U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
|_| TRANSITION REPORTUNDER 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)
(703) 931-2274
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
------- --------
The number of shares outstanding of the issuer's common stock, no par value, as
of May 10, 1999, was 2,324,216.
Transitional Small Business Disclosure Format
(check one): Yes No X
----- ------
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1999 and
December 31, 1998 1-2
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Shareholders' Equity for the Year Ended
December 31, 1998 and Three Months Ended March 31, 1999 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1999 and 1998 5-6
Notes to Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Condition 10-18
Part II - Other Information
Item 1 - Legal Proceedings 18
Item 3 - Defaults Upon Senior Securities 18
Item 4 - Submission of Matters To a Vote of Security Holders 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
PART I - FINANCIAL INFORMATION
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
- --------------------------------------------------------------------------------
1999 1998
---- ----
- -------------------------------------------------------------------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash $1,432,751 $2,420,644
---------- ----------
Purchased receivables 12,289,180 22,302,284
Advances receivable 23,198,725 15,652,457
---------- ----------
35,487,905 37,954,741
Less: Allowance for credit losses (2,898,582) (2,799,931)
----------- ----------
Total receivables - net 32,589,323 35,154,810
---------- ----------
Income tax receivable 831,656 831,656
Deferred income taxes 3,800,005 3,960,946
Furniture, fixtures and equipment, net 165,357 166,400
Other assets 211,300 653,957
-------- -------
TOTAL ASSETS $39,030,392 $43,188,413
=========== ===========
(Continued)
- -------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
- --------------------------------------------------------------------------------
1999 1998
---- ----
- --------------------------------------------------------------------------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Accounts payable and accrued expenses $ 592,080 $1,081,655
Credit balances of factoring clients 2,534,667 4,559,570
Notes payable 13,111,848 15,014,717
Convertible subordinated notes 4,957,000 4,958,000
--------- ---------
TOTAL LIABILITIES 21,195,595 25,613,942
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding -- --
Common stock, authorized 10,000,000
shares with no par value; 3,105,828
issued; 2,324,216 outstanding at
March 31, 1999 and 2,324,083
outstanding at December 31, 1998,
exclusive of shares held in treasury 40,000 40,000
Additional paid-in-capital 18,874,182 18,874,182
Treasury stock, 781,612 shares at
March 31, 1999 and 781,745 shares
at December 31, 1998 (4,981,448) (4,986,520)
Retained earnings (restricted) 3,902,063 3,646,809
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 17,834,797 17,574,471
---------- ----------
$ 39,030,392 $43,188,413
============ ===========
(Concluded)
- ------------------------------------------------------------- -------------------
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended March 31,
- --------------------------------------------------------------------------------
1999 1998
---- ----
- ------------------------------------------------------------- ------------------
<S> <C> <C>
REVENUE
Earned discounts and interest $1,614,471 $2,436,665
Fees and other revenue 181,574 526,817
------- -------
TOTAL REVENUE 1,796,045 2,963,482
--------- ---------
EXPENSES
Compensation and fringe benefits 610,013 812,234
General and administrative 405,293 984,824
Interest expense 375,574 410,331
Provision for credit losses - 547,000
--------- -------
TOTAL EXPENSES 1,390,880 2,754,389
--------- ---------
INCOME BEFORE INCOME TAX EXPENSE 405,165 209,093
INCOME TAX EXPENSE 149,911 77,364
------- ------
NET INCOME $ 255,254 $ 131,729
========= =========
NET INCOME PER COMMON SHARE
Diluted $ 0.11 $ 0.06
======= =======
Basic $ 0.11 $ 0.06
======= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Diluted 2,327,016 2,322,160
Basic 2,324,138 2,318,878
- ------------------------------------------------------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999
<CAPTION>
Additional Paid Treasury Retained
Common Stock in Capital Stock Earnings Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1, 1998 ........................... $ 40,000 $ 18,852,312 $ (5,030,594) $ 9,702,322 $ 23,564,040
Amortization of treasury stock
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
Amortization of treasury stock
acquisition costs (unaudited) ....................... 4,074 4,074
Conversion of Convertible
Subordinated Notes to 133 shares of
common stock (unaudited) ............................ 998 998
Net Income (Unaudited) .............................. 255,254 255,254
------------ ------------ ------------ ------------ -----------
Balance - March 31, 1999 ............................ $ 40,000 $ 18,874,182 $ (4,981,448) $ 3,902,063 $ 17,834,797
============ ============ ============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended March 31
- -------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................................. $ 255,254 $ 131,729
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net .................................... 13,000 36,000
Provision for credit losses ........................... -- 547,000
Changes in operating assets and liabilities:
Other assets ...................................... 442,657 650,091
Accounts payable and accrued expenses ............. (489,575) 132,503
Income taxes receivable and deferred
income taxes ................................. 160,941 (88,800)
Income taxes payable .............................. -- (240,226)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 382,277 1,168,297
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of receivables and advances ....................... (63,915,174) (70,968,743)
Collection of receivables, including life insurance
contracts, and advances ............................... 66,480,661 66,474,575
(Decrease)/Increase in credit balances of factoring clients (2,024,903) 394,436
Purchase of furniture, fixtures and equipment .............. (11,957) (19,069)
------------ ------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ................. 528,627 (4,118,801)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit ............................... 32,592,132 49,565,581
Principal payments on line of credit ....................... (34,495,000) (47,720,112)
Treasury stock acquisition costs ........................... 4,071 (5)
Options exercised .......................................... -- 5,620
------------ ---------
NET CASH PROVIDED (USED) BY FINANCING
ACTIVITIES ................................................. (1,898,797) 1,851,084
------------ ------------
NET (DECREASE) IN CASH ........................................... (987,893) (1,099,420)
CASH, Beginning of period ........................................ 2,420,644 4,200,050
------------ ------------
CASH, End of period .............................................. $ 1,432,751 $ 3,100,630
============ =========
(Continued)
</TABLE>
5
<PAGE>
<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
<CAPTION>
Three Months Ended March 31
1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 388,691 $ 410,331
========== =========
Income taxes paid $ 8,529 $ 390,226
========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH
ACTIVITIES
Conversion of Factoring Clients to ABL Loans $9,309,511 $ -
========== ======
Issuance of common stock in exchange
for convertible subordinated notes $ 998 $ 2,000
========= =========
(Concluded)
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation and subsidiaries (the "Company") included herein are unaudited for
the periods ended March 31, 1999 and 1998; however, they reflect all adjustments
which, in the opinion of management, are necessary to present fairly the results
for the periods presented. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Allstate Financial
Corporation believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the three months ended
March 31, 1999 are not necessarily indicative of the results of operations to be
expected for the remainder of the year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KSB for
the year ended December 31, 1998.
