SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
x/ Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended December 31, 1998
|_| Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ___________ to ____________
Commission File Number 0-17832
Allstate Financial Corporation
(Name of Small Business Issuer 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)
Issuer's telephone number, including area code: (703) 931-2274
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock - No par value
Check whether the issue (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ______
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-K (Section 229.405 of this chapter) contained in this
form, and no disclosure will be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10_KSB or any amendment to this Form 10-KSB.
|_|
Revenues for year ended December 31, 1998, were $10,301,218. Revenues
for year ended December 31, 1998, were $10,301,218.
The aggregate market value of the common stock held by non affiliates
as of March 29, 1999 was $9,294,732 computed by reference to the closing market
price at which the stock was traded on March 29, 1999.
The number of shares outstanding of the issuer's common stock, as of
March 29, 1999, was 2,323,683.
Transitional Small Business Disclosure Format (check one): Yes ____ No __X__
DOCUMENTS INCORPORATED BY REFERENCE.
Portions of the definitive proxy statement for the 1999 annual meeting
of stockholders to be filed on or about April 15, 1999 are incorporated into
Para. III, Items 9 through 12 of this Form 10-KSB.
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Part I
This Form 10-KSB may contain certain "forward-looking statements" relating
to the Company (defined in Item 1 below) 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-KSB 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
negatives or other variations 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 growth strategy, 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.
Item 1. Description of Business
Allstate Financial Corporation (the "Company") was incorporated in 1982 in
the Commonwealth of Virginia. The Company is a commercial finance institution
which provides financing to small and middle-market businesses through the
discounted purchase of invoices with recourse to the seller, and through loans
secured by accounts receivable, inventory, machinery and equipment, and real
estate. In addition, the Company provides other financial assistance to
businesses in the form of guarantees and letters of credit. In 1997, the Company
began a program of purchasing invoices without recourse, assuming the risk that
an account debtor may become insolvent. This activity ceased during 1998. 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.
Unless the context requires or otherwise permits, all references to the
"Company" include Allstate Financial Corporation and its wholly owned
subsidiaries.
The Company's corporate offices in Arlington, Virginia house all of its
credit and client administration activities. There is also a marketing office in
New York, New York. In 1999, the Company plans to open additional marketing
offices to focus on origination of earning assets in geographic areas where it
is not currently represented.
Business of Company
Principal Products
The Company's principal products are financing for small and medium-sized
businesses, usually those with annual sales of $1 million to $30 million dollars
per year. Through its offering of both the purchase of invoices with recourse to
the seller ("Recourse Factoring" or "Factoring") and 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 may also allow a client
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to use the Company's credit standing by
providing a letter of guaranty or by obtaining a letter of credit for the client
from the Company's bank. These forms of credit enhancement are used by the
clients to acquire inventory for sale to their customers. Through its range of
products, the Company believes it offers a single source of financing for these
businesses throughout their life cycles.
Distribution Methods
Traditionally, the Company has marketed its Factoring product through
referrals from a network of independent brokers with whom it has agreements.
These brokers receive fees when the Company advances funds to clients they have
referred to the Company. The ABL product is marketed through the Company's
marketing employees, who solicit referrals from business consultants, lawyers,
accountants, and commercial banks. The Company requires more extensive financial
information and reporting from clients who seek to qualify for its ABL product,
and believes that these kinds of referral sources will be more likely to provide
prospects who will qualify for such financing.
Competition
In its Factoring and ABL businesses, the Company faces competition from
other factoring companies, asset-based lenders, diversified lenders who offer
both products, and commercial banks who 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.
Sources of Capital
The Company's requirement for capital is a function of its level of its
investment in receivables. The Company funds this investment through its
revolving bank credit line, its convertible subordinated notes, and internally
generated funds.
The Company maintains a $25 million revolving line of credit with a group
of banks. The line of credit is secured by substantially all of the Company's
assets. The total facility may be used by the Company to fund the purchase of
invoices or advances secured by accounts receivable. There are sublimits
available for the funding of advances secured by client inventory and machinery
and equipment, and for issuance of letters of credit by the bank group.
Borrowings under the line of credit bear interest at the agent bank's base rate
or a margin over the London Interbank Offering Rate, at the Company's option.
The credit line has covenants of the type which are typical of those required of
borrowers in the Company's business line. The line of credit is due May 12,
2000.
The Company also has outstanding approximately $5 million in aggregate
principal amount of convertible subordinated notes of which $361 thousand are
due in 2000 and $4.6 million are due in 2003. The notes due in 2000 are
convertible into common stock of the Company at $7.50 per share and require
interest payments based on a spread over the prime rate. The notes due in 2003
are convertible into common stock of the Company at $6.50 per share and bear a
fixed interest rate of 10%. The notes are unsecured and subordinated in payment
to all other debt of the Company. The notes due 2003 have financial covenants
that are similar to but less restrictive than the covenants in
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the line of
credit. In addition, upon the occurrence of certain change of control events,
the holders of the notes have the ability to put their notes back to the
Company.
The Company believes that borrowings under its current credit facility, the
proceeds of the convertible subordinated notes, and internally generated funds
will be sufficient to finance the Company's funding requirements for the near
term.
Client Base
The Company's clients are small- to medium-sized growth and turnaround
companies with annual revenues typically between $1 million and $30 million. 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 a bank lender.
Accordingly, there is a significant risk of default and client failure inherent
in the Company's business.
[Remainder of Page Intentionally Left Blank]
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The following table indicates the composition of the Company's receivables
by type of client business as of December 31, 1998 and 1997.
<TABLE>
Year Ended December 31,
-----------------------------------------
1998 1997
------------------ --------------------
<CAPTION>
Business of Client Receivable Percent Receivable Percent
(in thousnds) (in thousnds)
<S> <C> <C> <C> <C>
Importer and distributor of:
Plastic bags ..................... $12,452 29.2% $ 4,745 9.5%
Jewelry and jewelry boxes ........ 8,797 20.6 433 0.8
Computer components and .......... 1,414 3.3 11,564 23.1
software 1
Tapes ............................ 1,401 3.3 2,094 4.2
Food industry .................... 1,036 2.4 587 1.2
Carpets .......................... -- -- 1,446 2.9
Motor engineers .................. -- -- 394 0.8
Importer, manufacturer and distri-
butor of apparel wear, accessories
and other durable goods .......... 3,423 8.0 7,205 14.4
Provider of publishing, direct mail
and advertising .................. 3,206 7.5 6,579 13.1
Life insurance contracts ............ 2,629 6.2 3,181 6.3
Provider of trucking and air freight 2,668 6.3 4,298 8.6
Contracts for construction and
construction supply .............. 2,228 5.2 4,359 8.7
Provider of computer training ....... 1,350 3.2 -- --
Legal claims receivable ............. 371 0.9 732 1.5
Provider of engineer and health
temps ............................. 334 0.8 380 0.8
Provider of uniform sales & rentals . 125 0.3 1,036 2.1
Recreational and health club ........ -- -- 400 0.8
facilities
Other ............................... 1,215 2.8 606 1.2
----- ------- ------ --------
Total ...................... $42,649 100.0% $50,039 100.0%
======= ======= ======= ========
</TABLE>
1 Does not reflect participation of others of $759,424 and $2,208,957 at
December 31, 1998 and 1997 respectiveley.
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The following table indicates the composition of the Company's gross
receivables by state of location of client business as of December 31, 1998 and
1997.
<TABLE>
1998 1997
<CAPTION>
-------------------- ---------------------
Client State Receivables Percent Receivables Percent
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
New York ........... $25,963 60.9% $15,827 31.6%
New Jersey ......... 5,375 12.6 7,061 14.1
Virginia ........... 3,000 7.0 3,913 7.8
California ......... 2,731 6.4 14,390 28.7
Florida ............ 1,979 4.6 1,302 2.6
North Carolina ..... 727 1.7 -- --
Pennsylvania ....... 707 1.7 1,415 2.8
Connecticut ........ 423 1.0 1,605 3.2
Delaware ........... 404 0.9 340 0.7
Minnesota .......... 330 0.8 179 0.4
District of Columbia 213 0.5 -- --
Maryland ........... 208 0.5 531 1.1
Rhode Island ....... 204 0.5 176 0.3
New Mexico ......... 160 0.4 176 0.3
Wisconsin .......... 125 0.3 130 0.3
Illinois ........... 50 0.1 80 0.2
Georgia ............ 50 0.1 1,159 2.3
Mississippi ........ -- -- 189 0.4
Nebraska ........... -- -- 400 0.8
South Carolina ..... -- -- 37 0.1
Texas .............. -- -- 1,078 2.2
Arkansas ........... -- -- 51 0.1
------- ---- ------- -----
Total .......... $42,649 100.0% $50,039 100.0%
======= ====== ======= =====
</TABLE>
The tables above reflect the composition of the Company's receivables by
client industry and state of client location at the dates indicated. Because the
Company's major clients tend to change significantly over time, these tables are
not likely to reflect the composition of the Company's receivables by client
industry or state of location at future points in time.
From time to time, a single client or single industry may account for a
significant portion of the Company's receivables. For the year ended December
31, 1998, two clients each accounted for more than 10% of gross earnings. The
total gross earnings for these two clients accounted for 36.6% of the Company's
total earned discounts and interest as compared to the year ended December 31,
1997 where one client accounted for more than 10% of gross earnings, with 36.9%.
At December 31, 1998, two clients each accounted for more than 10% of the
Company's outstanding gross finance receivables, and those two clients together
accounted for 36.9% of the Company's total finance receivables, while at
December 31, 1997, one client accounted for more than 10% of the Company's
outstanding gross finance receivables, with 22.8%. During 1998, the Company
adopted a policy to restrict the size of any one new client to a maximum of $3
million, and to take steps to reduce the size of the three existing clients who
are currently over that limit. Although the Company carefully monitors client
and industry concentration, there can be no assurance that the risks associated
with client or industry concentration could not have a material adverse effect
on the Company.
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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. Today,
however, because the Company is offering a wider range of products, at lower
rates than it has historically, it is possible that the length of the Company's
funding relationships with its clients may be extended. Although the Company has
historically been successful in replacing major clients, the loss of one or more
major clients and an inability to replace those clients could have a material
adverse effect on the Company.
Obligor (Account Debtor) Information
The quality of the purchased invoices is the Company's primary security
against credit losses from its Factoring activities. The Company generally does
not purchase accounts receivable that have aged significantly.
As of December 31, 1998 and 1997, the Company's receivables included $23.7
million and $34.8 million of purchased invoices on which approximately 4,200 and
3,400 entities, respectively, were obligated. There is considerable variation
from period to period in the composition of account debtors and the amount of
their respective obligations to the Company.
If the Company has not received payment on a Factored account receivable
within 90 days after its acquisition or if at any time prior to 90 days the
Company determines that it is unlikely to receive payment, the Company requires
the client to repay the amount the Company has advanced on the receivable plus
the amount of discount earned. If, after 90 days, follow up calls to account
debtors lead the Company to believe that an invoice is collectable within a
reasonable period of time, the Company may allow the advance to remain
outstanding in return for an additional discount from the client. In that event,
the earned discount owed on the original period of the advance is collected from
the client the end of 90 days and earned discounts thereafter accrue as if the
account receivable were a new purchase.
From time to time, a single account debtor or several account debtors may
be obligated on a significant portion of the Company's gross factored accounts
receivable. As of December 31, 1998 and 1997, the largest single account debtor
accounted for approximately 2% and 10.7%, respectively, of the Company's gross
purchased invoices. Although the Company carefully monitors account debtor
concentration and regularly evaluates the creditworthiness of account debtors,
there can be no assurance that account debtor concentration could not have a
material adverse effect on the Company.
Government Regulation
State's usury laws generally limit the amount of interest that a creditor
may contract for, charge or receive in connection with the lending of money. In
the Commonwealth of Virginia (in which the Company's operating offices are
located), there are no restrictions on the rates of interest and fees which may
be charged by the Company to commercial borrowers.
In connection with certain of its clients whose obligors include the United
States or departments or agencies thereof (the "U. S. Government"), certain
receivables purchased by the Company are subject to the Federal Assignment of
Claims Act ("FACA"). FACA provides that an assignment of
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a client's contractual
claim for monies due from the U.S. Government will be enforceable against the
U.S. Government by a third party assignee of such client, such as the Company
when it enters into a Factoring arrangement, only under limited circumstances.
The Company does not always comply with FACA when it purchases invoices where
the U.S. Government is the account debtor. Non-compliance with FACA causes the
Company to lose any right it may have to receive payments directly from the U.S.
Government or cause the U.S. Government to acknowledge the Company's claim in
such receivables. However, FACA does not limit the Company's ability to require
its clients to direct payments made by the U.S. Government to a Post Office box
controlled by the Company in order that the Company may apply them to the
clients' accounts. The U. S. Government also has significant rights of offset in
connection with its contractual payments. In cases where the U.S. Government is
the obligor, an assignee must comply with FACA in order to protect itself from
such offsets. The U.S. Government has broad offset rights, including offsets for
unpaid taxes and offsets arising from disputes involving other contracts between
the client and the U.S. Government. During 1998 and 1997, the U.S. Government
accounted for immaterial percentages of the Company's total volume of invoices
purchased.
