U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934
For the quarterly period ended September 30, 1999
Commission File Number 0-17832
ALLSTATE FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(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)
(703) 931-2274
- --------------------------------------------------------------------------------
(Registrant's telephone number)
Indicate by check mark whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
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 -
The number of shares outstanding of the issuer's common stock, no par
value, as of November 5, 1999, was 2,324,616.
[THIS SECTION INTENTIONALLY LEFT BLANK]
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ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1999 and
December 31, 1998 4
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 1999 and 1998 5
Consolidated Statements of Shareholders' Equity for the Nine Months
Ended September 30, 1999 and the Year Ended December 31, 1998 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and 1998 7
Notes to Consolidated Financial Statements 8-11
Item 2 - Management's Discussion and Analysis or Plan of
Operation 12-22
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 3 - Defaults Upon Senior Securities 23
Item 6 - Exhibits and Reports on Form 8-K 23
Signatures 24
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PART I - FINANCIAL INFORMATION
3
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<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(UNAUDITED)
ASSETS
<S> <C> <C>
CASH ................................................................................. $ 492,243 $ 2,420,644
------------ -----------
Purchased receivables ................................................................ 6,763,944 22,302,284
ADVANCES RECEIVABLE .................................................................. 20,161,557 15,652,457
------------ ------------
26,925,501 37,954,741
LESS: ALLOWANCE FOR CREDIT LOSSES .................................................... (11,787,839) (2,799,931)
------------ -----------
TOTAL RECEIVABLES - NET .............................................................. 15,137,662 35,154,810
------------ ------------
Income tax receivable ................................................................ 8,824 831,656
Deferred income taxes ................................................................ -- 3,960,946
Furniture, fixtures and equipment, net ............................................... 222,267 166,400
OTHER ASSETS ......................................................................... 26,327 653,957
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL ASSETS ......................................................................... $ 15,887,323 $ 43,188,413
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses ................................................ $ 796,754 $ 1,081,655
Credit balances of factoring clients ................................................. 413,144 4,559,570
Notes payable ........................................................................ 7,570,666 15,014,717
CONVERTIBLE SUBORDINATED NOTES ....................................................... 4,954,000 4,958,000
- -------------------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES .................................................................... 13,734,564 25,613,942
------------ -----------
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; 3,105,828 issued; 2,324,616 outstanding at September
30, 1999 and 2,324,083 outstanding at December 31, 1998,
exclusive of shares held in treasury ............................................. 40,000 40,000
Additional paid-in-capital ......................................................... 18,874,182 18,874,182
Treasury stock, 781,212 shares at September 30, 1999
and 781,745 shares at December 31, 1998 .......................................... (4,970,301) (4,986,520)
(DEFICIT) RETAINED EARNINGS ........................................................ (11,791,122) 3,646,809
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ........................................................... 2,152,759 17,574,471
- -------------------------------------------------------------------------------------- ------------ ------------
$ 15,887,323 $43,188,413
============ ===========
See Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
---- ---- ---- ----
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE .................................
Earned discounts and interest ......... $ 592,511 $ 1,831,083 $ 2,805,244 $ 6,846,331
FEES AND OTHER REVENUE ................ 34,736 244,966 359,182 1,253,401
TOTAL REVENUE ....................... 627,247 2,076,049 3,164,426 8,099,732
EXPENSES
Compensation and fringe benefits ...... 523,171 700,026 1,786,867 2,640,356
General and administrative ............ 563,375 1,712,599 2,318,024 4,803,356
Interest expense ...................... 319,874 482,308 1,030,839 1,341,463
Provision for credit losses ........... 800,000 3,865,502 9,176,057 9,323,503
RESTRUCTURING CHARGE .................. 259,221 -- 259,221 --
TOTAL EXPENSES ...................... 2,465,641 6,760,435 14,571,008 18,108,678
LOSS BEFORE INCOME TAX EXPENSE .......... (1,838,394) (4,684,386) (11,406,582) (10,008,946)
INCOME TAX EXPENSE (BENEFIT) ............ 9,500 (1,732,913) 4,031,349 (3,703,000)
NET LOSS ................................ $ (1,847,894) $ (2,951,473) $(15,437,931) $ (6,305,946)
NET LOSS PER COMMON SHARE - BASIC ...... $ (0.79) $ (1.27) $ (6.64) $ (2.72)
WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 2,324,616 2,320,966 2,324,400 2,321,195
See Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<CAPTION>
COMMON STOCK ADDITIONAL TREASURY RETAINED TOTAL
PAID IN STOCK EARNINGS/
CAPITAL (DEFICIT)
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1998 .... $ 40,000 $ 18,852,312 $ (5,030,594) $ 9,702,322 $ 23,564,040
Amortization of treasury stock 28,084 28,084
Conversion of Convertible
Subordinated Notes to 2,132
Shares of Common Stock 15,990 15,990
3,500 Options exercised ...... 21,870 21,870
NET LOSS ..................... (6,055,513) (6,055,513)
Balance - December 31, 1998 . $ 40,000 $ 18,874,182 $ (4,986,520) $ 3,646,809 $ 17,574,471
Amortization of treasury stock 12,221 12,221
Conversion of Convertible
Subordinated Notes to 533
shares of common stock 3,998 3,998
NET LOSS (UNAUDITED) ......... (15,437,931) (15,437,931)
BALANCE - SEPTEMBER 30, 1999 . $ 40,000 $ 18,874,182 $ (4,970,301) $(11,791,122) $ 2,152,759
See Notes to Consolidated Financial Statements
</TABLE>
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<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended September 30
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED) (UNAUDITED)
<S> <C> <C>
Net Loss $(15,437,931) $(6,305,946)
Adjustments to reconcile net loss
to cash provided by operating activities:
Depreciation - net 53,587 313,000
Loss on disposition of furniture, equipment, and
Automobiles 65,440 51,497
Provision for credit losses 9,176,057 9,323,503
Changes in operating assets and liabilities:
Other assets 627,630 4,078,056
Accounts payable and accrued expenses (284,901) 1,408,795
INCOME TAXES RECEIVABLE AND DEFERRED INCOME TAXES 4,783,778 (4,122,740)
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (1,016,340) 4,746,165
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of receivables and advances (106,562,864) (169,947,755)
Collection of receivables, including life insurance
contracts, and advances 117,403,655 156,445,190
(Decrease)/Increase in credit balances of factoring clients (4,146,426) 2,904,273
Sale of automobiles 6,800
PURCHASE OF FURNITURE, FIXTURES AND EQUIPMENT (181,394) (50,197)
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,519,771 (10,648,489)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 76,427,897 101,014,904
Principal payments on line of credit (83,871,948) (96,509,963)
Treasury stock acquisition costs 12,219 -
OPTIONS EXERCISED - 21,860
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (7,431,832) 4,526,801
NET DECREASE IN CASH (1,928,401) (1,375,523)
CASH, BEGINNING OF PERIOD 2,420,644 4,200,050
CASH, END OF PERIOD $ 492,243 $ 2,824,527
INTEREST PAID $ 283,111 $ 1,341,463
INCOME TAXES PAID $ - $ 418,051
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
CONVERSION OF FACTORING CLIENTS TO ABL LOANS $9,309,511 $ -
Issuance of common stock in exchange
FOR CONVERTIBLE SUBORDINATED NOTES $ 3,998 $ 12,990
See Notes to Consolidated Financial Statements
</TABLE>
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL. The consolidated financial statements of Allstate Financial
Corporation and subsidiaries (the "Company") included herein are unaudited for
the periods ended September 30, 1999 and 1998; however, they reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the results for the periods presented. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Allstate
Financial Corporation believes that the disclosures are adequate to make the
information presented not misleading. The results of operations for the nine
months ended September 30, 1999 are not necessarily indicative of the results of
operations to be expected for the remainder of the year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
2. SENIOR AND SUBORDINATED DEBT. The Company is operating under a forbearance
agreement negotiated with its bank lenders. The line of credit availability at
September 30, 1999 is limited to the lesser of $10,000,000 and a percentage of
the Company's collateral position less a fixed amount. The $10,000,000 line of
credit is reduced as collections of certain assets are received. As of September
30, 1999 the Company had approximately $1,300,000 available. The interest rate
on the line of credit is equal to the agent lender's base rate plus 2.25%. The
agreement was scheduled to expire October 31, 1999, at which time all amounts
under the line of credit was to become due. The Company is seeking to obtain
replacement financing or to sell some of its assets to repay the lenders in
whole or in part, and the Company obtained an extension of the forbearance
period to November 30, 1999. See Note 7.
The Company has obtained a $1,000,000 working capital loan from a major
stockholder. The working capital loan bears a 10% rate of interest, which is
payable quarterly, and repayment terms of 25% of collections of certain assets.
The outstanding balance of the loan is due March 31, 2000. The Company may seek
to extend the due date of the outstanding balance of the loan. As of September
30, 1999, the Company owed $1,000,000 on the working capital loan.
The Company also has outstanding $4,954,000 in aggregate principal amount of
convertible subordinated notes, of which $357,000 are due in September 2000 and
$4,597,000 are due in September 2003. The Company is currently in default on
certain financial covenants relating to the subordinated debt due September 30,
2003. There are no financial covenants in the convertible subordinated debt due
September 30, 2000.
3. CERTAIN CONTINGENCIES. The Company is a counterclaim defendant in Allstate
Financial Corporation v. A.G. Construction, Inc. (n/k/a A.G. Plumbing, Inc.),
American General Construction Corp., Adam Guziczek and Cheryl Lee Guziczek
(hereinafter collectively referred to as "AG") pending in the United States
Bankruptcy Court for the Southern District of New York. In a 1993 action, the
Company undertook an attempt to recover against AG. An answer and counterclaim
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was filed against the Company. The counterclaim asserted claims for usury,
diversion of proceeds of public improvement contracts, and overpayments to the
Company by AG in excess of $2,000,000 (hereinafter the "Counterclaims"). No
specific damage claims amount was set forth in the Counterclaims.
No action was ever taken by the trustee in the AG bankruptcy proceedings to
pursue the Counterclaims. On June 2, 1997, the trustee for the AG bankruptcy
estate filed a motion to abandon these claims against the Company. On October 7,
1997, New York Surety Company (hereinafter referred to as the "Surety"), which
provided the payment and performance bond to AG in connection with the
construction jobs performed for the City of New York, filed pleadings objecting
to the abandonment of such claims against the Company, asserting that it was
subrogated to AG's claims. The Surety's complaint adopts the Counterclaims and
seeks an accounting. The Surety asserts damages of approximately $4,000,000. On
April 9, 1998, the bankruptcy court remanded the matter to state court.
