-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HKtHQ6FpQCVUsfOXpqXRrFFRxlbeY1VhABcYbOstp9DeY5E/72TKvrajZhboj0BY RHVV95k7dN70QuDrkcNxxA== 0000852220-96-000011.txt : 19980128 0000852220-96-000011.hdr.sgml : 19980128 ACCESSION NUMBER: 0000852220-96-000011 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 DATE AS OF CHANGE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLSTATE FINANCIAL CORP /VA/ CENTRAL INDEX KEY: 0000852220 STANDARD INDUSTRIAL CLASSIFICATION: 6153 IRS NUMBER: 541208450 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-17832 FILM NUMBER: 96543582 BUSINESS ADDRESS: STREET 1: 2700 S QUINCY ST STE 540 CITY: ARLINGTON STATE: VA ZIP: 22206 BUSINESS PHONE: 7039312274 MAIL ADDRESS: STREET 1: 2700 S QUINCY STREET STREET 2: STE 540 CITY: ARLINGTON STATE: VA ZIP: 22206 10KSB 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 Commission file number 0-17832 Allstate Financial Corporation (Exact name of registrant as specified in its charter) Virginia 54-1208450 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2700 S. Quincy Street, Arlington, VA 22206 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (703)931-2274 Securities registered pursuant to Section 12(b) of the Exchange Act: None Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock - No par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X ----- Revenues for year ended December 31, 1995, were $12,997,346. The aggregate market value of the common stock held by non affiliates as of March 20, 1996 was $12,336,280 computed by reference to the market price at which the stock was traded on March 20, 1996. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 2,316,853 (March 20, 1996) DOCUMENTS INCORPORATED BY REFERENCE. NONE. PART I Item 1. Business (a) Consolidation This Form 10-KSB filing includes Allstate Financial Corporation and its wholly owned subsidiaries. Other than Lifetime Options, Inc., a Viatical Settlement Company, none of the Company's subsidiaries is currently engaged in any business which could have a material effect on the Company's and its subsidiaries' consolidated operations or financial position. Accordingly, unless the context requires or otherwise permits, references in this Form 10- KSB to "Company" or "Allstate" shall be references only to Allstate Financial Corporation. (b) Nature of Business The Company is a specialized commercial finance company principally engaged in providing small- to medium-sized, high risk growth companies with capital through the discounted purchase of their accounts receivable. The Company also makes advances to its factoring clients collateralized by inventory, equipment, real estate and other assets (collectively, "Collateralized Advances"). On occasion, the Company will also provide other specialized financing structures which satisfy the unique requirements of the Company's clients. In addition, the Company provides financial assistance to clients in the form of guaranties, letters of credit, credit information, receivables monitoring, collection service and customer status information. The Company was incorporated on July 22, 1982 under the laws of the Commonwealth of Virginia. The Company typically enters into an accounts receivable factoring and security agreement with each client which: (i) typically obligates the client to sell the Company a minimum amount of receivables each month (or a minimum amount of receivables during the term of the agreement); (ii) usually has a term of not less than six months and, more typically, one year and (iii) is automatically renewable. When making a Collateralized Advance, the Company enters into such additional agreements with the client and, if appropriate, third parties, as the Company deems necessary or desirable, based on the type(s) of collateral securing the Collateralized Advance. The Company purchases accounts receivable from its clients at a discount from face value and usually requires the client's customer to make payment on the receivable directly to the Company. The Company almost always reserves the right to seek payment from the client in the event the client's customer fails to make the required payment. To secure all of a client's obligations to the Company, the Company also takes a lien on all accounts receivable of the client (to the extent not purchased by the Company) and, whenever available, blanket liens on all of the client's other assets (some or all of which liens may be subordinate to other liens). When making a Collateralized Advance, the Company almost always takes a first lien on the specific collateral securing the Collateralized Advance. The Company may on occasion make Collateralized Advances secured by a subordinate lien position, but only if management of the Company determines that the equity available to the Company in a subordinate position is adequate to secure the Collateralized Advance. The Company almost always requires personal guaranties (either unlimited or limited to the validity and collectibility of purchased accounts receivable) from each client's principals. Although the Company obtains as much collateral as possible and usually retains full recourse rights against its clients, clients (and account debtors) may fail and there can be no assurance that the collateral obtained and the recourse rights retained (together with personal guaranties) will be sufficient to protect the Company against loss. In addition to providing clients with additional working capital, the Company believes its services enable its clients to realize improved terms on, and broader access to, the purchase of goods and services. The Company also believes its services benefit its clients by reducing certain of their accounts receivable, credit, collection and bookkeeping responsibilities. In most cases, the client's own procedures for evaluating and monitoring its customers and receivables are less effective than those offered by the Company. The Company believes that it can generally achieve shorter average collection times than clients themselves would achieve and that the Company's contacts with a client's customers can identify problems the client would not have discovered and addressed until a later time. Through its services, the Company can help clients to be more responsive to their customers and to manage their businesses more efficiently. In addition, clients can devote less manpower and resources to monitoring and collecting the accounts receivables purchased by the Company, thus allowing them to redirect their efforts toward the management, growth and profitability of their businesses. Through the services it provides, the Company seeks to help its clients achieve profitable growth, and ultimately to qualify for funding at a cost lower than that provided by the Company. Although clients frequently "graduate" to lower cost sources of funding, the Company believes that its role in facilitating this transition is one of the most significant benefits it can provide. Lifetime Options, Inc., a Viatical Settlement Company ----------------------------------------------------- In 1991 the Company formed Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options") as a wholly owned subsidiary to provide financial assistance to individuals facing life-threatening illnesses, by the discounted purchase of their life insurance policies. The amount of the discount is determined by Lifetime Options based on the size of the policy being purchased, the maximum life expectancy of the insured individual as determined by at least one independent medical specialist, the anticipated premiums payable with respect to the policy and Lifetime Options' expected financing costs associated with purchasing and carrying the policy. In general, the purchase price for a policy is between 55% and 85% of the amount of the benefits payable under the policy. Because most of the life insurance policies purchased by Lifetime Options are underwritten by highly rated insurance companies (and, in many cases, backed by state guaranty funds), Lifetime Options does not believe that credit risk is material to its business. Before Lifetime Options purchases a life insurance policy, the insured's medical records are reviewed by an independent physician who provides Lifetime Options with an opinion of the insured's life expectancy. Historically, Lifetime Options typically required up to three independent reviews but, based on its experience, the management of Lifetime Options no longer believes multiple medical reviews are necessary. To date, the physician engaged by Lifetime Options has provided life expectancies which, on average, fairly approximate actual lifespans. However, there can be no assurance that the physician engaged by Lifetime Options will in the future be able to perform as he has in the past. If the physician engaged by Lifetime Options were to systematically underestimate life expectancies or if life extending treatments (or a cure) were found for AIDS (almost all of the life insurance policies purchased by Lifetime Options to date have been purchased from individuals with AIDS), there would be a material adverse effect on the earnings of Lifetime Options. Lifetime Options relies on its independent physician to assist in monitoring important medical advances (and potential medical advances). Selected Financial Data ----------------------- The following table sets forth selected financial data for the Company and its subsidiaries as of, and for each of the last five years ended:
December 31, -------------------------------------------------------------- 1995 1994 1993 1992 1991 ------- ------ ------ ------ ------ (In Thousands, Except Per Share Data) Total Income $12,997 $12,030 $10,850 $11,538 $11,435 Net Income 481 148 457 3,393 2,465 Net Income per Share .16 .05 .15 1.22 1.18 Finance Receivables, net 32,671 27,503 24,674 29,971 22,349 Total Assets 44,881 41,851 36,583 39,559 26,917 Shareholders' Equity 25,730 28,121 27,974 27,343 12,326
(c) The Company's Clients The Company's clients are small- to medium-sized, high risk growth companies with annual revenues typically between $600,000 and $50,000,000. The Company's clients do not typically qualify for traditional bank or asset-based financing because they are either too new, too small, undercapitalized (over- leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank or traditional asset-based lender. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. The following table indicates the composition of the Company's Gross Finance Receivables (as defined below under "(d) The Company's Services") by type of client business as of December 31, 1995 and 1994.
1995 1994 --------------------------- ----------------------------- Gross Finance Gross Finance Business of Client Receivables Percent Receivables Percent - - - ------------------ ------------- ------- -------------- ------- (In thousands) (In thousands) Computer components and software $11,049 28.4% $11,552 34.6% Manufacturing 8,381 21.5 4,092 12.3 Publishing, direct mail and advertising 4,652 11.9 4,013 12.0 Importing and distributing 3,923 10.0 24 0.1 Food and drug store industry 3,900 10.0 1,912 5.7 Insurance claims 2,786 7.1 2,136 6.4 Trucking and air freight 1,277 3.3 22 0.1 Construction and construction supply 1,057 2.7 2,107 6.3 Distribution 724 1.9 - - Graphic art 556 1.4 1,091 3.3 Engineer and health temps 347 0.9 235 0.7 Airlines 251 0.6 - - Other 105 0.3 987 3.0 Automotive maintenance - - 990 3.0 Propane gas & gas distribution - - 2,684 8.1 Surgical protection products - - 1,478 4.4 ------- ----- ------- ----- Total $39,008 100.0% $33,323 100.0% ======= ===== ======= =====
The table above reflects the composition of the Company's Gross Finance Receivables by client industry at the dates indicated. Because the Company's major clients tend to change significantly over time (as more fully described below), this table is not likely to reflect the composition of the Company's Gross Finance Receivables by client industry at other future points in time. From time to time, a single client or single industry may account for a significant portion of the Company's Gross Finance Receivables. As of December 31, 1995 two clients (MGV International, Inc. and The Monroe Cable Co., Inc. ("Monroe")) each accounted for more than 10% of the Company's Gross Finance Receivables. Computer components and software accounted for 28.4% of Gross Finance Receivables at December 31, 1995 and 34.6% of Gross Finance Receivables at December 31, 1994. Two companies (Monroe and Boyd Acquisition Co., Inc., together with its affiliate, Stateline Snacks Corp.) each accounted for more than 10% of the Company's total income in 1995. As of December 31, 1994, a former client, Fulton Computer Products & Programming, Ltd. ("Fulton"), accounted for more than 10% of the Company's Gross Finance Receivables and computer components and software accounted for 34.6% of Gross Finance Receivables. Fulton also accounted for more than 10% of the Company's total income in 1994. Although the Company carefully monitors client and industry concentration, there can be no assurance that the risks associated with client or industry concentration could not have a material adverse effect on the Company. Historically, the Company has not expected to maintain a funding relationship with a client for more than two years; the Company expected that its client would ultimately qualify for more competitively priced bank or asset-based financing within that time period. Therefore, the Company's major clients have tended to change significantly over time. Today, however, because the Company is, where necessary and appropriate, offering lower rates than it has historically and making Collateralized Advances, it is possible that the duration of the Company's funding relationships with its clients may be extended. Although the Company has historically been successful in replacing major clients, the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. (d) The Company's Services The Company offers an interrelated package of financial services that meets a variety of the funding and business needs of its clients. Gross Finance Receivables ------------------------- The Company's principal funding activities consist of purchasing accounts receivable ("Factored Accounts Receivable") and the making of Collateralized Advances and Overadvances Secured by General Liens (as defined below). "Gross Finance Receivables" consist of Factored Accounts Receivable, Collateralized Advances, Overadvances Secured by General Liens and Non-Earning Receivables. See (g) Asset Quality. Factored Accounts Receivable ---------------------------- The Company's primary funding activity is the discounted purchase of a client's accounts receivable, typically at an initial advance to the client equal to 70% to 90% of the face amount of the accounts receivable purchased. The remaining 10% to 30% of the face amount of the accounts receivable purchased is initially allocated to: (i) earned but unpaid discount (recorded as income simultaneous with the purchase of the account receivable); (ii) unearned discount (recorded as income at periodic intervals after the purchase of the account receivable depending on the timing of payment) and (iii) credit balances of factoring clients. The credit balance with respect to a particular account receivable is generally remitted to the client when the Company collects the account receivable in full, but the remaining unearned discount is typically not remitted to the client until the Company has received full payment of all accounts receivable purchased on a specific schedule of accounts receivable. As such, the remaining unearned discount is available to offset any uncollected payments due on other accounts receivables purchased from the client and to offset uncollected payments due on other types of Gross Finance Receivables or any other amounts due from the client. The Company's range of earned discounts on Factored Accounts Receivable purchased is from 1.3% to 12.0%. The discount rate is based on a pre- determined sliding scale which increases over time until a Factored Account Receivable is paid by the client's customer or repurchased by the client. The discount rate established for the purchase of accounts receivable from a given client depends on various considerations, such as the length of time the accounts receivable are expected to be outstanding, the monthly volume of accounts receivable generated by the client, the Company's anticipated administrative costs and the perceived level of risk. The ratio of discounts earned to Gross Finance Receivables acquired (including Gross Finance Receivables repurchased by the Company) was approximately 5.8% for 1995. Discounts earned include all earnings with respect to Gross Finance Receivables. See (g) Asset Quality. The accounts receivable factoring and security agreement between the Company and its client typically obligates the client to sell a prearranged monthly (or annual) volume of accounts receivable to the Company usually for a period of not less than six months (and typically one year). The volume of accounts receivable that the client agrees to sell is based on the client's historical volume of accounts receivable generated and the client's growth projections. Clients are usually charged a supplemental discount for failure to satisfy the volume requirement. The client may, at any time upon payment of a supplemental discount, terminate its obligation to sell additional accounts receivable to the Company. Unless the Company is notified otherwise, the client's obligation to sell the agreed upon volume of accounts receivable automatically renews at the end of each term. For certain clients, a more flexible program is available which does not require a minimum monthly sale of accounts receivable. Collateralized Advances ----------------------- In addition to the purchase of accounts receivable, the Company makes Collateralized Advances. The Company has elected to more aggressively pursue the making of Collateralized Advances as it perceives the need by its targeted customers for such advances and such funding is not available from many of the Company's competitors. Prior to making any such advance, the Company, the client and, where appropriate, third parties, enter into such additional agreements, and the Company makes such additional public filings (if any), as the Company deems necessary or desirable based on the type(s) of collateral securing the Collateralized Advance. Furthermore, the Company conducts such additional due diligence as is appropriate with respect to the client and the type of collateral against which an advance is to be made. Advances against: (i) equipment are typically limited to no more than 60% of forced liquidation value; (ii) inventory are typically limited to no more than 50% of forced liquidation value and (iii) real estate are typically limited to 60% of current market value, less in all cases, the amount of prior encumbrances, if any. Collateral values are determined by independent appraisers and are reviewed periodically to determine whether loan-to-value ratios have been maintained. When making Collateralized Advances against inventory and certain types of equipment, the Company frequently engages a third party, at the client's expense, to assist in monitoring the collateral. Collateralized Advances entail different, and possibly greater, risks to the Company than the factoring of accounts receivable. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses. Overadvances Secured by General Liens ------------------------------------- The Company may advance funds to selected clients in excess of the amounts which would be available in accordance with the advance formulae set forth in the agreements between the Company and its client. Such advances are usually secured by equity (i.e., credit balances due the client and unearned discounts) in the client's existing portfolio of Factored Accounts Receivable, equity in other of the client's assets, other forms of collateral, including property pledged by the client's principal(s) or accounts receivable generated through the use of the proceeds of such secured advances (such advances, collectively, "Overadvances Secured by General Liens"). Earned discounts on Overadvances Secured by General Liens are usually greater than on other types of advances and are usually required to be paid in cash no less frequently than monthly in arrears. The principal amount thereof is typically required to be repaid in full (either in installments or in a single, lump sum payment) in as little as one week or as long as six months in accordance with a written agreement between the Company and its client. Amounts outstanding for various categories of finance receivables at the end of the last five years are set forth in the table below.