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
time-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 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 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 expected to be completed prior to April 30, 1999. Each new system selected is
"off the shelf", and is certified Year 2000 compliant, so, therefore, the third
phase, installation and testing, will be limited and is expected to be completed
by June 30, 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 September 30, 1999. The cost
of becoming Year 2000 compliant through acquisition of new systems is estimated
at $100 thousand, of which no expenditures have been incurred for the year ended
December 31, 1998. The funds for these expenditures are available from the
Company's expected cash flows during the periods of expenditure.
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 will evaluate their
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responses prior to September 30, 1999. 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 effect on the
Company's financial condition. The Company has not determined whether such
possible events may have a material effect on its financial condition, but is
continuing to analyze the uncertainty through monitoring the Year 2000
compliance efforts of clients and obligors.
A contingency plan has not yet been developed for dealing with the most
reasonably likely worst case scenario. The Company expects to complete its
analysis and contingency planning by September 30, 1999.
Employees
The Company currently has 30 full-time employees. None of the Company's
employees is a party to any collective bargaining agreement, and management
considers its relations with employees to be satisfactory.
Item 2. Description of Property
The Company's principal offices occupy approximately 8,000 square feet of
space in an office building in Arlington, Virginia. The Company's lease on this
property expires in December 2001. The cost of renting this office space was
approximately $184 thousand in 1998 compared to $172 thousand in 1997. The
Company has a right of first refusal to acquire an additional, contiguous 1,500
square feet at its present site when that space becomes available.
Commencing November 1997, the Company also occupied approximately 2,500
square feet of space in an office building in New York City. The costs of
renting this facility were $81 thousand in 1998 and $14 thousand in 1997. The
Company elected to terminate the lease in February 1999 for a one-time fee of
$35 thousand. At the same time the Company leased an executive suite facility in
New York City for a term ending July 1999, with options to renew. The annual
rent on the new facility is approximately $26 thousand.
The Company believes that its present office facilities are adequate.
Item 3. Legal Proceedings
See Notes to Consolidated Financial Statements - (L) Commitments and
Contingencies.
Item 4. Submission of Matters To A Vote Of Security Holders
None.
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Part II
Item 5. Market For Common Equity and Related Stockholder Matters The Company's
common stock is traded on the Nasdaq Stock Market (Symbol ASFN).
The following table sets forth the range of representative high and low
bids for the Company's common stock in the over the counter market for the
periods indicated, as furnished by the National Association of Securities
Dealers, Inc. These bids represent prices among dealers, do not include retail
markups, markdowns or commissions, and may not represent actual transactions.
<TABLE>
Fiscal Years Ended December 31,
1998 1997
<CAPTION>
High Low High Low
<S> <C> <C> <C> <C>
First Quarter 9.000 5.688 6.375 5.500
Second Quarter 8.375 5.438 6.125 5.625
Third Quarter 7.250 3.375 6.000 5.125
Fourth Quarter 4.375 2.625 7.000 4.875
</TABLE>
On March 3, 1999, there were approximately 42 stockholders of record based
on information provided by the Company's transfer agent. The number of
stockholders of record does not reflect the actual number of individual or
institutional stockholders of the Company because a significant portion of the
Company's stock is held in street name. Based on the best information made
available to the Company by the transfer agent, there are approximately 410
beneficial holders of the Company's common stock.
The Company has not paid a dividend and does not anticipate paying cash
dividends to holders of its common stock for the foreseeable future. The Company
currently intends to retain earnings for future capital requirements and growth.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
The Company is a commercial finance institution which provides financing to
small and middle-market businesses through Factoring, the discounted purchase of
invoices with full recourse to the seller, and ABL, advances secured by accounts
receivable, inventory, machinery and equipment, and real estate. On occasion,
the Company will also provide other specialized financing structures, which
satisfy the unique requirements of the Company's clients. The Company also
provides its clients with letters of guaranty, and arranges for the issuance of
letters of credit for its clients.
During the second quarter of 1997, the Company established a new division,
Allstate Factors, which was engaged in traditional "non-recourse" factoring in
which the factor typically assumes the risk that an account debtor may become
insolvent. The Company minimized the exposure associated with assuming such risk
by refactoring the receivables purchased by Allstate Factors with a large
commercial factor that assumed the insolvency risk. Allstate Factors has ceased
purchasing receivables, and the Company is now engaged in managing Allstate
Factors' existing portfolio.
Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"),
a wholly-owned subsidiary of the Company, was engaged in the business of buying
life insurance policies, at a
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discount, from individuals facing life-threatening
illnesses. During 1997, Lifetime Options ceased purchasing policies, and it is
now engaged solely in managing its existing portfolio.
The Company's clients are small- to medium-sized businesses with annual
revenues typically ranging between $1 million and $30 million. The Company's
clients do not typically qualify for traditional bank or asset-based financing
because they are either too new, too small, undercapitalized (or
over-leveraged), unprofitable or otherwise unable to satisfy the requirements of
a bank. They are frequently experiencing periods of rapid growth or some level
of financial stress. Thus, the Company generally relies on the quality of
obligors of the client or the assets the client can pledge as collateral, rather
than the financial condition of the client itself.
On December 29, 1997, Value Partners, Ltd., a major shareholder, together
with three other shareholders of the Company who were also independent
directors, filed a petition in the Circuit Court for Arlington County, Virginia
against the Company seeking to (i) invalidate the election of directors held at
the annual meeting of shareholders on November 18, 1997, (ii) order a new 1997
election of directors and (iii) enjoin the Board of Directors of the Company
from acting as such without court approval pending a new election. After
discovery and evidentiary and other hearings before the court, the plaintiffs
and the Company agreed to the entry of a decree by the court ordering a meeting
of shareholders on May 12, 1998, the date otherwise specified in the Company's
Amended By-Laws, as amended, as the date for the 1998 annual meeting of
shareholders. Prior to the 1998 annual meeting the "Allstate Financial
Corporation Independent Shareholders/Directors Committee" (the "Committee"),
which was composed of Value Partners, Ltd.; David W. Campbell, William H.
Savage, Edward A. McNally, and Lindsay B. Trittipoe, independent directors of
the Company; and C. Scott Bartlett, a former director of the Company, proposed
the election of a slate of directors in opposition to the nominees proposed by
the Company's management (the lawsuit and the election are hereinafter referred
to as the "Proxy Contest"). At the 1998 shareholders meeting, the shareholders
elected the directors proposed by the Committee.
Year ended December 31, 1998 vs. year ended December 31, 1997
In its Factoring product line, the Company purchases invoices at their face
amount, and makes an advance payment to its client against the collection of the
invoices. The amount (less negotiated discounts) of the advance payment is based
upon the size, age and type of accounts being purchased, the quality of client
documentation and the Company's judgment as to the payment history and
creditworthiness of the obligors. The Company generates revenue through purchase
discounts, which are negotiated on a client-by-client basis. Total purchased
invoices as of December 31, 1998 decreased $11.1 million, or 31.9%, to $23.7
million from $34.8 million as of December 31, 1997. The bulk of the decrease
related to the liquidation of a Factoring client of the Company which had filed
for bankruptcy in the fourth quarter of 1998, and to charge-offs. Two other
significant clients successfully obtained financing with lower-cost funding
sources.
The Company's ABL product line provides asset-based loans to the Company's
clients, primarily working capital and equipment loans, at negotiated spreads
over the prime rate. In its ABL activities, the Company typically analyzes the
accounts receivable collateral, obtains appraisals, based on liquidation value,
of the other collateral offered and extends credit based upon a negotiated
percentage of the appraised collateral values. During 1998, the Company's ABL
advances receivable increased $4.3 million, or 35.8%, to approximately $16.3
million from $12.0 million at December 31, 1997. One major new client accounted
for this increase. Interest income and amounts outstanding under such ABL
facilities are expected to increase in 1999 due to the
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continuing demand for
this type of financing. The Company believes that advances receivable subject
the Company to less volatility and risk than is inherent in its Factoring
portfolio.
The Company anticipates that in 1999 it will achieve growth in both of its
product lines, in the geographic markets currently served, and in new regions
where the Company can identify appropriate marketing employees. Continuing
growth depends heavily on the Company's ability to find, evaluate, underwrite
and process financing requests from small and middle-market businesses and their
advisors, accountants, attorneys, and other sources. This may require the
addition of experienced marketing, operations, support and administrative staff,
as well as additional funding resources to support growth in receivables.
At December 31, 1998 and 1997, the Company had $832 thousand and $0 in
income taxes receivable, and $4.0 million and $1.1 million in deferred income
taxes, respectively. Income taxes receivable represent the amounts of taxes
refundable for the years then ended. The deferred income taxes represent
projected decreases in taxes payable in future years as a result of
carryforwards at the end of each year.
Other assets decreased 72.8%, to $654 thousand from $2.4 million at
December 31, 1998 and 1997, respectively. This decrease was primarily the result
of a $1.7 million decrease in land and buildings held for resale, to $548
thousand from $2.2 million.
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.
<TABLE>
For the Years Ended December 31,
1998 1997
<CAPTION>
Type of Revenue Earned Percent Earned Percent
Revenue Revenue
<S> <C> <C> <C> <C>
Discount on purchased invoices $4,229,332 41.1% $4,705,913 47.0%
Earnings on advances
receivable 3,719,873 36.1 2,558,486 25.6
Earnings on purchased life
insurance policies 15,000 0.1 172,231 1.7
Fees and other income 2,337,013 22.7 2,569,213 25.7
--------- ---- ----------- ----
Total revenue $10,301,218 100.0% $10,005,843 100.0%
=========== ====== ========== ======
</TABLE>
Total revenue increased by 3.0% in 1998 versus 1997, to $10.3 million from
$10.0 million. Within total revenue, discounts on purchased invoices decreased
10.1% in 1998 as compared to 1997. The average earned discount as a percentage
of total invoices purchased in 1998 was 3.6%. The comparable average percentage
in 1997 was 3.0%, representing an increase of 20.0% in 1998. This increase
reflects higher discounts on two of the Company's larger clients. As the
composition of the Company's client base may change over time, there is no
assurance that the increased discount level can be maintained.
Earnings on advances receivable increased by 45.4% in 1998 versus 1997.
This was attributable to a higher average balance of advances, $23.8 million in
1998 versus $19.9 million in 1997, and a
12
<PAGE>
higher yield on the portfolio, 15.6%
versus 12.9%, respectively. As a result of the Company's intent to increase its
ABL business to decrease the risk in the portfolio, the composition of the
Company's ABL client base may change over time, and there is no assurance that
the increased yield level can be maintained.
There was a 91.3% decrease in earnings on purchased life insurance policies
in 1998 versus 1997. The company continues to adjust earnings on the polices
because it has determined that the assumptions of remaining life expectancy of
the insureds will not allow the collection of interest according to the terms of
the purchase agreements.
Fees and other income decreased 9.0% in 1998 as compared to 1997, to $2.3
million from $2.6 million, respectively. The decrease was because the 1997
results included several large termination fees, charged when clients refinance
their outstandings prior to expiration of their credit facilities.
The following table sets forth certain items of expense for the periods
indicated and the percentage relationship of each item to total expenses in the
period.
<TABLE>
For the Years Ended December 31,
1998 1997
<CAPTION>
Type of Expense Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Compensation and fringe
benefits $3,447,656 17.3% $3,087,085 36.9%
General and administrative 4,963,636 24.9 2,514,553 30.1
Interest expense 1,903,336 9.6 1,170,152 14.0
Provision for credit losses 9,598,503 48.2 1,593,555 19.0
--------- ---- ----------- ----- ----
Total expenses $19,913,131 100.0% $8,365,345 100.0%
=========== ====== ========== ======
</TABLE>
Compensation and fringe benefits increased $361 thousand, or 11.7%, due
primarily to the $302 thousand expenses associated with the severance of key
officers following the Proxy Contest, and the payroll costs associated with
Allstate Factors.
13
<PAGE>
General and administrative expense, which in total increased $2.4 million,
or 97.4%, consisted of the following items, each shown as a percentage of total
G&A for the corresponding period.
<TABLE>
For the Years Ended December 31,
1998 1997
<CAPTION>
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Rent, building & equipment $764,180 15.4% $524,698 20.9%
Office expense 605,250 12.2 540,473 21.5
Selling expenses 657,707 13.3 546,407 21.7
Client litigation 989,687 19.9 355,982 14.2
Other professional fees 587,209 11.8 200,339 7.9
Proxy Contest & investor
relations 993,767 20.0 24,388 1.0
Other 365,836 7.4 322,266 12.8
------- ---- -------- ----- ----
Total general and
administrative $4,963,636 100.0% $2,514,553 100.0%
========== ======= ========== ======
</TABLE>
The primary components of the increase in general and administrative
expenses were increased client litigation expense, higher professional fees, and
expenses related to the Proxy Contest. Rent, building & equipment expense
increased $239 thousand, or 45.6%, primarily due to the impairment of computer
equipment and related software that is not year 2000 compliant, and because of
higher rent expense due to the maintenance of the now closed New York office.