On June 24, 1998, the Surety was formally declared insolvent by the
Superintendent of Insurance of the State of New York (hereinafter referred to as
the "Superintendent") and as such the Superintendent was judicially appointed as
rehabilitator of the Surety to conduct its business. At this time, it is
uncertain whether the Superintendent will continue to pursue the litigation
against the Company.
The Company believes it has meritorious defenses to the Counterclaims and
intends to vigorously defend all claims. However, the litigation is in the
preliminary stage and the probability of a favorable or unfavorable outcome and
the potential amount of loss, if any, cannot be determined or estimated at this
time.
Except as described above, the Company is not a party to any litigation other
than routine proceedings incidental to its business, and the Company does not
expect that these other proceedings will have a material adverse effect on the
Company.
4. CREDIT CONCENTRATIONS. For the nine months ended September 30, 1999, three
clients accounted for 30.9% of the Company's total earned discounts and interest
as compared to 50.3% for the same period in 1998. For the quarter ended
September 30, 1999, three clients accounted for 39.0% of the Company's total
earned discounts and interest, as compared to 60.9% for the quarter ended
September 30, 1998.
At September 30, 1999, three clients accounted for 49.5% of the Company's total
receivables, while at December 31, 1998 three clients accounted for 48.7%. All
three of the Company's largest clients at September 30, 1999 are non-performing.
5. STOCK OPTIONS. The Company maintains two stock option plans: (1) an Incentive
Stock Option Plan (Qualified), and (2) a Non-Qualified Stock Option Plan
(Non-Qualified). The Company continues to account for stock options under APB 25
and provides the additional disclosures as required by SFAS No. 123.
QUALIFIED PLAN
The Company has reserved 275,000 shares of common stock for issuance under its
qualified stock option plans. Options to purchase common stock are granted at a
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price equal to the fair market value of the stock on 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.
NON-QUALIFIED PLAN
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 or 110% of fair value at the time of grant.
The table below summarizes the option activity for both the Qualified and
Non-Qualified Stock Option plans for the nine months ended September 30, 1999:
Nine Months Ended September 30, 1999
Outstanding January 1 219,600
Granted 155,000
Exercised -
FORFEITED OR EXPIRED (87,200)
OUTSTANDING 287,400
EXERCISABLE 272,021
The weighted average fair value at the date of grant for options granted during
1999 was $0.77. The fair value of options at the date of grant was estimated
using the Black-Scholes model with an expected option life of 3.0 years, zero
dividend yield, interest rates of 5.70% and volatility of 161%.
Nine Months Ended September 30, 1999
Per share
Outstanding January 1 $6.37
Granted 6.03
Exercised -
FORFEITED OR EXPIRED (5.74)
OUTSTANDING $6.28
EXERCISABLE $6.34
The Company's net loss would have been increased by $100,218 or $0.04 per share
basic and dilutive for the nine months ended September 30, 1999, in stock-based
compensation cost for the Company's qualified and non-qualified stock option
plans if the cost of the plans had been determined based on the fair value at
the grant dates for awards under the plans.
6. NEW ACCOUNTING PRONOUNCEMENT. IN JUNE OF 1998, THE FASB ISSUED SFAS NO. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement
establishes accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires a company to recognize all derivatives as either
assets or liabilities in the balance sheet and to measure those instruments at
fair value. This statement is effective for fiscal years beginning after June
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15, 2000. Management is in the process of evaluating the potential impact of
this standard on the Company's financial position and results of operations.
7. SUBSEQUENT EVENTS. The Company's board of directors elected to evaluate
alternatives to increase shareholder value, including investigating strategic
and financial partners or purchasers for the factoring and ABL businesses. On
October 29, 1999 the Company sold the Purchased Receivables and the Advances
Receivable related to its Factoring business to Metro Factors, Inc. ("Metro"),
for $5,990,252, a price that approximated the carrying value of the assets
involved. Simultaneous with the sale, the Company purchased a participation in
certain of the Advances Receivable associated with the Factoring clients for
$1,528,796. Metro will act as the servicer with regard to these participations.
The Company will receive a premium over time based on the performance of the
Purchased Receivables sold. The Company did not record any gain or loss on this
transaction. See the Proforma financial statements in Management's Discussion
and Analysis of Financial Condition and Results of Operations under the
Subsequent Events section. Management has also met with potential purchasers of
other assets, and continues to explore a sale or refinancing.
On November 8, 1999, the Company's lenders agreed to extend the Forebearance
Agreement into which they and the Company had entered on August 1, 1999. The
term of the agreement was extended to November 30, 1999, and the amount of the
facility was decreased to $3,500,000 or the availability as defined in the
revolving credit agreement, whichever is less. The interest rate on the facility
is a rate equal to the agent lender's base rate plus 2.25%. The Company plans to
use a portion of the proceeds of the sale of other assets to repay the lenders
before the expiration of the agreement. In the event that the Company is not
able to repay the lenders, there can be no assurance that the Company will be
able to continue to operate on an independent basis or that the shareholders
will receive any distributions if the Company is liquidated.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-QSB contains certain "forward-looking statements" relating to the
Company which represent the Company's current expectations or beliefs,
including, but not limited to, statements concerning the Company's operations,
performance, financial condition and growth. For this purpose, any statements
contained in this Form 10-QSB that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"intend", "could", "estimate", or "continue", or the negative or other variation
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, such as credit losses, dependence on management and key
personnel, seasonality, and variability of quarterly results, ability of the
Company to continue its business plan, competition, and regulatory restrictions
relating to potential new activities, certain of which are beyond the Company's
control. Should one or more of these risks or uncertainties materialize or
should the underlying assumptions prove incorrect, actual outcomes and results
could differ materially from those indicated in the forward-looking statements.
SUBSEQUENT EVENTS
The Company's board of directors elected to evaluate alternatives to increase
shareholder value, including investigating strategic and financial partners or
purchasers for the factoring and ABL businesses. On October 29, 1999 the Company
sold the Purchased Receivables and the Advances Receivable related to its
Factoring business to Metro Factors, Inc. (Metro), for a price that approximated
the carrying value of the assets involved. Simultaneous with the sale, the
Company purchased a participation in certain of the Advances Receivable
associated with the Factoring clients. Metro will act as the servicer with
regard to these participations. The net consideration received by the Company
was approximately $4.5 million, plus a premium to be received over time based on
the performance of the Purchased Receivables sold. The Company did not record
any gain or loss on this transaction. Management has also met with potential
purchasers of other assets.
[THIS SECTION INTENTIONALLY LEFT BLANK]
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Pro-Forma Financial Statement
The following tables shows the Company's Pro-forma Condensed Balance Sheet and
Statement of Operations as of September 30, 1999 adjusted by the sale of the
purchased receivables.
Pro-forma Balance Sheet
BEFORE SALE SALE OF AFTER SALE OF
OF ASSETS ASSETS ASSETS
Cash ..................................... $ 493 4,407 $ 4,900
Total Receivables, net ................... 15,138 (4,758) 10,380
OTHER ASSETS ............................. 257 -- 257
TOTAL ASSETS ............................. $15,888 $ (351) $15,537
======= ======= =======
Total liabilities ........................ $13,735 $ (351) $13,384
TOTAL SHAREHOLDERS' EQUITY ............... 2,153 -- 2,153
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,888 $ (351) $15,537
======= ======= =======
<TABLE>
Pro-forma Statement of Operations
<CAPTION>
BEFORE SALE OF SALE OF ASSETS AFTER SALE OF
ASSETS ASSETS
<S> <C> <C> <C>
REVENUE
Earned discounts and interest ..................... $ 2,805 $ (1,093) $ 1,712
Fees and other revenue ............................ 359 (313) 46
INCOME FROM DISCONTINUED OPERATIONS ............... -- 141 141
TOTAL REVENUE ................................... 3,164 (1,265) 1,899
EXPENSES
Compensation and fringe benefits .................. 1,787 (568) 1,219
General and administrative ........................ 2,318 (513) 1,805
Interest expense .................................. 1,031 (438) 593
Provision for credit losses ....................... 9,176 -- 9,176
Restructuring Charge .............................. 259 (259) --
INCOME TAX EXPENSE ................................ 4,031 -- 4,031
Total Expenses .................................. 18,602 (1,778) 16,824
NET LOSS ............................................ $ (15,438) $ 513 $ (14,925)
=========== =========== ===========
NET LOSS PER COMMON SHARE - Basic ................... $ (6.64) $ 0.22 $ (6.42)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 2,324,400 2,324,400 2,324,400
=========== =========== ===========
</TABLE>
ASSUMPTIONS
Balance Sheet - The Pro-forma Balance Sheet adjusts the September 30, 1999
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Balance Sheet by the sale of the factoring portfolio. Since the portfolio sale
took place on October 29, 1999 and the Balance Sheet is dated September 30,
1999, there were some immaterial fluctuations between the book balances of the
factoring portfolio on September 30, 1999 and October 29, 1999. Therefore, the
Pro-forma Balance Sheet does not represent actual account balances on any date.
Statement of Operations - The Pro-forma Statement of Operations adjusts the
Statement of Operations for the nine months ending September 30, 1999 as if the
sale of the factoring portfolio took place on January 1, 1999. The sale of
assets column in this pro-forma are management's estimates as to what revenue
and expenses would and would have been earned or incurred had the sale of the
factoring portfolio taken place on January 1, 1999.
The proceeds of the sale were used to reduce the Company's line of credit, in
accordance with the forbearance agreement. This paydown in the Company's line of
credit is not reflected in the above Pro-forma Balance Sheet.
Subsequent events, continued
On November 8,1999, the Company's lenders agreed to extend the Forebearance
Agreement into which they and the Company had entered on August 1, 1999. The
term of the agreement was extended to November 30, 1999, and the amount of the
facility was decreased to $3.5 million or the availability as defined in the
revolving credit agreement, whichever is less. The interest rate on the facility
is a rate equal to the agent lender's base rate plus 2.25%. The Company plans to
use a portion of the proceeds of the sale of other assets to repay the lenders
before the expiration of the agreement. In the event that the Company is not
able to repay the lenders, there can be no assurance that the Company will be
able to continue to operate on an independent basis or that the shareholders
will receive any distributions if the Company is liquidated.
GENERAL
The Company is a commercial finance institution, which provides financing to
small businesses, usually those with annual sales of $1 million to $10 million.
Through its offering of advances secured by accounts receivable, inventory,
machinery and equipment, and real estate ("Asset-Based Lending" or "ABL"), the
Company provides its clients with the ability to expand their working capital
and acquire productive business assets.
The Company's clients do not typically qualify for traditional bank financing
because they are either too new, too small, undercapitalized (over-leveraged),
unprofitable or otherwise unable to satisfy the requirements of bank lenders.