December 31, --------------------------------------------------------------- 1995 1994 1993 1992 1991 ------- ------ ------ ------ ------ (In thousands) Factored Accounts Receivable $25,170 $22,242 $22,275 $29,135 $20,189 Collateralized Advances 10,842 7,215 2,495 958 1,247 Overadvances Secured by General Liens 1,407 279 1,340 3,524 2,649 Non-Earning Receivables 1,589 3,587 3,411 2,142 2,134 ------- ------- ------- ------- ------- Gross Finance Receivables 39,008 33,323 29,521 35,759 26,219 Less: Unearned Discount (3,986) (3,309) (2,727) (4,566) (3,020) Less: Allowance for Credit Losses (2,351) (2,511) (2,120) (1,223) (784) ------- ------- ------- ------- ------- Finance Receivables, Net $32,671 $27,503 $24,674 $29,970 $22,415 ======= ======= ======= ======= =======
As reflected in the table, Gross Finance Receivables include Non-Earning Receivables. Non-Earning Receivables are classified as such when the Company stops accruing earned discounts on Gross Finance Receivables (other than Non- Earning Receivables). Under certain circumstances, the Company may classify as "Other Receivables" (as defined below under "(g) Asset Quality") Gross Finance Receivables on which the Company has stopped accruing earned discounts. Non-Earning Receivables may be reclassified as "Other Assets" (as defined below under "(g) Asset Quality") on the Company's balance sheet if the Company repossesses the collateral securing such receivables. At the time of any such repossession, the assets repossessed are recorded at estimated fair value at the date of repossession less estimated selling costs. See (g) Asset Quality. Credit Services --------------- For a fee, the Company may use its credit standing to assist a client by obtaining a letter of credit from a bank or issuing its own letter of guaranty. These forms of credit enhancement are typically used by clients to acquire finished goods to fill pre-existing orders. The Company generally provides these services when the client: (i) has a buyer for its products; (ii) has taken the required steps to sell the resulting account receivable to the Company on agreed upon terms; and (iii) has provided additional collateral to the Company to the extent the Company deems necessary. In the typical credit enhancement transaction, the Company maintains control over the goods from the time they are shipped until the time they are delivered to the ultimate purchaser. The Company may also issue guaranties to a bank to enable a client to obtain a line of credit. In these cases, the Company obtains collateral described below under "(h) Credit Loss Policy and Experience". The fees charged by the Company for issuing a letter of guaranty to a bank are based on: (i) the type and amount underlying collateral serving the guaranty; (ii) the amount of the letter of guaranty; and (iii) the length of time that the instrument is expected to be outstanding. The table below sets forth the Company's outstanding commitments under guaranties and letters of credit as of the end of each of the last five years.
December 31, ------------------------------------------- 1995 1994 1993 1992 1991 ---- ---- ------ ----- ------ (In thousands) Commitments under guaranties and letters of credit $727 $347 $1,794 $940 $1,498
Client/Customer Information Services ------------------------------------ In addition to its funding activities, the Company: (i) advises its clients as to potential problems with customers; (ii) provides its clients with a monthly portfolio analysis which includes an aging of all open accounts receivable, by customer; and (iii) supplies its clients with information as to the creditworthiness of customers. Although the Company's agreements with its clients do not require the Company to furnish these services, the information provided can make it easier for a client to develop an accurate picture of its own financial position. In addition, this information assists the Company in its accounts receivable monitoring activities. (e) Monitoring and Oversight Before a client relationship is established, the Company obtains information about the prospective client and its principals, including an on- site review of records pertaining to the client's operations and its available collateral. Similar on-site reviews are conducted during the year, either by Company personnel or by independent certified public accountants or other professionals retained by the Company. In addition, the Company arranges for initial and periodic reviews of public records in order to monitor the filing of any subsequent liens which could impair the value of collateral in which the Company has an ownership or security interest. The Company employs a legal staff, including three full-time attorneys who prepare the documentation establishing the Company's rights with respect to a new client and its assets, review the terms of the relationships between a client and its customers and perform (or oversee) such other due diligence as is appropriate for the specific transaction. Four of the Company's employees are certified public accountants, who are responsible for the Company's monitoring and oversight procedures. Prior to purchasing accounts receivable with an aggregate face amount of $10,000 or more owed by any one account debtor, the Company: (i) evaluates that account debtor's creditworthiness, which evaluation is updated periodically and (ii) establishes a limit on the amount of accounts receivable owed by that particular account debtor and Company will purchase from all clients. The Company also selectively verifies directly with account debtors the validity and primary terms of accounts receivable to be purchased. After purchasing accounts receivable, the Company carefully monitors whether they are paid according to terms. If payment is due, follow-up contact is made with the account debtor. During this follow-up contact, the Company seeks to determine the cause of the payment delay in order to take appropriate action at an early stage. The status of overdue accounts receivable and other relevant information is reported to each client monthly, or sooner, if appropriate. See (h) Credit Loss Policy and Experience. Before making a Collateralized Advance, the Company conducts (or engages third parties to conduct) such additional due diligence as is appropriate with respect to the client and the type of collateral against which an advance is to be made. (f) Management Information Systems The Company has developed data processing capabilities tailored to the requirements of the Company's accounting, receivables collection, monitoring and oversight functions. The system permits the Company to generate payment histories and analyses with respect to clients' customers, to accumulate accounting information and other data useful for credit analysis, to produce information used in marketing, and to respond to account and management inquiries. The Company's software was written specifically for the Company and the Company believes it to be proprietary. Although the Company believes that its computer hardware and software are adequate for its current level of business, a completely new system with greater capacity and more varied applications is in the final stages of development. The new computer system was originally scheduled for completion in late 1994. The complexity and scope of the new computer system led to delays in the completion and implementation of the new system. Management currently estimates that the new computer system should be fully operational by the summer of 1996. (g) Asset Quality Factored Accounts Receivable Portfolio -------------------------------------- The quality of Factored Accounts Receivable is the Company's primary security against credit losses from its accounts receivable purchasing activities. The Company generally does not purchase accounts receivable that have aged significantly, except when the Company first establishes a funding relationship with a client. Even in those circumstances, the Company will not purchase an account receivable that is more than 90 days old unless special circumstances lead the Company to believe that the receivable will be paid within a reasonable time, generally not more than 60 days. As of December 31, 1995, the Company's Gross Finance Receivables included $25,169,997 of Factored Accounts Receivable on which approximately 2,500 entities were obligated. There is considerable variation from period to period in the composition of account debtors and the amount of their respective obligations to the Company. The table below provides information about the principal account debtors obligated on Factored Accounts Receivable (in excess of 2% of gross Factored Accounts Receivable) as of December 31, 1995 and 1994.
