company's competitors. Prior to making any such advance, the Company, the client
and, where appropriate, third parties, enter into such additional agreements,
and the Company makes such additional public filings (if any), as the Company
deems necessary or desirable based on the type(s) of collateral securing the
Collateralized Advance. The Company also conducts such additional due diligence
as is appropriate with respect to the client and the type of collateral against
which an advance is to be made. Collateral values are determined by independent
appraisers and are reviewed periodically to determine whether loan-to-value
ratios have been maintained. When making Collateralized Advances against
inventory and certain types of equipment, the Company frequently engages a third
party, at the client's expense, to assist in monitoring the collateral.
Collateralized Advances entail different, and possibly greater, risks to the
Company than the factoring of accounts receivable. Management believes, however,
that these risks can be mitigated and the potential benefits to the Company
therefore outweigh the potential risks. See Management's Discussion and Analysis
of Financial Condition and Results of Operations - Provision for Credit Losses.
Overadvances Secured by General Liens
The Company may advance funds to selected clients in excess of the amounts
which would be available in accordance with the advance formulae set forth in
the agreements between the Company and its client. Such advances are usually
secured by equity (i.e., credit balances due the client and unearned discounts)
in the client's existing portfolio of Factored Accounts Receivable, equity in
other of the client's assets, other forms of collateral, including property
pledged by the client's principal(s) or accounts receivable generated through
the use of the proceeds of such secured advances (such advances, collectively,
"Overadvances Secured by General Liens"). Earned discounts on Overadvances
Secured by General Liens are usually greater than on other types of advances and
are usually required to be paid in cash no less frequently than monthly in
arrears. The principal amount thereof is typically required to be repaid in full
(either in installments or in a single, lump sum payment) in as little as one
week or as long as six months in accordance with a written agreement between the
Company and its client.
Amounts outstanding for various categories of finance receivables at the end of
the last five years are set forth in the table below.
December 31,
1996 1995 1994 1993 1992
(In thousands)
Factored Accounts Receivable $22,390 $25,170 $22,242 $22,275 $29,135
Collateralized Advances 8,809 10,842 7,215 2,495 958
Overadvances Secured by
General Liens 1,850 1,407 279 1,340 3,524
Non-Earning Receivables 4,547 1,589 3,587 3,411 2,142
------ ------ ------ ------ ------
Gross Finance Receivables 37,596 39,008 33,323 29,521 35,759
Less: Unearned Discount (3,443) (3,986) (3,309) (2,727) (4,566)
Less: Allowance for Credit
Losses (2,579) (2,351) (2,511) (2,120) (1,223)
Less: Participation (1,000) - - - -
------- ------- ------- ------- -------
Finance Receivables, Net $30,574 $32,671 $27,503 $24,674 $29,970
======= ======= ======= ======= =======
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As reflected in the table, Gross Finance Receivables include Non-Earning
Receivables. Non-Earning Receivables are classified as such when the Company
stops accruing earned discounts on Gross Finance Receivables (other than Non-
Earning Receivables). Under certain circumstances, the Company may classify as
"Other Receivables" (as defined below under "(g) Asset Quality") Gross Finance
Receivables on which the Company has stopped accruing earned discounts.
Non-Earning Receivables may be reclassified as "Other Assets" (as defined below
under "(g) Asset Quality") on the Company's balance sheet if the Company
repossesses the collateral securing such receivables. See (g) Asset Quality.
Credit Services
For a fee, the Company may use its credit standing to assist a client by
obtaining a letter of credit from a bank or issuing its own letter of guaranty.
These forms of credit enhancement are typically used by clients to acquire
finished goods to fill pre-existing orders. The Company generally provides these
services when the client: (i) has a buyer for its products; (ii) has taken the
required steps to sell the resulting account receivable to the Company on agreed
upon terms; and (iii) has provided additional collateral to the Company to the
extent the Company deems necessary. In the typical credit enhancement
transaction, the Company maintains control over the goods from the time they are
shipped until the time they are delivered to the ultimate purchaser.
The table below sets forth the Company's outstanding commitments under
guaranties and letters of credit as of the end of each of the last five years.
December 31,
1996 1995 1994 1993 1992
(In thousands)
Commitments under
guaranties and
letters of credit $ 336 $ 727 $ 347 $1,794 $940
Client/Customer Information Services
In addition to its funding activities, the Company: (i) advises its clients
as to potential problems with customers; (ii) provides its clients with a
monthly portfolio analysis which includes an aging of all open accounts
receivable by customer; and (iii) supplies its clients with information as to
the creditworthiness of customers. Although the Company's agreements with its
clients do not require the Company to furnish these services, the information
provided can make it easier for a client to develop an accurate picture of its
own financial position. In addition, this information assists the Company in its
accounts receivable monitoring activities.
(e) Monitoring and Oversight
Before a client relationship is established, the Company obtains
information about the prospective client and its principals, including an
on-site review of records pertaining to the client's operations and its
available collateral. Similar on-site reviews are conducted periodically, either
by
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Company personnel or by independent certified public accountants or other
professionals retained by the Company. In addition, the Company arranges for
initial and periodic reviews of public records in order to monitor the filing of
any subsequent liens which could impair the value of collateral in which the
Company has an ownership or security interest.
Prior to purchasing accounts receivable with an aggregate face amount of
$10,000 or more owed by any one account debtor, the Company: (i) evaluates that
account debtor's creditworthiness, which evaluation is updated periodically and
(ii) establishes a limit on the amount of accounts receivable owed by that
particular account debtor which the Company will purchase from all clients. The
Company also selectively verifies directly with account debtors the validity and
primary terms of accounts receivable to be purchased. After purchasing accounts
receivable, the Company carefully monitors whether they are paid according to
terms. If payment is due, follow-up contact is usually made with the account
debtor. During this follow-up contact, the Company seeks to determine the cause
of the payment delay in order to take appropriate action at an early stage. The
status of overdue accounts receivable and other relevant information is reported
to each client monthly, or sooner, if appropriate. See (h) Credit Loss Policy
and Experience.
Before making a Collateralized Advance, the Company conducts (or engages
third parties to conduct) such additional due diligence as is appropriate with
respect to the client and the type of collateral against which an advance is to
be made.
(f) Management Information Systems
The Company has developed data processing capabilities tailored to the
requirements of the Company's accounting, receivables collection, monitoring and
oversight functions. The system permits the Company to generate payment
histories and analyses with respect to clients' customers, to accumulate
accounting information and other data useful for credit analysis, to produce
information used in marketing, and to respond to account and management
inquiries. The Company's software was written specifically for the Company and
the Company believes it to be proprietary.
(g) Asset Quality
Factored Accounts Receivable Portfolio
The quality of Factored Accounts Receivable is the Company's primary
security against credit losses from its accounts receivable purchasing
activities. The Company generally does not purchase accounts receivable that
have aged significantly, except when the Company first establishes a funding
relationship with a client. Even in those circumstances, the Company will not
purchase an account receivable that is more than 90 days old unless special
circumstances lead the Company to believe that the receivable will be paid
within a reasonable time, generally not more than 60 days.
As of December 31, 1996, the Company's Gross Finance Receivables included
$22,390,229 of Factored Accounts Receivable on which approximately 2,500
entities were obligated. There is considerable variation from period to period
in the composition of account debtors and the amount of their respective
obligations to the Company.
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If the Company has not received payment on a Factored Account Receivable
within 90 days after its acquisition or if at any time prior to 90 days the
Company determines that it is unlikely to receive payment, the Company requires
the client to repay the amount the Company has advanced on the receivable plus
the amount of discount earned. If follow up calls to account debtors lead the
Company to believe that a Factored Account Receivable will be paid within a
reasonable period of time, the Company may "repurchase" the receivable. In that
event, the earned discount owed on the original purchase of the account
receivable is collected from the client at the time of the repurchase and earned
discounts thereafter accrue as if the account receivable were a newly Factored
Account Receivable.
From time to time, a single account debtor or several account debtors may
be obligated on a significant portion of the Company's Gross Factored Accounts
Receivable. As of December 31, 1996, no single account debtor accounted for more
than 10% of the Company's gross Factored Accounts Receivables. Although the
Company carefully monitors account debtor concentration and regularly evaluates
the creditworthiness of account debtors, there can be no assurance that account
debtor concentration could not have a material adverse effect on the Company.
Collateralized Advances Portfolio
As of December 31, 1996, the Company's Gross Finance Receivables included
$8,808,455 of Collateralized Advances. Collateralized Advances secured by fixed
assets (e.g., equipment or real estate) are scheduled to be repaid based
typically on a 36 month amortization schedule (although the amortization
schedule in certain circumstances may be significantly longer) with a final
balloon payment due not more than one year after the making of the
Collateralized Advance. If at the time the balloon payment is due the Company's
funding relationship with the client is extended, the Company will usually
continue the amortization with a new balloon payment due not more than one year
after the renegotiated contract date. Collateralized Advances secured by current
assets (e.g. inventory) are subject to a daily or weekly borrowing base formula
and come due in a single, lump sum payment not more than one year after the
making of the initial advance. If at the time such payment is due the Company's
funding relationship with the client is extended, the Company will typically
extend the maturity of the lump sum payment. See (d) The Company's Services -
Collateralized Advances and Management's Discussion and Analysis of Financial
Condition and Results of Operations Provision for Credit Losses.
Overadvances Secured by General Liens
As of December 31, 1996, the Company's Gross Finance Receivables included
$1,849,778 of Overadvances Secured by General Liens. See (d) The Company's
Services - Overadvances Secured by General Liens.
Non-Earning Receivables
As of December 31, 1996, the Company's Gross Finance Receivables included
$4,547,893 of Non-Earning Receivables. See (h) Credit Loss Policy and
Experience.
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Other Receivables
As of December 31, 1996, included on the Company's balance sheet were
$4,394,975 of "Other Receivables". Other Receivables consist primarily of
amounts receivable by the Company where the source of payment is expected to be
from legal proceedings or other collection efforts instituted against a client's
customer, guarantors and/or other third parties. Other Receivables typically
arise from the reclassification of Gross Finance Receivables. At the time of
reclassification, Other Receivables are stated at a value estimated by
management based on management's assessment of the likelihood of payment or
success on the merits, the ability of the third party(ies) to pay and other
discretionary factors. In addition, at the time of reclassification ,the accrual
of earnings is usually suspended or discontinued for financial statement
purposes. Write-downs, if any, at the time of reclassification are charged
against the allowance for credit losses. The costs of carrying and collecting
Other Receivables are generally expensed in operations during the period in
which they are incurred. Management's estimates of the value of Other
Receivables are typically reviewed quarterly and as adjustments become
necessary, the effects of the change in estimates are charged against the
allowance for credit losses. Other Receivables are subject to legal and other
collection processes and contingencies over which the Company does not have
exclusive control. Accordingly, the amounts which the Company ultimately
receives in payment of Other Receivables could differ significantly from
management's estimates. See (h) Credit Loss Policy and Experience below and
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Provision for Credit Losses.
Other Assets
As of December 31, 1996, included on the Company's balance sheet were
$2,116,343 of other assets.
December 31,
1996 1995
Other assets include:
Inventory held for sale $ -- $ 20,000
Commercial property held for sale 1,883,768 862,750
Residential property held for sale -- 910,000
--------- ---------
1,883,768 1,792,750
Miscellaneous 232,575 256,573
--------- ---------
2,116,343 2,049,323
========= =========
At the date of acquisition, Other Assets are recorded at fair value less
estimated selling costs. Write-downs to fair value at the date of acquisition
are charged against the allowance for credit losses. Also at the date of
acquisition, the accrual of earnings is usually suspended or discontinued for
financial statement purposes. Subsequent to acquisition, Other Assets are
adjusted to the lower of cost or fair value less estimated costs to sell and
adjustments, if any, are charged against the allowance for credit losses.
Operating expenses pertaining to Other Assets are expensed in operations during
the period in which they are incurred.
The amounts ultimately recovered by the Company from Other Assets could
differ materially from the amounts used in arriving at the net carrying value of
the assets because of future market factors beyond the Company's control,
adversarial actions taken by the client or other owner of the property
foreclosed or changes in the Company's strategy for recovering its investment.
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See (h) Credit Loss Policy and Experience and Management's Discussion and
Analysis of Financial Condition and Results of Operations - Provision for
Credit Losses.
(h) Credit Loss Policy and Experience
The Company regularly reviews its Gross Finance Receivables portfolio and
other extensions of credit to determine the adequacy of its allowance for credit
losses.
At the time an account receivable is purchased, a due date is set by
management based on the receivable's anticipated payment date. This anticipated
payment date is used to identify past due Factored Accounts Receivable. The
Company carefully monitors collections and takes follow-up action if payment is
past due. Within ninety days after the Company purchases an account receivable
which remains unpaid (or sooner if the Company deems necessary), the Company may
initiate additional actions which may involve obtaining payment from the account
debtor, requiring the client to repay the initial advance and the amount of the
earned but unpaid discount, obtaining substitute accounts receivable from the
client or charging the credit balance due the client. In appropriate
circumstances, the Company may also take action against personal guarantors and
other liens and collateral.
Gross Finance Receivables which have been identified as past due may
continue to accrue earnings if, in the opinion of management, collection of the
earnings from the account debtor, the client, guarantors or other collateral, if
any, is likely. The accrual of earned discounts is discontinued when, in the
opinion of management, the collection of additional earnings from the account
debtor, the client, guarantors or other collateral is unlikely. If the Company
concludes that it is unlikely to recover from any of the foregoing sources the
amount of its initial advance and the earned but unpaid discount, the Company
promptly increases the allowance for credit losses or reduces the carrying value
of the receivable to its estimated fair value and makes a charge to its
allowance for credit losses, in an amount equal to the difference between the
Company's investment in the receivable and its estimated fair value. In the case
of Other Receivables and Other Assets, the accrual of earnings is usually
suspended or discontinued for financial statement purposes at the time the Other
Receivable arises or the Other Asset is acquired. See (g) Asset Quality - Other
Receivables and Other Assets.
Credit loss experience, the adequacy of underlying collateral, changes in
the character and size of the Company's receivables portfolio and management's
judgement are factors used in determining the provision for credit losses and
the adequacy of the allowance for credit losses. Other factors given
consideration in determining the adequacy of the allowance are the level of
related credit balances of factoring clients and the current and anticipated
impact of economic conditions on the creditworthiness of the Company's clients
and account debtors. To mitigate the risk of credit loss, the Company, among
other things: (i) thoroughly evaluates the collateral to be made available by
each client; (ii) usually collects its Factored Accounts Receivable directly
from account debtors, which are frequently (though not always) large,
creditworthy companies or governmental entities; (iii) purchases, or takes a
first priority security interest in, all accounts receivable of each client;
(iv) takes, whenever available, blanket liens on all of its clients' other
assets and, when making Collateralized Advances, it employs what management
believes to be conservative loan-to-value ratios based on auction or liquidation
value appraisals performed by independent appraisers; (v) almost
12
<PAGE>
always requires personal guaranties (either unlimited guaranties or guaranties
limited to the validity and collectability of Factored Accounts Receivable) from
its clients' principals; and (vi) actively monitors its portfolio of Factored
Accounts Receivable, including the creditworthiness of account debtors and
periodically evaluates the value of other collateral securing Collateralized
Advances.
Collateralized Advances entail different, and possibly greater, risks to the
Company than the factoring of accounts receivable. Risks associated with the
making of Collateralized Advances (but not the factoring of accounts receivable)
include, among others (i) certain types of collateral securing Collateralized
Advances may diminish in value (possibly precipitously) over time (sometimes
short periods of time), (ii) repossessing, safeguarding and liquidating
collateral securing Collateralized Advances may require the Company to incur
significant fees and expenses some or all of which may not be recoverable, (iii)
clients may dispose of (or conceal) the collateral securing Collateralized
Advances and (iv) clients or natural disasters may destroy the collateral
securing Collateralized Advances. The Company attempts to manage these risks,
respectively, by (i) engaging independent appraisers to review periodically the
value of collateral securing Collateralized Advances at intervals established by
management based on the characteristics of the underlying collateral, (ii)
employing conservative loan-to-value ratios which management believes should
generally enable the Company to recover from liquidation proceeds most of the
fees and expenses incurred in connection with repossessing, safeguarding and
liquidating collateral, (iii) using its internal field examiners to inspect
collateral periodically and, when appropriate, engaging independent collateral
monitoring firms to implement appropriate collateral control systems including
bonding certain of the client's employees and (iv) requiring clients to maintain
appropriate amounts and types of insurance issued by insurers acceptable to the
Company naming the Company as the party to whom loss is paid. Although
management believes that the Company has (or third parties acting on behalf of
the Company have) the requisite skill to evaluate, monitor and manage the risks
associated with the making of Collateralized Advances, there can be no assurance
that the Company will in fact be successful in doing so.
Notwithstanding the foregoing, clients (and account debtors) may fail and
the collateral available to the Company (together with personal guaranties) may
prove insufficient to protect the Company against loss. See Legal Proceedings
and Management's Discussion and Analysis of Financial Condition and Results of
Operations - Provision for Credit Losses.
(i) Marketing
New clients are generated principally from a nation-wide referral network of
business brokers, banks, accountants, investment bankers, turnaround managers,
lawyers and independent brokers as well as from previous and existing clients.
Brokers are paid commissions calculated on the gross earnings collected by the
Company on each funded referral.
The Company employs six full-time marketing professionals to maintain and
expand its referral network. In addition, from time to time, the Company
advertises in national and local newspapers and trade journals to increase name
recognition. The Company also increases name recognition through direct mailings
to existing and potential referral sources.
13
<PAGE>
(j) Competition
Competition from banks, traditional asset-based lenders and small
independent finance companies accelerated in 1996. The Company anticipates that
competition will remain intense through all of 1997 and may continue to exert
downward pressure on pricing, especially in the Company's core factoring
business. In order to remain competitive, the Company is, where necessary and
appropriate, offering lower rates than it has historically. The Company has also
responded to increased competition (and the resulting downward pressure on
pricing in the Company's core factoring business) by putting increased emphasis
on funding relationships which include (in addition to the factoring of accounts
receivable) the making of Collateralized Advances. See (b) Nature of Business;
(g) Asset Quality and Management's Discussion and Analysis of Financial
Condition and Results of Operations - Total Income. The Company intends to
continue to pursue this strategy. In addition, the Company believes that its
ability to respond quickly and to provide specialized, flexible and
comprehensive financial arrangements to its clients enables it to compete
effectively. Although the Company has historically been successful in replacing
major clients, competition resulting in the loss of one or more major clients
and an inability to replace those clients could have a material adverse effect
on the Company.