Accordingly, there is a significant risk of default and client failure inherent
in the Company's business.
The Company faces competition from factoring companies, asset-based lenders,
diversified lenders, and commercial banks that offer secured financing. Due to
the size of facilities that it offers, the Company competes with both regional
sources of financing and large national organizations. Many of these competitors
have significant financial, marketing and operational resources, and may have
access to capital at lower costs than the Company can obtain.
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 qualify for more competitively priced bank or asset-based financing within
that time period, or would be liquidated. Therefore, the Company's major clients
have tended to change significantly over time. Although the Company has
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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. The Company was materially adversely affected
when the financial condition of its three largest clients deteriorated in June
30, 1999 quarter. The curtailment of the Company's credit line according to the
terms of the forebearance agreement limited the Company's ability to replace
those clients, which has had a material adverse effect on the Company.
The Company's subsidiary Lifetime Options, Inc. manages a portfolio of life
insurance policies it purchased from individuals facing life-threatening
illnesses. During 1997, Lifetime Options ceased purchasing policies.
Other than Lifetime Options, none of the Company's subsidiaries is currently
engaged in any business which could have a material effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's requirement for capital is a function of the levels of its
investment in receivables and its operating results. The Company funds these
needs through its revolving credit line, its working capital loan, its
convertible subordinated notes, and internally generated funds.
The Company is operating under a forbearance agreement negotiated with its bank
lenders. The line of credit availability at September 30,1999 was limited to $10
million or a percentage of the Company's collateral position less a fixed
amount. The $10 million line of credit was reduced by the sale proceeds from the
Purchased Receivables as collections of certain assets were received. As of
September 30, 1999 the Company had approximately $1.3 million available under a
$9.9 line of credit. The interest rate on the line of credit is equal to the
agent lender's base rate plus 2.25%. The agreement expired October 31, 1999, at
which time the Company requested and received an extension to November 30, 1999.
The Company is still seeking to obtain replacement financing or to sell other
assets to repay the lenders in whole or in part. See the subsequent events
sections in the notes to the financial statement and management's discussion and
analysis.
The Company has obtained a $1 million working capital loan from a major
stockholder. The working capital loan bears a 10% rate of interest, which is
payable quarterly, and repayment terms of 25% of collections of certain assets.
The outstanding balance of the loan is due March 31, 2000. The Company may seek
to extend the due date of the outstanding balance of the loan. As of September
30, 1999, the Company owed $1 million on the working capital loan.
The Company is also seeking to obtain replacement financing or to sell some of
its assets to repay the lenders in whole. There can be no assurance that these
efforts will be successful. Given the Company's current cash position and the
restrictions on the use of the line of credit imposed by the lenders, the
Company is not in a position to fund or acquire new clients. The Company is
currently working with its current ABL clients to meet their needs. In addition,
because of the amount of non performing assets in the portfolio, the Company is
not operating profitably, and does not expect to return to profitability unless
it can add new performing assets to the portfolio, which is dependent on the
Company's ability to obtain replacement financing. The Company is currently
reviewing options to cut costs and increase liquidity, including selling all or
a portion of the ABL portfolio, and using the proceeds to repay the lenders, and
has contacted new sources of financing. The Company has met with several
potential buyers of this portfolio. Should the Company sell the portfolio, the
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<PAGE>
Company may incur costs to eliminate the positions associated with the portfolio
sold.
The Company had expended approximately $500 thousand in the first six months of
1999 relating to acquiring a $30 million ABL portfolio and a $5 million ABL
company. Since the Company has decided not to pursue either the portfolio or
company, no further funds will be expended for these purposes during the second
half of 1999.
The Company also has outstanding approximately $5 million in aggregate principal
amount of convertible subordinated notes, of which $357 thousand are due in
September 2000 and $4.6 million are due in September 2003. The Company is
currently in default on certain financial covenants relating to the subordinated
debt due September 30, 2003. There are no financial covenants in the convertible
subordinated debt due September 30, 2000.
The Company believes that the proceeds of the working capital loan, borrowings
under its current credit facility (as modified by the forbearance agreement,)
and internally generated funds from the collection of non-performing assets will
be sufficient to finance the Company's working capital requirements for the
remainder of 1999. Further, the Company believes that, given the results of
efforts to date to obtain new financing or to sell assets to increase liquidity,
it will generate sufficient funds to repay the existing lenders. However, there
can be no assurance that collections from non-performing assets or sale of other
assets can be accomplished in the required time frames, or that sufficient
replacement financing can be obtained to restore the portfolio to a level where
the Company can operate profitably.
YEAR 2000 DISCLOSURES
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. Computer
equipment, software and other devices with embedded technology that are
date-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in other normal business
activities. The inability of business processes to function correctly in 2000
could have serious adverse effects on companies and entities throughout the
world. Management has determined that the consequences of its Year 2000 issues
could have a material adverse effect on the Company's business, results, or
financial condition if the Company and certain material third parties do not
become Year 2000 compliant.
The Company has identified all significant information technology ("IT")
applications that are not Year 2000 compliant. Management does not believe it
has any non-IT systems (those other than computers or software which include
microprocessors), which are not certified by their vendors as compliant. The
Company has determined to replace or upgrade all of the non-compliant IT
applications and hardware with applications and hardware certified by third
party vendors as compliant and tested for compliance. The first phase of Year
2000 remediation, identifying the appropriate replacement applications, has been
completed. The second phase, purchasing or contracting to license or purchase
the applications, is completed. Each new system selected is "off the shelf", and
is certified Year 2000 compliant, and, therefore, the third phase, installation
and testing, will be limited and is expected to be completed by November 30,
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1999. The fourth phase, limited conversion of certain existing data to the
replacement systems, is expected to be substantially completed at the end of the
testing phase, and finally completed before December 31, 1999. The cost of
becoming Year 2000 compliant through acquisition of new systems is estimated at
$50 thousand, all of which has been incurred.
The Company's IT systems are not interdependent with those of any third party.
Major suppliers, who are primarily telecommunications companies, financial
institutions and public utilities, have disclosed that they do not expect any
significant interruptions in their businesses. The Company has sent
questionnaires to its clients and material obligors, and has evaluated their
responses. If a material client or obligor has a business interruption, the
Company's operations could be affected. In the most likely worst case Year 2000
scenario, the Company will not be able to determine whether certain clients and
obligors have unresolved Year 2000 issues, and some clients and obligors may
have business interruptions even though the Company believes they will be
compliant. In these cases, the Company may have to cease doing business with
clients or obligors that could have a material adverse effect on the Company's
financial condition. Due to the Company's reduced size, the Company has
determined that such possible events are unlikely to have a material adverse
effect on its financial condition. The Company will continue to analyze the
uncertainty through monitoring the Year 2000 compliance efforts of clients and
obligors.
RESULTS OF OPERATIONS
The following table sets forth certain items of revenue and expense for the
periods indicated and indicates the percentage relationships of each item to
total revenue.
Nine Months Ended September 30
1999 1998
(UNAUDITED) (UNAUDITED)
REVENUE .......................... % %
Earned discounts and interest .. $ 2,805,244 88.6 $ 6,846,331 84.5
FEES AND OTHER REVENUE ......... 359,182 11.4 1,253,401 15.5
TOTAL REVENUE ................ 3,164,426 100.0 8,099,732 100.0
EXPENSES
Compensation and fringe benefits 1,786,867 56.5 2,640,356 32.6
General and administrative ..... 2,318,024 73.3 4,803,356 59.3
Interest expense ............... 1,030,839 32.6 1,341,463 16.6
Provision for credit losses .... 9,176,057 290.0 9,323,503 115.1
RESTRUCTURING CHARGE ........... 259,221 8.1 -- --
TOTAL EXPENSES ............... 14,571,008 460.5 18,108,678 223.6
LOSS BEFORE INCOME TAX EXPENSE ... (11,406,582) (360.5) (10,008,946)(123.6)
INCOME TAX EXPENSE (BENEFIT) ..... 4,031,349 127.4 (3,703,000) (45.7)
NET LOSS ......................... $(15,437,931) (487.9) $ (6,305,946) (77.9)
============ ===== ============ =====
NET LOSS PER COMMON SHARE - BASIC $ (6.64) $ (2.72)
============ =============
WEIGHTED AVERAGE NUMBER OF SHARES 2,324,400 2,321,195
17
<PAGE>
TOTAL REVENUE. Total revenue consists of (i) discounts on purchased invoices
earned in the Company's factoring business from the purchase of accounts
receivable and interest earnings on ABL advances receivable, and (ii) fees and
other revenue, which consist primarily of application fees, commitment or
facility fees, other transaction 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 those clients
"graduating" to a lower cost source of funding).
The following table breaks down total revenue by type of transaction for the
periods indicated and the percentage relationship of each type of transaction to
total revenue.
For the Nine Months Ended September 30,
1999 1998
TYPE OF REVENUE % %
Discount on purchased invoices $ 982,183 31.0 $3,733,476 46.1
Earnings on advances ......... 1,823,061 57.6 3,112,855 38.4
FEES AND OTHER REVENUE ....... 359,182 11.4 1,253,401 15.5
TOTAL REVENUE ................ $3,164,426 100.0 $8,099,732 100.0
========== ===== ========== =====
For the Three Months Ended September 30,
1999 1998
TYPE OF REVENUE % %
Discount on purchased invoices $ 288,910 46.1 $1,117,357 53.8
Earnings on advances ......... 303,601 48.4 713,726 34.4
FEES AND OTHER REVENUE ....... 34,736 5.5 244,966 11.8
TOTAL REVENUE ................ $ 627,247 100.0 $2,076,049 100.0
========== ===== ========== =====
Total revenue decreased by 60.9% in the nine months ended September 30, 1999
versus the same period in 1998, to $3.2 million from $8.1 million. In the three
months ended September 30, 1999, total revenue decreased by 69.8% versus the
same period in 1998, to $627 thousand from $2.1 million.
Within total revenue, discounts on purchased invoices decreased 73.7% and 74.1%
in the September 30, 1999 nine month and three month periods as compared to the
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same periods in the prior year. The volumes of invoices purchased were $35.2
million and $9.9 million in the nine and three months ending September 30, 1999
as compared to $107.4 million and $30.7 million in the nine and three month
periods ending September 30,1998, representing 67.2% and 67.8% decreases,
respectively. The major reasons for the decreases were a conversion of a
significant client from a factoring relationship to an Asset Based Loan
relationship and a reduced flow of factoring business as the Company emphasized
its ABL line in 1999. The average earned discounts as a percentage of total
invoices purchased in the nine and three months ended September 30, 1999 were
2.8% and 2.9%. The comparable average percentages in the 1998 periods were 3.2%
and 3.6%, representing decreases of 12.5% and 19.4%. The decreases were the
result of the default of a client in 1998.