Percent of Gross Factored Accounts Clients' Customers Receivable - - - ------------------ ----------------- 1995 1994 ---- ---- Federal Government (8 agencies in 1995 and 9 in 1994) 7.0% 1.3% KAO Information Systems 6.9 - Office Depot 6.4 - Comp USA 5.0 - Professional Housewares Dist. 4.3 - Government Technology Service 3.3 - Bristol-Myers Squib 2.2 - Jordan, McGrath, Case and Taylor 2.2 - United Nations - 9.4 New York City Department of Housing and Preservation Development - 5.2 Pemex Gas y Petroquimico - 4.9 Computer Services Corp. - 4.2 AMRE, Inc. - 2.4
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. This payment may be made directly by the client from the proceeds of accounts receivables not sold by the client or from the proceeds of accounts receivables purchased from the client, but not yet paid to the client, or from other sources such as credit balances or unearned discounts due the client. If follow up calls to account debtors lead the Company to believe that a Factored Account Receivable will be paid within a reasonable period of time, the Company may "repurchase" the receivable. In that event, the earned discount owed on the original purchase of the account receivable is collected from the client at the time of the repurchase and earned discounts thereafter accrue as if the account receivable were a newly Factored Account Receivable. From time to time, a single account debtor or several account debtors may be obligated on a significant portion of the Company's Gross Factored Accounts Receivable. As of December 31, 1995, no single account debtor accounted for more than 10% of the Company's gross Factored Accounts Receivables. Although the Company carefully monitors account debtor concentration and regularly evaluates the creditworthiness of account debtors, there can be no assurance that account debtor concentration could not have a material adverse effect on the Company. Collateralized Advances' Portfolio ---------------------------------- As of December 31, 1995, the Company's Gross Finance Receivables included $10,842,047 of Collateralized Advances. Prior to making such an advance, the Company conducts additional due diligence appropriate to the type of collateral against which such advances are to be made. In addition, the Company carefully monitors loan-to-value ratios and may engage third parties to assist in monitoring such collateral. Collateralized Advances secured by fixed assets (e.g., equipment or real estate) are required to be repaid based typically on a 36 month amortization schedule (although the amortization schedule in certain circumstances may be significantly longer) with a final balloon payment due not more than one year after the making of the Collateralized Advance. If at the time the balloon payment is due the Company's funding relationship with the client is extended, the Company will usually continue the amortization repayment with a new balloon payment due not more than one year after the renegotiated contract date. Collateralized Advances secured by current assets (e.g. inventory) are subject to a daily or weekly borrowing base formula and come due in a single, lump sum payment not more than one year after the making of the initial such Collateralized Advance. If at the time such payment is due the Company's funding relationship with the client is extended, the Company will typically extend the maturity of the lump sum payment. See (d) The Company's Services - Collateralized Advances and Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses. Overadvances Secured by General Liens ------------------------------------- As of December 31, 1995, the Company's Gross Finance Receivables included $1,407,233 of Overadvances Secured by General Liens. See (d) The Company's Services (above) - Overadvances Secured by General Liens. Non-Earning Receivables ----------------------- As of December 31, 1995, the Company's Gross Finance Receivables included $1,588,545 of Non-Earning Receivables. See (h) Credit Loss Policy and Experience (below). Other Receivables ----------------- As of December 31, 1995, included on the Company's balance sheet were $2,756,342 of "Other Receivables". Other Receivables consist primarily of amounts receivable by the Company where the source of payment is expected to be from legal proceedings or other collection efforts instituted against a client's customer, guarantors and/or other third parties. Other Receivables typically arise from the reclassification of Gross Finance Receivables. At the time of reclassification, Other Receivables are stated at a value estimated by management based on management's assessment of the likelihood of payment or success on the merits, the ability of the third party(ies) to pay and other discretionary factors. Write-downs, if any, at the time of reclassification are charged against the allowance for credit losses. The costs of collecting Other Receivables are generally charged to operations during the period in which they are incurred. Management's estimates of the value of Other Receivables are typically reviewed quarterly and as adjustments become necessary, the effects of the change in estimates are reported in operations in the period in which the adjustment is determined to be necessary. Other Receivables are subject to legal and other collection processes and contingencies over which the Company does not have exclusive control. Accordingly, the amounts which the Company ultimately receives in payment of Other Receivables could differ significantly from management's estimates. See (h) Credit Loss Policy and Experience below and Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses. Other Assets ------------ From time to time, the Company acquires assets in settlement of Finance and Other Receivables. The assets so acquired are included in "Other Assets" on the Company's balance sheet. As of December 31, 1995, Other Assets of $2,049,323 were reflected on the Company's balance sheet. Other Assets, including assets acquired in settlement of Finance and Other Receivables consist of:
December 31, ---------------------------- 1995 1994 ---------- ---------- Assets acquired in settlement of finance and other receivables: Inventory held for sale $ 20,000 $ 102,508 Commercial property held for sale 862,750 697,500 Residential property held for sale 910,000 1,287,400 ---------- ---------- 1,792,750 2,087,408 Miscellaneous 256,573 359,675 ---------- ---------- $2,049,323 $2,447,083 ========== ==========
Assets acquired in settlement of Finance and Other Receivables are either under option contracts, listed with brokers or being auctioned. During 1995, the Company wrote down inventory held for sale by $80,000 and commercial property held for sale was written down by $487,400. One commercial property and one residential property valued at $147,750 and $110,000, respectively, were added to Other Assets in 1995. Included in Commercial property held for sale and Residential property held for sale are collateralized properties for which the Company does not hold title, valued at $147,750 and $910,000 in 1995 and valued at $0 and $1,287,400 in 1994, respectively. The Company holds security liens against these assets in which the client or other obligor has no equity in the collateral at its current estimated fair value. Proceeds for repayment are expected to come only from the sale of the collateral, and either the client or other obligor has abandoned control of the asset or it is doubtful the client or other obligor will rebuild equity in the collateral or repay the receivable by other means in the foreseeable future. The amounts the Company may ultimately recover from assets acquired in settlement of Finance and Other Receivables could differ materially from the amounts used in arriving at the net carrying value of the assets because of future market factors beyond the Company's control, adversarial actions taken by the client or other owner of the property foreclosed or changes in the Company's strategy for recovering its investment. See (h) Credit Loss Policy and Experience below and Management's discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses. (h) Credit Loss Policy and Experience The Company regularly reviews its Gross Finance Receivables portfolio and other extensions of credit to determine the adequacy of its allowance for credit losses. At the time an account receivable is purchased, a due date is set by management based on the receivable's anticipated payment date. This anticipated payment date is used to identify past due Factored Accounts Receivable. The Company carefully monitors collections and takes follow-up action if payment is past due. Within ninety days after the Company purchases an account receivable which remains unpaid (or sooner if the Company deems necessary), the Company may initiate additional actions which may involve obtaining payment from the account debtor, requiring the client to repay the initial advance and the amount of the earned but unpaid discount, obtaining substitute accounts receivable from the client or charging the credit balance due the client. In appropriate circumstances, the Company may also take action against personal guarantors and other liens and collateral. Gross Finance Receivables which have been identified as past due may continue to accrue earnings if, in the opinion of management, collection of the earnings from the account debtor, the client, guarantors or other collateral, if any, is likely. The accrual of earned discounts is discontinued when, in the opinion of management, the collection of additional earnings from the account debtor, the client, guarantors or other collateral is unlikely. The accrual of earnings was suspended on $1.6 million and $3.6 million of Gross Finance Receivables at December 31, 1995 and 1994, respectively. If the Company concludes that it is unlikely to recover from any of the foregoing sources the amount of its initial advance and the earned but unpaid discount, the Company promptly increases the allowance for credit losses or reduces the carrying value of the receivable to its estimated fair value and makes a charge to its allowance for credit losses, in an amount equal to the difference between the Company's investment in the receivable and its estimated fair value. In the case of Other Receivables and Other Assets, the accrual of earnings is usually suspended or discontinued for financial statement purposes at the time the Other Receivable arises or the Other Asset is acquired. As adjustments to management's estimates of the value of Other Receivables and Other Assets become necessary, the effects of the adjustments are either charged against valuation reserves or reported in operations in the period in which the adjustment is determined to be necessary. See (g) Asset Quality - Other Receivables and Other Assets. At December 31, 1995 and 1994, the accrual of earnings was suspended on $2.7 million and $3.4 million of Other Receivables, respectfully, and $1.8 million and $2.1 million of Other Assets, respectfully. Credit loss experience, the adequacy of underlying collateral, changes in the character and size of the receivables portfolio and management's judgment are factors used determining the provision for credit losses and in assessing the overall adequacy of the allowance. The level of related credit balances of factoring clients and the impact of economic conditions on the creditworthiness of the Company's clients and account debtors are also given consideration in determining the adequacy of the allowance. Ultimate losses may vary from current estimates and the amount of the allowance and provision for credit losses, may be either greater or less than actual future charge- offs. There can be no assurance that future charge-offs will not require an increase in the provision for credit losses which would have an adverse effect on earnings in future periods. To mitigate the risk of credit loss, the Company, among other things: (i) thoroughly evaluates the collateral to be made available by each client; (ii) usually collects its Factored Accounts Receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) takes, whenever available, blanket liens on all of its clients' other assets and, when making Collateralized Advances, it employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) almost always requires personal guaranties (either unlimited guaranties or guarantees limited to the validity and collectability of Factored Accounts Receivable) from its clients' principals; and (vi) actively monitors its portfolio of Factored Accounts Receivable, including the creditworthiness of account debtors and periodically evaluates the value of the collateral securing Collateralized Advances. To further mitigate possible credit losses, when the Company purchases accounts receivable from a given client, the Company initially pays the client an amount which is less than what is ultimately expected to be paid if such accounts receivable are paid in full by the account debtors. The amount paid to the client is net of the maximum discount which the Company may earn (depending on the timing of the collection of the receivables) as well as an additional amount which the Company uses to establish a holdback reserve (recorded on the financial statements as credit balances of factoring clients). If for any reason an account receivable is not paid in full, the shortfall is charged against the holdback reserve. While the holdback reserve with respect to a particular account receivable is generally remitted to the client when the Company collects the receivable in full, the remaining unearned discount is usually not remitted to the client until the Company has received full payment on all accounts receivable purchased on a specific schedule (a group of accounts receivable purchased from a client at a particular time). As such, the remaining unearned discount is available to offset any uncollected payments due on other accounts receivable purchased from the client and to offset uncollected payments due on other types of Gross Finance Receivables or any other amounts due from the client. Notwithstanding the foregoing, clients (and account debtors) may fail and the collateral available to the Company (together with personal guaranties) may prove insufficient to protect the Company against loss. See Legal Proceedings and Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses. The following table provides a summary of the Company's Gross Finance Receivables, Other Receivables and Other Assets and information regarding the allowance for credit losses for the periods indicated.
As of December 31, --------------------------------------------------------------------------- 1995 1994 1993 1992 1991 ------ ------- ------- ------- ------- (Dollars in thousands) Gross Finance Receivables, Other Receivables and Other Assets Data: - - - ------------------------------------ Gross Finance Receivables $39,008 $33,323 $29,250 $35,760 $26,219 Non-Earning Receivables (also included in Gross Finance Receivables) 1,589 3,608 3,411 2,142 2,134 Other Receivables 2,756 3,389 2,344 1,397 973 Other Assets 1,793 2,112 3,200 2,017 1,083 (excluding miscellaneous) Allowance for credit losses: - - - -------------------- Balance, January 1 $2,511 $ 2,120 $ 1,223 $ 784 $ 445 Provision for credit losses 4,982 5,359 4,858 1,361 1,885 Receivables charged off (5,194) (5,016) (4,144) (941) (1,559) Recoveries 52 48 183 19 13 ------ ------- -------- ------- ------ Balance, December 31 $2,351 $ 2,511 $ 2,120 $ 1,223 $ 784 ====== ======= ======== ======= ====== Allowance for Credit Losses as a percent of: - - - --------------------------- Gross Finance Receivables 6.03% 7.54% 7.25% 3.42% 2.99% Non-Earning Receivables 148.00% 69.60% 62.15% 57.10% 36.74% Non-Earning Receivables, Other Receivables and Other Assets 38.30% 27.00% 23.67% 22.01% 18.71% As a percent of the sum of Gross Finance Receivables, Other Receivables and Other Assets: - - - ------------------------------- Non-Earning Receivables 3.65% 9.29% 9.80% 5.47% 7.55% Other Receivables 6.33% 8.73% 6.74% 3.57% 3.44% Other Assets 4.11% 5.44% 9.20% 5.15% 3.83%