2. Line of Credit. As of March 31, 1999, the Company had approximately
$4,500,000 available under a $25,000,000 secured revolving line of credit. The
revolving line of credit contains various sub facilities which limit its use.
The entire facility is available for borrowings by the Company secured by
Factored Accounts Receivable or Collateralized Advances backed by pledged client
receivables; however, the Company may (i) borrow only $5,000,000 secured by
Collateralized Advances backed by client machinery and equipment, (ii) borrow
only $2,000,000 secured by Collateralized Advances backed by client inventory,
and (iii) issue 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 which
are typical in revolving credit facilities of this type. At March 31, 1999, the
Company was in default of the financial covenant related to interest coverage,
and has received waivers of those defaults from the participants in the line of
credit. The current maturity date of this credit facility is May 12, 2000.
3. Certain Contingencies. 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 subsequent to a leveraged buy-out (the LBO). 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. The
court entered a judgment in favor of the Company and against the Trustee. The
Trustee noted an appeal on January 11, 1999. There was an indemnification
agreement between the Trustee and principal creditor/person of the Lyons Estate,
7
<PAGE>
Sherwin-Williams. According to the agreement, Sherwin-Williams was ultimately
responsible for payment of such judgement.
In connection with the same LBO, 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 LBO to recover damages allegedly incurred by
Sherwin-Williams in connection with the LBO and Lyons' subsequent bankruptcy.
Sherwin-Williams asserted that it had incurred pension fund liabilities and
other damages as a result of the Lyons transaction and asserted claims against
the Company and its co-defendants for such sums. During the first quarter of
1999, the Company and Sherwin-Williams agreed to settle Sherwin-Williams claims
against the Company in return for the Company's agreement to forego the judgment
entered in the Company's favor in Skiba, Trustee vs. Allstate Financial
Corporation. All parties executed a settlement agreement in March 1999 with
mutual releases as to all claims and all parties. The Company filed 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,
and the Court granted it on April 22, 1999. The U.S. District Court for the
Northern District of Ohio has now dismissed Sherwin-Williams Company v. Robert
Castello, et.al as to all parties 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 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.
8
<PAGE>
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.
4. Credit Concentrations. For the quarter ended March 31, 1999 three clients
accounted for 53.7% of the Company's total earned discounts and interest, as
compared to 88.0% for the quarter ended December 31, 1998. At March 31, 1999,
these three clients accounted for 28.3% of the Company's total receivables,
while at December 31, 1998 these three clients accounted for 48.7%.
5. Subsequent Event. On May 13, 1999, Business Funding of America, Inc. ("BFA"),
a wholly owned subsidiary, entered into an agreement with a financial
institution (the "Assignment Agreement") to purchase a portfolio of
approximately $32,500,000 of asset-based loans. BFA paid a premium of
approximately $329,000 to the seller as consideration for the Assignment
Agreement. The Company is required to pay the principal amount of the loans
outstanding to the seller on or before June 15, 1999, and has applied to several
financial institutions for an increased line of credit, on terms which are
comparable to those contained in the current agreement, to complete the
purchase. Although the Company believes that such a line of credit can be
obtained on acceptable terms, there can be no assurance that such financing can
be obtained. If the Company fails to pay the amounts due to the seller before
June 15, 1999 or the date is not otherwise extended, the premium will be
forfeited and such assets will not be transferred to the Company.
[THIS SPACE INTENTIONALLY LEFT BLANK]
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-QSB contains certain "forward-looking statements" relating to the
Company which represent the Company's current expectations or beliefs,
including, but not limited to, statements concerning the Company's operations,
performance, financial condition and growth. For this purpose, any statements
contained in this Form 10-QSB that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"intend", "could", "estimate", or "continue", or the negative or other variation
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, such as credit losses, dependence on management and key
personnel, seasonally, 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.