The largest components of the office expense increase were bank charges and
credit reports. Selling expense increased $111 thousand, or 20.4%, primarily due
to commissions to the bank which refactored the Allstate Factors invoices. The
increase in client litigation expenses of $633 thousand, or 178.0%, was
attributable to legal fees incurred by the Company in connection with the
settlement of ongoing legal cases to recover monies owed the Company or to
defend the Company as a result of claims made by former clients. The increase
principally related to four specific cases, three of which have been concluded.
Other professional fees increased $387 thousand or 193.1%, principally due to
recruiting fees paid to third parties to recruit individuals to fill specific
executive and staff positions, costs to obtain debt covenant waivers, and
accelerated amortization of remaining legal and administrative fees for the
convertible subordinated notes which were retired during 1998.
The Company incurred expenses of $947 thousand, which are not anticipated
to recur, related to the Proxy Contest, including $397 thousand paid directly or
reimbursed to Value Partners, Ltd. for expenses incurred by the Committee in
1998. In their proxy filing, the Committee advised shareholders that, if
successful in the Proxy Contest, they would seek reimbursement from the Company
for their expenses. This reimbursement was recorded as a general and
administrative expense. See Note I to the Consolidated Financial Statements
included herein.
Interest Expense increased $733 thousand, or 62.7%, due to increases in the
average amount outstanding under the Company's bank line of credit, which was
$11.7 million in 1998, compared to $4.7 million in 1997.
The provision for credit losses represented the largest category of expense
as a component of revenue. It also suffered the largest increase in 1998 from
its 1997 level, $8.0 million, representing a 502.3% increase. During 1998, the
Company had charge-offs of $9.6 million, while recovering or reclassifying $59
thousand. Of the charge-offs, approximately $5.3 million were related to
accounts placed on non-performing status prior to 1998 and which continued to
deteriorate in 1998, including
14
<PAGE>
$908 thousand related to the 1998 disposition at
a loss of real estate collateral securing an advance and the deterioration of
collections on health club notes, $1.3 million due to the bankruptcy of a major
obligor during 1998, $890 thousand due to a decision rendered in 1998 adverse to
the Company in a lawsuit, and $857 thousand due to the failure of a client
during 1998. Of the $4.1 million of charge-offs related to loans placed on non
accrual status in 1998, $3.4 million related to a single client who filed for
bankruptcy in 1998. Net charge-offs for 1998 of $9.5 million and the provision
of $9.6 million resulted in an allowance for credit losses of $2.8 million, or
7.93% of receivables (net of earned income), exclusive of life insurance
policies, outstanding as of December 31, 1998. None of the allowance at December
31, 1998 was allocated to non-performing accounts, which are carried at net
realizable value of $3.0 million. During 1997, the Company had charge-offs of
$1.8 million while recovering $341 thousand, resulting in net charge-offs of
$1.4 million. The Company's 1997 provision for credit losses of $1.6 million
brought the allowance for credit losses to $ 2.7 million, or 7.07% of
receivables (net of earned income). At December 31, 1997, $1.1 million of the
reserve amount was allocated to non-performing assets of $8.5 million, giving a
net realizable value estimate of $7.4 million. 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. The Company
believes that the allowance for credit losses is adequate in light of the risks
inherent in the portfolio at year-end 1998.
Liquidity and Capital Resources
The Company's requirement for capital is a function of its level of its
investment in receivables. The Company funds this investment through its
revolving bank credit line, its convertible subordinated notes, and internally
generated funds.
The Company's $25 million revolving line of credit with a group of banks
has covenants of the type typical of those required of borrowers in the
Company's business line. These covenants include maintenance of (i) a minimum
coverage of earnings before interest and taxes ("EBIT") to interest expense,
(ii) a minimum tangible net worth as defined, (iii) limitations on the amounts
advanced to any one borrower, (iv) limitations on non-earning assets as a
percentage of total assets, and (v) undrawn availablity of $2 million (in
addition to the Company's availability of $1.2 million at December 31, 1998.)
The Company was in default of the minimum EBIT coverage and the limitations on
funds advanced to any one client requirements at December 31, 1998. The Company
requested and received waivers of the defaults and modifications to the terms of
the covenants, and believes that it can meet the covenants in future periods as
they are now constructed while meeting the funding needs of its existing client
base. The Company is directing its efforts at increasing its portfolio of lower
risk asset-based loans while maintaining or increasing its Factoring business.
For these efforts to be successful, it may be necessary to request modifications
to the line of credit related to amount and terms. There can be no assurance
that the Company will be successful in obtaining such modifications, or in
obtaining replacement financing if is not successful.
In addition to the restrictions noted above, the revolving credit agreement
with the banks prohibits the Company from paying dividends on its common stock.
The Company has never paid dividends on its common stock and currently does not
intend to pay cash dividends; rather, it intends to retain its cash for the
continued expansion of its business.
As of December 31, 1997, the Company had convertible subordinated notes
(collectively the "Old Notes") outstanding with an aggregate principal of $5.0
million. The Old Notes were issued in exchange for 785,475 shares of the
Company's common stock (currently held by the Company as
15
<PAGE>
treasury stock). The
Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate
plus 1.25% per annum (currently 9.0% per annum) at December 31, 1998, (iii) are
convertible into common stock of the Company at $7.50 per share, and (iv) are
subordinated in right of payment to the Company's secured revolving credit
facility.
The Old Notes had a provision that upon the occurrence of certain
"fundamental changes"; the holders had the right to have these notes redeemed at
par. The election of the new Board of Directors at the May 1998 shareholder
meeting was deemed to have constituted a fundamental change under that
provision. The Company:
Advised all noteholders of their right to redeem the notes a par.
Issued new convertible subordinated notes to a major shareholder to provide the
Company with a funding source to repurchase all notes tendered under the
fundamental change provision. Repurchased the tendered notes. Offered all
remaining noteholders, that were accredited investors, the opportunity to
exchange their Old Notes for newly issued convertible subordinated notes.
The old noteholders tendered $2.9 million of Old Notes for repurchase at
par. Additionally, Old Notes with a par of $1.7 million were exchanged for the
new issue of Convertible Subordinated Notes.
During 1998, convertible subordinated notes were issued (collectively the
"New Notes") that (i) have a maturity of September 30, 2003, (ii) bear interest
at a fixed rate of 10% per annum, (iii) are not redeemable at the option of the
company, (iv) are convertible into the Company's common stock at $6.50 per share
and (v) are subordinated in right of payment to the Company's secured revolving
credit facility. The New Notes have financial covenants which are similar to,
but less restrictive than, the covenants in the Company's revolving line of
credit.
As of December 31, 1998, the Company had convertible subordinated notes
(Old and New Notes) outstanding of $5.0 million.
The Company expended $52 thousand and $178 thousand on premises and
equipment in 1998 and 1997, respectively, principally in connection with
upgrades to computer equipment, office furniture and equipment, and leasehold
improvements. The Company funded such expenditures from internally generated
funds or borrowings under the line of credit. The Company plans to continue to
significantly enhance its management information systems for providing, tracking
and supporting new products, such as the ABL offerings, and to assure compliance
with Year 2000. The source of funds for such expenditures is expected to be from
cash flow.
Impact of Inflation
Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the past two years.
Changes in interest rate levels do not generally affect the income earned
by the Company in the form of discounts charged. Rising interest rates would
increase the Company's cost of funding discounted receivables based on its
current borrowing arrangements which are base rate or LIBOR adjusted credit
facilities. The Company's advances receivable bear interest at floating (base)
rates, which would cause its borrowing costs to adjust at approximately the same
time as its costs would change.
16
<PAGE>
Item 7. Financial Statements
See pages 20 to 45.
Item 8. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16(a) of the Exchange Act
A definitive proxy statement is expected to be filed with the Securities
and Exchange Commission on or about April 15, 1999. The information required by
this item is set forth under the caption "Election of Directors", under the
caption "Executive Officers" and under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the definitive proxy statement, which
information is incorporated herein by reference thereto.
Item 10. Executive Compensation
The information required by this item is set forth under the caption
"Executive Compensation" in the definitive proxy statement, which information is
incorporated herein by reference thereto.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the
definitive proxy statement, which information is incorporated herein by
reference thereto.
Item 12. Certain Relationships and Related Transactions
This information required by this item is set forth under the caption
"Certain Transactions" in the definitive proxy statement, which information is
incorporated herein by reference thereto.
17
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) 1. Financial Statements: Page Number
The following financial statements are submitted:
Independent Auditors' Report on Consolidated Financial
Statements and Schedule 20
Consolidated Balance Sheets as of December 31, 1998 and 1997 21 through 22
Consolidated Statements of Operations for the years ended
years ended December 31, 1998 and 1997 23
Consolidated Statements of Shareholders' Equity for
the years ended December 31, 1998 and 1997 24
Consolidated Statements of Cash Flows for the years
ended December 31, 1998 and 1997 25 through 26
Notes to Consolidated Financial Statements 27 through 44
2. Financial Statement Schedules
The following financial statement schedule is filed as part of this report:
Schedule IV Indebtedness to Related parties
for the years ended December 31, 1998 and 1997. 45
Schedules other than those listed above have been omitted since they are either
not required or the information is included elsewhere in the financial
statements or notes thereto.
Exhibit 3. Articles of Incorporation and By-laws
Documents incorporated by reference - See Registration Statement on
Form S-1 33-46748
Exhibit 4. Instruments Defining the Rights of Security Holders
Documents incorporated by reference - See Registration Statement on
Form S-1 Registration No. 33-46748
Documents incorporated by reference - See the Company's Annual Report
on Form 10-KSB for the Fiscal Year Ended December 31, 1995
18
<PAGE>
Exhibit 10. Material Contracts
Waiver and Amendment No. 1 dated as of August 12, 1998 to Amended and
Restated Revolving Credit and Security Agreement of May 12, 1997.
Waiver and Amendment No. 2 dated as of September 14, 1998 to amended and
Restated Revolving Credit and Security Agreement of May 12, 1997.
Waiver and Amendment No. 3 dated as of November 13, 1998 to Amended and
Restated Revolving Credit and Security Agreement of May 12, 1997.
Indenture Dated as of September 14, 1998, $4,961,000.00 10% Convertible
Subordinated Notes.
Exhibit 10.9 Employment Contracts
Employment and Compensation Agreement dated July 1, 1996 with Lawrence M.
Winkler incorporated by reference to the Company's filing on Form 10-KSB for the
year ended December 31, 1996.
Employment and Compensation Agreement dated July 1, 1996 with Peter D.
Matthy incorporated by reference to the Company's filing on Form 10-QSB for the
year ended December 31, 1996.
Employment and Compensation Agreement dated July 1, 1996 with Wade
Hotsenpiller incorporated by reference to the Company's filing on Form 10-QSB
for the quarter ended September 30, 1997
Severance Agreement dated July 2, 1998 with Craig Fishman incorporated by
reference to the Company's filing on Form 10-QSB for the Quarter Ended June 30,
1998.
Employment and Compensation Agreement dated September 1, 1998 with C. Fred
Jackson incorporated by reference to the Company's filing on Form 10-QSB for the
Quarter Ended September 30, 1998.
Exhibit 21. Subsidiaries of the Company
19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Allstate Financial Corporation and subsidiaries
Arlington, Virginia
We have audited the accompanying consolidated balance sheets of Allstate
Financial Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the two years in the period ended December 31, 1998. Our
audits also included the financial statement schedule listed in the Index at
Item 13(a)2. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Allstate Financial Corporation
and subsidiaries as of December 31, 1998, and 1997, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
Deloitte & Touche LLP
Washington, D.C.