See Management's Discussion and Analysis of Financial Condition and Results of Operations - Provision for Credit Losses. (i) Marketing New clients are generated principally from a nation-wide referral network of business brokers, banks, accountants, investment bankers, turnaround managers, lawyers and independent brokers as well as from previous and existing clients. Brokers are paid commissions calculated on the gross earnings collected by the Company on each funded referral. Commissions and referral fees totaled $263,100 and $155,280 in 1995 and 1994, respectively. The increase in brokers fees in 1995 reflects the fact that a larger portion of the Company's business in 1995 was generated by outside referral sources as compared to 1994. The Company employs seven full-time marketing professionals to maintain and expand its referral network. In addition, from time to time, the Company advertises in national and local newspapers and trade journals to increase name recognition. The Company also increases name recognition through direct mailings to existing and potential referral sources. In January 1996, a wholly-owned subsidiary of the Company opened a sales and marketing office in Los Angeles, California. The Company anticipates that the California office will, by the second half of 1996, generate increased business for the Company from the West Coast. (j) Competition Competition from banks, traditional asset-based lenders and small independent finance companies accelerated in 1995. The Company anticipates that competition will remain intense through all of 1996 and may continue to exert downward pressure on pricing, especially in the Company's core factoring business. In order to remain competitive, the Company is, where necessary and appropriate, offering lower rates than it has historically. The Company has also responded to increased competition (and the resulting downward pressure on pricing in the Company's core factoring business) by putting increased emphasis on funding relationships which include (in addition to the factoring of accounts receivable) the making of Collateralized Advances. See (b) Nature of Business; (g) Asset Quality and Management's Discussion and Analysis of Financial Condition and Results of Operations - Total Income. The Company intends to pursue this strategy. In addition, the Company believes that its ability to respond quickly and to provide specialized, flexible and comprehensive financial arrangements to its clients enables it to compete effectively. Although the Company has historically been successful in replacing major clients, competition resulting in the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. (k) Expansion Strategy The Company's strategy for 1996 is to further penetrate its target market by: (i) developing additional, active referral sources while continuing to cultivate existing sources; (ii) identifying and marketing to new niche markets that are currently under-serviced by competitors where the Company can obtain higher yields on new business; (iii) expanding its marketing efforts by establishing a direct presence in certain geographic areas of the country which are under-serviced by either competitors or the Company; and (iv) developing new products and programs to meet the changing needs of its targeted market. The Company also intends to attempt to retain existing clients as long as possible by offering new products and providing the best service possible at competitive prices. (l) Employees The Company currently has 46 full-time employees, of whom 28 are employed in providing accounts receivable and credit services (including 3 certified public accountants), 7 are employed in marketing, 4 are in executive positions (including one CPA and one attorney), 4 are in legal (including 2 attorneys) and 3 are in general office capacities. The Company believes that a substantial increase in the volume of its business would require only a relatively modest increase in personnel. None of the Company's employees are unionized and management considers its relations with employees to be excellent. (m) Termination of Sale Process The Company had engaged Oppenheimer & Co., Inc. in the first quarter of 1995 to assist the Company in reviewing strategic alternatives to maximize shareholder value, including the possible sale of the Company. During the sale process, the Company received tentative offers which included deferred, and in some cases contingent, consideration which, if realized, could have resulted in a modest premium over the Company's then current market value. In July 1995, the Company's Board of Directors terminated the sale process because the Board determined that the actual consideration likely to be received by the Company's shareholders was less than the Company's true value and therefore not in the best interests of the Company's shareholders. (n) Issuance of Convertible Subordinated Notes On September 11, 1995, the Company issued an aggregate of $2,838,000 in principal amount of Convertible Subordinated Notes due September 30, 2000 (the "Notes") to Scoggin Capital Management, L.P. and Selig Partners, LP (collectively, the "Scoggin Stockholders"), in exchange for 447,200 shares of common stock of the Company owned by them. The Scoggin Stockholders: (i) have agreed not to convert their Notes into common stock prior to March 1, 1997; (ii) are entitled to certain demand and piggy-back registration rights; and (iii) are entitled to nominate up to two members of the Company's Board of Directors (depending on their level of ownership of Company securities). In addition, on November 28, 1995, the Company commenced an exchange offer pursuant to which the Company offered to issue to shareholders generally up to an aggregate of $2,162,000 in additional Notes in exchange for shares of the Company's common stock. The offer expired by its terms on January 12, 1996 and the Company issued approximately $2,160,000 in aggregate principal amount of Notes in exchange for 338,275 shares of common stock tendered for exchange. For a description of certain terms of the Notes, See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. Item 2. Properties The Company's offices occupy approximately 8,000 square feet of space in an office building in Arlington, Virginia. The Company's lease on this property expires in December 2001. The Company believes that its present office facilities are adequate but may need to be expanded in the near term to accommodate the Company's continued growth. The Company has a right of first refusal to acquire an additional, contiguous 1,500 square feet at its present site when that space becomes available. Item 3. Legal Proceedings The Company is a defendant in White, Trustee v. Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the Western District of Pennsylvania. The Company provided receivables financing and advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991, the Lyon's trustee brought an action against the Company claiming, inter alia, fraudulent transfer and breach of contract. A summary judgment was granted in favor of the Company which reduced the fraudulent transfer claim by $1.6 million. As a consequence, the remaining fraudulent transfer claim was approximately $1,000,000. The trustee has not actively pursued the breach of contract claim. In late 1994, the Company reached a settlement agreement with the Lyons trustee, subject to approval by the bankruptcy court, which would have released the Company from all claims upon the payment of $300,000. In connection with the settlement, the Company paid and added $300,000 to the provision for credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin-Williams Company, objected to the proposed settlement amount and, in March 1995, the objection was sustained by the bankruptcy court. The Company has appealed the order sustaining the objection. The appeal is currently pending. Management does not believe the Company has a material exposure in excess of the previously agreed upon and paid settlement amount. In connection with the same transaction, the Company was also named in January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin-Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. The complaint seeks relief against the Company based upon a claim of "misrepresentation" without a specific identification of the alleged misrepresentation made by the Company. Management does not believe the litigation will have a material effect on the financial position or results of operations of the Company because, in management's opinion, the claims are without merit. The Company has filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery has been granted and the motion to dismiss is currently pending. A hearing date on the motion to dismiss has not yet been set. The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee v. Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court in the District of Massachusetts. The Company factored the accounts receivable of Clearpoint Research Corporation ("CRC") from late 1992 through early 1993. In July 1993 CRC filed a petition in bankruptcy, after the Company had collected all amounts owed to it. The bankruptcy trustee has sued the Company seeking recovery of alleged preferential transfers made during the course of the factoring relationship. The bankruptcy trustee alleges that the Company did not properly perfect its security interest in the accounts receivable. No specific damage amount is specified in the complaint but it is assumed the bankruptcy trustee is seeking recovery of the full amount of accounts receivables collected (approximately $4 million). The Company has filed an answer to the complaint denying the substantive allegations asserted by the bankruptcy trustee. The Company has also filed a motion to remove the action to federal district court. The motion is currently pending. The Company believes it has a number of strong defenses to the complaint and intends to vigorously defend all claims. The litigation is in a preliminary stage and the probability of an unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. As previously disclosed in the Company's Form 10-QSB for the quarter ended March 31, 1995, the Company has reached a settlement with the Trustee in the bankruptcy of Premium Sales Corporation, a former client of one of the Company's wholly-owned subsidiaries. The settlement required the Company and one of its wholly-owned subsidiaries to waive claims totalling approximately $1.5 million and to make a cash payment of $1.4 million. On July 21, 1995, the Company placed the full cash settlement amount in escrow in accordance with the terms of the settlement. The settlement is intended to be a full release of any and all claims between the Company (and its subsidiaries) and the Trustee including, without limitation, any alleged preference liability of the Company and its subsidiaries. The settlement was approved by the bankruptcy court in January 1996. The settlement will become fully effective and the settlement monies will be disbursed at the time a plan of distribution in the Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The impact of this settlement has been reflected in the Company's financial statements. Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these proceedings will have a material adverse effect on the Company. From time to time, the Company is required to initiate litigation to collect amounts owed by former clients, guarantors or obligors. In connection with such litigation, the Company periodically encounters counterclaims by defendant(s) for material amounts. Such counterclaims are typically without any factual basis and, management believes, are usually asserted for defensive purposes by the litigant. Item 4. Submission of Matters To A Vote Of Security Holders (a) The Company's annual meeting of shareholders was held on November 1, 1995. (b) The shareholders voted as follows:
Number of Number of Number Votes for of Votes of Votes Election Withheld Abstained -------- -------- --------- Eugene Haskin 2,550,407 74,050 -0- David Campbell 2,622,907 1,550 -0- Craig Fishman 2,550,407 74,050 -0- Alan Freeman 2,550,407 74,050 -0- William Savage 2,622,907 1,550 -0- James Spector 2,550,407 74,050 -0- Lawrence Winkler 2,550,407 74,050 -0-
Part II Item 5. Market For The Registrant's Common Stock, Related Stockholder Matters The Company's common stock is traded on the NASDAQ National Market System (Symbol ASFN). The following table sets forth the range of representative high and low bids for the Company's common stock in the over the counter market for the period indicated, as furnished by the National Association of Securities Dealers, Inc. These bids represent prices among dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions.
Common Stock Bid Prices Fiscal year ended December 31, ---------------------------------------------------------------- 1995 1994 1993 ---------------- -------------- ---------------- High Low High Low High Low ------ ------ ----- ------- ------ ------ First Quarter 7 3/16 5 9/16 7 1/8 5 3/8 19 1/4 10 1/4 Second Quarter 8 6 1/4 6 5/8 4 5/8 13 1/2 10 3/8 Third Quarter 7 1/2 5 1/2 6 5/8 5 11/16 13 3/4 4 7/8 Fourth Quarter 6 5 6/16 6 7/8 6 7 1/2 5 5/8
On March 19, 1996 there were approximately 54 stockholders of record based on information provided by the Company's transfer agent. The number of stockholders of record does not reflect the actual number of individual or institutional stockholders of the Company because certain stock is held in the name of nominees. Based on the best information made available to the Company by the transfer agent, there are approximately 849 holders of the Company's common stock. The Company currently intends to retain earnings for future capital requirements and growth. The Company has not paid a dividend and does not anticipate paying cash dividends to holders of its common stock for the foreseeable future. In January 1996 the Company consummated and exchange offer to holders of its common stock. See Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. Item 6. Management's Discussion And Analysis of Financial Condition and Results of Operations General The Company's principal business is the discounted purchase of accounts receivable, usually on a full recourse, full notification basis. In addition, the Company also makes Collateralized Advances. The Company has elected to more aggressively pursue the making of Collateralized Advances as it perceives the need by its targeted customers for such advances and such funding is not available from many of the Company's competitors. On occasion, the Company will also provide other specialized financing structures which satisfy the unique requirements of the Company's clients. The Company also provides its clients with letters of guaranty, arranges for the issuance of letters of credit for its clients and provides other related financial services. The Company's clients are small- to medium-sized businesses with annual revenues typically ranging between $600,000 and $50,000,000. The Company's clients do not typically qualify for traditional bank or asset-based financing because they are either too new, too small, undercapitalized (or over- leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank or traditional, asset-based lender. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. The Company addresses these risks in various ways, including: (i) the Company thoroughly evaluates the collateral to be made available by each client; (ii) the Company collects its Factored Accounts Receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) the Company purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) the Company takes, whenever available, blanket liens on all of its clients' other assets and, when making Collateralized Advances, the Company employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) the Company almost always requires personal guaranties (either unlimited guaranties or validity guaranties limited to the validity and collectability of Factored Accounts Receivable) from its clients' principals; (vi) the Company actively monitors its portfolio of Factored Accounts Receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral securing Collateralized Advances and (vii) the Company maintains loss reserves which management believes are adequate and appropriate for its business. Notwithstanding the foregoing, clients (and account debtors) may fail and the collateral available to the Company (together with personal guaranties) may prove insufficient to protect the Company against loss. Continuing competition within the marketplace from banks, asset-based lenders and newly created financing companies have encroached upon the Company's potential client base and have negatively affected earned discounts on Factored Accounts Receivable. Additionally, the Company has attracted larger clients which often increases the amount of time needed to negotiate and fund new business. Also, Collateralized Advances require more in-depth and diverse due diligence which can further delay the funding of new business. Nonetheless, the Company believes that its ability to respond quickly and to provide specialized, flexible and comprehensive financing structures to its clients enables it to compete effectively. In order to remain competitive, the Company is, where necessary and appropriate, offering lower rates than it has historically. Although the Company's total income increased by 8.0% in 1995 over 1994, the Company believes that increased competition will continue for the foreseeable future and will continue to exert downward pressure on pricing, especially in the Company's core factoring business. To counter the downward pressure on pricing, the Company intends to continue to diversify its sources of income, primarily by continuing to place emphasis on funding relationships which include (in addition to the factoring of accounts receivable) the making of Collateralized Advances. Historically, the Company has not expected to maintain a funding relationship with a client for more than two years; the Company expected that its clients would ultimately qualify for more competitively priced bank or asset-based financing within that time period. Therefore, the Company's major clients have tended to change significantly over time. Today, however, because the Company is, where necessary and appropriate, offering lower rates and making Collateralized Advances, it is possible that the duration of the Company's funding relationships with its clients may be extended. Even if the Company succeeds in extending the duration of its funding relationship with its clients, there will not be a corresponding increase in non-current assets on the Company's balance sheet. This is because it is anticipated that the Company's funding relationships with its clients will continue to renew no less frequently than once a year. Although the Company has historically been successful in replacing major clients, the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. Lifetime Options, a wholly-owned subsidiary of the Company, provides financial assistance to individuals facing life-threatening illness by purchasing their life insurance policies at a discount from face value. The amount of the discount is determined by Lifetime Options based on the size of the policy being purchased, the maximum life expectancy of the insured, the amount of the anticipated premiums payable with respect to the policy being purchased and the anticipated financing cost associated with purchasing and carrying the policy. In general, the purchase price for a policy is between 55% and 85% of the benefits payable under the policy. Because most of the life insurance policies purchased by Lifetime Options are underwritten by highly rated insurance companies (and, in many cases, backed by state guaranty funds), the management of Lifetime Options believes that credit risk is not material to its business. Before purchasing each policy, Lifetime Options has each insured's medical records reviewed by at least one independent physician who provides Lifetime Options with an opinion of the insured's life expectancy. Historically, Lifetime Options typically required up to three independent reviews but, based on its experience, the management of Lifetime Options no longer believes multiple medical reviews are necessary. To date, the physicians engaged by Lifetime Options have provided life expectancies which, on average, fairly approximate actual lifespans. However, there is no assurance that the physician engaged by Lifetime Options will in the future be able to perform as he has in the past. If the physician(s) engaged by Lifetime Options were to systematically underestimate life expectancies or if life extending treatments (or a cure) were found for AIDS (almost all of the life insurance policies purchased by Lifetime Options to date have been purchased from individuals with AIDS), there would be a material adverse effect on the earnings of Lifetime Options. Lifetime Options relies on its independent physician to assist in monitoring important medical advances (and potential medical advances). Other than Lifetime Options, none of the Company's subsidiaries is currently engaged in business which could have a material effect on the Company. Results of Operations The following tables sets forth certain items of income and expense for the periods indicated and indicates parenthetically the percentage relationship of each item to total income.