GENERAL
The Company is a commercial finance institution which provides financing to
small and middle-market businesses, usually those with annual sales of $1
million to $30 million, 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. 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 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.
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.
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
10
<PAGE>
competes with both regional sources of financing and large national
organizations. Many of these competitors have significant financial, marketing
and operational resources, and may have access to capital at lower costs than
the Company can obtain.
Historically, the Company has not expected to maintain a funding relationship
with a client for more than two years. The Company expected that its clients
would qualify for more competitively priced bank or asset-based financing within
that time period, or would be liquidated. Therefore, the Company's major clients
have tended to change significantly over time. 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.
The Company's subsidiary Lifetime Options, Inc. manages a portfolio of life
insurance policies it purchased from individuals facing life-threatening
illnesses. During 1997, Lifetime Options ceased purchasing policies.
Other than Lifetime Options, none of the Company's subsidiaries is currently
engaged in business, which could have a material effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's requirement for capital is a function of the 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. At March 31, 1999, the Company was in
default of the financial covenant related to interest coverage, and has received
waivers of those defaults from the participants in the line of credit. The
maturity date of the line of credit is 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
September 2000 and $4.6 million are due in September 2003. 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.
11
<PAGE>
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 adverse effect on the Company's business, results, or
financial condition if the Company and certain material third parties do not
become Year 2000 compliant.
The Company has identified all significant information technology ("IT")
applications that are not Year 2000 compliant. Management does not believe it
has any non-IT systems, (those other than computers or software which include
microprocessors), which are not certified by their vendors as compliant. The
Company has determined to replace 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 May 31, 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 July 31, 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 $5 thousand has been incurred for the quarter ended
March 31,1999. 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
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 adverse
effect on the Company's financial condition. The Company has not determined
whether such possible events may have a material adverse effect on its financial
condition, but is continuing to analyze the uncertainty through monitoring the
Year 2000 compliance efforts of clients and obligors.
12
<PAGE>
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.
RESULTS OF OPERATIONS
The following table sets forth certain items of revenue and expense for the
periods indicated and indicates the percentage relationships of each item to
total revenue.
<TABLE>
<CAPTION>
Three Months Ended March 31,
- ----------------------------------------------------------------------------------------------
1999 1998
- ----------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Earned discounts and interest ............... $1,614,471 89.9% $2,436,665 82.2%
Fees and other revenue ...................... 181,574 10.1 526,817 17.8
---------- -------- ---------- -------
TOTAL REVENUE ............................. 1,796,045 100.0% 2,963,482 100.0%
---------- ------- --------- -------
EXPENSES
Compensation and fringe benefits ............ 610,013 33.9 812,234 27.4
General and administrative .................. 405,293 22.5 984,824 33.2
Interest expense ............................ 375,574 21.0 410,331 13.8
Provision for credit losses ................. -- -- 547,000 18.5
- ----------------------------------------------- ---------- ---- ---------- -----
TOTAL EXPENSES ............................ 1,390,880 77.4 2,754,389 92.9
---------- ---- ---------- -----
INCOME BEFORE INCOME TAX EXPENSE .............. 405,165 22.6 209,093 7.1
INCOME TAX EXPENSE ............................ 149,911 8.3 77,364 2.6
- ----------------------------------------------- ---------- ---- ---------- -----
NET INCOME .................................... $ 255,254 14.3% $ 131,729 4.5%
========== ===== ======= =========
NET INCOME PER COMMON SHARE
Diluted ..................................... $ 0.11 $ 0.06
======= =========
Basic ....................................... $ 0.11 $ 0.06
======= =========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Diluted ..................................... 2,327,016 2,322,160
Basic ....................................... 2,324,138 2,318,878
---------- -------------
</TABLE>
13
<PAGE>
Total Revenue. Total revenue consists of (i) discounts on purchased invoices
earned in the Company's factoring business from the purchase of accounts
receivable, interest earnings on ABL advances receivable, and (ii) fees and
other revenue, which consist primarily of application fees, commitment or
facility fees, other transaction related financing fees and supplemental
discounts paid by clients who do not sell the minimum volume of accounts
receivable required by their contracts with the Company (including "graduating"
to a lower cost source of funding).
The following table breaks down total revenue by type of transaction for the
periods indicated and the percentage relationship of each type of transaction to
total revenue.
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
- ------------------------------------------ ----------------- -------------------- ----------------- ----------------
Type of Revenue Earned Revenue Percent Earned Revenue Percent
- ------------------------------------------ ----------------- -------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Discount on purchased invoices $ 380,691 21.2% $1,308,990 44.2%
Earnings on advances
Receivable 1,233,780 68.7 1,127,675 38.0
Fees and other revenue 181,574 10.1 526,817 17.8
------- ---- ------- ----
Total revenue $1,796,045 100.0% $2,963,482 100.0%
========== ===== ========== =====
</TABLE>
Total revenue decreased by 39.4% in the three months ended March 31, 1999 versus
the same period in 1998, to $1.8 million from $3.0 million. Within total
revenue, discounts on purchased invoices decreased 70.9% in the March 31, 1999
quarter as compared to the March 31, 1998 quarter. The volume of invoices
purchased was $13.1 million in the three months ending March 31, 1999 as
compared to $44.2 million in the comparable period in 1998, a $31.1 million
decrease. The major reasons for the decrease include: (1) the Company converted
two large clients from factoring relationships to asset based loans; and (2) a
client whose volume was included in the March 31, 1998 volume in the amount of
$36.7 million has filed for bankruptcy. The average earned discount as a
percentage of total invoices purchased in the three months ended 1999 was 2.9%.