February 4, 1999
(March 30, 1999 as to Note F)
20
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
<CAPTION>
1998 1997
----- ----
ASSETS
<S> <C> <C>
Cash ....................................... $ 2,420,644 $ 4,200,050
------------ ------------
Purchased receivables ...................... 22,302,284 29,921,154
Advances receivable ........................ 15,652,457 12,022,624
------------ ------------
37,954,741 41,943,778
Less: Allowance for credit losses .......... (2,799,931) (2,738,931)
------------ ------------
Total receivables - net .................... 35,154,810 39,204,847
------------ ------------
Income tax receivable ...................... 831,656 --
Deferred income taxes ...................... 3,960,946 1,056,686
Furniture, fixtures and equipment, net ..... 166,400 494,240
Other assets ............................... 653,957 2,402,107
------------ ------------
TOTAL ASSETS ............................... $ 43,188,413 $ 47,357,930
============ ============
</TABLE>
21
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
1998 1997
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable and accrued expenses ........... $ 1,081,655 $ 420,356
Credit balances of factoring clients ............ 4,559,570 3,725,257
Notes payable ................................... 15,014,717 14,434,051
Convertible subordinated notes .................. 4,958,000 4,974,000
Income taxes payable ............................ -- 240,226
------------ ------------
TOTAL LIABILITIES ............................... 25,613,942 23,793,890
------------ ------------
COMMITMENTS AND CONTINGENCIES (See Note L) ...... -- --
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding ........................ -- --
Common stock, authorized
10,000,000 shares with no par value;
3,102,328 issued; 2,324,083 outstanding
at December 31, 1998 and 2,318,451
outstanding at December 31, 1997,
exclusive of shares held in treasury ......... 40,000 40,000
Additional paid-in-capital .................... 18,874,182 18,852,312
Treasury stock, 781,745 shares at December 31,
1998 and 783,877 at December 31, 1997 ....... (4,986,520) (5,030,594)
Retained earnings (restricted) ................ 3,646,809 9,702,322
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ...................... 17,574,471 23,564,040
------------ ------------
$ 43,188,413 $ 47,357,930
============ ============
(Concluded)
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
<CAPTION>
1998 1997
<S> <C> <C>
REVENUE
Earned discounts and interest .. $ 7,964,205 $ 7,436,630
Fees and other revenue ......... 2,337,013 2,569,213
------------
TOTAL REVENUE ................ 10,301,218 10,005,843
------------
EXPENSES
Compensation and fringe benefits 3,447,656 3,087,085
General and administrative ..... 4,963,636 2,514,553
Interest expense ............... 1,903,336 1,170,152
Provision for credit losses .... 9,598,503 1,593,555
------------ ------------
TOTAL EXPENSES ............... 19,913,131 8,365,345
------------
INCOME (LOSS) BEFORE INCOME TAX
EXPENSE (BENEFIT) ............. (9,611,913) 1,640,498
INCOME TAX EXPENSE (BENEFIT) ..... (3,556,400) 606,985
------------
NET INCOME (LOSS) ................ $ (6,055,513) $ 1,033,513
============
NET INCOME (LOSS) PER COMMON SHARE
Diluted ........................ $ (2.61) $ .44
Basic .......................... $ (2.61) $ .45
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Diluted ........................ 2,322,222 2,324,624
Basic .......................... 2,322,222 2,318,092
</TABLE>
See Notes to Consolidated Financial Statements
23
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
<CAPTION>
Additional
Common Paid in Treasury Retained
Stock Capital Stock Earnings Total
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1997 . $ 40,000 $ 18,852,312 $ (5,034,584) $ 8,668,809 $ 22,526,537
Conversion of
convertible
subordinated notes to
532 shares of common
stock ................... -- -- 3,990 -- 3,990
Net income .............. -- -- -- 1,033,513 1,033,513
------------ ------------ ------------ ------------ ------------
Balance -
December 31, 1997 ...... $ 40,000 $ 18,852,312 $ (5,030,594) $ 9,702,322 $ 23,564,040
Amortization of
treasury
stock acquisition costs . -- -- 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
============
</TABLE>
See notes to Consolidated Financial Statements
24
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
<CAPTION>
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) .................................. $ (6,055,513) $ 1,033,513
Adjustments to reconcile net income to cash
Provided by operating activities:
Depreciation - net ................................ 112,334 222,124
Impairment of software ............................ 218,202
Loss on disposition of automobiles ................ 49,487 --
Provision for credit losses ....................... 9,598,503 1,593,555
Changes in operating assets and liabilities:
Other assets ...................................... 1,748,150 (954,643)
Income tax payable ................................ (240,226) 240,226
Accounts payable and accrued expenses ............. 661,299 (26,004)
Deferred income taxes ............................. (2,904,260) (163,686)
Income tax receivable ............................. (831,656) 1,150,289
-------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES ........................................ 2,356,320 3,095,374
-------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of receivables, including life insurance
contracts, and advances ............................ (202,674,562) (195,768,163)
Collections of receivables, including life insurance
contracts, and advances ............................ 197,126,096 195,734,659
Increase in credit balances of
factoring clients ................................. 834,314 281,101
Purchase of furniture, fixtures and equipment ...... (52,183) (178,200)
-------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES
(4,766,335) 69,397
-------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit ....................... 100,417,016 100,490,490
Proceeds from subordinated debt .................... 4,597,000 --
Principal payments on line of credit ............... (99,820,361) (101,080,100)
Principal payments on subordinated debt ............ (4,613,000) --
Treasury stock acquisition costs ................... 28,084 (10)
Options exercised .................................. 21,870 _____--______
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES
630,609 (589,620)
-------------
NET INCREASE (DECREASE) IN CASH ...................... (1,779,406) 2,575,151
CASH, Beginning of year .............................. 4,200,050 1,624,899
-------------
CASH, End of year .................................... $ 2,420,644 $ 4,200,050
============= =============
(Continued)
</TABLE>
25
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
<CAPTION>
1998 1997
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
<S> <C> <C>
Interest paid .................................. $1,802,979 $1,121,272
========== ==========
Taxes paid ..................................... $ 419,742 $ 460,000
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH
ACTIVITIES:
Transfer of finance and other
receivables to other assets ................... $ -- $1,700,000
========== ==========
Issuance of common stock in exchange for
subordinated notes ............................ $ 15,990 $ 3,990
========== ==========
(Concluded)
</TABLE>
See Notes to Consolidated Financial Statements
26
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1998 and 1997
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Allstate Financial Corporation and
its subsidiaries (collectively, the "Company") conform to generally accepted
accounting principles and the general practices within the financial services
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flows are summarized below. In
preparing its financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates shown in the consolidated balance sheet and the statement of income.
Actual results could differ significantly from those estimates. In the normal
course of business, the Company encounters economic risks. Economic risk is
comprised of interest rate risk, credit risk, and market risk. Interest rate
risk is the risk that unfavorable discrepancies will occur between the rates of
interest earned by the Company on its receivables portfolio and its own costs of
borrowing funds in the market. Credit risk is the risk of default on the
Company's purchased receivable and advance portfolio that results from the
borrowers' inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of collateral underlying purchased
receivable and advance receivables and the valuation of the Company's real
estate owned.
The determination of the allowance for credit losses is based on estimates
that are susceptible to significant changes in the economic environment and
market conditions. Management believes that, as of December 31, 1998, the
allowance for credit losses is adequate based on the information currently
available. A worsening in the state of the general economy or a protracted
economic decline could increase the likelihood of losses due to credit and
market risks and could create the need for substantial additions to the
allowance for credit losses.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all material
inter-company transactions. No segment of its business, other than factoring and
general financing, is significant in relation to the Company's consolidated
total assets and revenues.
Reclassifications
Certain amounts related to 1997 have been reclassified to conform with the
1998 presentation.
Purchased and Advance Receivables and Allowance for Credit Losses
Purchased receivables consist of invoices, which have been purchased with
or without recourse to the seller, and life insurance policies. Invoices are
stated at the face amount outstanding, net of unearned discounts and
participations. Life insurance policies are stated at the purchase price paid
for the policies plus accrued earnings, net of an allowance based on
management's estimate of the discounted present value of the expected cash flows
from the contracts. Because most of the
27
<PAGE>
purchased life insurance policies are
underwritten by highly-rated insurance companies (and, in many cases, backed by
state guaranty funds), management believes that credit risk is not material.
Advances Receivable are interest-bearing loans collateralized by clients'
pledged assets and general liens and are stated at the aggregate principal
amount outstanding plus accrued earnings.
The allowance for credit losses represents the provision charged to
operations, less purchased receivables or advances receivables charged off, net
of recoveries. The allowance for credit losses is maintained at a level which,
in management's judgment, is sufficient to absorb losses inherent in the
receivable portfolio. The allowance for credit losses is based upon management's
review and evaluation of the receivable portfolio. Factors considered in the
establishment of the allowance for credit losses include management's evaluation
of specific receivables, the adequacy of underlying collateral, historical loss
experience, expectations of future economic conditions and their impact on
particular industries and individual clients, and other discretionary factors.
The allowance for credit losses is based on estimates of potential future
losses, and ultimate losses may vary from the current estimates. These estimates
are typically reviewed quarterly and as adjustments become necessary, the
effects of the change in estimates are charged against the allowance for credit
losses in the period in which they become known. When any receivable becomes
doubtful as to collection of discount or interest income, the account is placed
on non-performing status and, in accordance with The Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS
No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition
and Disclosure, is considered by management to be "impaired". When a receivable
becomes non-performing the Company discontinues the accrual of earnings for
financial statement purposes. If the Company determines that it is not likely to
recover, from any source, the amount of its initial advance and the earned but
unpaid discount or interest thereon, then the Company increases the allowance
for credit losses or reduces the carrying value of the non-performing,
receivable to its estimated fair value and makes a charge to its allowance for
credit losses in an amount equal to the difference between the Company's
investment in the non-performing receivable and its estimated fair value.
Purchased and advance receivables are fully charged off against the
allowance when the Company has exhausted its efforts against the client's
customer, the client, guarantors, other third parties and any additional
collateral retained by the Company.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost. Depreciation is
computed using straight line and accelerated methods over the estimated useful
lives of the related assets.
Other Assets
At the date of acquisition, other assets are recorded at fair value less
estimated selling costs. Write-downs, if any, to fair value at the date of
acquisition are charged against the allowance for credit losses. Subsequent to
acquisition, the asset is adjusted to the lower of cost or fair value less
estimated costs to sell and adjustments, if any, are charged against the
allowance for credit losses. Operating expenses pertaining to other assets are
expensed in operations in the period in which they are incurred. Gains or losses
on the disposition of other assets are first reflected in the allowance for
credit losses. Any gain which exceeds the amount, if any, previously written-off
is reflected in current income.
28
<PAGE>
The amounts ultimately recovered by the Company from other assets could
differ materially from the amounts used in arriving at the net carrying value of
the assets because of future market factors beyond the Company's control,
adversarial actions taken by the client or other owners of the foreclosed
property or changes in the Company's strategy for recovering its investment.
Fair Value of Financial Instruments
In accordance with the requirements SFAS No. 107, Disclosure About Fair
Value of Financial Instruments, which requires the disclosure of fair value
information about financial instruments when it is practicable to estimate that
fair value and excessive costs would not be incurred, the following methods and
assumptions were used in estimating the fair value of financial instruments:
Cash and Cash Equivalents--The carrying amounts for cash and cash
equivalents approximate fair value.
Purchased, advance receivables and commitments - The carrying amount of
receivables approximate fair value because of the short maturity of these
instruments.
Notes payable, which are primarily adjustable rate notes, are recorded at
book values, which approximate the respective fair values.
Convertible subordinated notes payable are primarily fixed rate. The
carrying amount of these notes approximates fair value because the interest
rate, conversion price, and period to maturity have not significantly changed
since the dates that the notes were issued.
Unearned and Earned Discounts on Purchased Receivables
At the time of purchase, the unearned discount is deducted from the face
amount of the invoice and is recorded as a reduction to such invoice. Unearned
discounts are recognized as income in accordance with the respective terms of
the agreements between the Company and each of its clients. The Company
recognizes discounts on the first day of each time interval. The Company's
method of recognizing earned discounts does not differ materially from the
interest method. At the time an invoice is purchased, a due date is set based on
the client's sales terms. This due date is used to identify past due
receivables. The accrual of earned discounts is discontinued when, in the
opinion of management, the collection of additional earnings from the client's
customer, the client, guarantors or collateral held, if any, is unlikely.
Invoices which have been identified as past due may continue to accrue earnings
if, in the opinion of management, collection of the earnings from one or more of
the above sources is likely.
When invoices are placed on non-performing status, earned discounts
theretofore accrued in the current year are charged against current year's
earnings if, in the opinion of management, the collection of such earnings is
unlikely. Earned discounts accrued in prior years are charged to the allowance
for credit losses if, the opinion of management, the collection of such earnings
is unlikely.
29
<PAGE>
Interest and Discounts Earned on Advances Receivable
Interest and discounts earned on advances receivable accrue on the average
monthly or semi-monthly outstanding amount or on the daily balance of the
advance. Accrued earnings are typically required to be paid in full no less
frequently than monthly in arrears.
Fees and Other Income
Fee income includes application fees, letter of credit and guaranty fees,
and commitment or facility fees received from clients. Commitment and facility
fees are deferred and recognized over the term of the commitment or facility on
a straight-line basis. Application fees are paid by clients to the Company to
cover the cost of performing credit investigations and field examinations and
are recognized when received. Letter of credit and guaranty fees are usually for
a sixty- to ninety-day period and are recognized when the letter of credit or
letter of guaranty is issued.
Other income includes supplemental discounts (i.e., early termination
fees), interest income and miscellaneous income.
Income Taxes
The Company recognizes the amount of taxes payable or refundable in the
current year and deferred tax liabilities and assets for the future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In addition, the Company will reduce any deferred tax
assets by the amount of any tax benefit that more than likely will not be
realized.
Recently Implemented Accounting Pronouncements
In February 1997, FASB issued SFAS No. 129, Disclosure of Information about
Capital Structure. SFAS No. 129 consolidates the existing guidance from several
other pronouncements relating to an entity's capital structure. At December 31,
1998, the implementation of this statement did not materially impact the
presentation of any component of the Company's financial statements and related
footnote disclosures.
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. SFAS No. 130 defines comprehensive income as the change in equity
excluding transactions with stockholders such as the issuance of stock.
Comprehensive income has two major components: net income and other
comprehensive income. Other comprehensive income includes such items as
unrealized gain and losses on available-for-sale securities. For the two years
ended December 31, 1998, net income equalled comprehensive income.
Effective January 1, 1998, the Company adopted SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for the way that public enterprises report information
about operating segments in the annual financial statements and
30
<PAGE>
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements beginning after December 15, 1997. At December 31, 1998, the Company
has one reportable segment.