Earnings on advances receivable decreased by 41.4% and 57.5% in the nine and
three month periods ending September 30, 1999 versus the comparable year earlier
periods. The earnings decreases were attributable to the three largest clients
defaulting on their loans during the second quarter of 1999. Fees and other
revenue decreased in the nine and three months ended September 30, 1999 by 71.3%
and 85.8% as compared to the September 30, 1998 periods. Two of the same clients
that defaulted on their loans during 1999 caused the majority of the reduction
in transaction fees in 1999 as compared to 1998.
The downward trend in revenue is highly likely to continue throughout the
remainder of the year. Given the Company's liquidity position as discussed
earlier, the Company cannot acquire or fund new clients. The sale of the
Factoring portfolio will decrease future earnings, and the Company may incur
certain costs in reducing staff levels in addition to the restructuring charge,
if other portions of the portfolio are sold.
COMPENSATION AND FRINGE BENEFITS. In the nine-month period ending September 30,
1999, compensation expense was $853 thousand lower than in the comparable period
in 1998. Compensation as a percentage of revenue was up by 73.3% due to the
significantly lower revenue. In the three-month period ending September 30,
1999, compensation expense was $177 thousand lower than in the comparable period
in 1998, while compensation as a percentage of revenue was up, by 147.5%, again
due to lower revenue. The lower compensation and fringe benefits during 1999
were chiefly the result of a decrease in the number of employees.
GENERAL AND ADMINISTRATIVE EXPENSE. Total general and administrative expense
decreased by $2.5 million (51.7%) to $2.3 million from $4.8 million for the nine
month period ended September 30, 1999 compared with 1998, and by $1.1 million
(67.1%) to $600 thousand from $1.7 for the three month period then ended
compared with the previous year. Client litigation expenses were $452 thousand
and $136 thousand for the nine and three month periods ending September 30, 1999
compared to $914 thousand and $284 thousand in the corresponding periods the
previous year. Other professional fees increased $118 thousand for the nine
months and decreased $109 thousand for the three months ending September 30,
1999 versus the same periods in 1998. Included in G&A expense for the nine
months ended September 30, 1999 was approximately $500 thousand in fees and
expenses paid in connection with the planned purchase of a loan portfolio. The
Company decided not to pursue the portfolio.
INTEREST EXPENSE. Interest expense was $1.0 million versus $1.3 million for the
nine months ended September 30, 1999 and 1998, respectively, and $181 thousand
and $482 thousand respectively for the three months ended September 30, 1999 and
1998. Interest expense for the nine-month period ended September 30, 1999
includes a one-time payment of $20 thousand in non-operating interest due to a
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<PAGE>
tax agency. The decrease in interest expense is primarily attributable to a
decrease in the average amount outstanding and, for the nine-month period only,
a lower average interest rate on the Company's line of credit. The average daily
outstanding balances on the Company's line of credit were $10.4 million and
$15.6 million for the nine-month periods and $7.3 million and $18.5 million for
the three-month periods ended September 30, 1999 and 1998, respectively. The
average interest rate paid on the Company's line of credit decreased to 7.83%
for the nine months ended September 30, 1999 from 8.07% during the comparable
period in 1998, and increased to 9.63% from 8.05% during the three-month periods
then ended. The increase in the quarter ending September 30, 1999 was due to an
increase of 2 percentage points by the lender on the bank line of credit and
interest on the working capital loan which bears an interest rate of 10%.
Interest expense on the Convertible Subordinated Notes was comparable in the
nine months and three months ended September 30, 1999 to that in the comparable
periods of 1998.
PROVISION FOR CREDIT LOSSES. During the three months ended September 30, 1999,
the Company had charge-offs of $11 thousand, while recovering $39 thousand, as
compared to 1998, when the comparable figures were $3.7 million and $40
thousand, respectively. The Company provided $800 thousand for estimated losses
during the three months ended September 30, 1999, compared to a $3.9 million
provision in third quarter of 1998.
For the nine-month period ending September 30, 1999, the Company took a
provision of $9.2 million as compared to $9.3 million for the same period in
1998. Charge-offs for the nine months ended September 30, 1999 were $96 thousand
as compared to $3.7 million for 1998. The provision taken during 1999 is in
accordance with the Company's policy of increasing reserves when it becomes
apparent that the Company's collateral position has deteriorated and the Company
will not realize the entire amount of the loan outstanding. The Company has a
policy of charging-off amounts when the loss amount is reasonably determinable.
The allowance for credit losses ended at a balance of $11.8 million at September
30, 1999 as compared to a balance of $7.9 million at September 30, 1998.
The following table provides a summary of activity in the Company's allowance
for losses for the three-month periods ending September 30, 1999 and 1998, in
dollars and percentages of the receivable portfolio.
Three Months Ended
1999 1998
(IN THOUSANDS) % (IN THOUSANDS) %
ALLOWANCE FOR CREDIT LOSSES
Balance Beginning of Period $ 10,960 40.7 $ 2,739 6.6
Additions ................. 800 3.0 8,823 21.2
Write-Offs ................ (11) -- (3,740) (9.0)
RECOVERIES ................ 39 0.1 40 0.1
BALANCE - END OF PERIOD ... $ 11,788 43.8 $ 7,862 18.9
======== ==== ======== ====
The Company's three largest clients, all classified as non-performing,
experienced severe financial problems in the three month and nine month periods
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<PAGE>
ending September 30, 1999. On September 30, 1999, one client refinanced its
obligations to the Company with two notes. The first note is secured by a second
lien on all of the client's assets, and requires monthly interest plus principal
amortization. The second note is an obligation of the client's principals, and
is secured by their stock in the client's parent company. Both notes bear
interest at rates that are lower than the original contractual rates. The client
defaulted on the first note during the month of November 1999. The Company is
working with the client to resolve this default and attempt collection on both
notes. There can be no assurance that the Company will realize any payments of
principal and interest and may have to incur further provisions and write-downs
of this asset. The other two clients, who are related through common ownership,
have ceased operations. The Company is pursuing legal action against the clients
and related guarantors to liquidate collateral and recover amounts due. The
Company has allocated $11.5 million of its allowance for losses against the
$13.5 million amount of the assets involved with these three clients, which
management deems impaired. However, management has not made a final
determination as to the amount of the losses that will actually be incurred.
The remaining non-performing assets have previously been written down to net
realizable value.
The Company determines overall reserve levels based on an analysis, which takes
into account a number of factors including a determination of the risk involved
with each individual client, plus additional considerations based on
concentration and asset class. Based on this analysis, the Company believes the
allowance for credit losses, net of the amounts allocated to specific impaired
accounts, is adequate in light of the risks inherent in the performing portfolio
at September 30, 1999.
RESTRUCTURING CHARGE
During the three-month period ending September 30, 1999 the Company developed a
plan to sell certain finance assets to cut its outstanding senior debt and lower
its cost. As a result, the Company expected to incur certain costs of employee
severance, termination of office and equipment leases. The total of these costs
was estimated at $259 thousand, and the Company provided for these expenses
through a charge to earnings in the period. As of November 8, 1999 the Company
has disbursed $202 thousand of the total. The balance is expected to be
substantially disbursed for the purposes intended by December 31, 1999.
[THIS SECTION INTENTIONALLY LEFT BLANK]
21
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RECEIVABLES
Receivables consist of the following:
September 30, 1999 December 31, 1998
Invoices .................. $ 5,868,409 $ 23,731,826
Less: Unearned discount . (1,248,235) (3,299,175)
Less: Participations .... -- (759,424)
LIFE INSURANCE POLICIES ... 2,143,770 2,629,057
TOTAL PURCHASED RECEIVABLES $ 6,763,944 $ 22,302,284
============ ============
Advances receivable ....... $ 20,909,855 $ 16,288,673
Less: Participations .... (748,298) --
LESS: UNEARNED DISCOUNT . -- (636,216)
TOTAL ADVANCES RECEIVABLE . $ 20,161,557 $ 15,652,457
============ ============
Life insurance policies purchased are stated net of a valuation allowance of
$760 thousand at September 30, 1999 and $275 thousand at December 31, 1998. The
Company periodically updates information on the life expectancies of the
insureds, and computes an allowance for the difference between the carrying
value of the policies and the policy benefit amounts discounted to the date of
the calculation.
Non-performing receivables included within the above totals were $14.1
million at September 30, 1999 and $3.8 million at December 31, 1998.
From time to time, a single client or single industry may account for a
significant portion of the Company's receivables. As detailed in Note 4 to the
Financial Statements, three clients each accounted for more than 10% of total
earned discounts and interest for the nine-month periods ended September 30,
1999 and 1998. In addition, three clients' portion of total receivables
outstanding increased to 49.5% of the portfolio as of September 30, 1999 as
compared to 48.7% of the portfolio as of December 31, 1998. During 1998, the
Company adopted a policy to generally restrict the size of any one new client to
a maximum of $3 million. Although the Company carefully monitors client and
industry concentration, the risks associated with client or industry
concentration could have a material adverse effect on the Company. The Company
was materially adversely affected when the financial condition of its three
largest clients deteriorated in the nine-month period ended September 30, 1999.
INCOME TAXES
The provision for income taxes of $4.0 million for the nine months ended
September 30, 1999 relates to a valuation allowance which completely offsets the
deferred tax asset. The Company recorded the valuation allowance as of June 30,
1999, because it concluded that it was unlikely to generate significant taxable
income for the foreseeable future.
NEW ACCOUNTING PRONOUNCEMENT
IN JUNE OF 1998, THE FASB ISSUED SFAS NO. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and
22
<PAGE>
reporting standards for derivative instruments including certain derivative
instruments embedded in other contracts, and for hedging activities. It requires
a company to recognize all derivatives as either assets or liabilities in the
balance sheet and to measure those instruments at fair value. This statement is
effective for fiscal years beginning after June 15, 2000. Management is in the
process of evaluating the potential impact of this standard on the Company's
financial position and results of operations.
[THIS SECTION INTENTIONALLY LEFT BLANK]
23
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PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 3 to the unaudited
financial statements contained in this Form 10-QSB.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 2 to the unaudited financial statements, the Company
was in default on several financial covenants with respect to its $10
million line of credit. The Company is operating under an extension of its
forbearance agreement that will expire November 30, 1999 with the lenders.
The Company believes that, given the results of efforts to date to obtain
new financing or to sell assets to increase liquidity, it will generate
sufficient funds to repay the existing lenders. However, there can be no
assurance that collections from non-performing assets or sale of other
assets can be accomplished in the required time frames
ITEM 6(a). - EXHIBITS
Exhibit 10.1 Material Contract. Agreement for Purchase and Sale of
Financing Arrangements, between Allstate Financial Corporation and Metro
Factors, Inc., dated October 29,1999. Portions of the exhibit have been
omitted pursuant to a request for confidential treatment.