The comparable average percentage in the same period in 1998 was 2.5%,
representing an increase of 16.0%. 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 9.4% in the three months ending
March 31, 1999 versus the same period in 1998. The earnings increase was
attributable to a higher average balance of advances receivable, $23.8 million
in the March 31, 1999 quarter versus $19.9 million in the March 31, 1998 quarter
due to the client conversions from factoring to ABL relationships previously
noted, and a 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.
14
<PAGE>
Fees and other revenue decreased 65.6% in three months ended March 31, 1999 as
compared to the same period in 1998, to $182 thousand from $527 thousand,
respectively. The difference was due to the reduction in transaction fees
related to the decreased volume of Purchased Receivables.
COMPENSATION AND FRINGE BENEFITS. In three months ended March 31, 1999 and 1998,
compensation and fringe benefits were $610 thousand (34.0% of total revenue) and
$812 thousand (27.4% of total revenue), respectively. The lower compensation and
fringe benefits during 1999 were chiefly the result of a decrease in the number
of employees.
GENERAL AND ADMINISTRATIVE EXPENSE. Total general and administrative expense
decreased by $579 thousand (58.9%) to $405 thousand from $984 thousand for the
three month periods ended March 31, 1999 compared with 1998. Rent, office, and
selling expenses were down 29%, 39%, and 71%, respectively, due to closing an
office the Company had maintained in New York. Client litigation and
professional fees decreased 78% and 68%, respectively, due to a decrease in open
legal cases.
INTEREST EXPENSE. Interest expense was $376 thousand (21.0% of total revenue)
versus $410 thousand (13.9% of total revenue) for the three months ended March
31, 1999 and 1998, respectively. The decrease in interest expense is primarily
attributable to a decrease in the average interest rate on the Company's line of
credit. The average interest rate paid on the Company's line of credit decreased
to 7.5% for the three months ended March 31, 1999 from 8.1% during the
comparable period in 1998. The average daily outstanding balance on the
Company's line of credit was $13.2 million and $13.4 million for the three-month
periods ended March 31, 1999 and 1998, respectively. Interest expense on the
Convertible Subordinated Notes was comparable in the three months ended March 31
1999 to that in the comparable period of 1998.
PROVISION FOR CREDIT LOSSES. During the three months ended March 31, 1999, the
Company had charge-offs of $78 thousand, while recovering $177 thousand. Net
recoveries for the three months ended March 31, 1999 of $99 thousand resulted in
an increase to allowance for credit losses, bringing it to $2.9 million, or 8.9%
of total receivables (net of earned income), exclusive of life insurance
policies, outstanding as of March 31, 1999. None of the allowance at March 31,
1999 was allocated to non-performing accounts, which are carried at net
realizable value of $2.9 million. During the three months ended March 31, 1998,
the Company had charge-offs of $274 thousand while recovering $13 thousand,
resulting in net charge-offs of $261 thousand. The Company's provision for
credit losses of $547 thousand in the three months ended March 31, 1998 brought
the allowance for credit losses to $2.8 million, or 8.0% of receivables (net of
earned income).
15
<PAGE>
The following table provides a summary of activity in the Company's allowance
for losses for the three-month periods ending March 31, 1999 and 1998.
Three Months Ended
March 31,
1999 1998
----- ----
(In Thousands)
Allowance for Credit Losses
Balance Beginning of Period 2,800 7.8% 2,739 7.2%
Additions - 547 1.4
Write-Offs (78) (0.2) (274) (0.7)
Recoveries 177 0.5 13 0.0
--- --- -- ---
Balance - End of Period $ 2,899 8.2% $ 3,025 8.0%
======= ==== ======= ====
At March 31, 1999, the Company is maintaining a larger reserve for losses (in an
absolute amount and as a percentage of receivables net of life insurance polices
and unearned revenue) than at December 31, 1998. There has been a deterioration
in the collateral position of the Company's largest client, an asset-based
borrower, which has caused the amount of their advance as of March 31, 1999 to
be larger than the amount to which they were entitled based on their agreed
collateral formula. 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, such as the "overformula" advance cited
above. Based on this analysis, the Company believes the allowance for credit
losses is adequate in light of the risks inherent in the portfolio at March 31,
1999. The Company is carefully monitoring the overformula advance and working
with its client to correct it, but there can be no assurance that the
overformula situation, particularly as it is concentrated with a single large
client, could not have a material adverse effect on the Company.