(k) Expansion Strategy
The Company's strategy for 1997 is to further penetrate its target market
by: (i) developing additional, active referral sources while continuing to
cultivate existing sources; (ii) identifying and marketing to new niche markets
that are currently under-serviced by competitors where the Company can obtain
higher yields on new business; (iii) expanding its marketing efforts by
establishing a direct presence in certain geographic areas of the country which
are under-serviced by either competitors or the Company; and (iv) developing new
products and programs to meet the changing needs of its targeted market. The
Company also intends to attempt to retain existing clients as long as possible
by offering new products and providing the best service possible at competitive
prices.
(l) Employees
The Company currently has 49 full-time employees, of whom 29 are employed in
providing accounts receivable and credit services (including 4 certified public
accountants and one attorney), 6 are employed in marketing, 5 are in executive
positions (including two CPA's and one attorney), 4 are in legal (including 2
attorneys) and 5 are in general office capacities. The Company believes that a
substantial increase in the volume of its business would require only a
relatively modest increase in personnel. None of the Company's employees are
unionized and management considers its relations with employees to be excellent.
(m) Issuance of Convertible Subordinated Notes
See Management's Discussion and Analysis of Financial Condition and Results
of Operations - Liquidity and Capital Resources.
14
<PAGE>
(n) Forward-Looking Information
Certain disclosures contained in this Form-10KSB 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.
Item 2. Properties
The Company's offices occupy approximately 8,000 square feet of space in an
office building in Arlington, Virginia. The Company's lease on this property
expires in December 2001. The cost of renting this office space was $191,000 in
1996 compared to $192,000 in 1995. The Company believes that its present office
facilities are adequate but may need to be expanded in the near term to
accommodate the Company's continued growth. The Company has a right of first
refusal to acquire an additional, contiguous 1,500 square feet at its present
site when that space becomes available.
Item 3. Legal Proceedings
See Notes to Consolidated Financial Statements - (L) Commitments and
Contingencies.
Item 4. Submission of Matters To A Vote Of Security Holders
The Company's annual meeting of shareholders was held on November 7, 1996.
The shareholders voted as follows:
Number of Number of Number
Votes for of Votes of Votes
Election Withheld Abstained
Leon Fishman 2,045,204 20,861 -0-
Eugene Haskin 2,045,204 20,861 -0-
David Campbell 2,046,104 19,961 -0-
Craig Fishman 2,045,204 20,861 -0-
Alan Freeman 2,045,762 20,303 -0-
William Savage 2,046,104 19,961 -0-
James Spector 2,046,104 19,961 -0-
Edward McNally 2,046,104 19,961 -0-
Lawrence Vecker 2,045,762 20,303 -0-
In addition, the shareholders approved an amendment to the Company's
1990 Qualified Stock Option Plan whereby the number of shares of the Company's
common stock issuable thereunder was increased from 175,000 shares to 275,000
shares. The results of the voting were 1,870,536 for, 170,294 against, and 5,185
abstaining.
15
<PAGE>
Part II
Item 5. Market For The Registrant's Common Stock, Related
Stockholder Matters
The Company's common stock is traded on the NASDAQ National Market System
(Symbol ASFN).
The following table sets forth the range of representative high and low bids
for the Company's common stock in the over the counter market for the period
indicated, as furnished by the National Association of Securities Dealers, Inc.
These bids represent prices among dealers, do not include retail markups,
markdowns or commissions, and may not represent actual transactions.
Common Stock Bid Prices
Fiscal year ended December 31,
1996 1995 1994
High Low High Low High Low
First Quarter 6 7/8 5 1/2 7 3/16 5 9/16 7 1/8 5 3/8
Second Quarter 6 1/2 5 1/2 8 6 1/4 6 5/8 4 5/8
Third Quarter 5 13/16 5 1/2 7 1/2 5 1/2 6 5/8 5 11/16
Fourth Quarter 7 5 1/2 6 5 6/16 6 7/8 6
On March 4, 1997 there were approximately 53 stockholders of record based on
information provided by the Company's transfer agent. The number of stockholders
of record does not reflect the actual number of individual or institutional
stockholders of the Company because certain stock is held in the name of
nominees. Based on the best information made available to the Company by the
transfer agent, there are approximately 527 holders of the Company's common
stock.
The Company currently intends to retain earnings for future capital
requirements and growth. The Company has not paid a dividend and does not
anticipate paying cash dividends to holders of its common stock for the
foreseeable future.
In January 1996 the Company consummated an exchange offer to holders of its
common stock. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.
Item 6. Management's Discussion And Analysis of Financial
Condition and Results of Operations
General
The Company's principal business is the discounted purchase of accounts
receivable, usually on a full recourse, full notification basis. In addition,
the Company also makes Collateralized Advances. The Company has elected to
continue to more aggressively pursue the making of Collateralized Advances as it
perceives the need by its targeted customers for such advances and such funding
is not available from many of the Company's competitors. On occasion, the
Company will also provide other specialized financing structures which
16
<PAGE>
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. The Company's
clients do not typically qualify for traditional bank or asset-based financing
because they are either too new, too small, undercapitalized (or over-
leveraged), unprofitable or otherwise unable to satisfy the requirements of a
bank or traditional, asset-based lender. However, banks and asset-based lenders
have started lending to our type of client. Accordingly, there is a significant
risk of default and client failure inherent in the Company's business. For a
description of ways in which the Company addresses these risks, see (h) Credit
Loss Policy and Experience.
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 more in-depth and diverse due
diligence which can further delay the funding of new business. Nonetheless, the
Company believes that its ability to respond quickly and to provide specialized,
flexible and comprehensive financing structures to its clients enables it to
compete effectively. In order to remain competitive, the Company is, where
necessary and appropriate, offering lower rates than it has historically. The
Company believes that increased competition will continue for the foreseeable
future and will continue to exert downward pressure on pricing, especially in
the Company's core factoring business. To counter the downward pressure on
pricing, the Company intends to continue to diversify its sources of income,
primarily by continuing to place emphasis on funding relationships which include
(in addition to the factoring of accounts receivable) the making of
Collateralized Advances.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its clients would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however, because
the Company is, where necessary and appropriate, offering lower rates and making
Collateralized Advances, it is possible that the duration of the Company's
funding relationships with its clients may be extended. Even if the Company
succeeds in extending the duration of its funding relationship with its clients,
there will not be a corresponding increase in non-current assets on the
Company's balance sheet. This is because it is anticipated that the Company's
funding relationships with its clients will continue to renew no less frequently
than once a year. Although the Company has historically been successful in
replacing major clients, the loss of one or more major clients and an inability
to replace those clients could have a material adverse effect on the Company.
Lifetime Options, a wholly-owned subsidiary of the Company, provides
financial assistance to individuals facing life-threatening illness by
purchasing their life insurance policies at a discount from face value. The
amount of the discount is determined by Lifetime Options based on the size of
the policy being purchased, the maximum life expectancy of the insured, the
17
<PAGE>
amount of the anticipated premiums payable with respect to the policy being
purchased and the anticipated financing cost associated with purchasing and
carrying the policy. In general, the purchase price for a policy is between 55%
and 85% of the benefits payable under the policy. Because most of the life
insurance policies purchased by Lifetime Options are underwritten by highly
rated insurance companies (and, in many cases, backed by state guaranty funds),
the management of Lifetime Options believes that credit risk is not material to
its business.
Before purchasing each policy, Lifetime Options has each insured's medical
records reviewed by at least one independent physician who provides Lifetime
Options with an opinion of the insured's life expectancy. Historically, Lifetime
Options typically required up to three independent reviews but, based on its
experience, the management of Lifetime Options no longer believes multiple
medical reviews are necessary. To date, the physicians engaged by Lifetime
Options have provided life expectancies which, on average, fairly approximate
actual lifespans. However, there is no assurance that the physician engaged by
Lifetime Options will in the future be able to perform as he has in the past. If
the physician(s) engaged by Lifetime Options were to systematically
underestimate life expectancies or if life extending treatments (or a cure) were
found for AIDS (almost all of the life insurance policies purchased by Lifetime
Options to date have been purchased from individuals with AIDS), there would be
a material adverse effect on the earnings of Lifetime Options. Lifetime Options
relies on its independent physician to assist in monitoring important medical
advances (and potential medical advances). In particular, Lifetime Options'
independent physician is closely monitoring the effects of a relatively new
class of drugs known as protease inhibitors. These drugs, while not a cure for
AIDS, may extend the lives of certain individuals infected with HIV.
During 1996, Lifetime Options started to curtail 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.
Other than Lifetime Options, none of the Company's subsidiaries is currently
engaged in business which could have a material effect on the Company.
Results of Operations
The following tables sets forth certain items of income and expense for the
periods indicated and indicates for each full year the percentage relationship
of each item to total income.
18
<PAGE>
<TABLE>
Consolidated Quarterly Summary of Operations
--------------------------------------------
<CAPTION>
1996 1995
----------------------------------------------- -----------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income:
Earned Discount ..... $ 2,546,104 $ 2,423,715 $ 2,722,140 $ 2,333,820 $ 3,055,687 $ 2,578,345 $ 2,420,653 $ 2,877,646
Fees and Other
Income ............. 763,730 499,802 563,398 551,852 408,619 600,245 649,726 406,425
------- ------- ------- ------- ------- ------- ------- -------
Total Income ..... 3,309,834 2,923,517 3,285,538 2,885,672 3,464,306 3,178,590 3,070,379 3,284,071
--------- --------- --------- --------- --------- --------- --------- ---------
Expenses:
Compensation and
Fringe Benefits .... 735,750 737,910 995,894 849,055 852,787 785,161 753,069 807,480
General and
Administration ..... 618,501 632,985 941,088 612,069 776,522 642,766 730,759 608,238
Interest Expense .... 463,591 360,627 426,983 355,360 353,885 205,307 166,020 258,506
Provision for
Credit Losses1 ..... 798,597 527,341 3,928,570 623,659 2,211,046 859,000 610,500 1,301,100
Commissions ......... 97,191 126,248 136,145 89,641 63,455 64,928 72,846 61,871
------ ------- ------- ------ ------ ------ ------ ------
Total Expenses ... 2,713,630 2,385,111 6,428,680 2,529,784 4,257,695 2,557,162 2,333,194 3,037,195
--------- --------- --------- --------- --------- --------- --------- ---------
Income/(Loss) Before
Income Taxes ........ 596,204 538,406 (3,143,142) 355,888 (793,389) 621,428 737,185 246,876
Income Taxes/(Benefit) 220,900 198,800 (1,162,900) 131,700 (260,200) 228,700 271,500 91,000
------- ------- ---------- ------- -------- ------- ------- ------
Net Income/(Loss) .... $ 375,304 $ 339,606 $(1,980,242) $ 224,188 $ (533,189) $ 392,728 $ 465,685 $ 155,876
=========== =========== =========== =========== =========== =========== =========== ===========
Net Income / (Loss)
Per Share .......... $ 0.16 $ 0.15 $ (0.85) $ 0.09 $ (.20) $ .13 $ .15 $ .05
=========== =========== =========== =========== =========== =========== =========== ===========
Weighted Average
Number of Shares .... 2,317,919 2,317,237 2,316,853 2,361,461 2,655,128 3,009,971 3,102,328 3,102,328
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
<TABLE>
For the Years Ended December 31,
------------------------------------------------------------------
<CAPTION>
1996 1995 1994
--------------------- -------------------- -------------------
REVENUE PERCENT REVENUE PERCENT REVENUE PERCENT
---------- -------- ---------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
INCOME:
Earned Discounts .................. $ 10,025,779 80.8% $ 10,932,331 84.1% $ 9,947,678 82.7%
Fees and Other Income ............. 2,378,782 19.2 2,065,015 15.9 2,082,320 17.3
--------- ---- --------- ---- --------- ----
TOTAL INCOME .................. 12,404,561 100.0 12,997,346 100.0 12,029,998 100.0
---------- ----- ---------- ----- ---------- -----
EXPENSES:
Compensation and Fringe Benefits .. 3,318,609 26.8 3,198,497 24.6 2,996,029 25.0
General and Administrative Expenses 2,804,643 22.6 2,758,285 21.2 2,673,959 22.2
Interest Expense .................. 1,606,561 12.9 983,718 7.6 610,531 5.1
Provision of Credit Losses<F1>..... 5,878,167 47.4 4,981,646 38.4 5,359,159 44.5
Commissions ....................... 449,225 3.6 263,100 2.0 155,280 1.3
------- --- ------- --- ------- ---
TOTAL EXPENSES ................ 14,057,205 113.3 12,185,246 93.8 11,794,958 98.1
---------- ----- ---------- ---- ---------- ----
INCOME BEFORE TAXES ................. (1,652,644) (13.3) 812,100 6.2 235,040 1.9
INCOME TAXES ........................ (611,500) (4.9) 331,000 2.5 87,500 .7
-------- ---- ------- --- ------ --
NET INCOME .......................... $ 1,041,144) (8.4)% $ 481,100 3.7% $ 147,540 1.2%
=========== ==== =========== === ========== ===
NET INCOME PER SHARE $ (0.45) $ 0.16 $ 0.05
=========== ======== ==========
WEIGHTED AVERAGE NUMBER OF SHARES 2,328,308 2,966,330 3,102,328
========= ========= =========
- -----------
<FN>
<F1> For a discussion of this item of expense, see Management's Discussion and
Analysis of Financial Condition and Results of Operation - Provision for Credit
Losses.
</FN>
</TABLE>
19
<PAGE>
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
TOTAL INCOME. Total income consists of (i) earned discounts and (ii) fees and
other income. "Earned discounts" consist primarily of income from the purchase
of accounts receivable and life insurance policies and income from
Collateralized Advances. "Fees and other income" consist primarily of closing or
application fees, commitment or facility fees, other related financing fees and
supplemental discounts paid by clients who do not sell the minimum volume of
accounts receivable required by their contracts with the Company (including as a
result of "graduating" to a lower cost source of funding).
The following table breaks down total income by type of transaction for the
periods indicated and the percentage relationship of each type of transaction to
total income.
For the Year Ended December 31,
----------------------------------------
1996 1995
----------------- -------------------
% of Total % of Total
Income Income Income Income
--------- ------ ---------- ------
Discount on Factored Accounts
Receivable ...................... $ 5,777,660 46.6% $ 6,155,374 47.4%
Earnings on Collateralized
Advances .......................... 2,522,856 20.3 2,930,731 22.5
Earnings on Purchased Life
Insurance Policies ................. 499,249 4.0 947,731 7.3
Other Earnings ..................... 1,226,014 9.9 898,495 6.9
--------- --- ------- ---
Total ........................... 10,025,779 80.8 10,932,331 84.1
Fees and Other Income .............. 2,378,782 19.2 2,065,015 15.9
--------- ---- --------- ----
Total Income .................... $12,404,561 100.0% $12,997,346 100.0%
=========== ===== =========== =====
Total income decreased 4.6% in 1996 over 1995, from $13.0 million to $12.4
million. Earned discounts from Factored Accounts Receivable decreased 6.1% in
1996 as compared to 1995, from $6.2 million to $5.8 million. Earned discounts
from Factored Accounts Receivable in 1996 as a percentage of total Factored
Accounts Receivable purchased in 1996 were 3.39%. The comparable percentage in
1995 was 4.25%, a decrease of 20.2% from 1995 to 1996. This reduction reflects
the downward pressure on pricing from competition in the Company's core
factoring business. In 1996 and 1995, earned discounts from Factored Accounts
Receivable comprised 46.6% and 47.4%, respectively, of total income.
Earned discounts from Collateralized Advances decreased 13.9% in 1996 over
1995, from $2.9 million to $2.5 million. In 1996 and 1995, earned discounts from
Collateralized Advances comprised 20.3% and 22.5%, respectively, of total
income. These percentages reflect management's decision to pursue the making of
Collateralized Advances, in addition to the Company's core factoring business.
Collateralized Advances currently bear interest at a rate, on average, of
approximately 2% per month. Earned discounts from Collateralized Advances are
required to be paid in cash monthly in arrears. See Provisions for Credit Losses
below.
20
<PAGE>
Fees and other income increased 15.2% in 1996 as compared to 1995, from $2.1
million to $2.4 million, respectively. In 1996 and 1995 fees and other income
comprised of 19.2% of total income and 15.9%, respectively.
As of December 31, 1996 and 1995, Factored Accounts Receivable included on
the Company's balance sheet were $22.4 million (60.0%) and $25.2 million
(64.5%), respectively, of Gross Finance Receivables. As of December 31, 1996 and
1995, Collateralized Advances included on the Company's balance sheet were $8.8
million (23.4%) and $10.8 million (27.8%), respectively, of Gross Finance
Receivables.
Compensation and Fringe Benefits. Compensation and fringe benefits were $3.3
million (26.8% of total income) and $3.2 million (24.6% of total income) in 1996
and 1995, respectively. The absolute dollar increase is chiefly the result of
small increases in several categories of compensation. Executive compensation in
1996 was $1.1 million (8.9% of total income) versus $1.0 million (7.9% of total
income) in 1995. Almost all of the 1996 increase in compensation and fringe
benefits (including executive compensation) is the result of expenses associated
with the severance of a key employee and costs associated with replacing that
employee, including hiring a former Company executive on an interim basis to
help identify and train the severed employee's replacement.
General and Administrative Expense. In 1996, general and administrative
expense was $2.8 million (22.6% of total income) as compared to $2.8 million
(21.2% of total income) in 1995. Overall general and administrative expenses
were flat between 1996 and 1995, however, an increase in professional fees was
offset by decreases in licenses and taxes and duplicating expense. In 1996
professional fees rose to $1.2 million (9.9% of total income) as compared to
$1.1 million (8.3% of total income) in 1995. Professional fees increased, in
part, due to on-going litigation and, in part, to the final resolution of
certain legal proceedings instituted in prior years. Also contributing to the
increase in general and administrative expense was an increase in directors'
fees attributable to an increase in the size of the Board and an increase in the
number of scheduled meetings of the Board.
Interest Expense. Interest expense was $1.6 million (13.0% of total income)
versus $984 thousand (7.6% of total income) in 1996 and 1995, respectively. The
increase in interest expense is attributable to (i) an increase in the average
daily balance outstanding on the Company's revolving line of credit and (ii)
interest expense related to the Company's Convertible, Subordinated Notes issued
in September 1995 and January 1996. The average daily outstanding balance on the
Company's revolving line of credit was $11.3 million and $8.5 million for 1996
and 1995, respectively and the average interest rate paid on the Company's
revolving line of credit was 9.0% during 1996 as compared to 9.7% during 1995.
Interest expense related to the Company's Convertible Subordinated Notes was
$465 thousand (3.8% of total income) in 1996, compared to $87 thousand (0.7% of
total income) in 1995. The increase in 1996 is attributable to the length of
time and dollar amount outstanding of the Convertible Subordinated Notes.