Exhibit 10.2 Material Contract. Extension of the Forbearance Agreement
dated August 1, 1999.
Exhibit 27. Financial Data Schedule
ITEM 6(b). - REPORTS ON FORM 8-K
Form 8-K filed September 7, 1999 is hereby incorporated by reference. The
Company announced a short-term working capital loan of $1 million from a large
shareholder. The Company also announced that it had entered into a forbearance
agreement with its senior debt lenders. No financial statements were required to
be filed.
Form 8-K filed October 15, 1999 is hereby incorporated by reference. The
Company reported that is was delisted from the Nasdaq National Stock Market. No
financial statements were required to be filed.
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
DATE: NOVEMBER 15, 1999 /S/ CHARLES G. JOHNSON
----------------------
Charles G. Johnson
Chief Executive Officer
DATE: NOVEMBER 15, 1999 /S/ C. FRED JACKSON
-------------------
C. Fred Jackson
Chief Financial Officer
EXECUTED 10/28/99
AGREEMENT FOR PURCHASE AND SALE
OF FINANCING ARRANGEMENTS
This Agreement for Sale and Purchase of Financing Arrangements (this
"Agreement") is made as of the 29th day of October 1999 by and between Metro
Factors, Inc., a Texas corporation ("Buyer") and Allstate Financial Corporation,
a Virginia corporation ("Seller").
I. RECITALS
WHEREAS, Seller desires to offer for sale to Buyer and Buyer desires to
purchase from Seller, on the terms and subject to the conditions set forth
herein, all rights and certain obligations of Seller pursuant to those certain
factoring and other lending agreements by and between Seller and Assigned
Clients as identified herein (the "Financing Agreements").
WHEREAS, Buyer and Seller are each in the business of, among other
things, originating, buying, servicing and selling, and otherwise dealing in,
factoring of accounts receivable in the ordinary course of each of their
respective businesses, and lending on an occasional basis.
WHEREAS, Buyer and Seller desire to enter into this Agreement to govern
the sale and purchase of such Financing Arrangements.
NOW, THEREFORE, in consideration of the above recitals and the mutual
covenants contained herein, the parties hereto agree as follows:
II. INCORPORATION BY REFERENCE
The Recitals to this Agreement are incorporated herein by this
reference thereto as though restated in their entirety herein.
III. DEFINITIONS
Whenever used in this Agreement, the following words and phrases,
unless the context otherwise requires, shall have the following meanings:
A. ACCOUNTS: All presently existing and hereafter created accounts, accounts
receivable, contract rights and general intangibles relating thereto, notes,
drafts and other forms of obligations owed to or owned by any Assigned Client
arising or resulting from the sale of goods or the rendering of services by any
such Assigned Client, all proceeds thereof, all guaranties and security
therefor, and all goods and rights represented thereby or arising therefrom
including, but not limited to, the right of stoppage in transit, replevin and
reclamation.
B. ACCOUNT DEBTOR: The person, firm, corporation or other entity that is
obligated to make payment on an Account.
C. ACCOUNT DEBTOR CREDITS: Open credits reflected on Seller's books
which cannot be allocated to a specific unpaid Account and may be payable to
Account Debtors, also referred to as "Exchanges" on Seller's FMIS Reports.
D. ACCOUNT PAYMENTS: All payments on Accounts by Account Debtors
or others.
E. ACCOUNT PURCHASE PRICE: The price paid by Seller for an Assigned
Client's Account(s) pursuant to the terms of a Factoring Agreement, which price
is reflected on Seller's FMIS Reports as "Gross Purchase."
F. AFFILIATE GUARANTIES: Those certain guaranties of the Assigned
Clients' affiliated entities pursuant to which the collections of the Assigned
Clients' Accounts are guaranteed.
G. AGREEMENT: Shall mean this Agreement as same may be amended and
supplemented from time to time. The parties agree that this Agreement shall be
used as the master sale and purchase agreement for those Financing Arrangements
purchased by Buyer from Seller in the future, unless otherwise agreed in writing
by the parties.
H. AMOUNT AT RISK: The Account Purchase Price, less collections to date
as reflected on Seller's FMIS Reports as "Collections", less any unpaid
holdbacks,less discounts owed, plus uncollected adjustments, plus or minus any
items in the Assigned Client's general ledger accounts as reflected on the "Net
Out Report" generated by Seller's FMIS Reports, plus the balance of Assigned
Client Loans, the subtotal of which is the "Net Out Subtotal" on the "Net Out
Report" ($6,044,937.44 as at October 28, 1999), less fifty percent (50%) of the
Earned Discounts ($54,685.13 as at October 28, 1999). *
I. AMOUNT DUE ASSIGNED CLIENTS: The credit balance reflected on
Seller's books which is due to Assigned Clients as of such date, or which, with
the passage of time or otherwise, may become due by Seller to such Assigned
Clients arising out of the purchase of Accounts pursuant to Financing
Agreements, also referred to as the "Discount Owed" on Seller's FMIS Reports.
J. ASSIGNED CLIENT: Any entity included in Assigned Client Group
One, Assigned Client Group Two, or Assigned Client Group Three.
K. ASSIGNED CLIENT GROUP ONE:
*
L. ASSIGNED CLIENT GROUP TWO:
*
M. ASSIGNED CLIENT GROUP THREE:
*
SCHEDULE A attached hereto, sets forth a general description of each of
the above Assigned Client Financing Arrangements. *
N. BASE LENDING RATE: The Base Lending Rate from time to time published as the
"Prime Rate" in The Wall Street Journal, on the date such Base Lending Rate must
be determined.
O. ASSIGNED CLIENT LOANS:
*
ASSIGNED CLIENT LOANS ( Con't):
*
P. CLOSING DATE: shall mean October 29, 1999.
Q. COLLATERAL: shall mean the property which is the security for the
Accounts, the Accounts Purchase Price, Client Loans and all other Obligations
R. DEDUCTIBLE COSTS AND EXPENSES: Those costs and expenses incurred by Buyer in
connection with the Financing Arrangements limited to the following; and with
respect items 2 through 10 below, only to the extent they are specifically
charged to Assigned Clients, in each case:
1) Interest at the Base Lending Rate with allowance for the same number of
collection days as provided in the Financing Arrangements.
2) Buyer's cost of wire transfers and ACH transfers as same may be
increased of decreased after the Closing Date. Such fees as of the Closing Date
are $8.50 for domestic wire transfers, $25.00 for international wire transfers,
and $2.00 for ACH transfers.
3) Per diem charges of field auditor per Factoring Agreement.
4) Buyer's out-of-pocket expenses incurred in connection with field auditor
related to the Financing Arrangements.
5) Buyer's out-of-pocket professional fees and expenses incurred in
connection with the interpretation or enforcement of the Financing Arrangements
including, but not limited to, attorney's, accountants, and expert witnesses. If
Buyer's in-house general counsel is used in lieu of an outside independent
attorney, such in-house general counsel's time shall be charged at the rate of
$25.00 per quarter hour or part thereof.
6) Buyer's cost of expedited delivery services and postage at current
postage rate.
7) Long distance telephone expense at the rate of $.50 per call for
purposes of collection of Accounts related to the Financing Arrangements.
8) $.50 per invoice or past due statement mailed to Account Debtors in
connection with the Financing Arrangements.
9) Buyer's cost of credit agency reports incurred in connection with
Performing credit checks of Account Debtors related to die Financing
Arrangements.
10) Buyer's cost of public records search and filing fees related to the
Financing Arrangements.
S. EARNED DISCOUNTS: That discount due Seller pursuant to the Financing
Agreements with the following Assigned Clients:
*
T. EARNED INTEREST: All interest due and payable pursuant to the Financing
Arrangements.
U. FACTORING OBLIGATIONS: Outstanding liabilities and commitments (contingent or
otherwise) of Seller for advances and other financial accommodations to the
Assigned Clients pursuant to the Financing Agreements.
V. FINANCING AGREEMENTS: The Agreements between Seller and the
Assigned Clients pursuant to which the Financing Arrangements are specified.
W. FINANCING ARRANGEMENTS: The servicing of Assigned Clients'
Accounts pursuant to the terms and conditions of the Financing Agreements
and Assigned Client Loans, with the Assigned Clients.
X. FINANCING ARRANGEMENT FILES: All legal documents and credit files
in connection with the Financing Arrangements, more particularly described in
Article IV.A herein.
Y. FMIS REPORTS: Computer software program used by Seller to record
transactions related to Accounts, payments on Accounts, and Client Loans.
Z. GROSS INCOME: All fees and expenses of every kind and character including,
but not limited to, the following:
1) Factor's commission/discount
2) Interest
3) Wire transfer fees
4) ACH transfer fees
5) Renewal fees
6) Commitment fees
7) Prefunding fees
8) Charge back fees
9) Repurchase fees
10) Same day advance fees
11) A.M. advance fees
12) Per diem field audit fees
13) Assigned Client field audit expenses
14) Handling fees including postage at current postage rates, and any
charges for long-distance phone usage
15) Public records search and filing fees
16) Professional fees and expenses (i.e., attorneys, accountants, and expert
witnesses)
17) Expedited delivery fees
18) Supplemental Discount fees
19) Credit investigation fees
20) Minimum invoice fee
21) Concentration fee
22) Sticker and stamp fee
AA. GUARANTIES: The Individual Guaranties, the Corporate Guaranties
collectively and the Validity Guaranties.
CC. INDIVIDUAL GUARANTIES: Those certain Guaranties of the Assigned
Clients' principals pursuant to which the collections of the Assigned Clients'
Accounts are guaranteed.
DD. OBLIGATIONS: All advances, debts, liabilities, obligations,
covenants and duties owing by an Assigned Client to Seller, direct or indirect
, absolute or contingent, due or to become due, now existing or hereafter
arising, including, without limitation, invoices for goods or services
purchased by an Assigned Client from any company whose accounts are factored or
financed by Seller and indebtedness arising under any guaranty made by an
Assigned Client or issued by Seller on an Assigned Client's behalf pursuant to
the Financing Agreements.
EE. PREFUNDING OR PREFUNDED: Amounts advanced by Seller to
Assigned Clients for which no invoice representing an amount due for goods
delivered or services rendered exists.
FF. PREMIUM INCOME: The Gross Income received by Buyer from Assigned
Client Group One, Assigned Client Group Two, and Assigned Client Group Three
after subtracting Deductible Costs and Expenses.