[THIS SPACE INTENTIONALLY LEFT BLANK]
16
<PAGE>
RECEIVABLES
Receivables consist of the following:
March 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------
Invoices $11,829,274 $23,731,826
Less: Unearned discount (1,409,726) (3,299,175)
Less: Participations (759,425) (759,424)
Life Insurance policies 2,629,057 2,629,057
--------- ---------
Total Purchased receivables $12,289,180 $22,302,284
============= ===========
Advances receivable $23,746,383 $16,288,673
Less: Unearned discount (547,658) (636,216)
-------- --------
Total Advances receivable $23,198,725 $15,652,457
============= ===========
- -------------------------------------------------- ----------------------
Non-performing receivables included within the above totals were $2.9 million at
March 31,1999 and $3.8 million at December 31,1998.
From time to time, a single client or single industry may account for a
significant portion of the Company's receivables. As detailed in Note 4 to the
Financial Statements, three clients each accounted for more than 10% of total
earned discounts and interest for the three month periods ended March 31, 1999
and December 31, 1998. These three clients portion of total revenue declined
39.0% for the quarter ended March 31, 1999 as compared to the quarter ended
December 31, 1998. In addition, these three clients portion of total receivables
outstanding decreased 23.3% from December 31, 1998 to March 31, 1999. During
1998, the Company adopted a policy to generally restrict the size of any one new
client to a maximum of $3 million, and to take steps to reduce the size of the
two 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.
SUBSEQUENT EVENT
As detailed in note 4 to the consolidated financial statements for the period
ended March 31, 1999 as presented in form 10-QSB, the Company has entered into
an agreement to acquire a portfolio of asset based loans. The purchase, if
completed, would substantially increase the size of the Company's ABL portfolio.
The Company expects that an increase in personnel experienced in negotiating and
servicing ABL relationships will be required to administer the accounts.
Appropriate staff has been identified and arrangements have been made to open a
loan servicing office in Illinois. The receivables to be acquired consist of
borrowers that are primarily located in the Midwest. The Company expects that
the acquisition
17
<PAGE>
will improve the geographic dispersion of the ABL portfolio, most of which is
currently concentrated in four East Coast states and California, and that the
increase in the overall size of the receivable base will lessen the reliance on
a small number of clients for substantial portions of total interest and
discount revenue, as well as decreasing the risks of asset concentration.
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 3 to the unaudited financial
statements contained in this Form 10-QSB.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
As discussed in Note 2 to the unaudited financial statements, the Company was in
default of certain financial covenants related to interest coverage requirements
with respect to its line of credit. The Company has received waivers of such
defaults. There can be no assurance that such defaults will not re-occur in the
future or that any future defaults will also be waived.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's proxy statement on Schedule 14A dated April 15, 1999 is
incorporated by reference.
ITEM 6(a). - EXHIBITS
EXHIBIT 10. EMPLOYMENT CONTRACTS
Employment and Compensation Agreement with Charles G. Johnson dated as of
January 20, 1999.
EXHIBIT 27. FINANCIAL DATA SCHEDULE
ITEM 6(b). - REPORTS ON FORM 8-K
None.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
Date: May 17, 1999 /s/ Charles G. Johnson
---------------------------------
Charles G. Johnson
Chief Executive Officer
Date: May 17, 1999 /s/ C. Fred Jackson
---------------------------------
C. Fred Jackson
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1432751
<SECURITIES> 0
<RECEIVABLES> 35487905
<ALLOWANCES> 2898582
<INVENTORY> 0
<CURRENT-ASSETS> 38858555
<PP&E> 667743
<DEPRECIATION> 502386
<TOTAL-ASSETS> 39030392
<CURRENT-LIABILITIES> 16238595
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 17794794
<TOTAL-LIABILITY-AND-EQUITY> 39030392
<SALES> 0
<TOTAL-REVENUES> 1796045
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1015306
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 375574
<INCOME-PRETAX> 405165
<INCOME-TAX> 149911
<INCOME-CONTINUING> 255254
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 255254
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
EMPLOYMENT AND COMPENSATION AGREEMENT
This EMPLOYMENT AND COMPENSATION AGREEMENT ("Agreement") is made as of the 20th
day of January, 1999, by and between ALLSTATE FINANCIAL CORPORATION, a Virginia
corporation, having its principal place of business at 2700 South Quincy Street,
Suite 540, Arlington, Virginia 22206 (the "Company"), and Charles G. Johnson, an
individual having a residence at 11 Harleston Green, Hilton Head, SC 29928 (the
"Employee"). The Company and the Employee in consideration of the mutual
premises contained herein, mutually agree as follows:
1. Employment. The Company employs the Employee and the Employee agrees to serve
the Company as President and Chief Executive Officer of the Company. It is
intended that the Employee shall serve as a member of the board of directors of
the Company (the "Board"). The Employee shall devote the Employee's full
business time and best efforts to Company business. Employee shall perform such
other duties commensurate with the Employee's position as may be specified from
time to time by the Chairman of the Board or the Board.
2. Term. The initial term of this Agreement shall commence on the date set forth
above, and shall end at the close of business on December 31, 2001, (the
"Term"). Notwithstanding the foregoing, commencing on January 1, 2001, the Term
shall extend one day at the end of every day during its length, and the new
closing date of the term shall be that additional day, unless either party shall
notify the other of its intention to stop such extensions, in which case the
closing date of the Term shall be one year from the date of such notice.
3. Salary. During the Term, the Company shall pay to the Employee a base salary
at a rate of One Hundred Eighty Five Thousand dollars ($185,000) per annum,
which amount may be increased from time to time at the discretion of the Board.