Provision for Credit Losses. The provision for credit losses increased in
1996 from $5.0 million (38.3% of total income) in 1995 to $5.9 million (47.4% of
total income) in 1996. As disclosed in the Company's Form 10-QSB for the period
ended June 30, 1996, following certain events in the second quarter of 1996,
management determined that it was necessary and appropriate to write off or
write down nine non-performing assets totalling $4.2 million. Prior to the
write-offs and write downs, these assets were included in Non-earning
Receivables, Other Receivables and Other Assets on the Company's balance sheet.
The provision for credit losses in the second quarter of 1996 reflected the
amount deemed necessary by management to enable the Company to charge the
allowance for credit losses for the foregoing write-offs and to leave a balance
in the allowance for credit losses deemed sufficient to cover potential future
write-offs.
21
<PAGE>
The following table provides a summary of the Company's Gross Finance
Receivables, Other Receivables and Other Assets and information regarding the
allowance for credit losses for the periods indicated.
<TABLE>
As of December 31,
------------------------------------------------------------
<CAPTION>
1996 1995 1994 1993 1992
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
GROSS FINANCE RECEIVABLES, OTHER
RECEIVABLES AND OTHER ASSETS DATA:
- ------------------------------------
Gross Finance Receivables .................. $ 37,600 $ 39,008 $ 33,323 $ 29,250 $ 35,760
Non-Earning Receivables (included
in Gross Finance Receivables) ............ 4,548 1,589 3,608 3,411 2,142
Other Receivables .......................... 4,390 2,756 3,389 2,344 1,397
Other Assets (excluding miscellaneous) ..... 1,884 1,793 2,112 3,200 2,017
ALLOWANCE FOR CREDIT
LOSSES:
- --------------------
Balance, January 1 ......................... $ 2,351 $ 2,511 $ 2,120 $ 1,223 $ 784
Provision for credit
losses ................................... 5,878 4,982 5,359 4,858 1,361
Receivables charged off .................... (5,711) (5,194) (5,016) (4,144) (941)
Recoveries ................................. 61 52 48 183 19
-- -- -- --- --
Balance, December 31 ....................... $ 2,579 $ 2,351 $ 2,511 $ 2,120 $ 1,223
======== ======== ======== ======== ========
ALLOWANCE FOR CREDIT LOSSES
AS A PERCENT OF:
- ---------------------------
Gross Finance Receivables .................. 6.85% 6.03% 7.54% 7.25% 3.42%
Non-Earning Receivables .................... 56.7% 148.00% 69.60% 62.15% 57.10%
Non-Earning Receivables, Other
Receivables and Other Assets ............. 23.8% 38.30% 27.00% 23.67% 22.01%
AS A PERCENT OF THE SUM OF GROSS
FINANCE RECEIVABLES, OTHER
RECEIVABLES AND OTHER ASSETS:
- --------------------------------
Non-Earning
Receivables .............................. 10.4% 3.65% 9.29% 9.80% 5.47%
Other Receivables .......................... 10.0% 6.33% 8.73% 6.74% 3.57%
Other Assets ............................... 4.29% 4.11% 5.44% 9.20% 5.15%
</TABLE>
The increase in Non-Earning Receivables and Other Receivables at December 31,
1996 was attributable to two clients put on non-accrual status in late November
1996.
Although the Company maintains an allowance for credit losses in an amount
deemed by management to be adequate to cover potential losses, no assurance can
be given that the allowance will in fact be adequate or that an inadequacy, if
any, in the allowance could not have a material adverse effect on the Company's
earnings in future periods. Furthermore, although management believes that its
periodic estimates of the value of Other Receivables and Other Assets are
appropriate, no assurance can be given that the amounts which the Company
ultimately collects with respect to Other Receivables and Other Assets will not
differ significantly from management's estimates or that those differences, if
any, could not have a material adverse effect on the Company's earnings in
future periods. See (g) Asset Quality and (h) Credit Loss Policy and Experience.
Commissions. Commission expense was $449 thousand (3.6% of total income) in
1996 as compared to $263 thousand (2.0% of total income) in 1995. The increase
was the result of a larger portion of Gross Finance Receivables acquired in 1996
being generated by commissioned brokers and other professionals to whom the
Company paid referral fees.
Liquidity and Capital Resources. The Company's principal funding sources
are the collection of purchased receivables, retained cash flow and external
borrowings.
22
<PAGE>
As of December 31, 1996, the Company had approximately $10.1 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 $2 million sub-facility (which under certain circumstances may
increase to $4 million) the proceeds of which may be used to make advances to
clients secured by machinery and 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. The current maturity date of this credit facility is
May 13, 1997. The Company is subject to covenants which are typical in revolving
credit facilities of this type. The Company is currently discussing the renewal
of this credit facility with its lenders.
As of December 31, 1996 and December 31, 1995, the Company had
outstanding approximately $4,978,000 and $2,838,000, respectively, in aggregate
principal amount of Convertible Subordinated Notes issued in exchange for shares
of the Company's common stock. The Convertible Subordinated Notes outstanding at
December 31, 1995 were issued in exchange for 447,200 shares of common stock and
the Convertible Subordinated Notes outstanding at December 31, 1996 were issued
in exchange for 785,475 shares of common stock (including the 447,200 shares of
common stock exchanged prior to December 31, 1995). 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.
At December 31, 1996, the Company had working capital of $24.9 million and
a ratio of current assets to current liabilities of 2.36 to 1 as compared to
December 31, 1995 working capital of $26.0 million and a ratio of current assets
to current liabilities of 2.60 to 1. As of December 31, 1996, the Company had
conditional commitments of $66.6 million to purchase accounts receivable and
make Collateralized Advances, subject to the Company's underwriting criteria.
Since many of those commitments may expire without being drawn upon, the figure
$66.6 million does not necessarily represent future cash requirements.
The Company believes that internally generated funds and borrowings under
its current or a replacement credit facility will be sufficient to finance the
Company's future funding requirements for the near term. If, however, an
unexpectedly high portion of the Company's potential new business includes
Collateralized Advances (especially Collateralized Advances secured by assets
other than equipment), internally generated funds and borrowings under the
Company's existing credit facility may not be sufficient to fund such new
business. Under such circumstances the Company would attempt to negotiate the
borrowing base in its existing credit facility to allow the Company to borrow
greater amounts from its primary lender(s) and thereby support the growth in
Collateralized Advances. If those negotiations were unsuccessful, there is no
assurance that the Company could attract sufficient capital to enable the
Company to pursue its strategy of making additional Collateralized Advances.
23
<PAGE>
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 funds based on its current borrowing
arrangements which are prime or base rate adjusted credit facilities.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
TOTAL INCOME. The Company's total income, which consists of earned
discounts and fees and other income, rose 8.0% in 1995 over 1994, from $12.0
million to $13.0 million. Earned discounts from Factored Accounts Receivable
decreased 18.7% in 1995 as compared to 1994, from $7.6 million to $6.2 million.
Earned discounts from Factored Accounts Receivable in 1995 as a percentage of
total Factored Accounts Receivable purchased in 1995 were 4.25%. The comparable
percentage in 1994 was 4.61%, a decrease of 7.8% from 1994 to 1995. This
reduction reflects the downward pressure on pricing from competition in the
Company's core factoring business. In 1995 and 1994, earned discounts from
Factored Accounts Receivable comprised 47.4% and 63.0%, respectively, of total
income. These percentages reflect lower average earned discounts from the
Company's core factoring business due to competition and management's decision
to pursue and increase the making of Collateralized Advances, in addition to the
Company's core factoring business.
Earned discounts from Collateralized Advances increased 145.1% in 1995 over
1994, from $1.2 million to $2.9 million. In 1995 and 1994, earned discounts from
Collateralized Advances comprised 22.5% and 9.9%, respectively, of total income.
These changes again reflect management's decision to pursue the making of
Collateralized Advances, in addition to the Company's core factoring business.
Collateralized Advances currently bear interest at a rate, on average, of
approximately 2% per month calculated generally on the highest outstanding
amount of the Collateralized Advance during the month. Earned discounts from
Collateralized Advances are required to be paid in cash monthly in arrears. See
Provisions for Credit Losses below.
Fees and other income were relatively unchanged in 1995 as compared to
1994. In both years fees and other income were approximately $2.1 million.
Increases in 1995 in closing fees and supplemental discounts were offset by
reductions in related financing fees and the absence of a one-time finders fee
of $50 thousand earned in 1994.
As of December 31, 1995 and 1994, Factored Accounts Receivable included on
the Company's balance sheet were $25.2 million (64.5%) and $22.2 million
(66.7%), respectively, of Gross Finance Receivables. As of December 31, 1995 and
1994, Collateralized Advances included on the Company's balance sheet were $10.8
million (27.8%) and $7.2 million (21.7%), respectively, of Gross Finance
Receivables. The relative increase from the end of 1994 to the end of 1995 in
the percentage of Gross Finance Receivables comprised of Collateralized Advances
reflects management's decision to emphasize the making of Collateralized
Advances, in addition to the Company's core factoring business.
24
<PAGE>
COMPENSATION AND FRINGE BENEFITS. Compensation and fringe benefits were
$3.2 million (24.6% of total income) and $3.0 million (25.0% of total income) in
1995 and 1994, respectively. The absolute dollar increase is chiefly the result
of increases in sales personnel and compensation. Executive compensation in 1995
was $1.0 million (7.9% of total income) versus $1.0 million (8.5% of total
income) in 1994.
GENERAL AND ADMINISTRATIVE EXPENSE. In 1995 general and administrative
expense was $2.8 million (21.2% of total income) as compared to $2.7 million
(22.2% of total income) in 1994. The increase for 1995 was primarily
attributable to a rise in professional fees, licenses and taxes and duplicating
expense. In 1995 professional fees rose to $1.1 million (8.3% of total income)
as compared to $805 thousand (6.7% of total income) for 1994. Professional fees
have increased, in part, due to on-going litigation and, in part, to the final
resolution certain of legal proceedings instituted in prior years. Also
contributing to the increase in general and administrative expense were license
and tax expenditures incurred in connection with maintaining certain assets
acquired in settlement of Finance and Other Receivables. Other charges
increasing general and administrative expense were telephone and travel and
entertainment (primarily associated with new business development) which were
offset, in part, by decreases in loan amortization, office supplies and credit
and filing costs.
INTEREST EXPENSE. Interest expense was $984 thousand (7.6% of total income)
versus $611 thousand (5.1% of total income) in 1995 and 1994, respectively. The
rise in interest expense is attributable in part to (i) an increase in the
average daily balance outstanding on the Company's revolving line of credit,
(ii) the rise in the base or prime rate of interest from 1994 to 1995 and (iii)
interest expense related to the Company's Convertible, Subordinated Notes issued
in September 1995. The average daily outstanding balance on the Company's
revolving line of credit was $8.5 million and $6.5 million for 1995 and 1994,
respectively and the average interest rate paid on the Company's revolving line
of credit rose (as a result of increases in the base or prime rate) to 9.7%
during 1995 as compared to 8.3% during 1994. Interest expense related to the
Company's Convertible Subordinated Notes was $87 thousand in 1995.
COMMISSIONS. Commission expense was $263 thousand (2.0% of total income) in
1995 as compared to $155 thousand (1.3% of total income) in 1994. The increase
was the result of a larger portion of Gross Finance Receivables acquired in 1995
being generated by commissioned brokers and other professionals to whom the
Company paid referral fees.
ITEM 7. FINANCIAL STATEMENTS (PAGES 34-56)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
25
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS: COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT
The directors and executive officers of the Company are as follows:
Name Age Position(s)
Craig Fishman.................36 President, Chief Executive Officer
and a Director
Leon Fishman..................65 Director/Vice Chairman
Eugene R. Haskin..............67 Chairman of the Board
Lawrence M. Winkler...........61 Secretary, Treasurer, Chief Financial
Officer
Edward McNally................53 Director
Lawrence Vecker...............67 Director
James C. Spector..............63 Director
William H. Savage.............64 Director
David W. Campbell.............50 Director
Alan L. Freeman...............55 Director
Wade Hotsenpiller.............55 Senior Vice President, Chief Operating
Officer
Peter Matthy..................51 Exec. Vice President, Director-Sales
& Marketing
Richard A. Brasch.............40 General Counsel
CRAIG FISHMAN has been the President and Chief Executive Officer of the
Company since July 1, 1996. He joined the Company in 1991 as a Vice President
and in February 1993, was appointed General Counsel. In May 1994, he was elected
President of Lifetime Options and in September 1995, Mr. Fishman was elected
Senior Vice President of the Company. Mr. Fishman has served as a director since
November 1995. From 1987 to April 1991 Mr. Fishman was an attorney associated
with the law firm of White & Case in New York City. Craig Fishman is the son of
Leon Fishman and the nephew of Lawrence Winkler.
LEON FISHMAN is a director and Vice Chairman of the Company. He was the
former President and Chief Executive Officer of the Company. Mr. Fishman served
on the Company's Board of Directors from 1982 until November 1995 and was
re-elected to the Board on November 7, 1996. He co-founded the Company with
Eugene Haskin in 1982. Mr. Fishman served as Secretary and Treasurer of the
Company and held other management positions prior to being elected President and
Chief Executive Officer in 1989.
Prior to co-founding the Company, Mr. Fishman had extensive experience as
the president and major shareholder of companies involved in factoring, real
estate development and manufacturing.
EUGENE R. HASKIN is Chairman of the Board of the Company and has served as
a Director of the Company since co-founding the Company with Leon Fishman in
1982. Mr. Haskin served as President of the Company from 1982 to 1989. Prior to
co-founding the Company, Mr. Haskin was an executive with and a major investor
in companies involved in factoring, real estate development and heating oil
distribution.
LAWRENCE M. WINKLER is Secretary, Treasurer and Chief Financial Officer of
the Company and has served as a director from 1983 until his resignation in
November 1996. Mr. Winkler began his career at the Company in 1982 as Second
Vice President, was promoted to Senior Vice President in April 1989 and has
held his current positions since May 1989. Mr. Winkler, a certified public
accountant, was a general partner in the accounting firm of Alexander Grant
26
<PAGE>
and Company prior to joining the Company. Mr. Winkler is the brother-in-law
of Leon Fishman and uncle of Craig Fishman.
JAMES C. SPECTOR has been a member of the Board of Directors since June
1989. Mr. Spector served as Executive Vice President of the Company from
February 1991 to October 1993. Prior to joining the Company, Mr. Spector had
served for many years as an executive with Heller Financial, Inc. and certain
of its related companies, specializing in asset-based and real estate lending.
His most recent positions in that organization included Executive Vice
President and Chief Operating Officer of Heller Mortgage Corporation, from
August 1984 through June 1985, and Senior Vice President of Heller Financial,
Inc. from July 1985 through September 1987. He is currently Executive Vice
President of Bank Atlantic, Ft. Lauderdale, Florida.
WILLIAM H. SAVAGE has been a member of the Board of Directors since
November 1995. Since 1990, Mr. Savage has been engaged in a variety of
investment ventures in real estate development and banking. Since 1991, Mr.
Savage has served as Chairman of Island Preservation Partnership, the owner and
developer of Dewees Island, a 1,200 acre ocean front, barrier island near
Charleston, South Carolina. He is the Chairman of the Board of Knights Hill
Corporation, which owns and manages timberlands in South Carolina. Since 1982,
he has been the Managing Partner of Calvert Associate which owns an apartment
complex in Alexandria, Virginia. Prior to 1990, Mr. Savage was the President and
Chief Executive Officer of Ameribanc Investors Group, Annandale, Virginia,
parent company of Ameribanc Savings Bank. Since 1977, he has been the President
of Richard United Corporation, a real estate investment company based in
Alexandria, Virginia.
DAVID W. CAMPBELL has been a member of the Board of Directors since
November 1995. Since April 1996, Mr. Campbell has been the President and Chief
Operating Officer and a Director of Southern Financial Bancorp and Southern
Financial Bank. Mr. Campbell was formerly President and Chief Executive Officer
of Ameribanc Savings Bank ("ASB") in Annandale, Virginia from June 1990 to March
1995. Prior to that, he was Executive Vice President and Chief Operating Officer
of ASB from 1984 to June 1990 and also a director of ASB from 1988 to March
1995. He served as a Trustee of the Ameribanc Investors Group from 1992 to March
1995.
ALAN L. FREEMAN has been a member of the Board of Directors since November
1995. He is currently Managing Partner of Freeman, Buczyner & Gero, an
accounting firm. Prior to that he was a Partner with Deloitte & Touche from 1989
to 1991 and a Partner with the accounting firm Shapiro, Fleischmann & Co.
from 1966 to 1989.
EDWARD A. MCNALLY has been a member of the Board of Directors since
November 1996. Mr. McNally is Managing Director, Windham Partners, LLC
(commencing August 1996); President, McNally and Co. (commencing August 1995);
Independent management consultant (commencing April 1991); formerly Senior Vice
President, National Westminster Bank USA (1983 through 1992).
LAWRENCE VECKER has been a member of the Board of Directors since November
1996. Mr. Vecker is currently Executive Vice President of North American Capital
Corp., a New York based private merchant bank. Formerly, he was Executive Vice
President of Congress Financial Corp., a subsidiary of CoreStates Financial Corp
(1974 through 1995); Executive Vice President, S.V. Associates (1971 through
1974); United Factors and UM&M Financial Corporation,
27
<PAGE>
divisions of United Merchants and Manufacturers, Inc., attained position of
Senior Vice President (1948 through 1971).
WADE HOTSENPILLER is the Company's Senior Vice President and Chief
Operating Officer (commencing December 19, 1996). Formerly, he was President and
Director (June 1986 to July 1996) and Chief Operating Officer (April 1984 to
July 1996) of Washington Federal Savings Bank, Herndon, VA. From 1976 to 1983,
he was an Executive Vice President and functioned as Chief Operating Officer of
Perpetual American Bank, FSB. Mr. Hotsenpiller is a certified public accountant
and served in various audit positions with increasing responsibilities for
Arthur Andersen & Co. From 1964 to 1976.
PETER MATTHY joined the Company in April 1996 in the capacity of Executive
Vice President and Chief Operating Officer. Mr. Matthy remains the Company's
Executive Vice President and has now assumed the functional responsibilities of
nationwide Director of Sales and Marketing. Prior to joining the Company, Mr.
Matthy was employed by IBJ Schroder Bank & Trust Company for 15 years, as an
executive Vice President with responsibilities as Director of Corporate Banking,
a Member of the Management Committee, and Chairman and Chief Executive Officer
of its leasing subsidiary. He previously was a corporate banking executive at
Bankers Trust Company from 1968 to 1978.