GG. PURCHASE PRICE (BASE): The purchase price for the Financing
Arrangements shall be the aggregate of the Amount at Risk for the Assigned
Clients as of the close of business Wednesday, October 27, 1999. ($5,990,252.31)
HH. PURCHASE PRICE (PREMIUM).
*
II. REPURCHASED ACCOUNTS: Accounts designated on Seller's FMIS Reports
for which the payment terms have been extended and the Account re-verified.
II. UNPAID ACCOUNTS: Accounts that the Account Debtor or other party has
not paid Seller in full.
JJ. VALIDITY GUARANTIES: Those certain guaranties of the Assigned Clients
as to the Accounts' existence and validity and the bona fide obligations of the
Account Debtors for the Accounts.
IV. PURCHASE AND SALE OF FINANCING ARRANGEMENTS
A. CONVEYANCE OF FINANCING ARRANGEMENTS: For each Financing Arrangement with an
Assigned Client, the Seller hereby sells, transfers, assigns, sets over and
otherwise conveys to Buyer as of the Closing Date, without recourse but subject
to the terms of this Agreement, all the right, title, interest, duties and
obligations of Seller in and to the Financing Arrangements; including, but not
limited to, those open and Unpaid Accounts listed on the Aged Trial Balances as
of the opening of business on October 28, 1999, copies of which will be supplied
to Buyer by 9:00 AM Eastern Time on the Closing Date (any Prefunded amounts
appearing thereon shall be conspicuously indicated on the face of such Aged
Trial Balance), the Financing Arrangement Files, the Obligations, the
Collateral, the Factoring Obligations, the Amount due Assigned Clients, the
Account Debtor Credits, and the Client Loans. Contemporaneously with such
transfer, Buyer agrees to make available, and Seller agrees to purchase, a one
hundred percent (100%) participation interest in the Client Loans, such
participation being more particularly described in Article XII hereof. Each
Financing Arrangement File shall be delivered by Seller to Buyer or a custodian
designated by Buyer, in exchange for a receipt therefor. Each Financing
Arrangement File shall contain the following documents:
1) The original Factoring Agreement;
2) The original notes and/or agreements evidencing
Assigned Client Loans, properly endorsed to Buyer and
all related documentation;
3) All original Individual Guaranties, if applicable;
4) All original Affiliate Guaranties, if applicable;
5) All original Validity Guaranties, if applicable,
6) The original resolutions of the Assigned Client and
any Affiliate Guarantor authorizing their actions in
connection with the Financing Arrangements;
7) Original UCC-2 or UCC-3 Assignments, as applicable,
assigning the interests in personal property security
and any other collateral security secured by all
UCC-1 Financing Statements relating to the
obligations signed by Seller in blank in form for
filing in the applicable public recording office;
8) Any and all amendment modifications, supplements, and waivers related
to any of the foregoing;
9) All notification letters;
10) All Account Debtor credit files;
11) The operative documents creating the Client Loans, if any, and
12) Any and all other documents, instruments, collateral agreements,
and assignments and endorsements for all documents, instruments and collateral
agreements, referred to in the Financing Agreements, or related thereto,
including, without limitation and without duplication of items 1 through 11
hereof and all files, books, papers, ledger cards, reports and records including
, without limitation, loan applications, Borrower financial statements, credit
reports and appraisals, relating to the Financing Agreements, all cash receipts
records related to the Financing Arrangements for the period commencing 60 days
prior to the Closing Date and any other documents, certificates, papers or
records relating to the Financing Arrangements in Seller's possession as of the
Closing Date. Seller shall not destroy or fail to maintain control of and
accessibility to any other records relating to the Financing Arrangements in
Seller's possession as of the Closing Date without giving Buyer at least ten
(10) business days advance written notice of its intent to do so, in which case
Buyer may take possession of all such records.
Notwithstanding the foregoing, in the event that, in
connection with any Financing Arrangement, Seller cannot deliver an original
counterpart of any of the documents required to be delivered pursuant to
Articles IV.A. 1-7 above, Seller shall deliver, or cause to be delivered, to
Buyer a duplicate original or true copy of such document certified by Seller.
Notwithstanding the foregoing, in the event that Seller cannot
deliver to Buyer any UCC-2 or UCC-3 Assignment with the filing information of
the UCC-1 Financing Statement being assigned, solely because of a delay caused
by the public filing office where such UCC-1 Financing Statement has been
delivered for filing, Seller shall deliver or cause to be delivered to Buyer a
photocopy of such UCC-2 or UCC-3 Assignment with the filing information left
blank. Seller, promptly upon receipt of the applicable filing information of the
UCC-1 Financing Statement being so assigned, shall deliver to Buyer the original
UCC-2 or UCC-3 Assignment with all appropriate filing information set forth
thereon.
B. ADDITIONAL SELLER CLOSING DELIVERIES. In addition to the items to be
delivered by Seller to Buyer under Article IV.A. Seller shall deliver or cause
to be delivered to Buyer the following:
1) A Limited Power of Attorney from Seller in favor of Buyer which covers
Buyer's ability to endorse, as Buyer deems necessary or appropriate, any checks
received payable to Seller in connection with the Accounts which shall be
satisfied by delivery of this Agreement containing such power of attorney in
Article X.
2) UCC-2 or UCC-3 Amendments reasonably deemed necessary by Buyer to
properly reflect the transactions contemplated by this Agreement.
3) Release from IBJ Whitehall Business Credit Company f/k/a IBJ Schroder
Bank & Trust Company (Bank) of Bank's security interest in all of the Financing
Arrangements sold and assigned to Buyer pursuant to this Agreement in such form
and substance as is acceptable to Buyer.
C. REFERRALS. Seller hereby agrees, for a period of two (2) years after the
Closing Date, to refer to Buyer all inquiries made to Seller for the factoring
services formerly provided by Seller that fall within Buyer's defined parameters
for such transactions. Such referrals shall be transmitted via facsimile to the
attention of Richard Worthy at (214) 987-7306 in exchange for normal
commissions. Buyer agrees, for a period of two (2) years after the Closing Date,
to refer to Seller all asset based lending inquiries made of Buyer falling
within Seller's defined parameters for such loans. Such referrals shall be
transmitted via facsimile to the attention of Charles G. Johnson at (703)
931-2034 in exchange for normal commissions.
D. PAYMENT ARRANGEMENTS. The Purchase Price (Base) shall be paid before 3:00 PM
Eastern Time on the Closing Date, in immediately available funds, less the
aggregate Assigned Client Loan balance on such date ($1,528,796.16), by wire
transfer in the amount of $4,461,456.16 to the following account:
IBJ Whitehall Bank & Trust Co.
ABA No. 026 00 7825
Account: Allstate Financial Corporation
No. 43589603
Upon payment of the Purchase Price (Base), all assignments to Buyer under this
Agreement shall be deemed to have FINALLY AND CONCLUSIVELY OCCURRED. THE
PURCHASE PRICE (PREMIUM) SHALL BE PAID BY THE FIFTEENTH (15TH) business day of
the month immediately following the month for which such payments are due and
shall be accompanied by a report on a per Assigned Client basis listing all
amounts of Gross Income and Deductible Costs and Expenses by category. Buyer
shall timely make scheduled payments of principal and interest to Seller for
Assigned Client Loans as set forth in Article III.O of this Agreement, provided
such Assigned Clients are not in default to Buyer and provided that such
payments shall be from funds due to the Assigned Client by Buyer. Payments of
the Purchase Price (Premium) and Assigned Client Loans shall be by wire transfer
in immediately available funds sufficient to cover the funding of Assigned
Clients which is approved by Buyer. Seller shall then wire transfer the amount
of funding approved by Buyer to the respective Assigned Clients as soon as
possible after Seller's receipt of funds from Buyer. Seller shall not purchase
any invoices received from the Assigned Clients on or after the Closing Date.
All such invoices shall be purchased or not purchased at Buyer's discretion.
Nowtwithstanding the payment of the Purchase Price (Base), Seller shall continue
to purchase accounts under the Financing Arrangements for the period October 28,
and October 29, 1999. Buyer shall wire transfer to Seller on such dates funds an
amount equal to the advances to be made to the Assigned Clients. Seller shall
not enter accounts purchased on such dates into the FMIS reports, and as between
Seller and Buyer, such accounts shall be deemed to have been purchased by Buyer
from the Assigned Clients effective the Closing Date. Such funds shall be wired
transferred to Seller as follows:
Bank of America
ABA No: 151-000-017
ACCOUNT: Allstate Financial Corporation
No. 000-1064-7097
E. PAYMENT OF CHARGES. As between Buyer and Seller, Buyer will be liable for,
and will pay directly, all charges imposed as a result of the purchase of the
Financing Arrangements hereunder for invoices purchased directly from Assigned
Clients by Buyer on or after Closing Date including, without limitation, sales
or use taxes, transfer or other taxes and governmental charges or levies
exclusive of charges imposed upon, or measured by, the net income attributable
to the factoring business of Seller, and Buyer shall indemnify and hold harmless
Seller from and against any reasonable loss, cost, expense, penalty or damage
arising out of or relating to the failure of Buyer to pay the such charges.
V. ALLOCATION OF COLLECTIONS
A. All monies received by wire transfer, or otherwise and posted to the FMIS
Reports by Seller prior to the close of business on October 27, 1999 in
connection with the Assigned Clients shall be the property of Seller.
B. All monies received by wire transfer, or otherwise, and posted to the FMIS
Reports by Seller on or after the close of business on October 28, 1999 or
received by Seller but not posted to the FMIS Reports in connection with the
Assigned Clients (excluding funds wired to Seller by Buyer for the purpose of
funding Assigned Clients on October 28 and 29, 1999) shall be the property of
Buyer and shall be forwarded to Buyer on the next business day following their
receipt.
C. Seller shall, on the day of receipt, send to Buyer all checks and
correspondence related to the Assigned Clients received by Seller on or after
the Closing Date via Federal Express "next business day"' service and charge
such delivery fees to Buyer's account.
D. If Seller receives any funds related to the Assigned Clients on or after the
Closing Date, Seller shall immediately cause to have the amount of such funds
wire transferred to Buyer. Buyer shall reimburse Seller the cost of such wire
transfer and include such payment with payments made pursuant to Article IV.D of
this Agreement. Further, Seller shall immediately deliver to Buyer via Federal
Express any documentation Seller has which explains the application of such
funds.
E. Seller agrees to cooperate with Buyer in transferring control from Seller to
Buyer of the Lockbox established for the collection of Accounts purchased from
Joseph J. Sheeran, Inc. and until such change of control is accomplished, Seller
agrees to timely forward all funds received in such Lockbox and copies of checks
received therein together with all other correspondence received in connection
therewith.