4. Benefits and Other Compensation. The Company shall provide the Employee with
the following additional compensation during the Term:
(a) Subject to meeting eligibility provisions, any and all
existing and future general Employee benefit plans, including
without limitation, medical, health, life and disability
insurance, pension and profit sharing plans, now or hereafter
granted by the Company to the employees of the Company as a
group, or to the executive officers of the Company as a group,
shall be granted to the Employee. If a disability insurance
plan is not provided to all employees, the Company will
provide a reasonable substitute for Employee.
(b) An annual management incentive bonus to be paid to Employee at
the discretion of the Board of Directors of the Company in an
amount up to 100% of Employee's then current base annualized
salary, predicated on the achievement of the company's
business plan. Such bonus shall be paid in a combination of
Company stock and cash, with the cash portion to be at least
50% unless the Employee elects a lesser amount be paid in
cash. Bonus for any calendar year shall be deemed fully
accrued as of December 31 of the applicable year (or, if
later, the date of the Board determines the amount of such
bonus) and shall be paid no later than March 31 of the
following year.
(c) Receipt of an automobile allowance of $500 per month.
(d) Employee shall receive on the date of execution of
this Agreement, options (which shall be incentive stock
options within the meaning of Section 422 of the Internal
Revenue Code of 1966, as amended) under the Allstate
Financial Corporation Stock Option Plan (a copy of which has
been provided to Employee) (the "Plan") to purchase 30,000
shares at a price equal to $6.50 and 30,000 shares at a
price equal to the higher of (i) $4.00, or (ii) the average
trading price of such shares over the five (5) trading days
immediately preceding the date of issuance of such options
(according to the NASDAQ). All 60,000 share options shall be
exercisable upon issuance. Said options will expire on the
earlier of (i) seven years from the date of issuance or (ii)
in connection with any termination of Employee's employment,
the date provided under the terms and provisions of the Plan
or subparagraph 9(c) hereunder.
(e) Interim housing expense reimbursement prior to Employee's
permanent relocation to the Company's headquarters office
location. Such housing expenses shall be limited to $15,000.
(f) Reimbursement for the movement and short term storage (if
necessary) of household goods from Employee's residence to the
Company's headquarters location. Such moving expenses shall be
limited to $10,000.
(g) Housing and moving reimbursements provided for in
subparagraphs 4(e) and 4(f) shall be "gross-up" to provide tax
equalization of any taxable income interpreted by Federal,
State, or local taxing authorities as taxable income.
5. Reimbursement. Bona fide business expenses incurred by the Employee in
connection with the performance of the Employee's duties hereunder shall be
reimbursed by the Company. Such allowances shall, without limitation, include
expenses such as travel, meals, hotels, telephone, telegraph, postage and other
normal and customary business expenses.
6. Commercial Finance Association. During the Term of this Agreement, Company
shall continue to be a member in good standing of the Commercial Finance
Association ("CFA"), the trade association of secured lenders and factors, and
Employee shall serve as the Company's Director Representative to CFA. Employee's
involvement in CFA activities may include serving as an Officer, Director,
Committee Member, Committee Chairman, President and Chairman of CFA. During the
Term, while Employee holds national office as a member of the Management
Committee of CFA, Company shall support and encourage Employee to fulfill the
duties of such CFA offices by providing reimbursement to the Employee for bona
fide travel and entertainment expenses incurred in conjunction with CFA
activities up to $25,000 annually.
7. Vacation. During the term, Employee shall be entitled to four (4) weeks paid
vacation per year. The dates of any vacation periods shall be arranged in order
that such vacation days shall not materially hinder the normal functioning of
the Company's business activities.
8. Trade Secrets; Non-Competition:
(a) In the course of the Employee's employment, the
Employee will have access to confidential records, data,
pricing information, lists of clients and prospective
clients, lists of vendors, books and promotional literature,
leases and agreements, policies and similar material and
information of the Company or used in the course of its
business (hereinafter collectively referred to as
"Confidential Information"). All such Confidential
Information which the Employee shall use or come into
contact with shall remain the sole property of the Company.
The Employee will not, directly or indirectly, disclose or
use any such Confidential Information, except as required in
the course of such employment. The Employee shall not for a
period of one (1) year following the end of the Term,
disclose or use in any fashion any Confidential Information
of the Company or any of its subsidiaries or affiliates,
whether such Confidential Information is in the Employee's
memory or embodied in writing or other physical form,
provided, that the foregoing requirements shall not apply to
any information (i) that (prior to disclosure by the
Employee) has been disclosed by the Company or any third
party or (ii) that Employee discloses (A) to any branch,
agency or regulatory authority of any federal, state or
local government to comply with any statute, regulation,
rule, order or ordinance or (B) to any federal, state or
local court, tribunal or other adjudicatory body in
connection with any suit, claim or question arising before
such court, tribunal or other adjudicatory body or
otherwise.
In the event of a breach or a threatened breach by the
Employee of the provisions of this subparagraph (a), the
Company shall be entitled to an injunction restraining the
Employee from disclosing any of the aforementioned
Confidential Information. Nothing contained herein shall be
construed as prohibiting the Company from pursuing any other
remedies available to the Company for such breach or
threatened breach, including the recovery of damages from the
Employee. Subject to subparagraph (c) below, this provision
shall survive the termination of this Agreement.