RICHARD A. BRASCH has been General Counsel of the Company since January
1996. He joined the Company in 1993 as Associate General Counsel. Prior to
joining the Company, Mr. Brasch was a partner/shareholder in the law firm of
Stearns Weaver Miller Alhadeff & Sitterson, P.A. in Miami, Florida where he
worked from 1985 to 1993 with a concentration on representing financial
institutions.
Directors of the Company are elected to serve until the next annual meeting
of shareholders of the Company and until their respective successors are elected
and qualified. Officers serve at the pleasure of the Board.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officer and directors, and persons who own more than 10% of its common stock, to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("Commission"). Officers, directors and greater than 10%
stockholders are required by the Commission to furnish the Company with copies
of all Section 16(a) forms that they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Form 5 was
required for those persons, the Company believes that during 1996 all filing
requirements applicable to its officers, directors and greater than 10%
stockholders were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The following tables provide certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the four most highly compensated executive
officers of the Company whose total compensation exceeded $100,000 for the year
ended December 31, 1996.
28
<PAGE>
SUMMARY COMPENSATION TABLE
AWARDS -
Securities
Name and Underlying All Other
Principal Position Year Salary Bonus Options (1) Compensation (2)
- ------------------ ---- -------- ------ ----------- ---------------
Craig Fishman
President and CEO 1996 $170,330 $ -0- 30,000 $3,000
1995 $161,177 $ -0- - $3,000
1994 $126,405 $ -0- - $2,578
Leon Fishman
Director/Vice Chairman 1996 $295,009 $ -0- - $3,000
1995 $377,885 $ -0- - $3,000
1994 $375,000 $ -0- - $3,000
Lawrence M. Winkler 1996 $169,450 $ -0- 20,000 $3,000
Secy/Treasurer & 1995 $154,732 $ -0- - $3,000
CFO 1994 $143,533 $2,500 - $2,889
Richard Brasch 1996 $109,328 $4,000 12,500 $3,000
General Counsel 1995 $132,023 $3,000 - $2,640
1994 $110,533 $2,500 - $2,211
Peter Matthy 1996 $105,435 $ -0- 20,000 -
Exec. Vice President, 1995 $ -0- $ -0- - -
Director of Sales & 1994 $ -0- $ -0- - -
Marketing
- --------------------------------------------
(1) No SARs have been granted.
(2) Represents contributions to 401(k) plan.
INDIVIDUAL GRANTS IN LAST FISCAL YEAR
Option Grants in Last Fiscal Year
Individual Grants
Number of Percent of
Securities Total Options Exercise
Underlying Granted to or
Options Employees in Base Expiration
Name Created Fiscal Year Price Date
- --------------------------------------------------------------------------------
Craig Fishman 30,000 36.4% 5.62 6/30/2001
Leon Fishman - - -
Lawrence M. Winkler 20,000 24.2 5.62 6/30/2001
Peter D. Matthy 20,000 24.2 5.62 6/30/2001
Richard A. Brasch 12,500 15.2 5.62 6/30/2001
------ ----
82,500 100.0%
====== =====
<TABLE>
AGGREGATE OPTIONS/SARS EXERCISED IN LAST FISCAL YEAR AND F/Y END OPTION/SAR
VALUE
<CAPTION>
Value of Unexercised
Shares Unexercised Options In-the-Money Options/SARs
Acquired on Value at F/Y End at F/Y End
Name Exercise Realized (Exercisable/Unexercisable) (Exercisable/Unexercisable)
- --------------- ------------ --------- ------------------------- --------------------------
<S> <C> <C> <C> <C>
Craig Fishman - - 2,500/32,500 - /$ -0-
Leon Fishman - - 7,500/ - - /$ -0-
Peter Matthy - - - /20,000 - /$ -0-
Lawrence Winkler - - 5,000/20,000 - /$ -0-
Richard Brasch - - - /12,500 - /$ -0-
</TABLE>
29
<PAGE>
Directors who are not officers of the Company receive a fee of $2,000 per
board or committee meeting attended in person, plus reimbursement for their
expenses associated with attending these meetings. Commencing November 1995,
Directors who are not officers of the Company receive a fee of $500 per special
board or committee meeting attended by conference telephone call. Directors who
are officers of the Company receive no compensation for serving as directors,
but are reimbursed for out-of-pocket expenses related to attending board or
committee meetings. In addition, commencing August 1996 and continuing through
December 31, 1997, Directors who are not officers of the Company are granted
1,000 stock options per meeting attended at an exercise price equal to the
greater of (i) 7.00 per share and (ii) 110% of the average of the closing bid
and ask prices for the Company's common stock on the most recent three days on
which trading occurred in the Company's common stock preceding such grants.
The options are exercisable until December 31, 1999.
The Company is party to employment agreements with four executive officers
of the Company. The following sets forth their principal terms.
The Company is party to an employment agreement with Craig Fishman, the
Company's President and Chief Executive Officer. Effective July 1, 1996, Mr.
Fishman's current base salary is $200,000 and is subject to annual cost of
living increases, but not less than 5% per annum. Any other increases in his
salary are at the discretion of the Compensation Committee. The agreement
contains confidentiality and non-compete provisions, obligates the Company to
provide Mr. Fishman with the use of an automobile and requires the Company to
include Mr. Fishman in any benefit plans made available to employees generally.
The agreement expires by its terms on June 30, 1998. If Mr. Fishman dies or his
employment is terminated (other than for cause) during the term of the
agreement, the Company is obligated to pay him an amount equal to the lesser of
(x) one year's compensation and (y) the compensation due for the then remainder
of the agreement (but in no event less than six months compensation).
The Company is party to an employment agreement with Peter D. Matthy, the
Company's Executive Vice President. Effective July 1, 1996, Mr. Matthy's current
base salary is $150,000; salary increases are at the discretion of the
Compensation Committee. The agreement contains confidentiality and non-compete
provisions, obligates the Company to provide Mr. Matthy with the use of an
automobile and requires the Company to include Mr. Matthy in any benefit plans
made available to employees generally. The agreement expires by its terms on
June 30, 1998. If Mr. Matthy dies or his employment is terminated (other than
for cause) during the term of the agreement, the Company is obligated to pay him
an amount equal to one year's compensation.
The Company is party to an employment agreement with Lawrence M. Winkler,
the Company's Secretary/Treasurer and Chief Financial Officer. Effective July 1,
1996, Mr. Winkler's current base salary is $160,775; salary increases are at the
discretion of the Compensation Committee. The agreement contains confidentiality
and non-compete provisions, obligates the Company to provide Mr. Winkler with
the use of an automobile and requires the Company to include Mr. Winkler in any
benefit plans made available to employees generally. The agreement expires by
its terms on June 30, 1998. If Mr. Winkler dies or his employment is terminated
(other than for cause) during the term of the agreement, the Company is
obligated to pay him an amount equal to the lesser of (x) one year's
compensation and (y) the compensation due for the then remainder of the
agreement (but in no event less than six months compensation).
30
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 20, 1997, the amount of common
stock of the Company which may be deemed beneficially owned: (i) by each person
known to the Company to be the beneficial owner of more than 5% of the aggregate
shares of the Company's outstanding common stock, (ii) by each of the named
executive officers in the Summary Compensation Table, (iii) by each director of
the Company and (iv) by all officers and directors as a group.
Common Shares Exercisable Percent of
Name and Address Beneficially Owned Options Included Class
- ------------------ ------------------- ---------------- ----------
Leon Fishman
20191 E. Country Club Dr.
N. Miami Beach, FL 33180 253,750 7,500 10.91%
Eugene Haskin
4000 Island Blvd.
N. Miami Beach, FL 37160 242,500 2,000 10.45%
Lawrence M. Winkler
1300 Crystal Drive
Arlington, VA 22202 5,050 5,000 0.03%
James Spector
10580 SW 77 Terrace
Miami, FL 33173 4,200 4,000 0.02%
Peter Matthy
5812 Highland Drive
Chevy Chase, MD 70815 7,000 - 0.03%
Alan Freeman
20191 East Country Club Drive
Aventura, FL 33180 4,000 4,000 0.02%
Craig Fishman
2687 Hillsman Street
Falls Church, VA 22043 7,300 2,500 0.03%
David W. Campbell
6410 Nobel Rock Court
Clifton, VA 22024 4,000 3,000 0.02%
William H. Savage
314 Franklin Street
Alexandria, VA 22314 11,000 4,000 0.04%
Edward A. McNally
120-41 Prospect Street
Ridgefield, CT 06837 5,000 4,000 0.02%
Lawrence Vecker
1600 Parker Avenue
Fort Lee, NJ 07024 4,000 4,000 0.02%
Timothy G. Ewing
Value Partners, Ltd.
2200 Ross Avenue
Dallas, TX 75201 661,835 - 26.57%
Tweedy, Browne Company L.P.
52 Vanderbilt Avenue
New York, NY 10017 245,150 - 10.58%
Franklin Resources, Inc.
777 Mariners Island Blvd.
San Mateo, CA 94403-7777 132,000 - 5.69%
Richard A. Brasch
9313 Hamilton Drive
Fairfax, VA 22031 - - -
For all Officers and Directors
as a group (12 persons) 547,800 - 23.20%
31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See Part II, Item 7 of this 10-KSB (Financial Statements).
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements: Page Number
The following Financial statements are submitted in Item 7.
Independent Auditors' Report on Consolidated Financial
Statements and Schedules 34
Consolidated Balance Sheets as of December 31, 1996 and 1995 35
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994 36
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1996, 1995 and 1994 37
Consolidated Statements of Cash Flows for the years
ended December 31, 1996, 1995 and 1994 38-39
Notes to Consolidated Financial Statements for the
year ended December 31, 1996 40-55
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this
report:
Schedule IV Indebtedness of and to Related Parties - Not
Current for the years ended December 31, 1996, 1995 and 1994 56
Schedules other than those listed above have been omitted since they are
either not required or the information is included elsewhere in the
financial statements or notes thereto.
(b) Reports on Form 8-K
None.
(c) Listing of Exhibits
EXHIBIT 3. ARTICLES OF INCORPORATION AND BY-LAWS
Documents incorporated by reference - See Registration Statement
on Form S-1 33-46748
32
<PAGE>
EXHIBIT 4. INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
Documents incorporated by reference - See Registration Statement
on Form S-1 33-46748
Documents incorporated by reference - See the Company's Quarterly
Report on Form 10-QSB for the Quarter Ended September 30, 1995.
EXHIBIT 10. MATERIAL CONTRACTS
Documents incorporated by reference - See Registration Statement
on Form S-1 33-46748
Documents incorporated by reference - See the Company's Annual
Report on Form 10-KSB for the Fiscal Year Ended December 31, 1995
Amendments to Exhibit 10.7 - Revolving Credit and Security Agreement
dated as of May 13, 1994 between IBJ Schroder Bank & Trust Company
(as Lender and as Agent) and Allstate Financial Corporation (as
Borrower), as amended to March 4, 1996.
Ninth Amendment dated as of April 26, 1996 Tenth Amendment dated as
of June 30, 1996
EXHIBIT 10.9 EMPLOYMENT CONTRACTS
Employment and Compensation Agreement, effective as of July 1,
1996, by and between the Company and Craig Fishman.
Employment and Compensation Agreement, effective as of July 1,
1996, by and between the Company and Lawrence M. Winkler
Employment and Compensation Agreement, effective as of July 1,
1996, by and between the Company and Peter D. Matthy
EXHIBIT 21. SUBSIDIARIES OF THE COMPANY
33
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Allstate Financial Corporation
Arlington, Virginia
We have audited the accompanying consolidated balance sheets of Allstate
Financial Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1996. Our
audits also included the financial statement schedule listed in the Index at
Item 13(a) 2. These financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Allstate Financial Corporation
and subsidiaries as of December 31, 1996, and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Deloitte & Touche LLP
Washington, D.C.
February 21, 1997
34
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
<CAPTION>
December 31,
-------------------------------------
1996 1995
----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash $1,624,899 $ 754,295
Receivables:
Finance, net 30,574,239 32,670,706
Purchased life insurance contracts, net 4,493,088 4,292,332
Other 4,394,975 2,756,342
Prepaid expenses 154,434 204,823
Income tax receivable 1,150,289 722,081
Deferred income taxes 893,000 893,000
------- -------
TOTAL CURRENT ASSETS 43,284,924 42,293,579
FURNITURE, FIXTURES AND EQUIPMENT, Net 538,164 537,629
OTHER ASSETS 2,116,343 2,049,323
--------- ---------
$45,939,431 $44,880,531
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 446,360 $ 292,602
Notes payable 14,851,582 13,516,938
Note payable-related party 103,000 103,000
Credit balances of factoring clients 2,964,873 2,333,729
--------- ---------
TOTAL CURRENT LIABILITIES 18,365,815 16,246,269
NONCURRENT PORTION OF NOTES PAYABLE:
Related parties 61,969 58,788
Convertible Subordinated Notes 4,985,110 2,845,110
--------- ---------
TOTAL LIABILITIES 23,412,894 19,150,167
---------- ----------
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; 2,317,919
outstanding at December 31, 1996 and 2,655,128
outstanding at December 31, 1995, exclusive of
shares held in treasury 40,000 40,000
Additional paid-in-capital 18,852,312 18,852,312
Treasury Stock 784,409 shares at
December 31, 1996 and 447,200 at
December 31, 1995 (5,034,584) (2,871,901)
Retained Earnings 8,668,809 9,709,953
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 22,526,537 25,730,364
---------- ----------
$45,939,431 $44,880,531
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
35
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<CAPTION>
Years Ended December 31,
---------------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
INCOME:
Earned discounts $10,025,779 $10,932,331 $ 9,947,678
Fees and other income 2,378,782 2,065,015 2,082,320
--------- --------- ---------
TOTAL INCOME 12,404,561 12,997,346 12,029,998
---------- ---------- ----------
EXPENSES:
Compensation and fringe benefits 3,318,609 3,198,497 2,996,029
General and administrative 2,804,643 2,758,285 2,673,959
Interest expense 1,606,561 983,718 610,531
Provision for credit losses 5,878,167 4,981,646 5,359,159
Commissions 449,225 263,100 155,280
------- ------- -------
TOTAL EXPENSES 14,057,205 12,185,246 11,794,958
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (1,652,644) 812,100 235,040
INCOME TAXES (BENEFITS) (611,500) 331,000 87,500
-------- ------- ------
NET INCOME (LOSS) (1,041,144) $ 481,100 $ 147,540
========== =========== ===========
NET INCOME (LOSS) PER SHARE $( .45) $ 0.16 $ 0.05
============ =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES 2,328,308 2,966,330 3,102,328
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
36
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
-----------------------------------------------
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
--------------------------------------------
<CAPTION>
Common Additional Treasury Retained
Stock Paid in Capital Stock Earnings
------ --------------- --------- -----------
<S> <C> <C> <C>
Balance - January 1, 1994 $40,000 $18,852,312 - $9,081,313
Net Income - - - 147,540
------ ---------- ------ ---------
Balance - December 31, 1994 40,000 18,852,312 9,228,853
Exchange of Convertible
Subordinated Notes for
447,200 shares of common stock - - (2,871,901) -
Net Income - - - 481,100
------- ----------- ------------ ----------
Balance - December 31, 1995 $40,000 $18,852,312 $(2,871,901) $9,709,953
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
======= =========== ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements
37
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1996 1995 1994
----------- ------------ ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (Loss) $(1,041,144) $ 481,100 $ 147,540
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net 107,664 100,093 92,801
Provision for credit losses 5,878,167 4,981,646 5,359,159
Changes in operating assets and liabilities;
Decrease/(Increase) in other receivables 133,237 632,296 (1,044,840)
(Increase)/Decrease in prepaid expenses 50,389 (6,732) 54,030
Decrease/(Increase) in other assets 461,955 397,760 997,247
(Decrease)/Increase in accounts payable
and accrued expenses 153,758 (11,236) 83,200
Decrease/(Increase) in deferred income tax asset - 16,000 (307,000)
Increase in income tax receivable (428,208) (93,958) (273,271)
-------- ------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,315,818 6,496,969 5,108,866
========= ========= =========
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of finance receivables,
including repurchases and life insurance
contracts (199,191,058) (172,311,795) (188,868,852)
Collections of finance receivables,
including repurchases and life insurance
contracts 192,907,757 162,403,869 177,854,250
Increase/(Decrease) in credit balances
of factoring clients 631,144 668,691 (246,290)
Purchase of furniture, fixtures and equipment (108,199) (158,691) (152,639)
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (5,760,356) (9,397,926) (11,413,531)
---------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit
and other borrowings 58,584,464 72,153,625 66,975,004
Principal payments on line of credit
and other borrowings (57,246,639) (70,228,402) (61,691,628)
Treasury Stock Acquisition costs (22,683) (33,901) -
------- ------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,315,142 1,891,322 5,283,376
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 870,604 (1,009,635) (1,021,289)
CASH, Beginning of year 754,295 1,763,930 2,785,219
------- --------- ---------
CASH, End of year $ 1,624,899 $ 754,295 $ 1,763,930
=========== ============= ===========
</TABLE>
See Notes to Consolidated Financial Statements
38
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(continued)
<CAPTION>
Years Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $1,605,196 $1,014,406 $ 631,187
========== ========== ==========
Taxes paid $ 14,321 $ 408,958 $ 667,919
========== ========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfer of finance and other
receivables to other assets $2,004,423 $ 267,750 $ 62,508
========== ========== ==========
Issuance of Convertible Subordinated
Notes in exchange for common stock $2,148,000 $2,838,000 $ -
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
39
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
The accounting and reporting policies of Allstate Financial Corporation and
its subsidiaries (collectively, the "Company") conform to generally accepted
accounting principles and the general practices within the financial services
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flows are summarized below. In
preparing its financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates shown in the consolidated balance sheet and the statement of income.
Actual results could differ significantly from those estimates. In the normal
course of business, the Company encounters economic risks. Economic risk is
comprised of interest rate risk, credit risk, and market risk. Credit risk is
the risk of default on the Company's loan portfolio that results from the
borrowers' inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of collateral underlying loans
receivable and the valuation of the Company's real estate owned.
The determination of the allowance for loan losses is based on estimates
that are susceptible to significant changes in the economic environment and
market conditions. Management believes that, as of December 31, 1996, the
allowance for loan losses is adequate based on the information currently
available. A worsening or protracted economic decline could increase the
likelihood of losses due to credit and market risks and could create the need
for substantial increases to the allowance for loan losses.
CONSOLIDATION
- -------------
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all material intercompany
transactions. No segment of its business, other than factoring and general
financing is significant in relation to consolidated total assets and revenues.