Consolidated Quarterly Summary of Operations --------------------------------------------------------- 1995 --------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ---------- ---------- ---------- Income: Earned Discount $3,055,687 $2,578,345 $2,420,653 $2,877,646 Fees and Other Income 408,619 600,245 649,726 406,425 ---------- ---------- ---------- ---------- Total Income 3,464,306 3,178,590 3,070,379 3,284,071 ---------- ---------- ---------- ---------- Expenses: Compensation and Fringe Benefits 852,787 785,161 753,069 807,480 General and Administration 776,522 642,766 730,759 608,238 Interest Expense 353,885 205,307 166,020 258,506 Provision for Credit Losses 2,211,046 859,000 610,500 1,301,100 Commissions 63,455 64,928 72,846 61,871 ---------- ---------- ---------- ---------- Total Expenses 4,257,695 2,557,162 2,333,194 3,037,195 ---------- ---------- ---------- ---------- Income/(Loss) Before Income Taxes (793,389) 621,428 737,185 246,876 Income Taxes/(Benefit) ( 260,200) 228,700 271,500 91,000 ---------- ---------- ---------- ---------- Net Income/(Loss) $ (533,189) $ 392,728 $ 465,685 $ 155,876 ========== ========== ========== ========== Net Income / (Loss) Per Share $ (.20) $ .13 $ .15 $ .05 ========== ========== ========== ========== Weighted Average Number of Shares 2,655,128 3,009,971 3,102,328 3,102,328 ========== ========== ========== ==========
Consolidated Quarterly Summary of Operations ------------------------------------------------------ 1994 ------------------------------------------------------ Fourth Third Second First Quarter Quarter Quarter Quarter ------------ ---------- ---------- ---------- Income: Earned Discount $ 3,284,431 $2,412,890 $2,278,236 $1,972,121 Fees and Other Income 659,442 689,119 409,675 324,084 ------------ ---------- ---------- ---------- Total Income 3,943,873 3,102,009 2,687,911 2,296,205 ------------ ---------- ---------- ---------- Expenses: Compensation and Fringe Benefits 849,368 754,546 713,986 678,129 General and Administration 1,053,496 552,813 586,381 481,269 Interest Expense 206,364 239,175 91,360 73,632 Provision for Credit Losses 3,873,518 613,515 508,771 363,355 Commissions 75,051 31,403 23,585 25,241 ------------ ---------- ---------- ---------- Total Expenses 6,057,797 2,191,452 1,924,083 1,621,626 ------------ ---------- ---------- ---------- Income/(Loss) Before Income Taxes (2,113,924) 910,557 763,828 674,579 Income Taxes/(Benefit) (777,900) 335,400 280,000 250,000 ----------- ---------- ---------- ---------- Net Income/(Loss) $(1,336,024) $ 575,157 $ 483,828 $ 424,579 =========== ========== ========== ========== Net Income / (Loss) Per Share $ (.44) $ .19 $ .16 $ .14 =========== ========== ========== ========== Weighted Average Number of Shares 3,102,328 3,102,328 3,102,328 3,102,328 =========== ========== ========== ==========
For the Years Ended December 31, ------------------------------------------------------------------------------- 1995 1994 1993 -------------------- -------------------- --------------------- INCOME PERCENT INCOME PERCENT INCOME PERCENT ----------- ------- ----------- ------- ---------- ------- INCOME: Earned Discounts $10,932,331 84.1% $ 9,947,678 2.7% $ 9,423,845 86.9% Fees and Other Income 2,065,015 15.9 2,082,320 17.3 1,426,586 13.1 ----------- ----- ----------- ----- ----------- ----- TOTAL INCOME 12,997,346 100.0 12,029,998 100.0 10,850,431 100.0 ----------- ----- ----------- ----- ----------- ----- EXPENSES: Compensation and Fringe Benefits 3,198,497 24.6 2,996,029 25.0 2,950,471 27.2 General and Administrative Expenses 2,758,285 21.2 2,673,959 22.2 1,961,941 18.1 Interest Expense 983,718 7.6 610,531 5.1 243,251 2.2 Provision of Credit Losses 4,981,646 38.4 5,359,159 44.5 4,858,235 44.8 Commissions 263,100 2.0 155,280 1.3 113,814 1.0 ----------- ----- ----------- ----- ----------- ----- TOTAL EXPENSES 12,185,246 93.8 11,794,958 98.1 10,127,712 93.3 ----------- ----- ----------- ----- ----------- ----- INCOME BEFORE TAXES 812,100 6.2 235,040 1.9 722,719 6.7 INCOME TAXES 331,000 2.5 87,500 .7 266,000 2.5 ----------- ----- ----------- ----- ----------- ----- NET INCOME $ 481,100 3.7% $ 147,540 1.2% $ 456,719 4.2% =========== ===== =========== ===== =========== ===== NET INCOME PER SHARE $ 0.16 $ 0.05 $ 0.15 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES 2,966,330 3,102,328 3,116,460 =========== =========== ===========
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994 Total Income. Total income consists of (i) earned discounts and (ii) fees and other income. "Earned discounts" consist primarily of income from the purchase of accounts receivable and life insurance policies and income from Collateralized Advances. "Fees and other income" consist primarily of closing or application fees, commitment or facility fees, other related financing fees and supplemental discounts paid by clients who do not sell the minimum volume of accounts receivable required by their contracts with the Company (including as a result of "graduating" to a lower cost source of funding). The following table breaks down total income by type of transaction for the periods indicated and the percentage relationship of each type of transaction to total income.
For the Year Ended December 31, -------------------------------------------------------- 1995 1994 ------------------------ ----------------------- Earned % of Total Earned % of Total Income Income Income Income ------------ ---------- ----------- ---------- Discount on Factored Accounts Receivable $ 6,155,374 47.4% $ 7,572,913 63.0% Earnings on Collateralized Advances 2,930,731 22.5 1,195,772 9.9 Earnings on Purchased Life Insurance Policies 947,731 7.3 605,111 5.0 Other Earnings 898,495 6.9 573,882 4.8 ----------- ----- ----------- ----- Total 10,932,331 84.1 9,947,678 82.7 Fees and Other Income 2,065,015 15.9 2,082,320 17.3 ----------- ----- ----------- ----- Total Income $12,997,346 100.0% $12,029,998 100.0% =========== ===== =========== =====
Total income rose 8.0% in 1995 over 1994, from $12.0 million to $13.0 million. Earned discounts from Factored Accounts Receivable decreased 18.7% in 1995 as compared to 1994, from $7.6 million to $6.2 million. Earned discounts from Factored Accounts Receivable in 1995 as a percentage of total Factored Accounts Receivable purchased in 1995 were 4.25%. The comparable percentage in 1994 was 4.61%, a decrease of 7.8% from 1994 to 1995. This reduction reflects the downward pressure on pricing from competition in the Company's core factoring business. In 1995 and 1994, earned discounts from Factored Accounts Receivable comprised 47.4% and 63.0%, respectively, of total income. These percentages reflect lower average earned discounts from the Company's core factoring business due to competition and management's decision to pursue and increase the making of Collateralized Advances, in addition to the Company's core factoring business. Earned discounts from Collateralized Advances increased 145.1% in 1995 over 1994, from $1.2 million to $2.9 million. In 1995 and 1994, earned discounts from Collateralized Advances comprised 22.5% and 9.9%, respectively, of total income. These changes again reflect management's decision to pursue the making of Collateralized Advances, in addition to the Company's core factoring business. Collateralized Advances currently bear interest at a rate, on average, of approximately 2% per month calculated generally on the highest outstanding amount of the Collateralized Advance during the month. Earned discounts from Collateralized Advances are required to be paid in cash monthly in arrears. See Provisions for Credit Losses below. Fees and other income were relatively unchanged in 1995 as compared to 1994. In both years fees and other income were approximately $2.1 million. Increases in 1995 in closing fees and supplemental discounts were offset by reductions in related financing fees and the absence of a one-time finders fee of $50 thousand earned in 1994. As of December 31, 1995 and 1994, Factored Accounts Receivable included on the Company's balance sheet were $25.2 million (64.5%) and $22.2 million (66.7%), respectively, of Gross Finance Receivables. As of December 31, 1995 and 1994, Collateralized Advances included on the Company's balance sheet were $10.8 million (27.8%) and $7.2 million (21.7%), respectively, of Gross Finance Receivables. The relative increase from the end of 1994 to the end of 1995 in the percentage of Gross Finance Receivables comprised of Collateralized Advances reflects management's decision to emphasize the making of Collateralized Advances, in addition to the Company's core factoring business. Compensation and Fringe Benefits. Compensation and fringe benefits were $3.2 million (24.6% of total income) and $3.0 million (25.0% of total income) in 1995 and 1994, respectively. The absolute dollar increase is chiefly the result of increases in sales personnel and compensation. Executive compensation in 1995 was $1.0 million (7.9% of total income) versus $1.0 million (8.5% of total income) in 1994. General and Administrative Expense. In 1995 general and administrative expense was $2.8 million (21.2% of total income) as compared to $2.7 million (22.2% of total income) in 1994. The increase for 1995 was primarily attributable to a rise in professional fees, licenses and taxes and duplicating expense. In 1995 professional fees rose to $1.1 million (8.3% of total income) as compared to $805 thousand (6.7% of total income) for 1994. Professional fees have increased, in part, due to on-going litigation and, in part, to the final resolution of legal proceedings instituted in prior years. Also contributing to the increase in general and administrative expense were license and tax expenditures incurred in connection with maintaining certain assets acquired in settlement of Finance and Other Receivables. Other charges increasing general and administrative expense were telephone and travel and entertainment (primarily associated with new business development) which were offset, in part, by decreases in loan amortization, office supplies and credit and filing costs. Interest Expense. Interest expense was $984 thousand (7.6% of total income) versus $611 thousand (5.1% of total income) in 1995 and 1994, respectively. The rise in interest expense is attributable in part to (i) an increase in the average daily balance outstanding on the Company's revolving lines of credit, (ii) the rise in the base or prime rate of interest from 1994 to 1995 and (iii) interest expense related to the Company's Convertible, Subordinated Notes issued in September 1995. The average daily outstanding balance on the Company's revolving lines of credit was $8.5 million and $6.5 million for 1995 and 1994, respectively and the average interest rate paid on the Company's revolving lines of credit rose (as a result of increases in the base or prime rate) to 9.7% during 1995 as compared to 8.3% during 1994. Interest expense related to the Company's Convertible Subordinated Notes was $87 thousand in 1995. Provision for Credit Losses. Credit loss experience, the adequacy of underlying collateral, changes in the character and size of the Company's receivables portfolio and management's judgement are factors used in determining the provision for credit losses and the adequacy of the allowance for credit losses. Other factors given consideration in determining the adequacy of the allowance are the level of related credit balances of factoring clients and the current and anticipated impact of economic conditions on the creditworthiness of the Company's clients and account debtors. To mitigate the risk of credit loss, the Company, among other things: (i) thoroughly evaluates the collateral to be made available by each client; (ii) usually collects its Factored Accounts Receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) takes, whenever available, blanket liens on all of its clients' other assets and, when making Collateralized Advances, it employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) almost always requires personal guaranties (either unlimited guaranties or guaranties limited to the validity and collectability of Factored Accounts Receivable) from its clients' principals, and (vi) actively monitors its portfolio of Factored Accounts Receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral securing Collateralized Advances. The provision for credit losses decreased slightly in 1995 from $5.4 million (44.5% of total income) in 1994 to $5.0 million (38.4% of total income) in 1995. The Company's provision for credit losses in 1995 and 1994, included approximately $1.4 million and $1.5 million, respectively, attributable to the bankruptcy of Premium Sales Corporation, a former client of a wholly-owned subsidiary of the Company. Early in the second quarter of 1995 the Company reached a settlement with the trustee in the bankruptcy case. The settlement required the Company and its wholly-owned subsidiary to waive claims totalling approximately $1.5 million and to make a cash payment of $1.4 million. The cash payment was made on July 21, 1995. The settlement is intended to be a full release of any and all claims between the Company (and its subsidiaries) and the Trustee including, without limitation, any alleged preference liability for the Company and its subsidiaries. The settlement was approved by the U.S. Bankruptcy Court in January 1996 and will become fully effective at the time a plan of distribution in the Premium Sales Corporation bankruptcy is approved by the U.S. Bankruptcy Court. As of December 31, 1995 and 1994 the allowance for credit losses was 6.0% ($2.4 million) and 7.5% ($2.5 million) of Gross Finance Receivables, respectively. At December 31, 1995 the accrual of earnings was suspended on $1.6 million of Gross Finance Receivables as compared to $3.6 million of Gross Finance Receivables at December 31, 1994. Other Receivables and Other Assets typically do not accrue earnings for financial statement purposes. As of December 31, 1995 and 1994, the allowance for credit losses as a percentage of the sum of non-earning receivables, Other Receivables and Other Assets was 38% and 