<PAGE>
(b) The Employee further agrees that, during the Term
(or, if the Employee's employment is terminated prior to the
end of the Term (whether by the Company or the Employee),
during the period prior to such termination, and for a
period of one (1) year thereafter, the Employee will not,
except with the prior written consent of the Board of
Directors, (i) be employed as an employee, consultant,
officer or director, by any other commercial finance or
factoring company, (ii) solicit any business from or have
any business dealings with, either directly or indirectly or
through corporate or other entities or associates, any
client of the Company, or (iii) initiate any action, either
directly or indirectly or through corporate or other
entities or associates, that would reasonably be expected to
encourage or to induce any employee of the Company or of any
subsidiary or affiliate of the Company to leave the employ
of the Company or of any such subsidiary or affiliate. The
Employee specifically acknowledges the necessity for this
subparagraph (b), given the nature of the Company's
business. The Employee agrees that the Company shall be
entitled to injunctive relief in the event of a breach of
the provisions of this subparagraph (b), the legal remedies
being inadequate to fully protect the Company. Nothing
contained herein shall be construed as prohibiting the
Company from pursuing any other remedies available to the
Company for such breach, including the recovery of damages
from the Employee. Subject to subparagraph (c) below, this
provision shall survive the termination of this Agreement.
<PAGE>
(c) In the event of a Business Combination or Change of
Control (as defined below) involving the Company (whether or
not the Company's Board of Directors recommends such
Business Combination or Change of Control for approval by
the Company's shareholders), subparagraphs (a) and (b) of
this Paragraph 8 shall, at the time such Business
Combination or Change of Control is consummated, but only in
the event Employee's employment is terminated or the
employee's Salary, Benefits and Other Compensation and/or
duties and responsibilities are substantially reduced and/or
changed in connection therewith under the terms of
subparagraph 9(c) below, be null and void and of no further
force or effect. For purposes of this Agreement, "Business
Combination" shall mean (i) a merger, a consolidation or any
other business combination of the Company with any
non-affiliated party, (ii) the disposition of all or
substantially all of the securities, business or assets of
the Company or (iii) a joint venture, reorganization or
other transaction (or series of transactions) as a result of
which all or substantially all of the business or assets of
the Company are transferred, with or without a Change of
Control, or any other similar corporate combination or
transaction (or series of related transactions). For
purposes of this Agreement, a "Change of Control" shall mean
a transaction (or series of transactions) or other event (or
series of events) that results in the acquisition of a
Controlling Interest in the Company by a person or entity
(or group of persons and/or entities) that did not have a
Controlling Interest in AFC prior to such transaction (or
series of transactions) or event (or series of events). As
used in the preceding sentence, the term "Controlling
Interest" means possession, directly or indirectly, of power
to direct or cause the direction of management or policies
(whether through ownership of voting securities, by contract
or otherwise); provided that, in any event, any person or
entity (or group of persons and/or entities) which
beneficially acquires, directly or indirectly, 25% or more
(in number of votes) of the securities having ordinary
voting power for the election of directors of the Company
shall be conclusively presumed to have a Controlling
Interest in the Company. This provision shall be construed
so that if a Business Combination or Change of Control (as
defined herein) occurs on more than one occasion, the terms
and provisions of this Agreement shall apply to the most
recent Business Combination or Change of Control.
9. Payments Upon Termination. The Company shall pay to the Employee upon
termination of employment during the Term, as follows:
(a) If the Employee's employment is terminated by
death, the Company shall continue to pay and provide to the
estate of the Employee for a period equal to three months,
Employee's then applicable base salary pursuant to the
provisions of Paragraph 3 for such period, in semi-monthly
installments. In addition, the Company, as soon as
reasonably possible, but not past the end of the fiscal year
of the death of the Employee, shall also pay to the estate
of the Employee (on a pro rata basis up to the date of the
Employee's death) the Benefits and Other Compensation
otherwise due and unpaid to the Employee as of the date of,
or in connection with, the Employee's death, pursuant and
subject to the provisions of subparagraphs 4(a), 4(b) and
4(c) herein. In addition, the Board will consider in good
faith the payment of an incentive bonus for the calendar
year in which the termination occurs, taking into account
the portion of the year completed prior to such termination,
the Company's performance for the year, and the Employee's
contributions to that performance.
<PAGE>
(b) In the event the Employee's employment is
terminated because of permanent disability (as defined
below), then following such termination the Company shall
continue to pay and provide to the Employee for a period
equal to six months, the Employee's then applicable salary
for such period in semi-monthly installments, pursuant to
the provisions of Paragraph 3 herein, and the Benefits and
Other Compensation for such period as if the Employee were
still employed to be paid not later than the last day of
such period under subparagraphs 4(a), 4(b) and 4(c) herein.