FINANCE RECEIVABLES AND ALLOWANCE FOR CREDIT LOSSES
- ---------------------------------------------------
Finance Receivables consist of factored accounts receivable, Collateralized
Advances (as defined below), overadvances secured by general liens and
non-earning receivables. Factored accounts receivable are stated at the face
amount outstanding, net of unearned discounts and an allowance for credit
losses. Advances collateralized by inventory, equipment, real estate and other
property (collectively, "Collateralized Advances") and overadvances secured by
general liens are stated at the aggregate principal amount outstanding plus
accrued earnings, net of an allowance for credit losses. Non-earning receivables
are stated at the amount advanced by the Company plus earnings accrued to the
time the accrual of earnings is suspended, net of an allowance for credit
losses. If the Company determines that it is not likely to recover from any
source the amount of its initial advance and the earned but unpaid discount,
then the Company promptly increases the allowance for credit losses or reduces
the carrying value of the non-earning receivable to its estimated fair value and
makes a charge to its allowance for credit losses, in an amount equal to the
difference between the Company's investment in the non-earning receivable and
its estimated fair value.
40
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
The allowance for credit losses is maintained at a level which, in
management's judgment, is sufficient to absorb losses inherent in the finance
receivables portfolio. The allowance for credit losses is based upon
management's review and evaluation of the finance receivables portfolio. Factors
considered in the establishment of the allowance for credit losses include
management's evaluation of specific finance receivables, the adequacy of
underlying collateral, historical loss experience, expectations of future
economic conditions and their impact on particular industries and individual
clients, and other discretionary factors. The allowance for credit losses is
based on estimates of potential future losses, and ultimate losses may vary from
the current estimates. These estimates are typically reviewed quarterly and as
adjustments become necessary, the effects of the change in estimates are charged
against the allowances for credit losses in the period in which they become
known. Finance receivables may be reclassified on the Company's balance sheet as
"other receivables" or "other assets" when, in management's opinion, such a
reclassification most accurately reflects the character of the asset. At the
time of any such reclassification, the Company usually suspends or discontinues
the accrual of earnings for financial statement purposes. If at any time the
Company determines it is not likely to recover a finance receivable in full, the
receivable is appropriately written down against the allowance. Finance
Receivables are fully charged off against the allowance when the Company has
exhausted its efforts against the client's customer, the client, guarantors,
other third parties and any additional collateral retained by the Company.
Effective January 1, 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114, "Accounting By Creditors for Impairment of
a Loan." This statement required the Company to measure the value of each
impaired loan based on the present value of its expected future cash flows
discounted at the loan's effective interest rate or, as a practical expedient,
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Effective January 1, 1995, the Company adopted
SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures." This Statement amends SFAS No. 114, to allow
creditors to use existing methods for recognizing interest income on impaired
loans. The Company's adoption of these Statements did not have a material impact
on its financial position or results of operations.
PURCHASED LIFE INSURANCE CONTRACTS
- ----------------------------------
The Company purchases life insurance contracts, at a discount, from
individuals facing life threatening illnesses. The life insurance contracts are
purchased after a review of the insured's medical records by an independent
physician who verifies the insured's physical condition and estimates his or her
life expectancy. Historically, the Company required up to three independent
medical reviews but, based on its experience, management no longer believes
multiple medical reviews are necessary. Life insurance contracts are purchased
from individuals who have an anticipated life expectancy of up to sixty months.
Purchase discounts, which are accounted for as unearned discounts, are based on
the estimated life expectancy of the insured individual, as determined by the
independent physician(s). At the time of purchase, the Company is named
beneficiary of the policy. Future insurance policy premiums are usually paid by
the Company. Unearned discounts are recorded as income using the interest method
over the estimated life expectancy of the individual insured. The Company
reviews such life expectancies on a quarterly basis and records adjustments as
necessary. Actual results could differ significantly from those estimated based
on life
41
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
expectancies. Factors such as life extending treatments (or a cure) for certain
illnesses could impact the recognition of unearned discounts. Most of the life
insurance contracts purchased are underwritten by highly rated insurance
companies and, in many cases, are backed by state guaranty funds. Accordingly,
management does not believe that credit risk is material and, therefore, no
allowance for credit losses is maintained with respect to purchased life
insurance contracts. The Company is curtailing the purchase of life insurance
policies to better focus on its core commercial finance activities.
OTHER RECEIVABLES
- -----------------
Other receivables consist primarily of amounts receivable by the Company
where the source of payment is expected to be from legal proceedings or other
collection efforts instituted against a client's customer, guarantors and/or
other third parties. Other receivables typically arise from the reclassifica-
tion of finance receivables. At the time of reclassification, other receivables
are stated at a value estimated by management based on management's assessment
of the likelihood of payment or success on the merits, the ability of the third
party to pay and other discretionary factors. Also at the time of
reclassification, the accrual of earnings is usually suspended or discontinued
for financial statement purposes. Write-downs, if any, at the time of
reclassification are charged against the allowance for credit losses.
Management's estimates of the fair value of other receivables are typically
reviewed quarterly and as adjustments become necessary, the effects of the
change in estimates are charged against the allowance for credit losses. The
costs of carrying and collecting other receivables are generally expensed in
operations during the period in which they are incurred. Other receivables are
subject to legal and other collection processes and contingencies over which the
Company does not have exclusive control. Accordingly, the amounts which the
Company ultimately receives in payment of other receivables could differ
significantly from management's estimates.
FURNITURE, FIXTURES AND EQUIPMENT
- ---------------------------------
Furniture, fixtures and equipment are recorded at cost. Depreciation is
computed using straight line and accelerated methods over the estimated useful
lives of the related assets.
OTHER ASSETS
- ------------
At the date of acquisition, other assets are recorded at fair value less
estimated selling costs. Also at the date of acquisition, the accrual of
earnings is usually suspended or discontinued for financial statement purposes.
Write-downs to fair value at the date of acquisition are charged to the
allowance for credit losses. Subsequent to acquisition, the asset is adjusted to
the lower of cost or fair value less estimated costs to sell and adjustments, if
any, are charged against the allowance for credit losses. Operating expenses
pertaining to other assets are expensed in operations in the period in which
they are incurred. Gains or losses on disposition of other assets are first
reflected in the allowance for credit losses. Any gain which exceeds the amount,
if any, previously written-off will be reflected in current income.
The amounts ultimately recovered by the Company from other assets could
differ materially from the amounts used in arriving at the net carrying value of
the assets because of future market factors beyond the Company's control,
adversarial actions taken by the client or other owner of the property
42
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
foreclosed or changes in the Company's strategy for recovering its investment.
See (h) Credit Loss Policy and Experience.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
In accordance with the requirements of SFAS No. 107, "Disclosure About Fair
Value of Financial Instruments", which requires the disclosure of fair value
information about financial instruments when it is practicable to estimate that
fair value and excessive costs would not be incurred, the following methods and
assumptions were used in estimating the fair value of financial instruments:
Cash and Cash Equivalents -- The carrying amounts for cash and cash
equivalents approximates fair value.
Finance Receivables, Purchased Life Insurance Contracts, Commitments and
Other Receivables -- The determination of the fair value of these assets is
not practicable to estimate as there is no secondary market and the Company
holds these assets to maturity.
Notes payable which are primarily adjustable rate notes, are recorded at
book values, which approximate the respective fair values.
UNEARNED AND EARNED DISCOUNTS ON FACTORED ACCOUNTS RECEIVABLE
- -------------------------------------------------------------
At the time of purchase, the unearned discount is deducted from the face
amount of the account receivable purchased and is recorded as a reduction to
such receivable. Unearned discounts are recognized as income in accordance with
the respective terms of the accounts receivable factoring and security agreement
between the Company and each of its clients. The factoring agreement contains an
earnings schedule detailing the discount the Company is entitled to charge at
various time intervals (typically a uniform discount during the first 30 days
following the purchase and an incrementally higher discount every 15 days
thereafter). The Company recognizes discounts on the first day of each time
interval. The Company's method of recognizing earned discounts does not differ
materially from the interest method. At the time an account receivable is
purchased, a due date is set by management based on the anticipated payment
date. This anticipated payment date is used to identify past due receivables.
The accrual of earned discounts is discontinued when, in the opinion of
management, the collection of additional earnings from the client's customer,
the client, guarantors or collateral held, if any, is unlikely. Accounts
receivable which have been identified as past due may continue to accrue
earnings if, in the opinion of management, collection of the earnings from the
client's customer, the client, guarantors or collateral held, if any, is likely.
When accounts receivable are placed on non-accrual status, earned discounts
theretofore accrued in the current year are charged against current year's
earnings if, in the opinion of management, the collection of such earnings is
unlikely. Earned discounts accrued in prior years are charged to the allowance
for credit losses if, the opinion of management, the collection of such earnings
is unlikely.
43
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
EARNED DISCOUNTS ON COLLATERALIZED ADVANCES AND OVERADVANCES SECURED BY
GENERAL LIENS
- -----------------------------------------------------------------------
Earned discounts on Collateralized Advances accrue typically on the highest
outstanding amount of the advance during each calendar month (or fraction
thereof). Earned discounts on overadvances secured by general liens accrue
typically on the outstanding amount of the overadvance during successive 15- day
intervals. In both cases, accrued earnings are typically required to be paid in
full no less frequently than monthly in arrears.
FEES AND OTHER INCOME
- ---------------------
Fee income includes application fees, letter of credit and guaranty fees,
and commitment or facility fees received from clients. Commitment and facility
fees are deferred and recognized over the term of the commitment or facility on
a straight line basis. Application fees are paid by clients to the Company to
cover the cost of performing credit investigations and field reviews and are
recognized when received. Letter of credit and guaranty fees are usually for a
sixty- to ninety-day period and are recognized when the letter of credit or
letter of guaranty is issued.
Other income includes supplemental discounts, interest income, finder's fees
and miscellaneous income.
INCOME TAXES
- ------------
The Company recognizes the amount of taxes payable or refundable in the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In addition, the Company will reduce any deferred tax
assets by the amount of any tax benefit that more than likely will not be
realized.
NET INCOME PER SHARE
- --------------------
Net income per share has been computed by dividing net income by the
weighted average number of common shares and common share equivalents
outstanding during each period. The Company's Convertible Subordinated Notes
were anti-dilutive for purposes of calculating earnings per share in 1996 and
1995.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
Disposed Of." This Statement prescribes the accounting for the impairment of
long-lived assets, such as property, plant and equipment, identifiable tangible
assets and goodwill related to those assets. An impairment loss is recorded when
the undiscounted cashflows from the use and eventual disposal of the asset is
less than the carrying value of the asset. The Company adopted this Statement
effective January 1, 1996. The adoption of this Statement did not have a
material impact on the Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This Statement gives the
Company the option of either: 1) continuing to account for stock options and
other forms of stock compensation paid to employees under the current
44
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
accounting rules (APB No. 25, "Accounting for Stock Issued to Employees")
while providing the disclosures required under SFAS No. 123, or 2) adopting
SFAS No. 123 accounting for all stock compensation arrangements. The Company
continues to account for stock options under APB No. 25 and provides the
additional disclosures as required by SFAS No. 123 (See Note H).
B. RECEIVABLES
-----------
Finance receivables consist of the following:
December 31,
-----------------------------
1996 1995
Factored accounts receivable $22,390,229 $25,169,997
Collateralized Advances 8,808,455 10,842,047
Overadvances and accrued earnings
collateralized by general liens 1,849,778 1,407,233
Non-Earning Receivables 4,547,893 1,588,545
--------- ---------
Gross Finance Receivables 37,596,355 39,007,822
Less: Participation (1,000,000) -
Less: Unearned discount (3,443,144) (3,986,148)
Less: Allowance for credit losses (2,578,972) (2,350,968)
---------- ----------
Finance receivables, net $30,574,239 $32,670,706
=========== ===========
Factored accounts receivable usually become due within a maximum of 90
days. After this time, the Company either requires the client to repay the
amount advanced on the receivable plus the earned discount under the full
recourse provisions of its agreements or, depending on an analysis of
collectability, extends the payment terms of the receivable through a process
referred to as "repurchasing" the receivable. If at any time the Company
determines that it is unlikely to receive payment on a factored account
receivable, the Company retains the right to require its clients to repay the
amount the Company has advanced on the receivable plus the amount of discount
earned.
Collateralized Advances secured by fixed assets (e.g., equipment or real
estate) are required to be repaid based typically on a 36 month amortization
schedule (although the amortization schedule in certain circumstances may be
significantly longer) with a final balloon payment due not more than one year
after the making of the Collateralized Advance. If at the time the balloon
payment is due the Company's funding relationship with the client is extended,
the Company will typically renegotiate the balloon payment. Collateralized
Advances secured by current assets (e.g. inventory) are subject to a daily or
weekly borrowing base formula and come due in a single, lump sum payment not
more than one year after the making of the initial such Collateralized Advance.
If at the time such payment is due the Company's funding relationship with the
client is extended, the Company will typically extend the maturity of the lump
sum payment.
Overadvances secured by general liens are required to be repaid in full
(either in installments or in a single, lump sum payment) in as little as one
week or as long as six months in accordance with a written agreement between the
Company and its client.
45
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
Purchased life insurance contracts consist of:
December 31,
----------------------------
1996 1995
----------- -----------
Purchased life insurance contracts $5,368,266 $5,155,828
Unearned discount (835,178) (861,496)
Amount withheld (40,000) -
Due other beneficiaries - (2,000)
---------- ----------
Purchased life insurance contracts, net $4,493,088 $4,292,332
========== ==========
Amounts "due other beneficiaries" represents Lifetime Options' obligation to pay
amounts to third parties upon its receipt of proceeds from the underlying life
insurance policies. Included in purchased life insurance contracts at December
31, 1996 and 1995 are $1.7 million and $2.0 million, respectively, of life
insurance contracts insuring individuals with life expectancies in excess of
twelve months.
Other receivables consist of the following:
December 31,
----------------------------
1996 1995
---------- ----------
Notes receivable $ - $ 68,284
Miscellaneous 5,394 18,868
Third party receivables in collection 4,389,580 2,669,190
$4,394,974 $2,756,342
Changes in the allowance for credit losses were as follows:
BALANCE, January 1, 1994 ...... $ 2,120,127
Provision for credit losses 5,359,159
Receivables charged off ... (5,015,957)
Recoveries ................ 47,449
---------
BALANCE, December 31, 1994 .... 2,510,778
Provision for credit losses 4,981,646
Receivables charged off ... (5,193,525)
Recoveries ................ 52,069
---------
BALANCE, December 31, 1995 .... $ 2,350,968
Provision for credit losses 5,878,167
Receivables charged off ... (5,711,065)
Recoveries ................ 60,902
---------
BALANCE, December 31, 1996 .... $ 2,578,972
===========
Impairment of loans having recorded investments of $3,396,661 at
December 31, 1996 have been recognized in conformity with FASB statements
No. 114 as amended by FASB statement No. 118. The average recorded
investment in impaired loans during 1996 was $3,396,661. The total allowance
for credit losses related to these loans was $525,000 at December 31, 1996.
The Company suspended the recording of income from these loans once deemed
impaired. Receipts of cash are credited to the outstanding loan
46
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
balance. At December 31, 1995 and December 31, 1994, loans totalling
$3,307,474 and $6,583,262, respectively, had specific reserves of $1,549,500
and $2,075,716.
C. FURNITURE, FIXTURES AND EQUIPMENT
---------------------------------
The Company's investment in property and equipment consists of the
following:
December 31,
---------------------------
1996 1995
--------- ----------
Furniture , fixtures and equipment $ 993,039 $1,109,894
Automobiles 149,141 181,703
Less: Accumulated depreciation (604,016) (753,968)
$ 538,164 $ 537,629
The furniture, fixtures and equipment are pledged as collateral under a
revolving line of credit (see Note F).
D. OTHER ASSETS
------------
Other assets consist of:
December 31,
------------------------------
1996 1995
---------- ----------
Inventory held for sale $ - $ 20,000
Commercial property held for sale 1,883,768 862,750
Residential property held for sale - 910,000
---------- ----------
1,883,768 1,792,750
Condominium, not used in trade or
business 232,575 232,575
Deferred loan costs - 23,998
Other - -
---------- ----------
$2,116,343 $2,049,323
========== ==========
Included in Commercial property held for sale and Residential property held
for sale are properties for which the Company does not hold title. Rather, the
Company holds mortgage liens against these assets in which the client or other
obligor has no equity in the collateral at its current estimated fair value.
Proceeds for repayment are expected to come only from the sale of the
collateral, and either the client or other obligor has abandoned control of the
asset or it is doubtful the client or other obligor will rebuild equity in the
collateral or repay the receivable by other means in the foreseeable future.
E. CREDIT BALANCES OF FACTORING CLIENTS
------------------------------------
At December 31, 1996 and 1995, credit balances of factoring clients consist
of: (i) a holdback reserve of $1,206,756 and $1,242,450, respectively, which is
payable to clients upon the collection of factored accounts receivable and (ii)
excess cash collateral of $1,758,117 and $1,091,279 respectively.
47
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
F. NOTES PAYABLE
-------------
Notes payable consist of:
December 31,
------------------------------
1996 1995
------------ ------------
Notes payable - related parties;
interest at 1% over prime due
December 31, 1996 (being extended
to December 31, 1999) and on demand;
unsecured $164,969 $161,788
Notes payable; interest payable
at 1% over prime due December 31,
1996 (being extended to December 31, 1999)
and on demand, unsecured 21,827 21,827
Convertible Subordinated Notes due
September 30, 2000 - interest at 1.25%
over prime; unsecured; total authorized
amount - $5,000,000 4,978,000 2,838,000
Revolving line of credit - interest
at 3/4% over the base rate; collateralized
by finance receivables and personal
property; total line - $25,000,000 14,825,012 12,262,522
Line of credit - interest at 1% over
prime, expired December 31, 1996,
collateralized by specific purchased life
insurance policies; total line
$2,000,000 - 1,239,699
Capitalized Lease - Payable over 24 months;
final payment due April, 1998, collateralized
by automobile. 11,853 -
----------- -----------
$20,001,661 $16,523,836
=========== ===========
At December 31, 1996, 1995 and 1994, the prime rate was 8.25%, 8.50% and
8.75%, respectively.
These notes payable are classified on the balance sheet as follows:
December 31,
-------------------------------
1996 1995
----------- -----------
Current portion of notes payable $14,851,582 $13,516,938
Current portion of notes payable -
related party 103,000 103,000
Noncurrent portion of notes payable -
related parties 61,969 58,788
Noncurrent portion of notes payable -
Convertible Subordinated Notes 4,985,110 2,845,110
--------- ---------
$20,001,661 $16,523,836
=========== ===========
48
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
Aggregate annual principal payments on notes payable for the five years
subsequent to December 31, 1996 are as follows:
Twelve Months Ending December 31,
---------------------------------
1997 $14,948,729
1998 5,853
1999 69,079
2000 4,978,000
2001 -
-----------
$20,001,661
===========
As of December 31, 1996 the Company had approximately $10.1 million
available under a $25.0 million secured revolving line of credit. The credit
facility contains a $5.0 million sub-facility for the issuance of letters of
credit, a $2 million sub-facility (which under certain circumstances may
increase to $4 million) the proceeds of which may be used by the Company to make
advances to clients secured by machinery and 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. The Company is subject to
covenants which are typical in revolving credit facilities of this type. The
current maturity date of this credit facility is May 13, 1997. The Company is
currently discussing with its lenders a renewal of this credit facility.