27.6%, respectively. Although the Company maintains an allowance for credit losses in an amount deemed by management to be adequate to cover potential losses, no assurance can be given that the allowance will in fact be adequate or that an inadequacy, if any, in the allowance could not have a material adverse effect on the Company's earnings in future periods. Furthermore, although management believes that its periodic estimates of the value of Other Receivables and Other Assets are appropriate, no assurance can be given that the amounts which the Company ultimately collects with respect to Other Receivables and Other Assets will not differ significantly from management's estimates or that those differences, if any, could not have a material adverse effect on the Company's earnings in future periods. See (g) Asset Quality and (h) Credit Loss Policy and Experience. Management recognizes that Collateralized Advances entail different, and possibly greater, risks to the Company than the factoring of accounts receivable. Risks associated with the making of Collateralized Advances (but not the factoring of accounts receivable) include, among others (i) certain types of collateral securing Collateralized Advances may diminish in value (possibly precipitously) over time (sometimes short periods of time), (ii) repossessing, safeguarding and liquidating collateral securing Collateralized Advances may require the Company to incur significant fees and expenses some or all of which may not be recoverable, (iii) clients may dispose of (or conceal) the collateral securing Collateralized Advances and (iv) clients or natural disasters may destroy the collateral securing Collateralized Advances. The Company attempts to manage these risks, respectively, by (i) engaging independent appraisers to review periodically the value of collateral securing Collateralized Advances at intervals established by management based on the characteristics of the underlying collateral, (ii) employing conservative loan-to-value ratios which management believes should generally enable the Company to recover from liquidation proceeds most of the fees and expenses incurred in connection with repossessing, safeguarding and liquidating collateral, (iii) using its internal field examiners to inspect collateral periodically and, when appropriate, engaging independent collateral monitoring firms to implement appropriate collateral control systems including bonding certain of the client's employees and (iv) requiring clients to maintain appropriate amounts and types of insurance issued by insurers acceptable to the Company naming the Company as the party to whom loss is paid. Although management believes that the Company has (or third parties acting on behalf of the Company have) the requisite skill to evaluate, monitor and manage the risks associated with the making of Collateralized Advances, there can be no assurance that the Company will in fact be successful in doing so. Commissions. Commission expense was $263 thousand (2.0% of total income) in 1995 as compared to $155 thousand (1.3% of total income) in 1994. The increase was the result of a larger portion of Gross Finance Receivables acquired in 1995 being generated by commissioned brokers and other professionals to whom the Company paid referral fees. Liquidity and Capital Resources. The Company's principal funding sources are the collection of purchased receivables, retained cash flow and external borrowings. As of December 31, 1995, the Company had approximately $12.7 million available under a $25 million secured revolving line of credit. The credit facility contains a $5.0 million sub-facility for the issuance of letters of credit and, until December 31, 1995, contained a $5.0 million sub-facility the proceeds of which were used to make advances to clients secured by machinery and equipment. The balance outstanding under the equipment sub-facility is currently being repaid by the Company, in accordance with the terms of the revolving line of credit, in equal monthly installments based on a 36 month amortization schedule with a balloon payment due May 13, 1997. The Company is having discussions with its lenders with respect to a new equipment sub- facility. Borrowings under the credit facility bear interest at the bank's base rate plus .75%. The current maturity date of this credit facility is May 13, 1997. The Company is subject to covenants which are typical in revolving credit facilities of this type. As of December 31, 1995, Lifetime Options had approximately $760 thousand available under a $2.0 million line of credit and an additional $1.5 million available under a $4.0 million availability from the Company. Lifetime Options' revolving line of credit: (i) is payable on demand and, if no demand is made, on December 31, 1996; (ii) bears interest at the prime rate of interest plus 1% and (iii) is collateralized by specific purchased life insurance contracts. As of December 31, 1995, the Company had outstanding an aggregate of approximately $2,838,000 in principal amount of Notes issued to Scoggin Stockholders on September 11, 1995, in exchange for 447,200 shares of common stock of the Company then owned by them. The Scoggin Stockholders (i) have agreed not to convert their Notes into common stock prior to March 1, 1997, (ii) are entitled to certain demand and piggy-back registration rights; and (iii) are entitled to nominate up to two members of the Company's Board of Directors (depending on their level of ownership of Company securities). In addition, on November 28, 1995, the Company commenced an exchange offer pursuant to which the Company offered to issue to shareholders generally up to an aggregate of $2,162,000 in additional Notes in exchange for the Company's common stock. The offer expired by its terms on January 12, 1996 and the Company issued approximately $2,160,000 in aggregate principal amount of Notes in exchange for 338,275 shares of common stock tendered for exchange. The Notes (i) mature on September 30, 2000; (ii) bear interest at the initial rate of 10% per annum which rate may fluctuate in accordance with the prime rate, but may not fall below 8% nor rise above 10% per annum; (iii) are convertible into common stock of the Company at the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as defined) of the Company and (v) were issued pursuant to an indenture which contains certain covenants which are less restrictive than those contained in the Company's secured revolving credit facility. Upon the occurrence of certain change of control events, holders of the Notes have the right to have their Notes redeemed at par. At December 31, 1995, the Company had working capital of $26.0 million and a ratio of current assets to current liabilities of 2.60 to 1 as compared to December 31, 1994 working capital of $25.3 million and a ratio of current assets to current liabilities of 2.85 to 1. As of December 31, 1995, the Company had conditional commitments of $59.2 million to purchase accounts receivable and make Collateralized Advances, subject to the Company's underwriting criteria. Since many of those commitments may expire without being drawn upon, the figure $59.2 million does not necessarily represent future cash requirements. A $5.0 million equipment sub-facility contained in the Company's $25.0 million secured revolving line of credit expired in accordance with its terms on December 31, 1995. The Company is having discussions with its lenders with respect to a new equipment sub-facility. Assuming the Company's lenders provide a new $5.0 equipment sub-facility, the Company believes that internally generated funds and borrowings under its current or a replacement credit facility will be sufficient to finance the Company's future funding requirements for the near term. If, however, the Company's lenders do not provide a new equipment sub-facility, or if they do, but an unexpectedly high portion of the Company's potential new business includes Collateralized Advances (especially Collateralized Advances secured by assets other than equipment), internally generated funds and borrowings under the Company's existing credit facility may not be sufficient to fund such new business. Under such circumstances the Company would attempt to negotiate the borrowing base in its existing credit facility to allow the Company to borrow greater amounts from its primary lender(s) and thereby support the growth in Collateralized Advances. If those negotiations were unsuccessful, there is no assurance that the Company could attract sufficient capital to enable the Company to pursue its strategy of making additional Collateralized Advances. Impact of Inflation Management believes that inflation has not had a material effect on the Company's income, expenses or liquidity during the past three years. Changes in interest rate levels do not generally affect the income earned by the Company in the form of discounts. Rising interest rates would, however, increase the Company's cost of borrowed money based on its current borrowing arrangements which are prime or base rate adjusted credit facilities. Year Ended December 31, 1994 Compared to Year Ended December 31, 1993 Total Income. The Company's total income, which consists of earned discounts and fees and other income, rose 10.9% in 1994 over 1993, from $10.9 million to $12.0 million. This increase was attributable to the growth in purchases of accounts receivables, the growth in advances secured by inventory, equipment and real estate and the growth in the purchase of life insurance contracts by Lifetime Options, as well as the growth in related financial services of the Company. Gross Finance Receivables purchased increased 4.9% to $188.9 million in 1994 from $180.0 million in 1993. Earned discounts rose 5.6% in 1994 ($9.9 million) over 1993 ($9.4 million). Expressed as a percentage of Gross Finance Receivables purchased, earned discounts remained relatively flat in 1994 as compared to 1993, 5.3% versus 5.2%, respectively. Earnings generated from advances secured by inventory, equipment and real estate are included in earned discounts. Fees and other income increased 46.0% to $2.1 million in 1994 from $1.4 million in 1993. Fees and other income consist primarily of closing fees, supplemental discounts paid by clients who do not sell the minimum volume of accounts required by their contracts with the Company or who terminate their contracts with the Company prior to the contract's expiration, commitment fees and related financing fees. This increase was largely the result of the growth in commitment fees, supplemental discounts, related financing fees and a one time referral fee of $50 thousand from an investment bank. Compensation and Fringe Benefits. Compensation and fringe benefits remained flat in 1994, $3.0 million (25.0% of total income) as compared to $3.0 million (27.2% of total income) in 1993. Executive compensation decreased 17.5% in 1994, from $1.2 million to $1.0 million as a result of the departure of an executive in the fourth quarter of 1993 and the reduction in bonuses paid. This decrease was offset by increases in employee compensation and staffing requirements needed to support the growth of the Company. General and Administrative Expenses. General and administrative expenses were $2.7 million (22.2% of total income) and $2.0 million (18.1% of total income) in 1994 and 1993, respectively. The increase was primarily attributable to the rise in professional fees and loan amortization. Professional fees increased from $449.0 thousand (4.1% of total income) in 1993 to $805.3 thousand (6.7% of total income) in 1994. The increase in professional fees was attributable in part to the final resolution of certain legal proceedings instituted in prior years. Loan amortization increased from $172.2 thousand in 1993 to $318.5 thousand in 1994, chiefly due to the refinancing of the Company's line of credit in the second quarter of 1994. Other expenditures contributing to the increase in general and administrative expenses were increases in credit and filing costs, travel and entertainment, insurance and shareholder related expenses. Interest Expense. Interest expense increased from $243.3 thousand in 1993 to $610.5 thousand in 1994. This increase was primarily attributable to increases in the average daily outstanding balance of the Company's revolving line of credit as well as increases in the prime rate of interest throughout 1994. The average daily outstanding balance under the Company's line of credit increased from $2.4 million during 1993 to $6.5 million during 1994. The average per annum interest rate paid on the Company's line of credit increased from 7.25% during 1993 to 8.31% during 1994. Provision for Credit Losses. Credit loss experience, the adequacy of underlying collateral, changes in the character and size of the receivables portfolio and management's judgment are factors used in assessing the overall adequacy of the allowance and determining the provision for credit losses. The level of related credit balances of factoring clients and the impact of economic conditions on the creditworthiness of the Company's clients and account debtors are also given consideration in determining the adequacy of the allowance. To mitigate the risk of credit loss, the Company, among other things; (i) thoroughly evaluates the collateral to be made available by each client; (ii) collects its factored accounts receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) takes, whenever available, blanket liens on all of its clients' assets and, when making advances against inventory, equipment, real estate or other property, it employs what management believes to be conservative loan-to-value ratios; (v) requires personal guaranties (either unlimited guaranties or validity guaranties) from its clients' principals, and (vi) actively monitors its portfolio of factored accounts receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral. Although the Company maintains an allowance for credit losses in an amount deemed by management to be adequate to cover potential losses, no assurance can be given that the allowance will in fact be adequate