New Accounting Pronouncements
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 15, 1999. Management is in the
process of evaluating the potential impact of this standard on the Company's
financial position and results of operations.
RECEIVABLES
<TABLE>
Receivables consist of the following at December 31:
<CAPTION>
1998 1997
<S> <C> <C>
Invoices ................................. $ 23,731,826 $ 34,835,229
Less: Unearned discount ................ (3,299,175) (5,885,984)
Less: Participations ................... (759,424) (2,208,959)
Life Insurance policies .................. 2,629,057 3,180,868
------------ ------------
Total Purchased receivables - net ........ $ 22,302,284 $ 29,921,154
============ ============
Advances receivable ...................... 16,288,673 12,022,624
Less: Unearned discount ................ (636,216) --_____
------------ ------------
Total Advances receivable - net .......... $ 15,652,457 $ 12,022,624
============ ============
</TABLE>
Invoices purchased usually become due within a maximum of 90 days. After
this time, the Company generally requires the client to repay the amount
advanced on the receivable plus the earned discount under the full recourse
provisions of its agreements. If at any time the Company determines that it is
unlikely to receive payment on a purchased invoice, the Company retains the
right to require its clients to repay the amount the Company has advanced on the
receivable plus the amount of discount earned.
Advances receivable may be made on a revolving basis or require monthly
amortization. Revolving advances receivable secured by current assets (e.g.
accounts receivable or inventory) are subject to a daily or weekly borrowing
base formula and come due in a single, lump sum payment at the maturity of the
agreement between the Company and its client.
31
<PAGE>
<TABLE>
Changes in the allowance for credit losses were as follows:
<CAPTION>
<S> <C> <C>
BALANCE, January 1, 1997 .............................. 2,578,972
Provision for credit losses .......................... 1,593,555
Receivables charged off .............................. (1,775,586)
Recoveries ........................................... 341,990
-----------
BALANCE, December 31, 1997 ............................. 2,738,931
Provision for credit losses .......................... 9,598,503
Receivables charged off .............................. (9,596,124)
Recoveries ........................................... 58,621
-----------
BALANCE, December 31, 1998 ............................. $ 2,799,931
===========
</TABLE>
Impaired loans recognized in conformity with SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, which required the Company to measure the
value of each impaired loan based on the present value of its expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent; as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, which allows the Company to use existing methods for recognizing
interest income on impaired loans, are as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
<S> <C> <C>
Total recorded investment in impaired loans $2,633,856 $6,536,471
Amount of recorded investment in impaired
loans for which there is no related allowance $2,633,856 $2,058,068
Amount of recorded investment in impaired
oans for which there is a related allowance -- $4,478,403
Related allowance for impaired loans -- $1,030,294
</TABLE>
- - --------------------------------------------------------------------------------
See note J-Financial obligations with off-balance sheet risk and credit
concentrations.
[Remainder of Page Intentionally Left Blank]
33
<PAGE>
C. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consist of:
<TABLE>
December 31,
<CAPTION>
1998 1997
<S> <C> <C>
Furniture, fixtures and equipment .......... $ 634,296 $ 1,145,785
Automobiles ................................ 21,290 156,810
Less: Accumulated depreciation ............ (489,186) (808,355)
----------- -----------
$ 166,400 $ 494,240
=========== ===========
</TABLE>
- - --------------------------------------------------------------------------------
Furniture, fixtures and equipment is pledged as collateral under a
revolving line of credit (see Note F). Also, in 1997 the Company pledged an
automobile as collateral under a capital lease.
OTHER ASSETS
Other assets consist of:
<TABLE>
December 31,
<CAPTION>
1998 1997
<S> <C> <C>
Land held for sale ....................... $ 375,000 $1,700,000
Building held for sale ................... -- 281,124
Condominium held for sale ................ 172,575 232,575
Employee advance ......................... 6,000 340
Prepaid expenses ......................... 42,602 184,034
Miscellaneous receivable ................. 57,780 4,034
---------- ----------
$ 653,957 $2,402,107
========== ==========
</TABLE>
E. CREDIT BALANCES DUE CLIENTS
At December 31, 1998 and 1997, credit balances of factoring clients
consisted of: (i) a holdback reserve of $3,139,873 and $2,179,328, respectively,
which is payable to clients upon the collection of receivables, (ii) a factors
reserve of $7,250 and $428,067 in 1998 and 1997 (which represents amounts due to
factoring clients subject to contractual limitation) and (iii) cash collateral
of $1,412,447 and $1,117,862, respectively.
[Remainder of Page Intentionally Left Blank]
33
<PAGE>
F. NOTES PAYABLE AND CONVERTIBLE SUBORDINATED NOTES
<TABLE>
December 31,
<CAPTION>
1998 1997
<S> <C> <C>
Notes payable- related parties;
due on demand;
interest payable at 1/4% over prime;
unsecured ......................................... $ -- $ 156,216
Notes payable; due on demand;
interest payable at 1/4% over prime;
unsecured ......................................... 14,717 21,827
Revolving line of credit; due
May 12, 2000; interest at .25% over
the base rate or 2.25% over one month
LIBOR; collateralized by finance receivables
and personal property ............................. 15,000,000 14,250,081
Capitalized Lease - payable over 24 months;
final payment due April, 1998;
collateralized by automobile ..................... -- 5,927
----------- -----------
Total notes payable .............................. $15,014,717 $14,434,051
=========== ===========
Convertible Subordinated Notes; due September 30,
2000; interest payable at 1.25% over prime;
unsecured ........................................ 361,000 4,974,000
Convertible Subordinated Notes; due September 30,
2003; interest payable at 10% fixed; unsecured ... 4,597,000 --
---------- -----------
Total convertible subordinated notes ............. $ 4,958,000 $ 4,974,000
=========== ===========
</TABLE>
- - --------------------------------------------------------------------------------
At December 31, 1998 and 1997, the prime rate was 7.75% and 8.5%,
respectively, and the one month LIBOR was 5.582% and 5.118%, respectively. At
December 31, 1998 and 1997, the prime rate was 7.75% and 8.50%, respectively.
Notes payable - related parties arose from advances made to the Company
prior to 1990 and were paid in full during 1998. Interest expense on notes
payable to related parties for the years ended December 31, 1998 and 1997 was
$5,428 and $15,187, respectively.
34
<PAGE>
Aggregate annual principal payments on notes payable for the five years
subsequent to December 31, 1998, are as follows:
Years Ending December 31, Amount
1999 $ 14,717
2000 15,361,000
2001 --
2002 --
2003 4,597,000
------------
Total $19,972,717
===========
As of December 31, 1998, the Company had $1,217,407 available under a
$25,000,000 secured revolving line of credit from a group of banks. The
revolving line of credit contains various sub facilities that limit its use. The
entire facility may be used for borrowing to finance the purchase of invoices or
advances secured by accounts receivable. However, the Company may (i) borrow
only $5,000,000 collateralized by advances secured by machinery and equipment,
(ii) borrow only $2,500,000 collateralized by advances secured by inventory, and
(iii) issue only up to $5,000,000 of Letters of Credit. Borrowings under the
credit facility bear interest at a spread over the bank's base rate or a spread
over LIBOR, at the Company's election. The Company is subject to covenants that
are typical in revolving credit facilities of this type. Additionally, the
revolving credit agreement with the banks prohibits the Company from paying
dividends on its common stock. At December 31, 1998, the Company was in default
of the covenants, which relate to interest coverage and the maximum amount of
funds which may be advanced to any one client. Waivers of the defaults were
received from the members of the bank group on March 30, 1999. The current
maturity date of this credit facility is May 12, 2000.
Bank commitment fee expense for the years ended December 31, 1998 and 1997
was $10,912 and $27,828, respectively.
As of December 31, 1997, the Company had convertible subordinated notes
(collectively the "Old Notes") outstanding with an aggregate principal of
$4,974,000. The Old Notes were issued in exchange 785,475 shares of the
Company's common stock (currently held by the Company as treasury stock). The
Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate
plus 1.25% per annum, (iii) are convertible into common stock of the Company at
$7.50 per share, and (iv) are subordinated in right of payment to the Company's
secured revolving credit facility.
The Old Notes had a provision that upon the occurrence of certain
"fundamental changes"; the holders had the right to have these notes redeemed at
par. The election of the new Board of Directors at the May, 1998 shareholder
meeting was deemed to have constituted a fundamental change under that
provision. The Company:
- - -Advised all noteholders of their right to redeem the notes a par.
- - -Issued new convertible subordinated notes to a major shareholder to provide
the Company with a funding source to repurchase all notes tendered
under the fundamental change provision.
- - -Repurchased the tendered notes.
- - -Offered all remaining noteholders, that were accredited investors, the
opportunity to exchange their Old Notes for newly issued convertible
subordinated notes.
35
<PAGE>
The old noteholders tendered $2,896,000 of Old Notes for repurchase at par.
Additionally, Old Notes with a par of $1,701,000 were exchanged for the new
issue of convertible subordinated notes.
During 1998, convertible subordinated notes were issued (collectively the
"New Notes") that (i) have a maturity of September 30, 2003, (ii) bear interest
at a fixed rate of 10% per annum, (iii) are not redeemable at the option of the
Company, (iv) are convertible into the Company's common stock at $6.50 per share
and (v) are subordinated in the right of payment to the Company's secured
revolving credit facility. The New Notes have financial covenants which are
similar to, but less restrictive than, the covenants in the Company's revolving
line of credit. At December 31, 1998, the Company was in default of the covenant
which relates to interest coverage. A waiver of the default was received from
the required percentage of noteholders
As of December 31, 1998, the Company had convertible subordinated notes
(Old and New Notes) outstanding of $4,958,000.
G. STOCK OPTION AND BENEFIT PLAN
Stock Option Plans
In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. This Statement gives the Company the option of either: 1)
continuing to account for stock options and other forms of stock compensation
paid to employees under the current accounting rules (APB No. 25, Accounting for
Stock Issued to Employees) while providing the disclosures required under SFAS
No. 123, or 2) adopting SFAS No. 123. The Company continues to account for stock
options under APB No. 25 and provides the additional disclosures as required by
SFAS No. 123.
[Remainder of Page Intentionally Left Blank]
36
<PAGE>
Qualified Plan
The Company has reserved 275,000 shares of common stock for issuance under
its qualified stock option plan. Options to purchase common stock are granted at
a price equal to the fair market value of the stock at the date of grant or 110%
of fair market value of the stock at the date of grant for stockholders owning
10% or more of the combined voting stock of the Company. The following table
summarizes qualified stock option transactions for the years ended December 31,
1997 and 1998.
Total Option Price
Options Per Share
Outstanding, January 1, 1997 133,400 1 $5.37 to $14.00
Granted 16,200 $5.62 to $6.75
Forfeited or expired (800) $5.43 to $14.00
---------
Outstanding, December 31, 1997 148,800 $5.37 to $7.75
Granted 30,200 $5.00 to $7.75
Exercised (3,500) $5.62 to $6.50
Forfeited or expired (57,900) $5.62 to $14.00
----------
Outstanding, December 31, 1998 117,600 $5.00 to $7.75
=======
Exercisable, December 31, 1998 49,201
==========
- - -------------------------------------------------------------------------------
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 and 110% of fair value at the time of grant. The
following table summarizes non-qualified stock option transactions from 1997
through 1998:
Total Option Price
Options Per Share
Outstanding, January 1, 1997 25,000 $7.00 to $14.00
Granted 44,000 $7.00
Forfeited or expired -- --
-------
Outstanding, December 31, 1997 69,000 $5.60 to $14.00
Granted 35,000 $7.00
Forfeited or expired (2,000) $14.00
-------
Outstanding, December 31, 1998 102,000 $7.00
=======
Exercisable, December 31, 1998 102,000
=======
- - --------------------------------------------------------------------------------
1 In December 1997, the expiration date on 15,000 stock options issued in
December 1992 was extended from December 1997 to June 15, 1998. No compen-
sation was recorded since the exercise price was in excess of the market
price when extended.
37
<PAGE>
Qualified and Non-Qualified Plans
The table below summarized the option activity for both plans for the years
ended December 31: The table below summarizes the stock option activity for both
plans:
1998 1997
Outstanding at January 1 ................... 217,800 158,400
Granted .................................. 65,200 60,200
Exercised ................................ (3,500) --
Forfeited or expired ..................... (59,900) (800)
-------- --------
Outstanding at December 31 ................. 219,600 217,800
======== ========
Exercisable at December 31 ................. 151,201 138,303
======== ========
--------
The weighted average fair value at date of grant for options granted during
1998 and 1997 was $.98 and $2.29, respectively. The fair value of options at
date of grant was estimated using the Black-Scholes model with an expected
option life of 2.5 years and 3.1 years in 1998 and 1997, respectively, and the
following weighted average assumptions, respectively, for 1998 and 1997:
dividend yield - none either year; interest rate - 5.63% and 6.86%; volatility
41.00% and 38.00% for the respective year.