VI. REPRESENTATIONS AND WARRANTIES OF THE SELLER
A. REPRESENTATIONS AND WARRANTIES OF SELLER -- GENERAL. It is understood and
agreed by Seller and Buyer that as a material inducement to Buyer to enter into
this Agreement, Seller hereby represents and warrants to Buyer as follows:
1) Seller is duly organized, validity existing and in good standing under
the laws of the state in which it is domiciled, and is duly qualified to do
business in all jurisdictions wherein the character of the property owned or
leased or the nature of the business transacted by it makes qualification
necessary.
2) The execution and delivery of the Agreement by Seller and the
performance by Seller of the obligations to be performed by it hereunder have
been duly authorized by all necessary corporate or other similar action. At
least one(1) business day prior to the Closing Date, Seller shall have delivered
to Buyer certified copies of relevant corporate or similar resolutions.
3) The execution and delivery of this Agreement by Seller and the
performance by Seller of the obligations to be performed by it hereunder do not,
and will not, violate any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination oil or award presently in effect
having applicability to Seller of to the character or bylaws of Seller.
4) The execution and delivery of this Agreement by Seller and the
performance by Seller of the obligations to be performed by it hereunder do not
and will not result in a breach of, or constitute a default under, any indenture
or local or credit agreement or any other agreement, lease or instrument to
which Seller is a party or by which it or its properties may be bound or
affected.
5) This Agreement constitutes, when duly executed and delivered by Seller,
a legal, valid and binding obligation of Seller enforceable against Seller
according to its terms, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, receivership, moratorium, or similar laws affecting
creditors' rights in general, including equitable remedies.
6) Seller has not engaged the services of a broker or other representative
for the purpose of selling the Financing Arrangements and no commission or other
fee is due to any other party in connection with the sale of the Financing
Arrangements hereunder.
7) At least one(1) business day prior to the Closing Date Seller shall have
delivered to Buyer original copies of written consents to this Agreement duly
executed by any and all parties who have a lien and/or a security interest in
any of the Financing Arrangements which are sold and assigned to Buyer hereunder
together with such parties' agreement to execute any and all UCC-2 or UCC-3
forms or other documents necessary to evidence termination of such parties' lien
and/or security interests in all of such Financing Arrangements upon payment by
Buyer of that portion of the Purchase Price (Base) specified in Article IV.D
above.
B. REPRESENTATIONS AND WARRANTIES OF SELLER AS TO EACH FINANCING ARRANGEMENT. It
is understood and agreed by Seller and Buyer that as a material inducement to
Buyer to enter into this Agreement, Seller hereby represents and warrants the
following to Buyer as of the Closing Date;
1) Seller is the sole owner of and has good title to the Financing
Arrangements. Seller has not sold, assigned or otherwise transferred any right
or interest in or to any of the Financing Arrangements to any party other than
Bank.
2) Seller represents and warrants to Buyer that each of the Financing
Arrangements to be sold by Seller to Buyer at the Closing Date will be genuine,
legal, valid and binding obligations of each of the Assigned Clients thereto and
that all subordinations necessary for Buyer to have a first lien security
interest in all of Assigned Client's presently existing and hereafter acquired
accounts receivable exist or will be granted by any holder of a security
interest or lien in or on such accounts receivable that is superior to Buyer's
security interest absent such subordination.
3) That as of the Closing Date, the Amount at Risk for each Assigned Client
shall not exceed the contractual advance rate as stipulated in the related
FactoringAgreement, i.e., there will exist no "over advance" to any Assigned
Client other than the Client Loans and over advances specifically approved by
Buyer.
4) Seller represents and warrants that all of the Financing Arrangements
and Accounts are assignable without the consent of the Assigned Clients.
VII. REPRESENTATIONS AND WARRANTIES OF BUYER
It is understood and agreed by Seller and Buyer that as a material
inducement to Seller to enter into this Agreement Buyer hereby represents and
warrants to Seller, as follows:
A. Buyer is an organization as set forth in the introductory article and is duly
organized, validly existing and in good standing under laws applicable to its
organization's existence.
B. The execution and delivery of this Agreement by Buyer and the performance by
Buyer of the obligations by it to be performed hereunder have been duly
authorized by all necessary corporate resolutions.
C. The execution and delivery of this Agreement by Buyer and the performance by
Buyer of the obligations by it to be performed hereunder do not, and will not,
violate any provision of any law, rule, regulations, order, writ, judgment,
injunction, decree, determination or award presently in effect having
applicability to Buyer or to the charter or bylaws of Buyer.
D. This Agreement constitutes, when duly executed and delivered by Buyer, a
legal, valid and binding obligation of Buyer enforceable against Buyer according
to its terms, except as such enforcement may be limited by bankruptcy,
insolvency, reorganization, receivership, moratorium or similar laws affecting
creditors' rights in general, including equitable remedies.
E. Buyer has not engaged the services of a broker or other representative for
the purpose of buying the Financing Arrangements and no commission or other fee
is due to any other party in connection with the sale of the Financing
Arrangements hereunder.
F. Buyer is a sophisticated investor and his extensive experience in
consummating transactions similar to those contemplated hereunder. Buyer fully
understands and hereby acknowledges that it is fully and exclusively assuming
the risk that the face amount of the Accounts may not be collected. The
transactions contemplated by this Agreement are exempt from all state and
federal securities laws.
VIII. INDEMNIFICATION
A. Seller agrees to protect, indemnify, and hold Buyer and its employees,
officers, directors and agents (the "'Buyer Indemnities") harmless against, and
in respect of, any and all losses, liabilities, costs and EXPENSES (INCLUDING
REASONABLE ATTORNEY'S FEES), JUDGMENTS, DAMAGES, CLAIMS, counterclaims, demands,
actions or proceedings, by whomsoever asserted, including but not limited to the
Assigned Clients or Account Debtors, against any Buyer Indemnities or the
settlement or compromise of any of the foregoing, providing, however, only if
any of the foregoing arises out of, is connected with or results from: (i) any
breach of any representations, covenant or warranties made by Seller hereunder,
(ii) Seller's misapplication of credits for Collections; (iii) data entry errors
made by Seller on the FMIS Reports prior to the Closing Date; (iv) any actions
or omissions by Seller that is the basis of any claim or cause of action against
Buyer by or on behalf of any Assigned Client or Account Debtor; and (v) Seller
having advanced monies to an Assigned Client or Assigned Clients after the
earlier of forty-five (45) days after the filing of a government tax lien or
Seller's actual knowledge of the filing of such a lien.
B. Buyer agrees to protect, indemnify, and hold Seller and its employees,
officers, directors and agents (the "Seller Indemnities") harmless against, and
in respect of, any and all losses, liabilities, costs and expenses (including
reasonable attorney's fees), judgments, damages, claims, counterclaims, demands,
actions or proceedings, by whomsoever asserted, including but not limited to,
the Assigned Clients or Account Debtors, against any Seller Indemnities or the
settlement or compromise of any of the foregoing, providing, however, any of the
foregoing arises out of, is connected with or results from: (i) any breach of
any representations, covenants or warranties made by Buyer hereunder, (ii)
Buyers retention of any monies that do not constitute Collections of Accounts
beyond the time period permitted hereunder (iii) all Collections returned for
insufficient funds within thirty (30) days of October 27, 1999; and (iv) any
actions or omissions by Buyer that is the basis of any claim or cause of action
against Seller by or on behalf of any Assigned Client or Account Debtor.
IX. COVENANT NOT TO SOLICIT CLIENTS
For a period of two (2) years from and after the Closing Date, neither
Seller, any of its affiliates, its parent nor any other related entity will
solicit any Assigned Client for any factoring services.
X. BUYER'S LIMITED POWER OF ATTORNEY
Seller hereby irrevocably appoints Buyer as its attorney-in-fact for
the limited and exclusive purpose of endorsing Collections received by Buyer
after the Closing Date. Buyer hereby acknowledges that this power of attorney is
limited only to Collections and Buyer agrees to indemnify and hold Seller
harmless for Buyer's endorsement of any items that do not constitute
Collections.
XI. ADDITIONAL COVENANTS
A. ADDITIONAL BUYERS COVENANTS. In addition to the other agreements and
obligations of Buyer hereunder, Buyer hereby agrees to:
1) Within five (5) business days after the Closing Date, file with the
appropriate United States Bankruptcy Courts, notices pursuant to Federal Rules
of Bankruptcy Procedure, Rule 3001, to the effect that the Financing
Arrangements have been assigned to Buyer for those Assigned Clients that have
file proceedings under Chapter 11 of Title II of the United States Code, if any,
Buyer shall provide Seller with copies of all such notices, within five (5)
business days after filing.
2) Within ten (10) business days after the Closing Date, file all necessary
or appropriate notices or documents with the appropriate departments of the
United States government in order to receive consent from such United States
Government Department of the assignment of any Account purchased hereunder for
which the Account Debtor is the United States Government of any department or
sub-division thereof, if any. Buyer shall use all reasonable best efforts to
obtain all such necessary consents to assignment within sixty (60) business days
after the Closing Date. Buyer shall provide Seller with copies of all such
documents or notices within five (5) business days after their transmittal.
3) Prepare and deliver, at Buyer's expense, to Seller for execution within
thirty (30) business days after the Closing Date all (UCC-2 or UCC-3 Assignments
necessary to assign Seller's security interests in the Collateral to Buyer.
4) As soon as possible after the Closing Date, Buyer shall initiate
procedures to redirect all payments of collections to Buyer's address.
5) At closing, provide to Seller for its execution, a letter to the
Assigned Clients and Account Debtors constituting notice of due sale of the
Financing Arrangements to Buyer with a directive to remit all Account Payments
to Buyer.
6) Prior to the Closing Date, not attempt to renegotiate the terms or
conditions of any Financing ARRANGEMENT WITH ANY ASSIGNED CLIENT AND NOT
INDICATE ITS INTENTION TO renegotiate any terms or conditions of any Financing
Arrangement with any Assigned Client, except as may be approved in writing by
Seller.
B. ADDITIONAL SELLER'S COVENANTS. In addition to the other agreements
and obligations of Seller hereunder, Seller hereby agrees to comply with all
reasonable requests for information or assistance by Buyer with respect to
Buyer's covenant in Article X.A.2 herein.
XII. PARTICIPATION
On the Closing Date, Seller shall purchase a one hundred percent (100%)
participation interest in all Client Loans and in the Collateral, in form and
substance acceptable to the parties; it being understood and agreed, however,
that in the event of a default by the Assigned Client and liquidation of the
Collateral, the proceeds therefrom shall be distributed as follows until the
parties shall have been paid in full:
1) The proceeds of all Accounts shall be distributed first to
Buyer until Buyer has been paid in full, with the balance, if
any, to be paid to Seller until paid in full.