or that an inadequacy, if any, in the allowance could not have a material adverse effect on the Company's earnings in future periods. The allowance for credit losses was 7.2% ($2.1 million) and 7.5% ($2.5 million) of Gross Finance Receivables at December 31, 1993 ($29.5 million) and 1994 ($33.3 million), respectively. The amount provided for credit losses increased 10.3% in 1994, from $4.9 million in 1993 to $5.4 million in 1994. See also Credit Loss Policy and Experience. The size of the provision for credit losses in 1994 was adversely affected (i.e., increased) by two significant events, one of which occurred in late 1994 and the other of which occurred in early 1995. In late 1994, a mediator recommended a small award in a large case in which the Company is plaintiff. The mediation was non-binding. The Company elected not to accept the mediator's recommended award and is pursuing the case vigorously in federal court. The Company hopes to recover in litigation significantly more than the mediator's award. Nonetheless, in light of the mediator's award and after year-end consultation with its independent accountants, the Company elected for financial statement purposes to add approximately $1.7 million to the provision for credit losses in the fourth quarter of 1994. In early 1995, the Company received notice of certain threatened claims from the Trustee in the bankruptcy of Premium Sales Corporation. See Legal Proceedings. Most of the threatened claims are claims which arise in the ordinary course of a bankruptcy proceeding. The Trustee has, however, also threatened to assert as yet unsubstantiated, non-bankruptcy claims of fraud against the Company and certain of its executive officers (in their corporate as well as individual capacities). The Company and its executive officers believed that any claim sounding in fraud would be without merit. After thoroughly reviewing the Trustee's threatened claims with outside legal counsel, the Company added approximately $1.5 million to the provision for credit losses in 1994. See Legal Proceedings for resolution of the Premium Sales matter. Commissions. Commissions increased from $113.8 thousand (1.0% of total income) in 1993 to $155.3 (1.3% of total income) in 1994, because a greater proportion of gross receivables purchased in 1994 were generated by commissioned brokers and other professionals to whom the Company paid referral fees. Item 7. Financial Statements (Pages 41 to 63) Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosures None. Part III Item 9. Directors and Executive Officers The directors and executive officers of the Company are as follows: Name Age Position(s) Leon Fishman. . . . . . . . .. 64 President and Chief Executive Officer Eugene R. Haskin. . . . . . . 66 Chairman of the Board Lawrence M. Winkler . . . . . 60 Secretary, Treasurer, Chief Financial Officer and Director James C. Spector. . . . . . . 61 Director Craig Fishman . . . . . . . . 35 Senior Vice President, General Counsel and Director William H. Savage . . . . . . 63 Director David W. Campbell . . .. . . . 48 Director Alan L. Freeman . . . .. . . . 54 Director Leon Fishman is President and Chief Executive Officer of the Company and served on the Company's Board of Directors until November 1995. He co- founded the Company with Eugene Haskin in 1982. Mr. Fishman served as Secretary and Treasurer of the Company and held other management positions prior to being elected President and Chief Executive Officer in 1989. Effective July 1, 1996, Mr. Fishman will resign his position as President and Chief Executive Officer of the Company at which time Craig Fishman will become President and Chief Executive Officer of the Company. It is expected that Leon Fishman will have an active on-going relationship with the company following his resignation. Prior to co-founding the Company, Mr. Fishman had extensive experience as the president and major shareholder of companies involved in factoring, real estate development and manufacturing. Eugene R. Haskin is Chairman of the Board of the Company and has served as a director of the Company since co-founding the Company with Leon Fishman in 1982. Mr. Haskin served as President of the Company from 1982 to 1989. Prior to co-founding the Company, Mr. Haskin was an executive with and a major investor in companies involved in factoring, real estate development and heating oil distribution. Lawrence M. Winkler is Secretary, Treasurer and Chief Financial Officer of the Company and has served as a director since 1983. Mr. Winkler began his career at the Company in 1982 as Second Vice President, was promoted to Senior Vice President in April 1989 and has held his current positions since May 1989. Mr. Winkler, a certified public accountant, was a general partner in the accounting firm of Alexander Grant and Company prior to joining the Company. Mr. Winkler is the brother-in-law of Leon Fishman. Craig Fishman joined the Company in 1991 as a Vice President. In February 1993, Mr. Fishman was appointed General Counsel. In May 1994, he was elected President of Lifetime Options and in September 1995, Mr. Fishman was elected Senior Vice President of the Company. Mr. Fishman has served as a director since November 1995. The Board of Directors has elected Mr. Fishman President and Chief Executive Officer of the Company effective July 1, 1996. From 1987 to April 1991 Mr. Fishman was an attorney associated with the law firm of White & Case in New York City. Craig Fishman is the son of Leon Fishman and the nephew of Lawrence Winkler. James C. Spector has been a member of the Board of Directors since June 1989. Mr. Spector served as Executive Vice President of the Company from February 1991 to October 1993. Prior to joining the Company, Mr. Spector had served for many years as an executive with Heller Financial, Inc. and certain of its related companies, specializing in asset-based and real estate lending. His most recent positions in that organization included Executive Vice President and Chief Operating Officer of Heller Mortgage Corporation, from August 1984 through June 1985, and Senior Vice President of Heller Financial, Inc. from July 1985 through September 1987. William H. Savage has been a member of the Board of Directors since November 1995. Since 1990, Mr. Savage has been engaged in a variety of investment ventures in real estate development and banking. Since 1991, Mr. Savage has served as Chairman of Island Preservation Partnership, the owner and developer of Dewees Island, a 1,200 acre ocean front, barrier island near Charleston, South Carolina. He is the Chairman of the Board of Knights Hill Corporation, which owns and manages timberlands in South Carolina. Since 1982, he has been the Managing Partner of Calvert Associate which owns an apartment complex in Alexandria, Virginia. Since 1977, he has been the President of Richard United Corporation, a real estate investment company based in Alexandria, Virginia. David W. Campbell has been a member of the Board of Directors since November 1995. He is currently a private investor. Mr. Campbell was formerly President and Chief Executive Officer of Ameribanc Savings Bank ("ASB") in Annandale, Virginia from June 1990 to March 1995. Prior to that, he was Executive Vice President and Chief Operating Officer of ASB from 1984 to June 1990 and also a director of ASB from 1988 to March 1995. He served as a Trustee of the Ameribanc Investors Group from 1992 to March 1995. Alan L. Freeman has been a member of the Board of Directors since November 1995. He is currently Managing Partner of Freeman, Buczyner & Gero, an accounting firm. Prior to that he was a Partner with Deloitte & Touche from 1989 to 1991 and a Partner with the accounting firm Shapiro, Fleischmann & Co. from 1966 to 1989. Directors who are not officers of the Company receive a fee of $2,000 per board or committee meeting attended, plus reimbursement for their expenses associated with attending these meetings. Commencing November 1994, Directors who are not officers of the Company receive a fee of $500 per special board or committee meeting attended by conference telephone call. Directors who are officers of the Company receive no compensation for serving as directors, but are reimbursed for out-of-pocket expenses related to attending board or committee meetings. Directors of the Company are elected to serve until the next annual meeting of shareholders of the Company and until their respective successors are elected and qualified. Officers serve at the pleasure of the Board. Section 16(a) of the Securities Exchange Act of 1934 requires the Company's officer and directors, and persons who own more than 10% of its common stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("Commission"). Officers, directors and greater than 10% stockholders are required by the Commission to furnish the Company with copies of all Section 19(a) forms that they file. Based solely on its review of the copies of such forms received by it, or written representations from certain reporting persons that no Form 5 was required for those persons, the Company believes that during 1995 all filing requirements applicable to its officers, directors and greater than 10% stockholders were complied with. MEETINGS AND COMMITTEES OF THE BOARD The Board of Directors established an Audit Committee in 1989. The Audit Committee currently consists of Messrs. Freeman, Haskin and Campbell. The committee met once during the year ended December 31, 1995. The Audit Committee reviewed the results of operations for 1994 and the status of certain specific accounts. The Board established a compensation committee during 1992. Messrs. Haskin, Spector and Savage are currently serving on this committee. The Compensation Committee met once in 1995. The Board does not have a nominating committee. The functions of this committee are performed by the Board of Directors. During 1995 there were nine meetings of the Board of Directors. Each of the directors of the Company attended 100% of the meetings of the Board of Directors during 1995. During 1995 there were two vacancies on the Board of Directors. Effective November 1, 1995, the Board of Directors was increased from six to seven members. Item 10. Executive Compensation The following tables provide certain summary information concerning compensation paid or accrued by the Company to or on behalf of the Company's Chief Executive Officer and each of the four most highly compensated executive officers of the Company whose total compensation exceeded $100,000 for the years ended December 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE AWARDS Name and Other Annual Options/ All Other Principal Position Year Salary Bonus Compensation(1) SAR Grants(7) Compensation(8) - - - ---------------------------- ---- -------- ------ --------------- ------------- --------------- Leon Fishman President & CEO 1995 $377,885 $ -0- - - $3,000 1994 $375,000 $ -0- - - $3,000 1993 $375,000 $48,442 - - $4,717 James Spector 1995 (2) $ 82,500 $ -0- - - $ 950 1994 (3) $ 48,000 $ -0- - - $ 120 1993 (4) $183,445 $ 7,500 - - $1,507 Bret Kelly 1995 (5) $220,500 $ -0- - 10,000 (6) $3,000 Senior V.P. & COO 1994 $220,502 $ -0- - - $3,000 1993 $221,044 $15,000 - - $4,720 Lawrence Winkler 1995 $154,732 $ -0- - - $3,000 Secy/Treasurer & 1994 $143,533 $ 2,500 - - $2,889 CFO 1993 $136,786 $10,000 - - $2,936 Craig Fishman 1995 $161,177 $ -0- - - $3,000 Sr. V.P. & General Counsel 1994 $126,405 $ 2,500 - - $2,578 1993 $115,601 $15,600 - - $2,624
In May 1994, the Board of Directors unanimously approved a reduction in the exercise price of options granted in 1992 to Mr. Winkler and Craig Fishman to $6.50 per share from $14.00 per share. The reduced exercise price of $6.50 per share exceeded the per share market value of the Company's common stock at the time of the reduction. The reduction in the exercise price of these options was made to provide a supplemental performance incentive for Mr. Winkler and Craig Fishman. - - - -------------------------------------- 1) Does not include the value of various personal benefits provided to the executives officers. The aggregate amount of other compensation provided to each individual did not exceed the lesser of $50,000 or 10% of his reported compensation. 2) Engaged by the Company in November 1995 as a full time consultant on an interim basis to fill the vacancy created by the departure of Bret Kelly as a full-time employee. From January 1995 through October 1995, Mr. Spector was paid unrelated consulting fees. 3) Consulting Fee. 4) Ceased employment with the Company in November 1993. See note 2 above. 5) Ceased full-time employment with the Company effective November 3, 1995. Commencing in November 1995, Mr. Kelly is entitled to salary continuation of $220,500 payable over 12 months. 6) Options granted in connection with cessation of full-time employment. 7) No SARs have been granted. 8) Represents contributions to 401(k) plan. INDIVIDUAL GRANTS IN LAST FISCAL YEAR In connection with the cessation of his full-time employment, Mr. Kelly was granted an option to acquire 10,000 shares of the Company's common stock at an exercise price of $5.60 per share. The exercise price of $5.60 per share exceeded the per share market value of the Company's common stock at the time the option was granted. The option is exercisable with respect to 5,000 shares on or after November 3, 1997 and with respect to 5,000 shares on or after November 3, 1998. The option expires on November 3, 1999. AGGREGATE OPTIONS/SARS EXERCISED IN LAST FISCAL YEAR AND F/Y END OPTION/SAR VALUE
Shares Value of Unexercised Acquired on Value Number of Unexercised In-the-Money Options/SARs Name Exercise Realized Option/SAR at F/Y End (1) at F/Y End - - - ---------------- ----------- -------- ------------------------- ------------------------- Exercisable/Unexercisable Exercisable/Unexercisable Leon Fishman - - 15,000/ 2,500 $ - /$ -0- James Spector - - 5,000/ 1,667 $ - /$ -0- Bret Kelly - - - /10,000 $ - /$ -0- Lawrence Winkler - - 8,334/ 1,666 $ - /$ -0- Craig Fishman - - 1,667/ 833 $ - /$ -0- - - - --------------------------------------------- 1) No SARs have been granted.