Weighted average option exercise price information (both plans) for years
ended December 31:
1998 1997
Per Share
Outstanding at January 1 ..................... $ 6.24 $ 6.45
Granted .................................... $ 5.01 $ 6.16
Exercised .................................. $ 6.25 --
Forfeited or Expired ....................... $ 5.76 $ 6.22
------ ------
Outstanding at December 31 ................... $ 6.37 $ 6.24
====== ======
Exercisable at December 31 ................... $ 6.49 $ 7.04
====== ======
The Company's net loss would have been increased by $88,335 or $0.04 per
share basic and dilutive for 1998, in stock-based compensation cost for the
Company's qualified and non-qualified stock option plans if the plan had been
determined based on the fair value at the grant dates for awards under the
plans. The Company's net income would have been reduced by $74,712 or $0.03 per
share basic and dilutive for 1997.
Retirement Plan
Effective January 1, 1990, the Company adopted the Allstate Financial
Corporation 401(k) Retirement Plan (the "Plan") for the benefit of the Company's
employees. The Plan provides for the deferral of up to 15% of a participating
employee's salary, subject to certain limitations, and a discretionary
contribution by the Company. The Company's contribution is allocated to
participating employees based on relative compensation. The Company's
contribution for the years ended December 31, 1998 and 1997 was $46,701 and
$45,704, respectively.
38
<PAGE>
H. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
Years Ended December 31,
<CAPTION>
1998 1997
<S> <C> <C>
Federal:
Current ...................................... $ 45,187 $ 765,405
Deferred ..................................... (3,366,887) (160,100)
----------- -----------
(3,321,700) 605,305
----------- -----------
State:
Current ...................................... -- 5,266
Deferred ..................................... (234,700) (3,586)
----------- -----------
(234,700) 1,680
----------- -----------
Total income tax expense (benefit) ............. $(3,556,400) $ 606,985
=========== ===========
Tax (benefit) expense at statutory rate ........ $(3,268,050) $ 557,770
Change in (benefit) expense resulting from:
State income taxes, net of Federal income
tax effect ................................. (154,903) --
Non-deductible expense ....................... 11,900 20,100
Other ........................................ (145,347) 29,115
----------- -----------
$(3,556,400) $ 606,985
=========== ===========
Effective tax rate ............................. 37.0% 37.0%
=========== ===========
</TABLE>
The deferred tax asset consists of:
<TABLE>
December 31,
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax asset:
Allowance for credit losses .............. $3,874,302 $1,056,686
Fixed assets ............................. 86,644 --
---------- ----------
Total ...................................... $3,960,946 $1,056,686
========== ==========
</TABLE>
- - --------------------------------------------------------------------------------
The Company's net operating loss ("NOL") for the year ending December 31,
1998, amounted to $8,768,082. The carry-forward period associated with the NOL
expires December 31, 2018.
RELATED-PARTY TRANSACTIONS
Certain members of the immediate families of Eugene Haskin and Leon
Fishman, shareholders and former directors and officers, directly or through
trusts, had provided financing to a subsidiary of the Company through unsecured
loans with interest payable monthly at an annual interest rate of 1/4% over the
prime rate, the same rate paid by the Company to its unaffiliated bank lenders.
Total indebtedness to members of Mr. Haskin's and Mr. Fishman's immediate
families was $-0- at December 31, 1998 and $53,217 as of 1997. During 1998 and
1997, the Company paid aggregate interest on these loans of $2,058 and $5,326,
respectively.
Rental payments of $13,173 were received by the Company in 1998, and
$24,000 in 1997 and from Leon Fishman, for the personal use of a condominium
owned by a subsidiary of the Company. Mr. Fishman ceased renting the apartment
on June 30, 1998.
In 1998 the "Allstate Financial Corporation Independent
Shareholders/Directors Committee" (the "Committee"), which was composed of Value
Partners, Ltd., a major shareholder; David W. Campbell, William H. Savage,
Edward A. McNally, and Lindsay B. Trittipoe, independent directors of the
Company; and C. Scott Bartlett, a former director of the Company, proposed the
election of a slate of directors in opposition to the nominees proposed by the
Company's management. In their proxy filing, the Committee advised shareholders
that, if successful in the election, they would seek reimbursement for their
expenses from the Company. The Company paid directly or reimbursed Value
Partners, Ltd. for expenses incurred by the Committee in the amount of $397,318
in 1998. This reimbursement was recorded in the consolidated statement of
operations as a general and administrative expense.
Value Partners, Ltd., was paid approximately $207 thousand and $123
thousand in 1998 and 1997, respectively, in interest on convertible subordinated
notes. Value Partners, Ltd held convertible subordinated notes of $4,197,000 and
$1,301,000 at December 31, 1998 and 1997, respectively.
J. FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT
CONCENTRATIONS
The Company is a party to financial obligations with off-balance sheet risk
in the normal course of business to meet the financing needs of its clients.
These financial obligations include conditional commitments to purchase
receivables, obligations under guaranties issued by the Company and
reimbursement obligations under letters of credit issued for the Company's
account. These obligations involve, to varying degrees, elements of credit risk
in excess of the amount recognized on the balance sheet.
The Company's maximum exposure to credit loss under financial obligations
with off-balance sheet risk is represented by the contractual or notional amount
of these obligations. The Company uses the same credit policies in making
conditional commitments and incurring contingent obligations as it does for
on-balance sheet obligations. These commitments have fixed expiration dates or
other termination clauses and usually require payment of a fee by the client.
Since many of the commitments may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
Company receives collateral to secure letters of credit and guarantees.
Financial obligations whose contract or notional amounts represent credit
risk are as follows:
December 31,
1998 1997
Conditional Commitments to purchase
receivables .................................. $47,810,000 $57,948,000
Standby letters of credit and guarantees ....... -- $ 219,927
- - --------------------------------------------------------------------------------
40
<PAGE>
For the year ended December 31, 1998, three clients accounted for 46.4% of
the Company's total earned discounts and interest. At December 31, 1998, three
clients accounted for 48.7% of the Company's total receivables. Although the
Company monitors account debtor concentration and regularly evaluates the credit
worthiness of account debtors, there can be no assurances that account debtor
concentration could not have a material adverse effect on the Company.
K. NET INCOME PER SHARE
In March 1997, FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128
supersedes APB No. 15 to conform earnings per share with international standards
as well as to simplify the complexity of the computation under APB No. 15. SFAS
No. 128 requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 is effective for both interim and annual periods
ending after December 15, 1997. The basic and dilutive earnings per share are
reflected in the statement of operations.
[Remainder of Page Intentionally Left Blank]
41
<PAGE>
The following table details the calculation of the basic and diluted
earnings per share.
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
Year Ended January 1, 1997
Basic EPS
Net income available to common
stockholders ................... $ 1,033,513 2,318,092 $ .45
Effect of Dilutive Securities
Stock Options .................... -- 6,532 --
Diluted EPS
Net income available to Common
stockholders plus assumed
conversions ...................... $ 1,033,513 2,324,624 $ .45
Year Ended December 31, 1998
Basic EPS
Net (loss) ........................ $(6,055,513) 2,322,222 $ (2.61)
Effect of dilutive securities
Stock options ..................... -- -- --
Diluted EPS
Net (loss) plus assumed
conversions ....................... $(6,055,513) 2,322,222 $ (2.61)
- - --------------------------------------------------------------------------------
During 1998 and 1997, respectively, there were various options to purchase
103,700 and 84,349 shares of common stock which were not included in the
computation of the diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
The Company incurred net losses for the years ended December 31, 1998.
Since the inclusion of stock options in the computation of diluted EPS would
have had an antidilutive effect, the common shares associated with the options
were excluded from the computation.
The convertible subordinated notes, which convert into the Company's common
stock at $6.50 and $7.50 per share, were also excluded from the computation of
the diluted EPS because the conversion price was greater than the market price
at any given point during which they were outstanding for the three years ended
December 31, 1998.
L. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases with Consumer Price
Index escalations and rental escalations based on increases in base operating
expenses as defined in the agreements. The Company's headquarters lease was
renegotiated during 1995 and extended for six years to December 1, 2001 at a
reduced rental. The Company also pays rent for a sales office and storage space.
Future minimum rental payments are as follows:
Years Ending December 31, Amount
1999 $203,000
2000 190,000
2001 174,000
--------
Total $567,000
========
- - -------------------------------------------------------------------------------
Rental expense for the years ended December 31, 1998 and 1997 was $330,226
and $230,416, respectively.
The Company was a defendant in Skiba, Trustee (f/k/a White, Trustee) v.
Allstate Financial Corporation in the U.S. District Court for the Western
District of Pennsylvania. The Company provided receivables financing and
advances for Lyons Transportation Lines, Inc. ("Lyons"), which filed a
bankruptcy petition. The Trustee brought suit against the Company making
fraudulent conveyance and breach of contract claims and the Company
counter-claimed for its attorneys' fees and costs. The case was tried in
December 1998, at which time a jury found in the Company's favor both as to the
Trustee's claims, as well as on the Company's counter-claim against the Trustee
for the Company's legal fees and costs of $465,000. The court entered judgment
in favor of the Company and against the Trustee for that amount. The Trustee
noted an appeal. Pursuant to an indemnification agreement between the Trustee
and a principal creditor/debtor of the Lyons estate, Sherwin Williams,
Sherwin-Williams is ultimately responsible for payment of such judgment.
In connection with the same Lyons transaction, the Company was also named
in January, 1994 as a defendant in Sherwin-Williams Company v. Robert Castello,
et.al. in the United States District Court for the Northern District of Ohio.
Sherwin-Williams sued parties involved in the Lyons leveraged buy-out to recover
damages allegedly incurred by Sherwin-Williams in connection with the leveraged
buy-out and Lyons' subsequent bankruptcy. Sherwin-Williams asserted that it had
incurred pension fund liabilities and other damages as a result of the Lyons
transaction exceeding $11,000,000 and asserted claims against the Company and
its co-defendants for such sums. Subsequent to December 31, 1998 (the date of
the financial statements), the Company and its co-defendants agreed to settle
the case - at no cost to the Company - in return for the Company's agreement to
forego the judgment entered in the Company's favor in the Western District of
Pennsylvania Skiba, Trustee vs. Allstate Financial Corporation. As of the date
of this Report, such settlement agreement is in the process of being documented
with mutual releases as to all claims and all parties. The Company expects to
file a joint motion with the Lyons Trustee to have such settlement approved as
to the Trustee and the Company in the Western District of Pennsylvania
bankruptcy proceeding. The Company expects all parties to present such
settlement to the U.S. District Court for the Northern District of Ohio, along
with a request for dismissal of that case as well.
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
43
<PAGE>
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 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 proposed 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 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.
44
<PAGE>
SCHEDULE IV
<TABLE>
INDEBTEDNESS TO RELATED PARTIES
<CAPTION>
Balance at Balance at
Beginning of Amounts End of
Name of Creditor Period Additions Paid Period
<S> <C> <C> <C> <C>
Year Ended December 31, 1998:
All directors and officers as a
group ....................... $ -- $ 102,000 $ -- $ 102,000
Various other related parties . 156,216 882 157,098 --
Value Partners, Ltd. .......... 1,301,000 2,896,000 --___ 4,197,000
---------- ---------- ---------- ----------
$1,457,216 $2,998,882 $ 157,098 $4,299,000
========== ========== ========== ==========
Year Ended December 31, 1997:
Various other related parties $ 164,968 $ 4,248 $ 13,000 $ 156,216
Value Partners, Ltd. ......... 1,301,000 --____ --___ 1,301,000
---------- ---------- ---------- ----------
$1,465,968 $ 4,248 $ 13,000 $1,457,216
========== ========== ========== ==========
</TABLE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
By: /s/ Charles G. Johnson
Charles G. Johnson
President and CEO
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
/s/ Charles G. Johnson Charles G. Johnson
Date March 30, 1999 President, Chief Executive Officer, Director
/s/ Lawrence M. Winkler Lawrence M. Winkler
Date March 30, 1999 Secretary/Treasurer, Principal Accounting and
Chief Financial Officer
/s/ David W. Campbell David W. Campbell
Date March 30, 1999 Chairman, Director
________________William H. Savage
Date ___________________ Director
/s/ Edward A. McNally Edward A. McNally
Date March 30, 1999 Director
/s/ Lindsay B. Trittipoe Lindsay B. Trittipoe
Date March 30, 1999 Director
/s/ C. Scott Bartlett C. Scott Bartlett
Date March 30, 1999 Director
/s/ Steven Lefkowitz Steven Lefkowitz
Date March 30, 1999 Director
<PAGE>
FIRST SUPPLEMENTAL
TRUST INDENTURE
ALLSTATE FINANCIAL CORPORATION, ISSUER
This First Supplemental Trust Indenture, dated as of March 11, 1999
(this "Supplemental Indenture"), is [executed by*] [made by and between**]
Allstate Financial Corporation (together with any successor to its rights,
duties and obligations hereunder, the "Issuer")[, and ___________ (together with
any successor trustee hereunder, the "Trustee")**].