In addition, the Board will consider in good faith the
payment of an incentive bonus for the calendar year in which
the termination occurs, taking into account the portion of
the year completed prior to such termination, the Company's
performance for the year, and the Employee's contributions
to that performance. As used herein, the Employee shall be
deemed to be permanently disabled in the event that the
Employee has not been able (due to mental or physical
illness or incapacity) to render services required by this
Agreement for a period of ninety (90) consecutive days. Any
salary payments to be made by the Company under the
provisions of this subparagraph (b) are to be offset by
payments, if any, made to the Employee under any disability
insurance plan maintained by the Company.
<PAGE>
(c) In the event the Employee's employment is terminated (i) by
the company other than for the Cause, or (ii) by the Employee
for Good Reason, as defined in Section 9(d) below, the
Employee shall receive:
(1) a lump sum payment, payable within thirty (30) days
following such termination without discount, equal to
the Employee's then current base salary otherwise
payable through the later of the end of the Term, or
one year;
(2) continuation of the benefits described in Paragraphs
4(a) and 4(c) above for a period of one year
following termination of employment (provided that if
the Company cannot continue the Employee's
participation under the terms of any applicable plan
it shall pay the employee an amount equal to the cost
the Company would have incurred in providing such
participation);
(3) any declared but unpaid bonus for any prior calendar year, and
(4) bonus, for the year in which such termination occurs,
in an amount no less than the bonus declared or paid,
as the case may be, for the prior year, pro-rated to
reflect the number of weeks in which the Employee was
employed in the calendar year of termination, such
bonus to be paid within thirty (30) days following
such termination.
(d) For this purpose Good Reason shall mean:
(i) any material breach of this Agreement by the Company
at any time, including (A) loss of the Employee's
position as President and Chief Executive Officer,
(B) failure to elect, or re-elect the Employee as a
member of the Board, (C) breach of the provisions of
Paragraph 6, or (D) attempted reduction in Employee's
Salary, Benefits and Other Compensation.
(ii) failure of the Company to obtain the agreement of any
successor to perform this agreement at least ten (10)
days prior to a Business Combination or Change in
Control in which the Company will not be the
surviving entity; or
(iii) following a Business Combination or Change in
control, assignment of duties inconsistent with
Employee's position or any reduction in Employee's
authority or direct support.
(e) Notwithstanding anything else contained in
subparagraph (c) above, no compensation shall be payable
under subparagraph (c) above if the Employee's employment
was or is terminated for Cause (as defined below). As used
herein, the term "Cause" shall mean (i) the Employee's
conviction of (or entry of a plea of nolo contendere with
respect to) a felony or other crime involving moral
turpitude or (ii) a willful, substantial and continual
failure by the Employee in breach of this Agreement to
perform the lawful duties, responsibilities or obligations
assigned to the Employee pursuant to the terms hereof and
the failure to cure such breach within fifteen (15) days
following written notice from the Company containing
specific findings by the Board of Directors of the Company
detailing such failures.
10. Validity. In the event that any provision or portion of this Agreement shall
be determined to be invalid or unenforceable for any reason, the remaining
provisions and portions of this Agreement shall be unaffected thereby and shall
remain in full force and effect to the fullest extent permitted by law.
11. Amendment and Waiver. This Agreement constitutes the entire agreement
between the parties as to employment by the Company of the Employee and may not
be changed orally but only by a written document signed by both parties. No
waiver by either party hereto at any time of any breach by the other party
hereto of any condition or provision of this Agreement to be performed by such
other party shall be deemed a waiver of any other breach by such party at that
time or any other time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not set forth expressly in this Agreement.
12. Arbitration. Any dispute whatsoever relating to the interpretation,
validity, or performance of this Agreement and any other dispute arising out of
this Agreement which cannot be resolved by the parties to such a dispute shall,
upon thirty (30) days written notice by either party, be settled upon
application of any such party by arbitration in Arlington County, Virginia, in
accordance with the rules then prevailing of the American Arbitration
Association, and judgment upon the award rendered by the arbitrators may be
entered in any court of competent jurisdiction. The cost of any arbitration
proceedings under this paragraph shall be shared equally by the parties to such
a dispute. Nothing contained in this paragraph shall limit the Company's rights
to obtain injunctive relief to enforce the provisions of paragraphs 8(a) and
8(b) above.
13. Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia (without regard to
conflicts of law principles).
14. Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns and shall become effective upon execution by the Company.
<PAGE>
15. Notice. All notices and other communications made pursuant to this Agreement
shall be made in writing and shall be deemed to have been given if delivered
personally or mailed, postage prepaid, to the applicable party hereto at the
applicable address first above written, or in either case, to such other address
as the Company or Employee shall have specified by written notice to the other
party.
16. Paragraph Headings. All paragraph headings are included herein for
convenience and are not intended to affect in any way the meaning or
interpretation of this Agreement.
17. Counterparts. This Agreement may be executed in one or more counterparts,
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
18. Prior Agreements Superseded. In the event that the Employee has heretofore
entered into an employment agreement with the Company, then this Agreement
hereby revokes, replaces and supersedes the prior employment agreement between
the Company and the Employee. IN WITNESS WHEREOF, the parties have executed this
agreement, the Company acting herein by its duly authorized officer, the day and
year first above written.
ALLSTATE FINANCIAL CORPORATION
By: /s/ David W. Campbell
---------------------
David W. Campbell, Chairman of the Board
/s/ Charles G. Johnson
----------------------
EMPLOYEE: Charles G. Johnson