Bank commitment fee expense for the years ended December 31, 1996, 1995 and
1994 was $38,400, $41,900, and $24,700, respectively.
During 1996 Lifetime Options, Inc., a Viatical Settlement Company (a
wholly-owned subsidiary of the Company), had a $2 million revolving line of
credit with a local federal savings bank. This line of credit expired on
December 31, 1996 at which time all indebtedness was paid in full.
As of December 31, 1996 and December 31, 1995, the Company had outstanding
approximately $4,978,000 and $2,838,000, respectively, in aggregate principal
amount of Convertible Subordinated Notes issued in exchange for shares of the
Company's common stock (currently held by the Company as treasury stock). The
Convertible Subordinated Notes outstanding at December 31, 1995 were issued in
exchange for 447,200 shares of common stock and the Convertible Subordinated
Notes outstanding at December 31, 1996 were issued in exchange for 785,475
shares of common stock (including the 447,200 shares of common exchanged prior
to December 31, 1995). The Convertible Subordinated Notes (i) mature on
September 30, 2000, (ii) currently bear interest at a rate of 9.5% per annum,
which rate of interest may fluctuate with the prime rate, but may not fall below
8% nor rise above 10% per annum, (iii) are convertible into common stock of the
Company at $7.50 per share, (iv) are subordinated in right of payment to the
Company's obligations under its secured revolving credit facility and (v) were
issued pursuant to an indenture which contains certain covenants which are less
restrictive than those contained in the Company's secured revolving credit
facility. Upon the occurrence of certain change of control events, the holders
of the Convertible Subordinated Notes have the right to have their notes
redeemed at par. During 1996, $8,000 of Convertible Subordinated Notes were
converted into 1,066 shares of common stock of the Company.
The majority of the notes payable to related parties arose from cash
advances made to the Company prior to 1990 and are due to individuals related to
the former principal owners of the Company. Interest expense on notes
49
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
payable to related parties for the years ended December 31, 1996, 1995 and 1994
was $15,400, $16,200, and $33,400, respectively.
G. SHAREHOLDERS' EQUITY
--------------------
On September 11, 1995, and January 12, 1996 the Company exchanged its
Convertible Subordinated Notes for an aggregate of 785,475 shares of its stock
currently held in the Company's treasury. Costs incurred in this transaction
amounted to $22,683 in 1996 and $33,901 in 1995. For details of this
transaction, see Note F.
H. STOCK OPTION AND BENEFIT PLANS
------------------------------
The Company has reserved 275,000 shares of common stock for issuance under
its qualified stock option plan. Options to purchase common stock are granted at
a price equal to the fair market value of the stock at the date of grant or 110%
of fair market value of the stock at the date of grant for stockholders owning
10% or more of the combined voting stock of the Company. The following table
summarizes qualified stock option transactions from 1994 through 1996.
Total Option Price
Options Per Share
------- -----------------
Outstanding, January 1, 1994 94,371 $7.00 to $14.00
Granted 1,200 $5.75 to $ 6.50 (1)
Forfeited (1,134) $6.50 to $14.00
-------
Outstanding, December 31, 1994 94,437 $5.750 to $14.000
Granted 1,200 $5.375 to $ 7.6875
Forfeited (53,470) $5.875 to $14.00
--------
Outstanding, December 31, 1995 42,167 $5.375 to $14.00
Granted 116,100 $5.62 to $ 6.75
Forfeited (24,867) $5.437 to $14.00
--------
Outstanding, December 31, 1996 133,400
=======
Exercisable, December 31, 1996 15,794
=======
- ------------------------------------
(1) In May 1994, 11,200 stock options issued in 1992 and 1993 at $11.6250
to $17.000, were repriced to $6.50.
The Company has reserved 150,000 shares of common stock for issuance under
its non-qualified stock option plan. Options to purchase shares of common stock
are granted at a price equal to the fair value of the stock at the date of grant
except in the case of options granted to directors, in which case the minimum
price is the greater of $7.00 and 110% of fair value at the time of grant. The
following table summarizes non-qualified stock option transactions from 1994
through 1996:
50
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
Total Option Price
Options Per Share
-------- ----------------
Outstanding, January 1, 1994 21,668 $7.125 to $14.00
Exercised - $7.125 to $14.00
Forfeited (13,000) $
--------
Outstanding, December 31, 1994 8,668 $7.125 to $14.000
Granted 10,000 $5.600
Forfeited ( 6,668) $7.125
--------
Outstanding, December 31, 1995 12,000 $5.600 to $14.000
Granted 23,000 $7.000
Forfeited (10,000) $5.600
--------
Outstanding, December 31, 1996 25,000
=======
Exercisable, December 31, 1996 25,000
=======
The table below summarizes the stock option activity for both plans:
1996 1995 1994
------- ------- -------
Outstanding at January 1 54,167 103,105 116,039
Granted 139,100 11,200 1,200
Exercised -- -- --
Canceled (34,867) (60,138) (14,134)
Outstanding at December 31 158,400 54,167 103,105
Exercisable at December 31 40,794 34,231 71,368
The weighted average fair value at date of grant for options granted
during 1996 and 1995 was $2.37 and $2.64, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model using an
expected option life of 3.9 years and 4.2 years in 1996 and 1995, and the
following weighted average assumptions, respectively, for 1996 and 1995:
dividend yield - none either year; interest rate - 6.25% and 6.17%; volatility -
42.00% for both years. Weighted average option exercise price information for
years 1996, 1995 and 1994:
Per Share 1996 1995 1994
----- ----- -----
Outstanding at January 1 $8.64 $8.56 $8.58
Granted 5.96 5.67 6.21
Exercised -- -- --
Canceled 7.79 7.68 8.30
Outstanding at December 31 6.45 8.64 8.56
Exercisable at December 31 10.50 9.10 8.21
Proforma Disclosure
If stock-based compensation cost for the Company's qualified and
non-qualified stock option plans had been determined based on the fair value at
the grant dates for awards under the plans, the Company's net loss would have
been increased by $49,000 or 0.02 per share for 1996 compared to a reduction of
net income of $2,000 with no change in the earnings per share in 1995. The
proforma effect on net income for 1996 and 1995 is not representative of the
proforma effect on net income in future years because it does not take into
consideration proforma compensation expense related to grants made prior to
1995.
51
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
Effective January 1, 1990, the Company adopted the "Allstate Financial
Corporation 401(k) Retirement Plan" (the Plan) for the benefit of the Company's
employees. The Plan provides for the deferral of up to 15% of a participating
employee's salary, subject to certain limitations, and a discretionary
contribution by the Company. The Company's contribution is allocated to
participating employees based on relative compensation. The Company's
contribution for the years ended December 31, 1996, 1995 and 1994 was 45,751,
$34,563, and $38,100, respectively.
I. INCOME TAXES
------------
The tax provision consists of:
Years Ended December 31,
---------------------------------------
1996 1995 1994
---------- --------- ----------
Federal:
Current .......................... $(591,200) $ 276,500 $ 394,500
Deferred ......................... (65,900) 16,000 (307,000)
------- ------ --------
(657,100) 292,500 87,500
-------- ------- ------
State:
Current .......................... (20,300) 38,500 --
Deferred ......................... 65,900 -- --
------ ------ ------
45,600 38,500 --
------ ------ ------
TOTAL ........................... $(611,500) $ 331,000 $ 87,500
========= ========= =========
Tax Expense at Statutory Rate ...... $(561,900) $ 276,100 $ 79,900
Increase (Decrease)
Resulting from:
State Income Taxes,
Net of Federal Income
Tax Effect ...................... (15,800) 24,500 --
Non-deductible expense ........... 25,200 19,100 7,600
Other ............................ (59,000) 11,300 --
------- ------ ------
$(611,500) $ 331,000 $ 87,500
========= ========= =========
Effective Tax Rate ................. 37.0% 40.8% 37.2%
==== ==== ====
December 31,
---------------------------
1996 1995
-------- --------
Deferred tax asset:
Allowance for credit losses $893,000 $893,000
======== ========
J. RELATED-PARTY TRANSACTIONS
--------------------------
Certain members of the immediate families of Eugene Haskin and Leon
Fishman, directly or through trusts, have provided financing to Lifetime Options
through unsecured loans with interest payable monthly at an annual interest rate
of 1% over the prime rate. One percent (1%) over the prime rate was the same
rate paid by Lifetime Options to its unaffiliated, bank lender.
Lifetime Options' total indebtedness to members of Mr. Haskin's immediate
family was $15,146 at December 31, 1996 and 1995. During 1996 and 1995, Lifetime
Options paid aggregate interest on these loans of $1,427 and $1,514,
respectively.
52
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
Lifetime Options' total indebtedness to members of Leon Fishman's immediate
family was $46,823 at December 31, 1996, and 43,642 at December 31, 1995. During
1996 and 1995, Lifetime Options paid aggregate interest of $4,229 and $4,360,
respectively.
Rental payments of $24,000 were received by the Company in 1996, 1995 and
1994, respectively, from Leon Fishman, the Company's current Vice Chairman and
former President, for the personal use of a condominium owned by a subsidiary of
the Company.
K. FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT
CONCENTRATIONS
------------------------------------------------------------
The Company is a party to financial obligations with off-balance sheet risk
in the normal course of business to meet the financing needs of its clients.
These financial obligations include conditional commitments to purchase
receivables, obligations under guaranties issued by the Company and
reimbursement obligations under letters of credit issued for the Company's
account. These obligations involve, to varying degrees, elements of credit risk
in excess of the amount recognized on the balance sheet.
The Company's maximum exposure to credit loss under financial obligations
with off-balance sheet risk is represented by the contractual or notional amount
of these obligations. The Company uses the same credit policies in making
conditional commitments and incurring contingent obligations as it does for
on-balance sheet obligations. These commitments have fixed expiration dates or
other termination clauses and usually require payment of a fee by the client.
Since many of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company receives collateral to secure letters of credit and guaranties.
Financial obligations whose contract or notional amounts represent credit
risk are as follows:
December 31,
-----------------------------
1996 1995
----------- -----------
Conditional Commitments to purchase
receivables $66,641,000 $59,153,000
Standby letters of credit and guaranties $ 336,230 $ 726,967
For the year ended December 31, 1996, gross earnings from two clients
accounted for 31% of the Company's total earned discounts. At December 31, 1996,
two clients each accounted for more than 10% of the Company's outstanding gross
finance receivables. For the year ended December 31, 1995, gross earnings from
three clients accounted for 37% of total earned discounts. At December 31, 1995,
two clients accounted for more than 10% of the Company's outstanding gross
finance receivables.
L. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company leases office space under operating leases with Consumer Price
Index escalations and rental escalations based on increases in base operating
expenses as defined in the agreements. The lease was renegotiated during 1995
and extended for six years from December 1, 1995 at a reduced rental. The
53
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
Company also pays rent for subsidiaries and storage space. Rent expense was
$200,539, $232,500, and $222,000, in 1996, 1995 and 1994, respectively.
Future minimum rental payments are as follows:
Twelve Months Ended December 31,
1997 $164,000
1998 169,000
1999 173,000
2000 179,000
2001 184,000
---- -------
$869,000
========
The Company is a defendant in White, Trustee v. Allstate Financial
Corporation pending in the U.S. Bankruptcy Court for the Western District of
Pennsylvania. The Company provided receivables financing and advances for Lyons
Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged
buy-out and subsequently filed a bankruptcy petition. In 1991, the Lyon's
trustee brought an action against the Company claiming, among other things,
fraudulent transfer and breach of contract. A partial summary judgement was
granted in favor of the Company which reduced the fraudulent transfer claim by
$1.6 million. As a consequence, the remaining fraudulent transfer claim was
approximately $1,000,000. In late 1994, the Company reached a settlement
agreement with the Lyons trustee, subject to approval by the bankruptcy court,
which would have released the Company from all claims upon the payment of
$300,000. In connection with the settlement, the Company paid and added $300,000
to the provision for credit losses in 1994. A creditor in the bankruptcy
proceeding, Sherwin-Williams Company, objected to the proposed settlement amount
and, in March 1995, the objection, was sustained by the bankruptcy court. The
Company appealed the order sustaining the objection, however, in April 1996 the
appellate court exercised its discretion not to hear the appeal at that time.
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.
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. The Company filed a motion to dismiss the
claims and a motion to stay discovery pending a ruling on the motion to dismiss.
The motion to stay discovery was granted and, in March 1996, a federal
magistrate recommended to the District Court that the Company's motion to
dismiss be granted. Prior to the District Court ruling on the magistrate's
recommendation, Sherwin-Williams filed an amended complaint. The amended
complaint added two additional claims for "civil conspiracy" and
54
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(continued)
"tortious interference with contract". The two new claims arise from essentially
the same allegations set forth in the earlier complaint, i.e., that the Company
assisted in the breach of the purchase agreement. In March 1997, the federal
magistrate again recommended to the District Court that the Company's motion to
dismiss the claims contained in the original complaint be granted. However, the
magistrate recommended that the Company's motion to dismiss the two new claims
contained in the amended complaint be denied. 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 was a defendant in Harold B. Murphy, Chapter 7 Trustee v.
Allstate Financial Corporation, et al. in the U.S. Bankruptcy Court in the
District of Massachusetts. Claims for alleged preferential transfers were
asserted by the bankruptcy trustee for Clearpoint Research Corporation ("CRC"),
for former client, who filed a petition in bankruptcy, after the Company had
collected all amounts owed to it. No specific damage amount was specified in the
complaint but it is assumed the bankruptcy trustee was seeking recovery of the
full amount of accounts receivables collected (approximately $4 million). In
December 1996, the Company settled all claims with the bankruptcy trustee for a
payment of $95,000. This settlement will be paid in 1997.
As previously disclosed in the Company's Form 10-QSB for the quarter
ended June 30, 1995, the Company has reached a settlement with the Trustee in
the bankruptcy of Premium Sales Corporation, a former client of one of the
Company's wholly-owned subsidiaries. The settlement is intended to be a full
release of any and all claims between the Company (and its subsidiaries) and the
Trustee including, without limitation, any alleged preference liability of the
Company and its subsidiaries. The settlement was approved by the bankruptcy
court in January 1996. The settlement will become fully effective and the
settlement monies will be disbursed at the time a plan of distribution in the
Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The
impact of this settlement has been reflected in the Company's financial
statements.
Except as described above, the Company is not party to any litigation
other than routine proceedings incidental to its business, and the Company does
not expect that these proceedings will have a material adverse effect on the
Company. From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without any
factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
55
<PAGE>
<TABLE>
SCHEDULE IV
INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT
<CAPTION>
Balance at
Beginning of Amounts Balance End of Period
Name of Debtor Period Additions Paid Current Not Current
- -------------- ------------ ----------- ---------- ------- -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Various $161,788 $ 3,180 $ - $103,000 $ 61,9681
Year Ended December 31, 1995:
Various $161,788 $ - $ - $103,000 $ 58,788
Year Ended December 31, 1994:
Various $602,759 $377,237 $818,208 $103,000 $ 58,788
</TABLE>
56
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
By:
Craig Fishman, President and CEO
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Craig Fishman
Date President, Chief Executive
Officer, Director
Lawrence M. Winkler
Date Secretary/Treasurer,
Principal Accounting,
Chief Financial Officer
Eugene R. Haskin
Date Director
James Spector
Date Director
Leon Fishman
Date Director
William Savage
Date Director
57
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
By: /s/ Craig Fishman
Craig Fishman, President and CEO
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Craig Fishman Craig Fishman
Date March 19, 1997 President, Chief Executive
Officer, Director
/s/ Lawrence M. Winkler Lawrence M. Winkler
Date March 19, 1997 Secretary/Treasurer,
Principal Accounting and
Chief Financial Officer
/s/ Eugene R. Haskin Eugene R. Haskin
Date March 19, 1997 Director
/s/ James Spector James Spector
Date March 19, 1997 Director
/s/ Leon Fishman Leon Fishman
Date March 19, 1997 Director
/s/ William H. Savage William H. Savage
Date March 19, 1997 Director
57
Exhibit 10.7
NINTH AMENDMENT
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
NINTH AMENDMENT ("Ninth Amendment") dated as of April 26, 1996 to (i)
Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and
waived to the date hereof and as may be further amended, supplemented, modified
or waived from time to time, the "Loan Agreement") by and among ALLSTATE
FINANCIAL CORPORATION, a corporation organized under the laws of the
Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY
("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the
other lenders which may now or in the future be a party to the Loan Agreement,
the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the
"Agent") and (ii) Security Agreement dated as of May 13, 1994 (as amended and
waived to the date hereof and as may be further amended, supplemented, modified
or waived from time to time, the "Security Agreement") by and among Agent and
RECEIVABLE FINANCING CORPORATION, LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT
COMPANY, BUSINESS FUNDING OF AMERICA, INC., PREMIUM SALES NORTHEAST, INC.,
BUSINESS FUNDING OF FLORIDA, INC., SETTLEMENT SOLUTIONS, INC. and AFC HOLDING
CORPORATION (each of which individually is referred to as a "Guarantor" and,
collectively, the "Guarantors").
BACKGROUND
Borrower has requested that Agent and Lenders amend certain provisions of
the Loan Agreement and the Agent and the Lenders are willing to do so on the
terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of credit
heretofore or hereafter made to or for the account of Borrower by Lenders, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. DEFINITIONS. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. AMENDMENT TO LOAN AGREEMENT. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1.2 of the Loan Agreement is hereby amended as follows:
(i) the following defined terms are hereby added in their appropriate
alphabetical order:
<PAGE>
"ADDITIONAL EQUIPMENT VALUE ADVANCES" shall mean the Advances made pursuant
to Section 2.2A(a) hereof.
"ADDITIONAL EQUIPMENT VALUE BORROWING PERIOD" shall have the meaning set
forth in Section 2.2A(a) hereof.
"ELIGIBLE CLIENT FUNDED INVENTORY" shall have the meaning set forth in
Section 2.2B(a) hereof.
"INVENTORY BORROWING BASE" shall have the meaning set forth in Section
2.2B(a).