2) The proceeds of all machinery, equipment, inventory and all
other tangible assets shall be distributed first to Seller
until Seller shall has been paid in full, with the balance, if
any, to be paid to Buyer until paid in full.
XIII. MISCELLANEOUS
A. CONFIDENTIALITY. Buyer and Seller agree to keep the terms of this Agreement
confidential except as required by legal process, until the Closing Date,
provided, however that Buyer may disclose to the Assigned Clients that it is
scheduled to purchase their Financing Arrangements on the Closing Date if such
is done in the process of attempting to renegotiate any Financing Arrangements.
B. ARBITRATION. Any dispute, controversy or claim arising under or in relation
to this Agreement or any modification thereof, shall be settled only by
arbitration which shall be held in the City of Arlington, Virginia in accordance
with the laws of the State of Virginia and the rules of the American Arbitration
Association. The parties hereto consent to the jurisdiction of the courts of the
State of Virginia and of the United States District Court for the District of
Virginia and further consent that any process or notice or other application to
any court or a judge thereof may be served within or without the State of
Virginia or the District of Virginia by certified mail or by personal service,
provided a reasonable time for appearance is allowed. Judgment upon the award
rendered by the Arbitrator(s) may be entered in any State or Federal court
having jurisdiction thereof
C. WAIVER OF JURY TRIAL. Each of the parties hereto agrees that if any issue,
claim, controversy or other matter arising under or out of this Agreement is
tried in a court of law in any jurisdiction, such trial or other proceeding
shall be without a jury, and each of the parties hereto expressly waives its
right to a trial by jury in connection with any such trial or other proceeding.
D. SURVIVAL OF COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES: SUCCESSORS
AND ASSIGNS. All warranties, representations and covenants made by either party
in this Agreement or in any other instrument delivered by either party to the
other, shall he considered to have been relied upon by die other party (unless
otherwise agreed in writing by the parties) and shall survive the Closing Date.
E. SEVERABILITY. If any provision, or part thereof, of this Agreement is invalid
or unenforceable under any law, such provision, or part thereof, is and will be
totally ineffective to that provision, but the remaining provisions, or pan
thereof, will be unaffected.
F. ATTORNEYS' FEES. Anything to the contrary notwithstanding, in the event of
any action at law, in equity, arbitration or otherwise between the parties in
relation to this Agreement or any Loan or other instrument or agreement required
or purchased or sold hereunder, the non-prevailing party, in addition to any
other sums which such party shall be required to pay pursuant to the terms and
conditions of this Agreement, at law, equity, arbitration of otherwise shall
also be required to pay to the prevailing party all costs and expenses of such
litigation, including reasonable attorney fees.
G. WAIVERS. No waiver of any term, provision or condition of this Agreement,
whether by conduct or otherwise, in any one or more instances, shall be deemed
to be, or construed as a further or continuing waiver of any such term,
provision or condition, or any other term, provision or condition of this
Agreement.
H. NOTICE. Any notice or other communication in this Agreement provided or
permitted to be given by one party to the other must be in writing and given by
personal delivery by depositing the same in the United States mail (certified
mail, return receipt requested), addressed to the other party to be notified,
postage prepaid or by facsimile transmission. For purposes of notice, the
addresses of the parties shall be as follows:
SELLER: ALLSTATE FINANCIAL CORPORATION
2700 S. Quincy Street
Suite 540
Arlington, Virginia 22206
ATTENTION: Charles G. Johnson, President
(703) 931-2034 (fax)
(703) 931-2274 (phone)
BUYER: METRO FACTORS, INC.
Walnut Glen Tower
8144 Walnut Hill Lane
Suite 900
Dallas, Texas 752314316
ATTENT1ON: Richard Worthy, President
(214) 987-7306 (fax)
(214) 987-7315 (phone)
The above address may be changed from time to time by written notice
from one party to the other.
I. ASSIGNMENT. Neither Buyer nor Seller shall without the prior written consent
of the other, assign any of its rights or obligations hereunder except that
Buyer may assign its rights in the Financing Arrangements to its secured
lenders.
J. CAPTIONS. Article or other headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
K. ENTIRE AGREEMENT. This Agreement and the documents referred to herein or
executed concurrently herewith constitute the entire agreement between the
parties hereto with regard to the subject matter hereof, and there are no prior
agreements, understandings, restrictions, warranties or representations between
the parties with respect thereto.
L. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Virginia. This Agreement shall be
interpreted fairly in accordance with its provisions and without regard to which
party drafted it.
M. SOLICITATION OF EMPLOYEES. Seller agrees to cooperate with Buyer, at Buyer's
election, in its efforts TO SECURE THE EMPLOYMENT SERVICES OF THOMAS FEVOLA AND
TIMOTHY HAFFIELD on terms and conditions acceptable to Buyer. This Agreement,
however, is not contingent upon such employment.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
[SIGNATURE PAGE FOLLOWS]
<PAGE>
SELLER: ALLSTATE FINANCIAL CORPORATION,
a Virginia Corporation
By:___________/s/__________________
Charles G. Johnson, President
Date: October 28,1999
WIRE TRANSFER INSTRUCTIONS:
Bank of America
ABA No. 151-000-017
Account: Allstate Financial Corporation
No. 000-1064-7097
BUYER: METRO FACTORS, INC.,
a Texas corporation
By:___________/s/_______________
Richard G. Worthy, President
Date: October 28,1999
WIRE TRANSFER INSTRUCTIONS:
KeyBank National Association
ABA No. 041001039
Account: Metro Factors, Inc.
No. 1000598694
IBJ WHITEHALL BUSINESS CREDIT CORPORATION
ONE STATE STREET
NEW YORK, NEW YORK 10004
As of October 29, 1999
Allstate Financial Corporation
2700 South Quincy Street
Arlington, Virginia 22206
Re: Forbearance Agreement
Gentlemen:
Reference is made to that certain (i) Amended and Restated Revolving
Credit and Security Agreement dated as of May 17, 1997, (as amended,
supplemented or otherwise modified from time to time, the "Loan Agreement") by
and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws
of the Commonwealth of Virginia ("Borrower"), IBJ WHITEHALL BUSINESS CREDIT
CORPORATION ("IBJWBCC") and NATIONAL BANK OF CANADA ("NBC") (IBJWBCC and NBC
each a "Lender" and collectively the "Lenders") and IBJWBCC as agent for the
Lenders (IBJWBCC, in such capacity, the "Agent") and (ii) Forbearance Agreement
dated as of August 1, 1999 among Agent, Lenders, Borrower and the Guarantors (as
amended, modified or supplemented from time to time the "Forbearance
Agreement"), pursuant to which Agent agreed, among other things, to forbear from
exercising any remedies under the Loan Agreement until October 31, 1999.
Capitalized terms not otherwise defined herein shall have the meanings set forth
in the Loan Agreement or the Forbearance Agreement.
Borrower has advised Agent that its will not be able to complete the
sale of its asset based lending business by October 31, 1999 (the "ABL Sale").
In order to assist Borrower in completing the ABL Sale and paying off the
Obligations in full, Borrower has requested Agent to, among other things, extend
the Forbearance Period to November 30, 1999, and Agent and Lenders are willing
to do so upon the terms herein stated.
Subject to the satisfaction of the conditions precedent set forth in
paragraph 5 hereof, the parties hereby agree as follows:
1. Borrower affirms and acknowledges that (i) as of the end of business
on the date hereof there is due and owing to Agent and Lenders, under the Loan
Agreement (after giving effect to the proceeds of the Factoring Sale as
hereafter defined), approximately $2,427,523.78 in principal amount of Advances
(inclusive of the undrawn amount of outstanding Letters of Credit) together with
accrued interest thereon and costs and expenses; (ii) all such Obligations are
valid obligations of Borrower and there are no claims, setoffs or defenses to
the payment by Borrower of the Obligations; and (iii) the Loan Agreement and the
Other Documents are and shall continue to be legal, valid and binding
obligations and agreements of Borrower enforceable in accordance with their
respective terms.
2. The Forbearance Period set forth in paragraph 4(i) of the
Forbearance Agreement is hereby extended to November 30, 1999.
3. The Maximum Revolving Advance Amount shall equal $3,500,000.
4. Effective on the date hereof, Advances shall bear interest at the
Revolving Interest Rate plus two percent (2%). Upon the occurrence and during
the continuance of a Forbearance Default (including if the Obligations are not
repaid in full by the end of the Forbearance Period), the Advances shall bear
interest at the applicable Revolving Interest Rate plus four and three quarters
percent (4.75%).
5. This amendment shall become effective upon the receipt by Agent of
each of the following: (i) four (4) copies of this amendment signed by Borrower
and each Guarantor, (ii) a forbearance extension fee payable to Agent for the
ratable benefit of Lenders equal to $20,000, which fee shall be charged to
Borrower's Account on the date hereof and (iii) an administration fee payable to
Agent for its own account and not for the benefit of Lenders equal to $5,000.
Except as specifically amended herein, the Loan Agreement, the
Forbearance 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.
Kindly acknowledge your agreement with the foregoing by signing where
indicated below. This agreement may be executed in any number of and by
different parties hereto on separate counterparts, all of which when so executed
shall be deemed an original, but all such
<PAGE>
counterparts shall constitute one and the same agreement. Any signature
delivered by a party via facsimile transmission shall be deemed an original
signature hereto.
Very truly yours,
IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as Agent and as Lender
By: /s/
Name: Adam Moskowitz
Title: Vice President
NATIONAL BANK OF CANADA, as Lender
By: /s/
Name: Michael Williams
Title: Vice President
ACKNOWLEDGED AND AGREED TO:
ALLSTATE FINANCIAL CORPORATION
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
SETTLEMENT SOLUTIONS, INC.
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
AFC HOLDING CORPORATION
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
PREMIUM SALES NORTHEAST, INC.
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
BUSINESS FUNDING OF AMERICA, INC.
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
RECEIVABLE FINANCING CORPORATION
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: /s/
Name: C. Fred Jackson
Title: Senior Vice President
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 492243
<SECURITIES> 0
<RECEIVABLES> 26925501
<ALLOWANCES> 11787839
<INVENTORY> 0
<CURRENT-ASSETS> 15665056
<PP&E> 344855
<DEPRECIATION> 122588
<TOTAL-ASSETS> 15887323
<CURRENT-LIABILITIES> 9137564
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 2112759
<TOTAL-LIABILITY-AND-EQUITY> 15887323
<SALES> 0
<TOTAL-REVENUES> 3164426
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1015306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1030839
<INCOME-PRETAX> (11406582)
<INCOME-TAX> 4031349
<INCOME-CONTINUING> (15437931)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15437931)
<EPS-BASIC> (6.64)
<EPS-DILUTED> (6.64)
</TABLE>