WHEREAS, the Issuer has heretofore executed and delivered [those
certain 10% Convertible Subordinated Notes (the "Notes") in the principal sum of
$4,961,000.00 dated as of September 14, 1998, to which is attached Exhibit "A",
the terms and provisions thereof which shall constitute an Indenture in the
event of appointment of an Indenture Trustee*] [that certain Trust Indenture
dated as of September 14, 1998, together with those certain 10% Convertible
Subordinated Notes thereunder (the "Notes")**] (the "Indenture"); and
WHEREAS, the Indenture provides in Section 8.2 thereof that the Issuer,
when authorized by a resolution of the Board of Directors [and by the
Trustee**], may with the consent of the Holders of not less than a majority in
aggregate principal amount of the Notes at the time outstanding, add any
provisions to or change in any manner or eliminate any of the provisions of the
Indenture or of any supplemental indenture or modify in any manner the rights of
the Holders of the Notes, except under certain circumstances not applicable
herein; and
WHEREAS, the Issuer [and the Trustee**], with the consent of a majority
of the holders of the aggregate principal amount of the Notes outstanding, now
[desires*] [desire**] to amend the Indenture for the purpose of modifying
certain provisions of the Indenture regarding Section 3.16, entitled Earnings to
Debt Coverage; and
WHEREAS, the execution and delivery of this Supplemental Indenture has
been duly and validly authorized in all respects by the Board of Directors of
the Issuer; and
NOW, THEREFORE, in consideration of the mutual understandings, promises
and agreements herein contained and other good and valuable consideration, the
sufficiency of which are hereby acknowledged, the Issuer [does*] [and Trustee
do**]covenant and agree hereby, for the equal and proportionate benefit of the
respective Holders from time to time of the Notes, as follows:
* Delete upon execution of the Form of Indenture by the Issuer and Trustee, if
named.
** Insert upon execution of the Form of Indenture.
Supplement - Allstate -1-
<PAGE>
ARTICLE I
DEFINITIONS AND STATUTORY AUTHORITY
Section 1.1. Supplemental Indenture. This Supplemental Indenture is a
Supplemental Indenture and is adopted in accordance with Article 8 of the
Indenture.
Section 1.2. Definitions.
(A) Unless the context shall require otherwise, all defined terms contained
in the Indenture shall have the same respective meanings in this Supplemental
Indenture as such defined terms are given in the Indenture.
(B) As used in this Supplemental Indenture, except as otherwise
expressly provided or unless the context shall require otherwise:
(1) This "Supplemental Indenture" means this instrument as originally
executed or as it may, from time to time, be supplemented or amended by one or
more supplemental indentures hereto entered into pursuant to the applicable
provisions of the Indenture.
(2) All references in this instrument to designated "Articles," "Sections,"
and other subdivisions are to the designated Articles, Sections, and other
subdivisions of this instrument as originally executed.
Section 1.3. Indenture to Remain in Force. Except as amended by this
Supplemental Indenture, the Indenture shall remain in full force and effect as
to matters covered therein.
Section 1.4. Successors and Assigns. All covenants and agreements in this
Supplemental Indenture by the Issuer [and the Trustee**] shall bind the Holders
of the Notes, the Issuer, [the Trustee **] and their respective successors and
assigns, whether so expressed or not.
Section 1.5. Benefits of Supplemental Indenture. Nothing in this
Supplemental Indenture or in the Notes, express or implied, shall give any
Person, other than the parties hereto, their respective successors hereunder and
the Holders of the
Note, any benefit or any legal or equitable rights, remedy or claim under
this Supplemental Indenture.
Section 1.6. Governing Law. This Supplemental Indenture shall be construed
in accordance and governed by the laws of the State of Virginia.
* Delete upon execution of the Form of Indenture by the Issuer and Trustee, if
named.
** Insert upon execution of the Form of Indenture.
Supplement - Allstate -2-
<PAGE>
ARTICLE II
AMENDMENTS TO INDENTURE
Section 2.1. Earnings to Debt Coverage. Section 3.16 of the Indenture is
deleted in its entirety and replaced in full by the following, which shall read
in its entirety as follows:
Section 3.16 Earnings to Debt Coverage. On the last day of
each fiscal quarter commencing with the fiscal quarter ended December 31, 1998,
the ratio of (A) EBIT to (B) total interest expense for (w) the fiscal quarter
ended December 31, 1998, (x) the fiscal two quarters ended March 31, 1999 (taken
as one accounting period), (y) the fiscal three quarters ended June 30, 1999
(taken as one accounting period), and (z) the four fiscal quarters (taken as one
accounting period) ended on the last day of each fiscal quarter commencing with
the fiscal quarter ended September 30, 1999, shall not be less than 1.5:1.
ARTICLE III
MISCELLANEOUS
Section 3.1. Ratification and Reaffirmation. The Issuer [and Trustee**]
hereby [ratifies and reaffirms*] [ratify and reaffirm**] all the terms and
conditions of the Indenture, as specifically amended and supplemented by this
Supplemental Indenture, and [each**] hereby
[acknowledges*] [acknowledge**] that the Indenture remains in full force
and effect, as so amended and supplemented.
Section 3.2. Execution and Counterparts. This Supplemental Indenture may be
executed in several counterparts, all of which shall constitute one and the same
instrument and each of which shall be, and shall be deemed to be, an original.
Section 3.3 Security Holder Consent. The consenting Security Holders will
execute this document solely to signify their consent to this Supplemental
Indenture.
IN WITNESS WHEREOF, the Issuer [has*] [and the Trustee each have**]
caused this Supplemental Indenture to be signed on its behalf by its duly
authorized representative, all as of the date first hereinabove written.
ALLSTATE FINANCIAL CORPORATION
By:
Name: David Campbell
Title: President
**[Indenture Trustee Signature]
* Delete upon execution of the Form of Indenture by the Issuer and Trustee, if
named.
** Insert upon execution of the Form of Indenture.
Supplement - Allstate -3-
<PAGE>
Consent of Security Holders:
The below designated Security holders of the Indenture, by their
execution hereof, consent to the First Supplemental Trust Indenture.
VALUE PARTNERS, LTD.
By:_____________________________
Name: Timothy G. Ewing
Managing Partner of Ewing & Partners
General Partner of Value Partners, Ltd.
* Delete upon execution of the Form of Indenture by the Issuer and Trustee, if
named.
** Insert upon execution of the Form of Indenture.
Supplement - Allstate -4-
<PAGE>
WAIVER AND AMENDMENT NO. 1
TO
AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT
THIS WAIVER AND AMENDMENT NO. 1 ("Amendment") is entered into as of
August 12, 1998, by and among ALLSTATE FINANCIAL CORPORATION, a corporation
organized under the laws of the Commonwealth of Virginia ("Borrower"), the
undersigned financial institutions (collectively the "Lenders" and individually
a "Lender") and IBJ SCHRODER BUSINESS CREDIT CORPORATION as successor to IBJ
Schroder Bank & Trust Company ("IBJS"), as agent for the Lenders (IBJS, in such
capacity, the "Agent).
BACKGROUND
Borrower, Agent and Lenders are parties to an Amended and Restated
Revolving Credit Loan and Security Agreement dated as of May 17, 1997 (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement") pursuant to which Agent and Lenders provide Borrower with certain
financial accommodations.
Borrower has requested that Agent and Lenders waive certain Events of
Default and amend certain financial covenants and Agent and Lenders are willing
to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by Agent
and Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby amended as
follows:
(a) Section 7.19 of the Loan Agreement is amended in its entirety to
provide as follows:
7.19. Financial Covenants. Breach, on a consolidated basis, any of the
following financial covenants, each of which shall be calculated in accordance
with GAAP as in effect on the Effective Date:
(a) (i) On the last day of each Fiscal Quarter commencing with the Fiscal
Quarter ended September 30, 1998, the ratio of (A) EBIT to (B) interest expense
(other than interest expense in respect of the Convertible, Senior Subordinated
Notes) for (w) the Fiscal Quarter ended September 30 1998, (x) the two Fiscal
Quarters ended December 31, 1998 (taken as one accounting period), (y) the three
Fiscal Quarters ended March 31, 1999 (taken as one accounting period), and (z)
the four Fiscal Quarters ended on the last day of each Fiscal Quarter commencing
with the Fiscal Quarter ended June 30, 1999 (taken as one accounting period),
shall not be less than 3:1; and
(ii) On the last day of each Fiscal Quarter commencing with the Fiscal
Quarter ended September 30, 1998, the ratio of (A) EBIT to (B) total interest
expense for (w) the Fiscal Quarter ended September 30 1998, (x) the two Fiscal
Quarters ended December 31, 1998 (taken as one accounting period), (y) the three
Fiscal Quarters ended March 31, 1999 (taken as one accounting period), and (z)
the four Fiscal Quarters (taken as one accounting period) ended on the last day
of each Fiscal Quarter commencing with the Fiscal Quarter ended June 30, 1999,
shall not be less than 2:1.
(b) On the last day of each Fiscal Quarter, the ratio of (i) Total
Liabilities to (ii) Tangible Net Worth plus the aggregate principal amount of
Convertible, Senior Subordinated Notes then outstanding shall not exceed 2:1.
(c) (1) The sum of (i) Tangible Net Worth plus (ii) the aggregate principal
amount of Convertible, Senior Subordinated Notes outstanding shall equal or
exceed $25,200,000 on June 30, 1998, and (2) on the last day of any Fiscal
Quarter thereafter, the sum of (i) Tangible Net Worth plus (ii) the aggregate
principal amount of Convertible, Senior Subordinated Notes then outstanding
shall equal or exceed the sum of (x) $25,200,000 and (y) $10,000 times the
number of Fiscal Quarters elapsed from June 30, 1998 to the end of such Fiscal
Quarter.
(d) (i) Net cash advanced to any Client by Borrower (net of Risk
Participations sold with respect to such Client) shall not at any time exceed
15% of the sum of (x) Borrower's Tangible Net Worth (on a consolidated basis)
and (y) the aggregate principal amount of Convertible, Senior Subordinated Notes
outstanding at such time, except that net cash advances to MGV International
("MGV"), Jarnow Corporation ("Jarnow") and United Plastics International
Corporation ("UPIC") by Borrower (net of Risk Participations sold with respect
to each such Client) may exceed 15% of the sum of clauses (x) and (y), but shall
at no time exceed (A) with respect to Jarnow and UPIC (X) (until December 31,
1998) 25% of the sum of clauses (x) and (y) calculated as of March 31, 1998 or
(y) (after December 31, 1998) 25% of the sum of clauses (x) and (y) calculated
as of the date such determination is made and (B) with respect to MGV,
$6,500,000.00; provided however, that in the event at any time the net cash
advances by Borrower to any two of MGV, Jarnow and UPIC (net of Risk
Participations sold with respect to each such Client) do not exceed 15% of the
sum of clauses (x) and (y), net cash advances to any one other Client by
Borrower (net of Risk Participations sole with respect to such Client) may
exceed 15%, but shall not exceed 20%, of the sum of clauses (x) and (y);
provided further, however, that in the event at any time the net cash advances
by Borrower to every one of MGV, Jarnow and UPIC (net of Risk Participations
sold with respect to each such Client) do not exceed 15% of the sum of clauses
(x) and (y), net cash advances to any two other Clients by Borrower (net of Risk
Participations sold with respect to each such Client) may exceed 15%, but shall
not exceed 20%, of the sum of clauses (x) and (y); and (ii) net cash advanced by
Borrower (net of Risk Participations) with respect to Receivables owed by a
single Account Debtor shall not at any time exceed 25% of the sum of (x)
Borrower's Tangible Net Worth (on a consolidated basis) and (y) the aggregate
principal amount of Convertible, Senior Subordinated Notes outstanding at such
time.
For purposes of this Section 7.19(d), (x) each agency, branch or division
of the Federal government shall be treated as a separate Account Debtor and (y)
each insurance company under state workman's compensation arrangements shall be
treated as a separate Account Debtor.
(b) Any references in the Loan Agreement to the Convertible, Senior
Subordinated Notes shall be deemed to refer to the existing Convertible, Senior
Subordinated Notes as well as to any Convertible, Senior Subordinated Notes
which may be issued in exchange for the original Convertible, Senior
Subordinated Notes, or which are issued to Value Partners in consideration of
Value Partners providing loans to enable Borrower to repay the existing
Convertible, Senior Subordinated Notes which are required to be redeemed at par
pursuant to a Notice of Fundamental Charge mailed to existing holders of
Convertible, Senior Subordinated Notes on June 17, 1998. Any new Convertible,
Senior Subordinated Notes shall be subject to subordination provisions which are
acceptable to Agent and Required Lenders (with the existing subordination
provisions being acceptable to Agent and Lenders), have a maturity date of
September 20, 2003, a fixed interest rate of 10% per annum and be convertible
into common stock of the Borrower at $6.50 per share. All references in the Loan
Agreement and any other documents shall be deemed to refer to the existing
Convertible, Senior Subordinated Notes and to any notes issued in substitution
therefor or issued to Value Partners in exchange for money to be used by
Allstate to redeem any existing Convertible, Senior Subordinated Notes. No
Advances shall be used to redeem the existing Convertible, Senior Subordinated
Notes.
3. Waiver. Subject to satisfaction of the conditions precedent set forth in
Section 4 below, Lender hereby waives the following Events of Default which have
occurred as a result of Borrower's non-compliance with the following provisions
of the Loan Agreement on or prior to June 30, 1998:
(a) Section 7.19, to the extent that such Event of Default arose solely as
a result of Borrower's failure to comply with clauses (a) - (d) thereof at and
for the four Fiscal Quarters ended June 30, 1998.