"INVENTORY COLLATERAL ASSIGNMENT OF SECURITY" shall mean the agreement
executed by Borrower in favor of Agent pursuant to which all rights of Borrower
under each Inventory Collateral Funding Repayment Agreement and related
documents (including all UCC-1 Financing Statements) are collaterally assigned
to Agent for its benefit and the benefit of the Lenders.
"INVENTORY COLLATERAL FUNDING REPAYMENT AGREEMENT" shall mean an Inventory
Collateral Funding Repayment Agreement and such other agreements in
substantially the forms attached hereto as Exhibit 1.2(d) entered into between
Borrower and a Client, together with such modifications thereto as Borrower may
from time to time deem appropriate or desirable and such other agreements to be
approved by Agent in its sole reasonable discretion; PROVIDED, HOWEVER, THAT, no
such modifications can be made without Agent's approval following the occurrence
and during the continuance of an Event of Default, such approval not to be
unreasonably withheld.
"INVENTORY VALUE ADVANCES" shall mean Advances made pursuant to Section
2.2B(a) hereof.
"INVENTORY VALUE BORROWING PERIOD" shall have the meaning set forth in
Section 2.2B(a) hereof.
"MAXIMUM ADDITIONAL EQUIPMENT VALUE ADVANCE AMOUNT" shall mean (i) during
the Additional Equipment Value Borrowing Period, the sum of (x) $2,000,000 and
(y) an amount equal to the actual principal amount of Equipment Value Advances
repaid (other than regularly scheduled monthly amortization payments) or prepaid
during the Additional Equipment Value Borrowing Period not to exceed $2,000,000
and (ii) on and after April 1, 1996, the aggregate outstanding principal amount
of Additional Equipment Value Advances made pursuant to Section 2.2A.
"MAXIMUM INVENTORY VALUE ADVANCE AMOUNT" shall mean $2,500,000.
"NINTH AMENDMENT" shall mean the Ninth Amendment to Revolving Credit and
Security Agreement dated as of April 26, 1996.
-2-
<PAGE>
"NINTH AMENDMENT EFFECTIVE DATE" shall mean the date on which all of the
conditions set forth in Section 4 of the Ninth Amendment are satisfied or waived
in writing by Agent.
(ii) the following defined terms are hereby amended in their entirety to
provide as follows:
"ADVANCES" shall mean and include, without duplication, the Revolving
Advances, the Inventory Value Advances, the Equipment Value Advances, the
Additional Equipment Value Advances and Letters of Credit.
"MAXIMUM REVOLVING ADVANCE AMOUNT" shall mean $25,000,000.00 less the sum
of (x) outstanding Equipment Value Advances, (y) outstanding Additional
Equipment Value Advances and (z) outstanding Inventory Value Advances.
"OTHER DOCUMENTS" shall mean the Revolving Credit Note, Stock Pledge
Agreements, Guaranty, Security Agreement, Collateral Assignment of Security,
Equipment Collateral Assignment of Security, Inventory Collateral Assignment of
Security and any and all other agreements, instruments and documents, including,
without limitation, guaranties, pledges, powers of attorney, consents, and all
other writings heretofore, now or hereafter executed by Borrower and/or
delivered to Agent or any Lender in respect of the transactions contemplated by
this Agreement.
"REVOLVING ADVANCES" shall mean Advances made other than Letters of Credit
but inclusive of Equipment Value Advances, Additional Equipment Value Advances
and Inventory Value Advances.
(iii) Clause (p) of the definition of "Eligible Receivables" is hereby
amended by deleting the words "15% of Tangible Net Worth" appearing therein and
inserting in lieu thereof the words "15% of the sum of Tangible Net Worth and
the aggregate principal amount of outstanding Convertible, Senior Subordinated
Notes".
(b) Section 2.1(a) of the Loan Agreement is hereby amended by inserting
"(other than Equipment Value Advances, Additional Equipment Value Advances and
Inventory Value Advances)" after the words "Revolving Advances" appearing in the
third line thereof.
(c) Section 2.2(a) of the Loan Agreement is hereby amended by deleting the
last sentence thereof in its entirety and inserting the following in lieu
thereof:
"Any repayment (other than regularly scheduled monthly
amortization payments) or prepayment of Equipment Value Advances
made after the end of the Equipment Value Borrowing Period shall
be applied in inverse order of maturity to the then remaining
monthly amortization of Equipment Value Advances."
-3-
<PAGE>
(d) Section 2.2(b) of the Loan Agreement is hereby amended by (x) replacing
clause (ii)(1) thereof in its entirety with "(i) the aggregate principal amount
of Equipment Value Advances outstanding shall not exceed the lesser of" and (y)
by deleting the word "and" appearing immediately before clause (ii)(2) thereof
and inserting immediately after the figure "$25,000,000" appearing at the end
thereof the following:
", and (3) the sum of the aggregate principal amount of
Equipment Value Advances outstanding and the aggregate principal
amount of Additional Equipment Value Advances outstanding shall
not exceed $4,924,167 less regularly scheduled monthly
amortization payments on and after the Ninth Amendment Effective
Date with respect to Equipment Value Advances and Additional
Equipment Value Advances".
(e) The Loan Agreement is hereby amended by inserting the following new
Sections 2.2A and 2.2B immediately after Section 2.2:
"2.2A ADDITIONAL EQUIPMENT VALUE ADVANCES. (a) Subject to
the terms and conditions of this Agreement, each Lender,
severally and not jointly, agrees to make loans to Borrower
("Additional Equipment Value Advances") to permit Borrower to
make loans or advances to Clients secured by Client Funded
Equipment in aggregate amounts outstanding at any time equal to
such Lender's Commitment Percentage of the lesser of (i) the
Maximum Additional Equipment Value Advance Amount, (ii)
eighty-five percent (85%) of the aggregate amount from time to
time outstanding of actual cash advances by Borrower to Clients
which is secured by Client Funded Equipment or (iii) sixty
percent (60%) of the liquidation value of such Client Funded
Equipment; PROVIDED, HOWEVER, that under no circumstances shall
Additional Equipment Value Advances be made against Client Funded
Equipment unless Borrower has recorded on its books and records
and actually made advances or loans to a Client pursuant to the
applicable Collateral Funding Repayment Agreement. Additional
Equipment Value Advances shall only be made on and after the
Ninth Amendment Effective Date and on or prior to March 31, 1997
(the "Additional Equipment Value Borrowing Period"). During the
Additional Equipment Value Borrowing Period, Borrower may use the
Additional Equipment Value Advances by borrowing, repaying and
reborrowing, all in accordance with the terms and conditions
hereof. The proceeds of each Additional Equipment Value Advance
requested by Borrower shall, to the extent Lenders make such
Additional Equipment Value Advance, be made available to Borrower
on the day so requested by way of credit to Borrower's Operating
Account, or such other bank as Borrower may designate following
notification to Agent, in immediately available federal or other
immediately available funds. The aggregate principal amount of
Additional Equipment Value Advances outstanding
-4-
<PAGE>
on the last day of the Equipment Value Borrowing Period will
be amortized on the basis of a thirty-six (36) month amortization
schedule and shall be payable in equal monthly installments
commencing on March 31, 1997 and on the last day of each month
thereafter with the balance payable upon the expiration of the
Term, subject to acceleration upon the occurrence of an Event of
Default under this Agreement or termination of this Agreement.
Any repayment or prepayment of Additional Equipment Value
Advances made after the end of the Additional Equipment Value
Borrowing Period shall be applied in direct order of maturity to
the then remaining monthly amortization of Additional Equipment
Value Advances.
(b) The agreement of Lenders to make each Additional
Equipment Value Advance is subject to satisfaction of the
following conditions precedent: (i) receipt by Agent of (1)
copies of all documentation and appraisals required to be
delivered by a Client to Borrower pursuant to the applicable
Collateral Funding Repayment Agreement, (2) evidence that such
Client has obtained insurance covering the theft, destruction or
other loss of the Client Funded Equipment and (3) such other
documentation and evidence that Agent may reasonably request,
including, without limitation, copies of UCC-1 financing
statements filed in accordance with Section 6.10 hereof or
evidence that such financing statements have been filed in
accordance therewith and (ii) after giving effect thereto (1) the
aggregate principal amount of Additional Equipment Value Advances
outstanding shall not exceed the lesser of (i) the Maximum
Additional Equipment Value Advance Amount, (ii) eighty-five
percent (85%) of the aggregate amount from time to time
outstanding of actual cash advances made by Borrower to Clients
which is secured by Client Funded Equipment in accordance with
the Collateral Funding Repayment Agreement or (iii) sixty percent
(60%) of the liquidation value of such Client Funded Equipment,
(2) the aggregate outstanding Advances shall not exceed
$25,000,000, and (3) the sum of the aggregate principal amount of
Equipment Value Advances outstanding and the aggregate principal
amount of Additional Equipment Value Advances outstanding shall
not exceed $4,924,167 less regularly scheduled monthly
amortization payments on and after the Ninth Amendment Effective
Date with respect to Equipment Value Advances and Additional
Equipment Value Advances."
"2.2B INVENTORY VALUE ADVANCES. (a) Subject to the terms and
conditions of this Agreement, each Lender, severally and not
jointly, agrees to make loans to Borrower ("Inventory Value
Advances") to permit Borrower to make loans or advances to
Clients secured by Eligible Client Funded Inventory (as defined
below) in aggregate amounts outstanding at any time equal to such
Lender's Commitment Percentage of the lesser of (i) the Maximum
Inventory Value Advance
-5-
<PAGE>
Amount or (ii) (x) to the extent (but only to the extent)
that the aggregate amount from time to time outstanding of actual
cash advances by Borrower to Clients which is secured by Eligible
Client Funded Inventory is equal to or less than fifty percent
(50%) of the liquidation value of such Eligible Client Funded
Inventory, thirty percent (30%) of the aggregate amount from time
to time outstanding of such actual cash advances by Borrower to
Clients secured by such Eligible Client Funded Inventory and (y)
to the extent (but only to the extent) that the aggregate amount
from time to time outstanding of actual cash advances by Borrower
to Clients which is secured by Eligible Client Funded Inventory
exceeds 50% of the liquidation value of such Eligible Client
Funded Inventory, twenty-five percent (25%) of the aggregate
amount from time to time outstanding of such actual cash advances
by Borrower to Clients secured by such Eligible Client Funded
Inventory (the sum of preceding clauses (ii)(x) and (y), the
"Inventory Borrowing Base"); PROVIDED, HOWEVER, that under no
circumstances shall Inventory Value Advances be made against
Eligible Client Funded Inventory unless Borrower has recorded on
its books and records and actually made advances or loans to a
Client pursuant to the applicable Inventory Collateral Funding
Repayment Agreement. "Eligible Client Funded Inventory" shall
mean, with respect to any Client, all of such Client's raw
materials inventory and finished goods inventory to the extent
(i) Borrower provides Agent with a written description thereof in
reasonable detail and a written request that such inventory be
treated as Eligible Client Funded Inventory and (ii) Agent does
not, within two business days of its receipt of such description
and request, notify Borrower in writing that, in the exercise of
Agent's sole, reasonable discretion, such inventory (or a
specified portion thereof) does not constitute Eligible Client
Funded Inventory. Notwithstanding the foregoing, Borrower
acknowledges and agrees that dynamic random access memory chips
shall not constitute Eligible Client Funded Inventory unless
Agent (in the exercise of its sole and absolute discretion)
affirmatively consents thereto in writing.
Inventory Value Advances shall only be made on and after the
Ninth Amendment Effective Date and on or prior to the last day of
the Term (the "Inventory Value Borrowing Period"). During the
Inventory Value Borrowing Period, Borrower may use the Inventory
Value Advances by borrowing, repaying and reborrowing, all in
accordance with the terms and conditions hereof. The proceeds of
each Inventory Value Advance requested by Borrower shall, to the
extent Lenders make such Inventory Value Advance, be made
available to Borrower on the day so requested by way of credit to
Borrower's Operating Account, or such other bank as Borrower may
designate following notification to Agent, in immediately
available federal or other immediately available funds. The
aggregate principal amount of Inventory Value Advances
-6-
<PAGE>
outstanding on the last day of the Term shall be payable in
full upon the expiration of the Term, subject to acceleration
upon the occurrence of an Event of Default under this Agreement
or termination of this Agreement.
(b) The agreement of Lenders to make each Inventory Value
Advance is subject to satisfaction of the following conditions
precedent: (i) receipt by Agent of (1) copies of all
documentation and appraisals required to be delivered by a Client
to Borrower pursuant to the applicable Inventory Collateral
Funding Repayment Agreement, (2) evidence that such Client has
obtained insurance covering the theft, destruction or other loss
of the Client Funded Inventory, (3) a copy of a duly executed
inventory management or inventory control agreement among
Borrower, the applicable Client and DiversiCorp, Inc. (or another
third party collateral monitoring firm selected by Borrower and
reasonably satisfactory to Agent) and (4) such other
documentation and evidence that Agent may reasonably request,
including, without limitation, copies of UCC-1 financing
statements filed in accordance with Section 6.10 hereof or
evidence that such financing statements have been filed in
accordance therewith and (ii) after giving effect thereto (1) the
aggregate principal amount of Inventory Value Advances
outstanding shall not exceed the lesser of (i) the Maximum
Inventory Value Advance Amount or (ii) the Inventory Borrowing
Base, and (2) the aggregate outstanding Advances shall not exceed
$25,000,000."
(f) Section 2.4 of the Loan Agreement is hereby amended in its entirety to
provide as follows:
"2.4 MAXIMUM ADVANCES (OTHER THAN EQUIPMENT VALUE ADVANCES,
ADDITIONAL EQUIPMENT VALUE ADVANCES AND INVENTORY VALUE
ADVANCES).
The aggregate balance of Advances (other than Equipment
Value Advances, Additional Equipment Value Advances and Inventory
Value Advances) outstanding at any time shall not exceed the
lesser of (x) the Maximum Revolving Advance Amount and (y) the
Borrowing Base."
(g) The Loan Agreement is hereby amended by inserting the following new
Sections 2.5A and 2.5B immediately after Section 2.5:
"2.5A MAXIMUM ADDITIONAL EQUIPMENT VALUE ADVANCES. The
aggregate balance of the Additional Equipment Value Advances
outstanding at any time shall not exceed the lesser of (i) the
Maximum Additional Equipment Value Advance Amount, (ii)
eighty-five percent (85%) of the aggregate amount from time to
time outstanding of actual cash advances by Borrower to Clients
secured by Client Funded
-7-
<PAGE>
Equipment or (iii) sixty percent (60%) of the liquidation
value of such Client Funded Equipment."
"2.5B MAXIMUM INVENTORY VALUE ADVANCES. The aggregate
balance of the Inventory Value Advances outstanding at any time
shall not exceed the lesser of (i) the Maximum Inventory Value
Advance Amount or (ii) the Inventory Borrowing Base."
(h) Section 2.6 of the Loan Agreement is hereby amended in its entirety to
provide as follows:
"2.6 REPAYMENT OF EXCESS ADVANCES. The aggregate balance of
Advances (other than Equipment Value Advances, Additional
Equipment Value Advances and Inventory Value Advances), Equipment
Value Advances, Additional Equipment Value Advances and Inventory
Value Advances, as the case may be, outstanding at any time in
excess of the maximum permitted under Section 2.4, Section 2.5,
Section 2.5A or Section 2.5B, as applicable, shall be immediately
due and payable without the necessity of any demand, at the
Payment Office, whether or not a Default or Event of Default has
occurred."
(i) Clause (i) of Section 2.8 of the Loan Agreement is hereby amended by
inserting "(other than Equipment Value Advances, Additional Equipment Value
Advances and Inventory Value Advances)" after the words "Revolving Advances"
appearing therein.
(j) The second sentence of Section 2.10(c) of the Loan Agreement is hereby
amended by inserting "(other than Equipment Value Advances, Additional Equipment
Value Advances and Inventory Value Advances)" after the words "Revolving
Advances" appearing therein.
(k) Section 2.12(a) of the Loan Agreement is hereby amended by deleting the
words "and/or Equipment Value Advance" after the words "Revolving Advance"
appearing in the first sentence thereof and inserting in lieu thereof the words
", Equipment Value Advance, Additional Equipment Value Advance and/or Inventory
Value Advance".
(l) Section 2.12 (e) of the Loan Agreement is hereby amended by deleting
the words "and, subject to Section 2.2 hereof, Equipment Value Advances, as
applicable," after the words "Revolving Advances" appearing in the first
sentence thereof and inserting in lieu thereof the words "and, subject to
Sections 2.2, 2.2A and 2.2B hereof, to Equipment Value Advances, Additional
Equipment Value Advances and Inventory Value Advances, as the case may be, as
applicable,".
(m) Clauses (i), (ii), (iii) and (iv) of Section 2.12(f) of the Loan
Agreement and Sections 2.12(g) and 2.12(h) of the Loan Agreement are hereby
amended by inserting the words ", Equipment Value Advances, Additional Equipment
Value Advances and/or
-8-
<PAGE>
Inventory Value Advances (as the case may be)" immediately after the words
"Revolving Advances" each place they appear therein.
(n) Clauses (i), (vi), (vii), (viii) and (xi) of Section 4.15(f)(2) of the
Loan Agreement are hereby amended by inserting ", the Inventory Collateral
Funding Repayment Agreements, if any," after the words "the Collateral Funding
Repayment Agreements, if any," each place they appear.
(o) Section 4.15(g) of the Loan Agreement is hereby amended by inserting
the words ", the Inventory Collateral Funding Repayment Agreements, if any,"
after the words ", the Collateral Funding Repayment Agreements, if any,"
appearing in the second sentence thereof.
(p) Section 4.16 (c) of the Loan Agreement is hereby amended by (x)
redesignating clause (iii) thereof as clause (v) and (y) inserting the following
new clauses (iii) and (iv) after clause (ii) thereof:
", (iii) deposit proceeds of Additional Equipment Value
Advances made pursuant to Section 2.2A hereof for use in
accordance with the provisions of Section 2.2A hereof, (iv)
deposit proceeds of Inventory Value Advances made pursuant to
Section 2.2B hereof for use in accordance with Section 2.2B
hereof"
(q) Section 6.10 of the Loan Agreement is hereby amended by deleting the
words "and applicable Collateral Funding Repayment Agreement, if any" and
inserting the words ", applicable Collateral Funding Repayment Agreement and/or
applicable Inventory collateral Funding Repayment Agreement, if any," in lieu
thereof.
(r) Section 7.5(d) of the Loan Agreement is hereby amended by deleting the
words "or Collateral Funding Repayment Agreements" appearing before clause (i)
thereof and inserting the words ", Collateral Funding Repayment Agreements, if
any, or Inventory Collateral Funding Repayment Agreements, if any," in lieu
thereof.