(b) Section 10.14, but only to the extent that such Event of Default arose
solely as a result of the modification in May 1998 to the Board of Directors of
Borrower.
4. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Agent shall have received
(i) four (4) copies of this Amendment executed by Borrower and Required Lenders
and consented and agreed to by each of the Guarantors, and (ii) an amendment fee
of $15,000 for the ratable benefit of Lenders (such fee may be charged to
Borrower's account).
5. Representations and Warranties. Borrower hereby represents and warrants
as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of Borrower and are enforceable against
Borrower in accordance with their respective terms.
(b) After given effect to this Amendment, Borrower hereby reaffirms all
covenants, representations and warranties made in the Loan Agreement to the
extent the same are not amended hereby and agree that all such covenants,
representations and warranties shall be deemed to have been remade as of the
effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or would
exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset to the Obligations.
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
7. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
ALLSTATE FINANCIAL CORPORATION
By:_______________________________
Name:
Title:
IBJ SCHRODER BUSINESS CREDIT CORPORATION, as Agent and Lender
By:_______________________________
Name:
Title:
NATIONAL BANK OF CANADA, as Lender
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By:
Name:
Title
[SIGNATURES CONTINUED ON NEXT PAGE]
1026981.1/SJS/25254/010 3/31/99
2
<PAGE>
PREMIUM SALES NORTHEAST, INC.
By:
Name:
Title
RECEIVABLE FINANCING CORPORATION
By:
Name:
Title
BUSINESS FUNDING OF FLORIDA, INC.
By:
Name:
Title
BUSINESS FUNDING OF AMERICA, INC.
By:
Name:
Title
SETTLEMENT SOLUTIONS, INC.
By:
Name:
Title
AFC HOLDING CORPORATION
By:
Name:
Title
1026981.1/SJS/25254/010 3/31/99
3
<PAGE>
AMENDMENT NO. 2
TO
AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT
THIS AMENDMENT NO. 2 ("Amendment") is entered into as of September __,
1998, by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under
the laws of the Commonwealth of Virginia ("Borrower"), the undersigned financial
institutions (collectively the "Lenders" and individually a "Lender") and IBJ
SCHRODER BUSINESS CREDIT CORPORATION as successor to IBJ Schroder Bank & Trust
Company ("IBJS"), as agent for the Lenders (IBJS, in such capacity, the "Agent).
BACKGROUND
Borrower, Agent and Lenders are parties to an Amended and Restated
Revolving Credit Loan and Security Agreement dated as of May 17, 1997 (as
amended, supplemented or otherwise modified from time to time, the "Loan
Agreement") pursuant to which Agent and Lenders provide Borrower with certain
financial accommodations.
In connection with the issuance by Borrower of certain 10% Convertible
Subordinated Notes, Borrower and Lender have agreed to amend the Loan Agreement
on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by Agent
and Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby amended as
follows:
(a) Section 1.2 is amended by inserting the following defined terms in the
appropriate alphabetical order.
"Average Assets" shall mean all property of Borrower and its Subsidiaries
averaged over the period of five consecutive Fiscal Quarters ending on the date
of such fifth prior quarter.
"Gross Non-Earning Assets" shall mean (a) gross finance receivables on
which Borrower stops or should stop accruing earned discounts, whether
classified as such , as "other receivables" or "other assets", or in any other
manner; and (b) amounts receivable by Borrower where the source of payment is
expected to be derived from legal proceedings or other collection efforts
instituted against a client's customer, guarantors and/or third parties,
regardless of how classified. Gross Non-Earning Assets excludes goodwill and any
investment by Borrower or its Subsidiaries in the equity of an entity (other
than a present or future Subsidiary or Affiliate of the Borrower) which Borrower
or its Subsidiaries may acquire subsequent to September 14, 1998, even to the
extent not performing to its stated expectation.
"Net Non-Earning Assets" means Gross Non-Earning Assets less allowance for
credit losses (which shall include any reserve, whether allocated to a specific
asset or generally).
(b) Section 7.19 is amended by inserting the following provision at the end
thereof:
"(e) on the last day of each Fiscal Quarter the percentage arrived at by
dividing Net Non-Earning Assets by Average Assets shall not be more than the
following percent during each of the following periods:
Period Percentage
October 1, 1998 through March 31, 1999 19.5
April 1, 1998 through September 30, 1999 14.5
October 1, 1999 through September 30, 2000 11.5
October 1, 2000 and thereafter 7.5"
3. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Agent shall have received
four (4) copies of this Amendment executed by Borrower and Required Lenders and
consented and agreed to by each of the Guarantors.
4. Representations and Warranties. Borrower hereby represents and warrants
as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of Borrower and are enforceable against
Borrower in accordance with their respective terms.
(b) After given effect to this Amendment, Borrower hereby reaffirms all
covenants, representations and warranties made in the Loan Agreement to the
extent the same are not amended hereby and agree that all such covenants,
representations and warranties shall be deemed to have been remade as of the
effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or would
exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset to the Obligations.
5. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not operate as a waiver of any right, power or remedy of Lender,
nor constitute a waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or delivered under or in
connection therewith.
6. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
7. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
8. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
ALLSTATE FINANCIAL CORPORATION
By:_______________________________
Name:
Title:
IBJ SCHRODER BUSINESS CREDIT CORPORATION, as Agent and Lender
By:_______________________________
Name:
Title:
NATIONAL CANADA FINANCE CORP., as Lender
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By:
Name:
Title
[SIGNATURES CONTINUED ON NEXT PAGE]
2
<PAGE>
PREMIUM SALES NORTHEAST, INC.
By:
Name:
Title
RECEIVABLE FINANCING CORPORATION
By:
Name:
Title
BUSINESS FUNDING OF FLORIDA, INC.
By:
Name:
Title
BUSINESS FUNDING OF AMERICA, INC.
By:
Name:
Title
SETTLEMENT SOLUTIONS, INC.
By:
Name:
Title
AFC HOLDING CORPORATION
By:
Name:
Title
3
<PAGE>
WAIVER AND AMENDMENT NO. 3
TO
AMENDED AND RESTATED REVOLVING CREDIT AND SECURITY AGREEMENT
THIS WAIVER AND AMENDMENT NO. 3 ("Amendment") is entered into as of
November 13, 1998, by and among ALLSTATE FINANCIAL CORPORATION, a corporation
organized under the laws of the Commonwealth of Virginia ("Borrower"), the
undersigned financial institutions (collectively the "Lenders" and individually
a "Lender") and IBJ SCHRODER BUSINESS CREDIT CORPORATION as successor to IBJ
Schroder Bank & Trust Company ("IBJS"), as agent for the Lenders (IBJS, in such
capacity, the "Agent).
BACKGROUND
Borrower, Agent and Lenders are parties to an Amended and Restated
Revolving Credit Loan and Security Agreement dated as of May 17, 1997, as
amended by Waiver and Amendment No. 1 dated as of August 12, 1998 and Amendment
No. 2 dated as of September, 1998 (as amended and as may be further amended,
supplemented or otherwise modified from time to time, the "Loan Agreement")
pursuant to which Agent and Lenders provide Borrower with certain financial
accommodations.
Borrower has requested that Agent and Lenders waive certain Events of
Default and amend certain financial covenants and Agent and Lenders are willing
to do so on the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by Agent
and Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein shall
have the meanings given to them in the Loan Agreement.
2. Amendment to Loan Agreement. Subject to satisfaction of the conditions
precedent set forth in Section 4 below, the Loan Agreement is hereby amended as
follows:
(a) Section 7.19(c) of the Loan Agreement is hereby amended in its entirety
to provide as follows:
"(c) (1) The sum of (i) Tangible Net Worth plus (ii) the aggregate
principal amount of Convertible, Senior Subordinated Notes outstanding shall
equal or exceed $25,200,000 on June 30, 1998, and (2) on the last day of any
Fiscal Quarter thereafter, the sum of (i) Tangible Net Worth plus (ii) the
aggregate principal amount of Convertible, Senior Subordinated Notes then
outstanding shall equal or exceed the sum of (x) $22,000,000 and (y) $10,000
times the number of Fiscal Quarters elapsed from September 30, 1998 to the end
of such Fiscal Quarter."
(b) The Loan Agreement is hereby amended by inserting a new Section 7.20 to
read in its entirety as follows:
"7.20. Undrawn Availability. At any time permit Undrawn Availability to be
less than $2,000,000."
3. Waiver. Subject to satisfaction of the conditions precedent set forth in
Section 4 below, Lender hereby waives the following Events of Default which have
occurred as a result of Borrower's non-compliance with the following provisions
of the Loan Agreement on or prior to September 30, 1998:
(a) Section 7.19, to the extent that such Event of Default arose solely as
a result of Borrower's failure to comply with clauses (a) - (c) thereof at and
for the four Fiscal Quarters ended September 30, 1998.
(b) Section 7.19(d), to the extent that such Event of Default arose solely
as a result of Borrower's failure to comply with subsection (A) thereof at
September 30, 1998.
4. Conditions of Effectiveness. This Amendment shall become effective upon
satisfaction of the following conditions precedent: Agent shall have received
(i) four (4) copies of this Amendment executed by Borrower and Required Lenders
and consented and agreed to by each of the Guarantors, and (ii) an amendment fee
of $15,000 for the ratable benefit of Lenders (such fee may be charged to
Borrower's account).
5. Representations and Warranties. Borrower hereby represents and warrants
as follows:
(a) This Amendment and the Loan Agreement, as amended hereby, constitute
legal, valid and binding obligations of Borrower and are enforceable against
Borrower in accordance with their respective terms.
(b) After given effect to this Amendment, Borrower hereby reaffirms all
covenants, representations and warranties made in the Loan Agreement to the
extent the same are not amended hereby and agree that all such covenants,
representations and warranties shall be deemed to have been remade as of the
effective date of this Amendment.
(c) No Event of Default or Default has occurred and is continuing or would
exist after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset to the Obligations.
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof, each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like
import shall mean and be a reference to the Loan Agreement as amended hereby.
(b) Except as specifically amended herein, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall not,
except as expressly provided in Section 3, operate as a waiver of any right,
power or remedy of Lender, nor constitute a waiver of any provision of the Loan
Agreement, or any other documents, instruments or agreements executed and/or
delivered under or in connection therewith.
7. Governing Law. This Amendment shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. Counterparts. This Amendment may be executed by the parties hereto in
one or more counterparts, each of which shall be deemed an original and all of
which when taken together shall constitute one and the same agreement.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first written above.
ALLSTATE FINANCIAL CORPORATION
By:_______________________________
Name: David W. Campbell
Title: Chairman-CEO
IBJ SCHRODER BUSINESS CREDIT CORPORATION, as Agent and Lender
By:_______________________________
Name:
Title:
NATIONAL CANADA FINANCE CORP., as Lender
By:_______________________________
Name:
Title:
By:_______________________________
Name:
Title:
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By:
Name: David W. Campbell
Title Chairman-CEO
[SIGNATURES CONTINUED ON NEXT PAGE]
2
<PAGE>
PREMIUM SALES NORTHEAST, INC.
By:
Name: David W. Campbell
Title Chairman-CEO
RECEIVABLE FINANCING CORPORATION
By:
Name: David W. Campbell
Title Chairman-CEO
BUSINESS FUNDING OF FLORIDA, INC.
By:
Name: David W. Campbell
Title Chairman-CEO
BUSINESS FUNDING OF AMERICA, INC.
By:
Name: David W. Campbell
Title Chairman-CEO
SETTLEMENT SOLUTIONS, INC.
By:
Name: David W. Campbell
Title Chairman-CEO
AFC HOLDING CORPORATION
By:
Name: David W. Campbell
Title Chairman-CEO
3
<PAGE>
Exhibit 21 to 1998 10-KSB
Allstate Financial Corporation
Wholly-owned Subsidiary List
State of
Name Incorporation
Receivable Financing Corporation Virginia
Business Funding of Florida, Inc. Florida
Business Funding of America, Inc. Virginia
Premium Sales Northeast, Inc. Virginia
Lifetime Options, Inc., a Viatical
Settlement Company Maryland
Settlement Solutions, Inc Virginia
AFC Holding Corporation Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2420644
<SECURITIES> 0
<RECEIVABLES> 37954741
<ALLOWANCES> 2799931
<INVENTORY> 0
<CURRENT-ASSETS> 42388794
<PP&E> 655586
<DEPRECIATION> 489186
<TOTAL-ASSETS> 43188413
<CURRENT-LIABILITIES> 20655942
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 17534471
<TOTAL-LIABILITY-AND-EQUITY> 43188413
<SALES> 0
<TOTAL-REVENUES> 10301218
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8411292
<LOSS-PROVISION> 9598503
<INTEREST-EXPENSE> 1903336
<INCOME-PRETAX> (9611913)
<INCOME-TAX> (3556400)
<INCOME-CONTINUING> (6055513)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6055513)
<EPS-PRIMARY> (2.61)
<EPS-DILUTED> (2.61)
</TABLE>