(s) Section 7.5(d)(ii) of the Loan Agreement is hereby amended by deleting
the words "or Collateral Funding Repayment Agreement, as the case may be" and
inserting the words "or, if applicable, its Collateral Funding Repayment
Agreement or its Inventory Collateral Funding Repayment Agreement," in lieu
thereof.
(t) Section 8.2(c) of the Loan Agreement is hereby amended by deleting the
words "or Section 2.5 hereof, as applicable" and inserting the words ", Section
2.5, Section 2.5A or Section 2.5B, as applicable" in lieu thereof.
(u) Section 9.2 of the Loan Agreement is hereby amended by replacing the
word "and" immediately before subsection "(d)" with "," and inserting a new
subsection "(e)" to read in its entirety as follows:
-9-
<PAGE>
"and (e) a schedule of loans made by Borrower to its Clients
which are secured by Eligible Client Funded Inventory stating the
name of the Client to which such loans are made and the dollar
amount thereof".
(v) Section 10.13 of the Loan Agreement is hereby amended by inserting the
words "or Inventory Collateral Assignment of Security," after the words
"Equipment Collateral Assignment of Security".
(w) Clause (ii) of Section 15.2(b) of the Loan Agreement is hereby amended
by inserting the words ", the Maximum Additional Equipment Value Advance Amount,
the Maximum Inventory Value Advance Amount" after the words "Maximum Equipment
Value Advance Amount" appearing therein.
3. Subject to satisfaction of the conditions precedent set forth in Section
4 below, the Security Agreement is hereby amended as follows:
(a) Section 3(b) of the Security Agreement is hereby amended
by inserting the words "and Inventory Collateral Funding
Repayment Agreement" after the words "Collateral Funding
Repayment Agreement".
(b) Clauses (i), (vi), (vii), (viii) and (xi) of Section
6(2) of the Security Agreement are hereby amended by inserting
the words "Inventory Collateral Funding Repayment Agreements, if
any," after the words "Collateral Funding Repayment Agreements,
if any," each place they appear.
4. CONDITIONS OF EFFECTIVENESS. This Ninth Amendment shall become effective
as of the date first above written (the "Ninth Amendment Effective Date") upon
receipt by the Agent of (i) this Ninth Amendment duly executed by Borrower and
the Required Lenders and consented to by each of the Guarantors, (ii) three (3)
copies of the Inventory Collateral Assignment of Security duly executed by
Borrower, (iii) a copy of the Inventory Collateral Funding Repayment Agreement
in the form attached as Exhibit A hereto (which form shall, on the Ninth
Amendment Effective Date, be deemed to be Exhibit 1.2(d) attached to the Loan
Agreement (without further action by Borrower, Agent or any Lender)) and (iv) a
payment for the ratable benefit of the Lenders of an amendment fee in the amount
of $7,500.
5. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants
as of the Ninth Amendment Effective Date as follows:
(a) This Ninth Amendment and the Loan Agreement, as amended
hereby constitute the legal, valid and binding obligations of
Borrower and are enforceable against Borrower in accordance with
their respective terms.
(b) After giving effect to this Ninth Amendment, Borrower
hereby reaffirms all covenants, representations and warranties
made in the Loan Agreement and agrees that all such covenants,
representations and warranties
-10-
<PAGE>
shall be deemed to have been remade as of the Ninth
Amendment Effective Date.
(c) No Event of Default or Default has occurred and is
continuing or would exist after giving effect to this Ninth
Amendment.
(d) Borrower has no defense, counterclaim or offset to the
Obligations.
6. EFFECT ON THE LOAN AGREEMENT AND THE SECURITY AGREEMENT.
(a) Upon the effectiveness of SECTIONS 2 AND 3 hereof, each reference in
the Loan Agreement or the Security Agreement, as the case may be, to "this
Agreement," "hereunder," "hereof," "herein" or words of like import shall mean
and be a reference to the Loan Agreement or the Security Agreement, as the case
may be, as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, the Security
Agreement and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Ninth Amendment shall
not operate as a waiver of any right, power or remedy of Agent and Lenders, nor
constitute a waiver of any provision of the Loan Agreement, the Security
Agreement or any other documents, instruments or agreements executed and/or
delivered under or in connection therewith.
7. GOVERNING LAW. This Ninth Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
and shall be governed by and construed in accordance with the laws of the State
of New York.
8. HEADINGS. Section headings in this Ninth Amendment are included herein
for convenience of reference only and shall not constitute a part of this Ninth
Amendment for any other purpose.
9. COUNTERPARTS; TELECOPY SIGNATURES. This Ninth Amendment may be executed
by the parties hereto in one or more counterparts, each of which taken together
shall be deemed to constitute one and the same instrument. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers,
have executed this Ninth Amendment as of the day and year first above written.
IBJ SCHRODER BANK & TRUST COMPANY
as Agent and Lender
By:_______________________
Name:
Title:
NATIONAL CANADA FINANCE CORP., a Lender
By:_______________________
Name:
Title:
By:_______________________
Name:
Title:
ALLSTATE FINANCIAL CORPORATION
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By: ___________________________
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION
By: ___________________________ By:______________________________
Name: Craig Fishman Name: Craig Fishman
Title: Senior Vice President Title: Senior Vice President
[SIGNATURES CONTINUED ON NEXT PAGE]
-12-
<PAGE>
RECEIVABLE FINANCING CORPORATION
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF AMERICA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
SETTLEMENT SOLUTIONS, INC.
By:______________________________
Name: Craig Fishman
Title: Senior Vice President
-13-
Exhibit 10.7
TENTH AMENDMENT AND WAIVER
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
TENTH AMENDMENT AND WAIVER (the "Amendment") dated as of June
30, 1996 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as
amended and waived to the date hereof and as may be further amended,
supplemented, modified or waived from time to time, the "Loan Agreement") by and
among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of
the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY
("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the
other lenders which may now or in the future be a party to the Loan Agreement,
the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the
"Agent")
BACKGROUND
Borrower has requested that Agent and Lenders waive certain
provisions of the Loan Agreement and the Agent and the Lenders are willing to do
so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or
grant of credit heretofore or hereafter made to or for the account of Borrower
by Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS. All capitalized terms not otherwise defined
herein shall have the meanings given to them in the Loan Agreement.
2. AMENDMENTS TO THE LOAN AGREEMENT. Subject to satisfaction
of the conditions precedent set forth in Section 5 below, the Loan Agreement is
hereby amended as follows:
(i) Subsection (a) of Section 7.19 of the Loan
Agreement is hereby deleted in its entirety and the following
new subsection "(a)" is inserted to read as follows:
"(a)(i) On the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended June 30, 1994 and
ending with the Fiscal Quarter ended June 30, 1996, the ratio
of (A) EBIT to (B) interest expense (other than interest
expense in respect of the Convertible, Senior Subordinated
Notes) for the four Fiscal Quarters then ended (taken as one
accounting period) shall not be less than 3:1;
<PAGE>
(ii) On the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended September 30, 1996,
the ratio of (A) EBIT to (B) interest expense (other interest
expense in respect of the Convertible, Senior Subordinated
Notes) for (w) the Fiscal Quarter ended September 30, 1996,
(x) the two Fiscal Quarters ended December 31, 1996 (taken as
one accounting period), (y) the three Fiscal Quarters ended
march 31, 1997 (taken as one accounting period) and (z) the
Four Fiscal Quarters (taken as one accounting period) ended on
the last day of each Fiscal Quarter commencing with the Fiscal
Quarter ended June 30, 1997, shall not be less than 3:1;
(iii) On the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended September 30, 1995
and ending with the Fiscal Quarter ended June 30, 1996, the
ratio of (A) EBIT to (B) total interest expense for the four
Fiscal Quarters then ended (taken as one accounting period)
shall not be less than 2:1; and
(iv) On the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended September 30, 1996,
the ratio of (A) EBIT to (B) total interest expense for (w)
the Fiscal Quarter ended September 30, 1996, (x) the two
Fiscal Quarters ended December 31, 1996 (taken as one
accounting period), (y) the three Fiscal Quarters ended March
31, 1997 (taken as one accounting period) and (z) the four
Fiscal Quarters (taken as one accounting period) ended on the
last day of each Fiscal Quarter commencing with the Fiscal
Quarter ended June 30, 1997, shall not be less than 2:1,
provided that, in the case of preceding clauses (i), (ii),
(iii) and (iv), as applicable, in the event the Base Rate
exceeds 8 1/2% per annum for any period of determination
hereunder then the applicable ratio shall be reduced by a
percentage equal to the percentage by which the Base Rate
exceeds 8 1/2% per annum; provided further, that in no event
shall the applicable ratio be reduced below 1.75:1."
(b) Subsection (c) of Section 7.19 of the Loan
Agreement is hereby amended by inserting the following proviso
immediately before the period appearing at the end thereof:
"provided further that, notwithstanding the
foregoing, commencing on June 30, 1996, and on the
last day of each Fiscal Quarter thereafter, the sum
of (i) Tangible Net Worth and (ii) the aggregate
principal amount of Convertible, Senior Subordinated
Notes then outstanding shall equal or exceed
$26,700,000".
3. WAIVER OF SECTION 7.19 (A)(I) AND (A)(III) FOR THE FOUR
QUARTERS ENDED JUNE 30, 1996. Subject to satisfaction of the conditions
precedent set forth in Section 5 below, the Agent and the Lenders hereby waive
compliance by the Borrower with Section
-2-
<PAGE>
7.19(a)(i) and (a)(iii) of the Loan Agreement (after giving
effect to Section 2 of this Amendment) for the four Fiscal Quarters ended on
June 30, 1996.
4. WAIVER OF SPECIFIED DEFAULTS AND EVENTS OF DEFAULT. Subject
to satisfaction of the conditions set forth in Section 5 below, the Agent and
the Lenders hereby waive any and all Defaults or Events of Default which would
exist (and any and all rights and remedies which may exist as a consequence
thereof) absent this Amendment.
5. CONDITIONS OF EFFECTIVENESS. This Amendment shall become
effective as of the date first above written (the "Amendment Effective Date")
upon receipt by the Agent of this Amendment duly executed by Borrower and the
Required Lenders and consented to by each of the Guarantors.
6. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents
and warrants as of the Amendment Effective Date as follows:
(a) This Amendment and the Loan Agreement, as amended
and waived hereby constitute the legal, valid and binding
obligations of Borrower and are enforceable against Borrower
in accordance with their respective terms.
(b) After giving effect to this Amendment, Borrower
hereby reaffirms all covenants, representations and warranties
made in the Loan Agreement and agrees that all such covenants,
representations and warranties shall be deemed to have been
remade as of the Amendment Effective Date (after giving effect
to this Amendment).
(c) No Event of Default or Default has occurred and
is continuing or would exist, in either case, after giving
effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset
to the Obligations.
7. EFFECT ON THE LOAN AGREEMENT AND THE SECURITY AGREEMENT.
(a) Upon the effectiveness of SECTIONS 2, 3 AND 4 hereof, each
reference in the Loan Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import shall mean and be a reference to the Loan
Agreement as waived hereby.
(b) Except as specifically amended and waived herein, the Loan
Agreement and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and effect, and
are hereby ratified and confirmed.
(c) Except as expressly set forth herein, the execution,
delivery and effectiveness of this Amendment shall not operate as an amendment
or waiver of any right, power or remedy of Agent and Lenders, nor constitute an
amendment or waiver of any
-3-
<PAGE>
provision of the Loan Agreement or any other documents, instruments or
agreements executed and/or delivered under or in connection therewith.
8. GOVERNING LAW. This Amendment shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns and shall be governed by and construed in accordance with the laws of
the State of New York.
9. HEADINGS. Section headings in this Amendment are included
herein for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
10. COUNTERPARTS; TELECOPY SIGNATURES. This Amendment may be
executed by the parties hereto in one or more counterparts, each of which taken
together shall be deemed to constitute one and the same instrument. Any
signature delivered by a party by facsimile transmission shall be deemed to be
an original signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Amendment as of the day and year first
above written.
IBJ SCHRODER BANK & TRUST COMPANY
as Agent and Lender
By:_______________________
Name:
Title:
NATIONAL CANADA FINANCE CORP., a Lender
By:_______________________
Name:
Title:
By:_______________________
Name:
Title:
ALLSTATE FINANCIAL CORPORATION
By: ___________________________
Name: Craig Fishman
Title: President
[SIGNATURES CONTINUED ON NEXT PAGE]
-4-
<PAGE>
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By: ___________________________
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION
By: ___________________________ By:______________________________
Name: Craig Fishman Name: Craig Fishman
Title: Senior Vice President Title: Senior Vice President
RECEIVABLE FINANCING CORPORATION
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF AMERICA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
SETTLEMENT SOLUTIONS, INC.
By:______________________________
Name: Craig Fishman
Title: Senior Vice President
-5-
Exhibit 10.9
EMPLOYMENT AND COMPENSATION AGREEMENT
This EMPLOYMENT AND COMPENSATION AGREEMENT ("Agreement") is made as of
the 1st day of July, 1996, 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 Craig Fishman
of Falls Church, Virginia (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 President and Chief Executive 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 Two Hundred Thousand and 00/100 Dollars
($200,000.00), which amount shall be
1
<PAGE>
increased on July 1, 1997 by the greater of (i) the amount of any increase in
the Consumer Price Index since June 30, 1996 and (ii) 5%; PROVIDED that this
amount may be increased further from time to time at the discretion of the Board
of Directors of the Company.
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
2
<PAGE>
automobile allowance of equivalent value as reasonably determined by the
Company).
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.
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
3
<PAGE>
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.
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.
4
<PAGE>
(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 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
5
<PAGE>
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 of Control"
shall mean
6
<PAGE>
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 estate of the Employee for a period
equal to the lesser of (i) one year and
7
<PAGE>
(ii) the remainder of the Term (but not less than six months) the 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
estate of the Employee (on a pro rata basis up to the date of the Employee's
death) compensation otherwise due and 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 the lesser of (i)
one year and (ii) the remainder of the Term (but not less than 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,
8
<PAGE>
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 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 the lesser of (i) one year and (ii) the remainder of the Term
(but not less than six months). In addition, for a period equal to the lesser of
(i) one year and (ii) the remainder of the Term (but not less than six months),
9
<PAGE>
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.
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.
10
<PAGE>
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
11
<PAGE>
respective heirs, legal representatives, successors and assigns and shall become
effective upon execution by the Company.
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 AGREEMENT 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.
12
<PAGE>
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:_______________________
Wade Hotsenpiller
Senior Vice President
EMPLOYEE:
___________________________
Craig Fishman
13
Exhibit 10.9
EMPLOYMENT AND COMPENSATION AGREEMENT
This EMPLOYMENT AND COMPENSATION AGREEMENT ("Agreement") is made as of
the 1st day of July, 1996, 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 Peter Matthy
of Arlington, Virginia (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 Executive Vice President. 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 Fifty Thousand and 00/100
Dollars ($150,000.00), which amount may
1
<PAGE>
be increased from time to time at the discretion of the Board of Directors of
the Company.
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 not less than $350.00 per
month plus reimbursement for costs of insurance, fuel, maintenance and repairs
for one automobile).
2
<PAGE>
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.
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
3
<PAGE>
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.
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
4
<PAGE>
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 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
5
<PAGE>
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 of Control"
shall mean a transaction (or series of transactions) or other event (or series
of events) that results in the acquisition of a
6
<PAGE>
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 estate of the Employee for a period
equal to one year, Employee's then applicable base salary pursuant to the
provisions of Paragraph 3 for such period, in bi-monthly installments.
7
<PAGE>
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
estate of the Employee (on a pro rata basis up to the date of the Employee's
death) compensation otherwise due and 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 one year, 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
8
<PAGE>
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 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 one year. In addition, for one year, 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
9
<PAGE>
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.
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
10
<PAGE>
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.
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
11
<PAGE>
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.
12
<PAGE>
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:
________________________________
Peter Matthy
13
EMPLOYMENT AND COMPENSATION AGREEMENT
This EMPLOYMENT AND COMPENSATION AGREEMENT ("Agreement") is made as of
the 1st day of July, 1996, 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 Lawrence M.
Winkler of Arlington, Virginia (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 Secretary/Treasurer and Chief Financial 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 Sixty Thousand Seven Hundred
Fifty and 00/100 Dollars
1
<PAGE>
($160,750.00), which amount may be increased from time to time at the discretion
of the Board of Directors of the Company.
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 equivalent value as
reasonably determined by the Company).
5. REIMBURSEMENT. Usual and normal monetary allowances for bona fide
business expenses incurred by the Employee in
2
<PAGE>
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.
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
3
<PAGE>
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.
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
4
<PAGE>
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 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.
5
<PAGE>
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 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
6
<PAGE>
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 estate of the Employee for a period
equal to the lesser of (i) one year and (ii) the remainder of the Term (but not
less than six months) the Employee's then applicable base salary pursuant to the
provisions of Paragraph 3 for such period, in bi-monthly installments.
7
<PAGE>
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
estate of the Employee (on a pro rata basis up to the date of the Employee's
death) compensation otherwise due and 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 the lesser of (i)
one year and (ii) the remainder of the Term (but not less than 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.
8
<PAGE>
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 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 the lesser of (i) one year and (ii) the remainder of the Term
(but not less than six months). In addition, for a period equal to the lesser of
(i) one year and (ii) the remainder of the Term (but not less than six months),
the Company shall provide to the Employee benefits for such period as if the
Employee were still employed to be paid not
9
<PAGE>
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.
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
10
<PAGE>
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.
11
<PAGE>
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 AGREEMENT(S) 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.
12
<PAGE>
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:
_______________________________
Lawrence M. Winkler
13
Exhibit 21 to 1995 10-KSB
Allstate Financial Corporation
Wholly-owned Subsidiary List
State of
Name Incorporation
Receivable Financing Corporation Virginia
Business Funding of Florida, Inc. Florida
Business Funding of America, Inc. Virginia
Premium Sales Northeast, Inc. Virginia
Lifetime Options, Inc., a Viatical
Settlement Company Maryland
Settlement Solutions, Inc Virginia
AFC Holding Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCILA CORPORATION
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1624899
<SECURITIES> 0
<RECEIVABLES> 39462302
<ALLOWANCES> 2478972
<INVENTORY> 0
<CURRENT-ASSETS> 43284924
<PP&E> 1123269
<DEPRECIATION> 586630
<TOTAL-ASSETS> 45939431
<CURRENT-LIABILITIES> 18365815
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 22486537
<TOTAL-LIABILITY-AND-EQUITY> 45939431
<SALES> 0
<TOTAL-REVENUES> 12404561
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 6572477
<LOSS-PROVISION> 5878167
<INTEREST-EXPENSE> 1606561
<INCOME-PRETAX> (1652644)
<INCOME-TAX> (611500)
<INCOME-CONTINUING> (1041144)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1041144)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