The Company was party to an employment agreement with Lawrence Winkler, the Company's Secretary/Treasurer and Chief Financial Officer. The contract expired in January 1996. Under the agreement, Mr. Winkler received an annual salary of $153,467. The Company was party to an employment agreement with Leon Fishman, the Company's President. The contract expired in December 1995. Under the terms of the contract, the Company was committed to pay annual compensation of $375,000. The agreement also provided for additional payments in the amount of 2% of the Company's annual pre-tax net earnings between $3 million and $5 million and 3% of the Company's annual pre-tax net earnings in excess of that amount. OTHER TRANSACTIONS In January 1989, a corporation wholly owned by Lawrence M. Winkler, his wife and a son of Eugene Haskin purchased an apartment building from the Company for consideration in the form of a demand note to the Company in the principal amount of $100,000. The Company created this ownership structure on the advice of counsel who advised the Company not to take direct title to real property. While it owned the apartment building, the affiliate corporation paid to the Company all rental income received from the apartment building. In 1995 the apartment building was sold to an unaffiliated third party for consideration of $20,000 cash and a note in the principal amount of $70,000. The note bears interest at a rate of 9% per annum, is due on April 1, 2002 and is secured by the apartment building. The $20,000 was paid to the Company and the note payable by the unaffiliated third party (together with the collateral therefor) have been assigned to a wholly-owned subsidiary of the Company in exchange for cancellation of the original note payable from the Company's affiliate. At December 31, 1995 the principal amount owing on the note was $68,284. Certain members of the immediate families of Eugene Haskin and Leon Fishman, directly or through trusts, have provided financing to Lifetime Options through unsecured loans with interest payable monthly at an annual interest rate of 1% over the prime rate. One percent (1%) over the prime rate is the same rate paid by Lifetime Options to its unaffiliated bank lender. Lifetime Options' total indebtedness to members of Mr. Haskin's immediate family was $15,146 at December 31, 1995 and 1994, respectively. During 1994, at the request of members of Mr. Haskin's family, Lifetime Options repaid $445.4 thousand of long term indebtedness on these loans. During 1995 and 1994, Lifetime Options paid aggregate interest on these loans of $1.5 thousand and $16.3 thousand, respectively. Lifetime Options' total indebtedness to members of Leon Fishman's immediate family was $43.6 thousand at December 31, 1995 and 1994, respectively. During 1995 and 1994, Lifetime Options paid aggregate interest of $4.4 thousand and $8.8 thousand, respectively. At various times during 1994, Leon Fishman loaned Lifetime Options a total of $265 thousand which was repaid in full by December 31, 1994. During the periods of indebtedness, Mr. Fishman received $2.5 thousand of interest. At January 1, 1994, Craig Fishman was owed $18.7 thousand by Lifetime Options. The level of borrowings from Craig Fishman increased at various intervals during 1994 to $97.8 thousand. As of December 31, 1994 the indebtedness of $97.8 thousand was paid in full. Craig Fishman received interest from Lifetime Options of $2.6 thousand in 1994. Neither Craig Fishman nor Leon Fishman loaned money to Lifetime Options in 1995 and neither of them received any interest in 1995. In February 1994, the Company made a loan in the amount of $1 million to Eugene Haskin, a director of the Company, and his wife. The loan was unanimously approved by all members of the Board of Directors of the Company (with one director absent and Mr. Haskin abstaining) and conformed to a previous loan to an unrelated party. The loan bore interest at a rate equal to 2% per month, was collateralized by a pledge of securities having a market value of approximately $1.6 million and was due on or before July 15, 1994. The loan, together with all accrued interest thereon, was repaid on March 24, 1994. On September 11, 1995, the Company issued an aggregate of $2,838,000 in principal amount of Convertible Subordinated Notes due September 30, 2000 to the Scoggin Stockholders, in exchange for 447,200 shares of common stock of the Company then owned by them. The Scoggin Stockholders (i) have agreed not to convert their Notes into common stock prior to March 1, 1997, (ii) are entitled to certain demand and piggy-back registration rights; and (iii) are entitled to nominate up to two members of the Company's Board of Directors (depending on their level of ownership of Company securities). In addition, on November 28, 1995, the Company commenced an exchange offer pursuant to which the Company offered to issue to shareholders generally up to an aggregate of 2,162,000 in additional Notes in exchange for shares of the Company's common stock. The offer expired by its terms on January 12, 1996 and the Company issued approximately $2,160,000 in aggregate principal amount of Notes. For certain terms of the Notes, see Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources. Rental payments of $24,000 were received by the Company in 1995, 1994 and 1993, respectively, from its President, for the personal use of a condominium owned by a subsidiary of the Company. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 20, 1996, the amount of common stock of the Company which may be deemed beneficially owned: (i) by each person known to the Company to be the beneficial owner of more than 5% of the aggregate shares of the Company's outstanding common stock, (ii) by each of the named executive officers in the Summary Compensation Table, (iii) by each director of the Company and (iv) by all officers and directors as a group. Common Shares Percent of Name and Address Beneficially Owned Class - - - ---------------- ------------------ ---------- Leon Fishman 20191 E. Country Club Dr. N. Miami Beach, FL 33180 261,250 11.20% Eugene Haskin 4000 Island Blvd. N. Miami Beach, FL 37160 241,834 10.43% Bret Kelly 225 Marlborough Pt. Road Stafford, VA 22554 10,000 0.04% Lawrence M. Winkler 1300 Crystal Drive Arlington, VA 22202 8,384 0.04% James Spector 10580 SW 77 Terrace Miami, FL 33173 5,000 0.02% Craig Fishman 2687 Hillsman Street Falls Church, VA 22043 4,017 0.02% David W. Campbell 6410 Nobel Rock Court Clifton, VA 22024 1,000 - % William H. Savage 314 Franklin Street Alexandria, VA 22314 1,000 - % Timothy G. Ewing Value Partners, Ltd. 2200 Ross Avenue Dallas, TX 75201 661,835 26.58% AIM Charter Fund 11 Greenway Plaza, Suite 1919 Houston, TX 77046-1173 320,000 13.81% Schwab 100 Fund 101 Montgomery St. San Francisco, CA 94104 119,124 5.14% Tweedy, Browne Company L.P. 52 Vanderbilt Avenue New York, NY 10017 223,200 9.63% Farley Capital 655 Third Avenue New York, NY 10015 147,000 6.35% For all Officers and Directors as a group (7 persons) 522,485 22.51% Item 12. Certain Relationships and Related Transactions See Part II, Item 7 of this 10-KSB (Financial Statements) and Part III, Item 10 of this 10-KSB (Other Transactions). Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements: Page Number The following Financial statements are submitted in Item 7. Independent Auditors' Report on Consolidated Financial Statements and Schedules 41 Consolidated Balance Sheets as of December 31, 1995 and 1994 42 Consolidated Statements of Income for the years ended December 31, 1995, 1994, and 1993 43 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995, 1994 and 1993 44 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 45 - 46 Notes to Financial Statements for the years ended December 31, 1995, 1994 and 1993 47 - 63 2. Financial Statement Schedules The following financial statement schedule is filed as part of this report: Schedule IV Indebtedness of and to Related Parties - Not Current for the years ended December 31, 1995, 1994 and 1993 64 Schedules other than those listed above have been omitted since they are either not required or the information is included elsewhere in the financial statements or notes thereto. (b Reports on Form 8-K None. (c) Listing of Exhibits Exhibit 3. Articles of Incorporation and By-laws Documents incorporated by reference - See Registration Statement on Form S-1 33-46748 Exhibit 4. Instruments Defining the Rights of Security Holders Documents incorporated by reference - See Registration Statement on Form S-1 33-46748 Documents incorporated by reference - See the Company's Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 1995 Exhibit 10. Material Contracts Documents incorporated by reference - See Registration Statement on Form S-1 33-46748 Documents incorporated by reference - See the Company's Annual Report on Form 10-KSB for the Fiscal Year Ended December 31, 1994 Amendments to Exhibit 10.7 - Revolving Credit and Security Agreement dated as of May 13, 1994 between IBJ Schroder Bank & Trust Company (as Lender and as Agent) and Allstate Financial Corporation (as Borrower), as amended to March 21, 1995. Fourth Amendment and Waiver dated as of March 31, 1995 Fifth Amendment dated as of June 12, 1995 Sixth Amendment and Waiver dated as of September 7, 1995 Seventh Amendment dated as of November 1, 1995 Eighth Amendment dated as of March 4, 1996 Exhibit 10.8 Letter Agreement dated as of December 13, 1995 between Allstate Financial Corporation and Bret Kelly Exhibit 21. Subsidiaries of the Company INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Allstate Financial Corporation Arlington, Virginia We have audited the accompanying consolidated balance sheets of Allstate Financial Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995, and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 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. March 4, 1996
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- December 31, ---------------------------------- 1995 1994 ----------- ----------- ASSETS CURRENT ASSETS: Cash $ 754,295 $ 1,763,930 Receivables: Finance, net 32,670,706 27,502,806 Purchased life insurance contracts, net 4,292,332 4,533,952 Other 2,756,342 3,388,638 Prepaid expenses 204,823 198,091 Prepaid income taxes 722,081 628,123 Deferred income taxes 893,000 909,000 ----------- ----------- TOTAL CURRENT ASSETS 42,293,579 38,924,540 PROPERTY AND EQUIPMENT, Net 537,629 479,034 OTHER ASSETS 2,049,323 2,447,083 ----------- ----------- $44,880,531 $41,850,657 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 292,602 $ 303,838 Notes payable 13,516,938 11,591,718 Note payable-related party 103,000 103,000 Credit balances of factoring clients 2,333,729 1,665,038 ----------- ----------- TOTAL CURRENT LIABILITIES 16,246,269 13,663,594 NONCURRENT PORTION OF NOTES PAYABLE: Related parties 58,788 58,788 Other 2,845,110 7,110 TOTAL LIABILITIES 19,150,167 13,729,492 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, authorized 2,000,000 shares with no par value; no shares issued or outstanding - - Common stock, authorized 10,000,000 shares with no par value; issued and outstanding 2,655,128 at December 31, 1995 and 3,102,328 at December 31, 1994 40,000 40,000 Additional paid-in-capital 18,852,312 18,852,312 Treasury Stock (447,200 shares) (2,871,901) - Retained Earnings 9,709,953 9,228,853 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 25,730,364 28,121,165 ----------- ----------- $44,880,531 $41,850,657 =========== =========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- Years Ended December 31, ------------------------------------------------------ 1995 1994 1993 ----------- ----------- ----------- INCOME: Earned discounts $10,932,331 $ 9,947,678 $ 9,423,845 Fees and other income 2,065,015 2,082,320 1,426,586 ----------- ----------- ----------- TOTAL INCOME 12,997,346 12,029,998 10,850,431 ----------- ----------- ----------- EXPENSES: Compensation and fringe benefits 3,198,497 2,996,029 2,950,471 General and administrative 2,758,285 2,673,959 1,961,941 Interest expense 983,718 610,531 243,251 Provision for credit losses 4,981,646 5,359,159 4,858,235 Commissions 263,100 155,280 113,814 ----------- ----------- ----------- TOTAL EXPENSES 12,185,246 11,794,958 10,127,712 ----------- ----------- ----------- INCOME BEFORE INCOME TAXES 812,100 235,040 722,719 INCOME TAXES 331,000 87,500 266,000 ----------- ----------- ----------- NET INCOME $ 481,100 $ 147,540 $ 456,719 =========== =========== =========== NET INCOME PER SHARE $ 0.16 $ 0.05 $ 0.15 =========== =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES 2,966,330 3,102,328 3,116,460 =========== =========== =========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ----------------------------------------------- YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 -------------------------------------------- Common Additional Treasury Retained Stock Paid in Capital Stock Earnings ------- --------------- ----------- ---------- Balance - January 1, 1993 $40,000 $18,678,839 $ - $8,624,594 Exercise of 3,000 warrants at $7.80 per share - 23,400 - - Exercise of 15,332 options at $7.125 per share - 109,242 - - Exercise of 5,833 options at $7.00 per share - 40,831 - - Net Income - - - 456,719 ------- ----------- ----------- ---------- Balance - December 31, 1993 40,000 18,852,312 - 9,081,313 Net Income - - - 147,540 ------- ----------- ----------- ---------- Balance - December 31, 1994 40,000 18,852,312 9,228,853 Exchange of Convertible Subordinated Notes for 447,200 shares of common stock - - (2,871,901) - Net Income - - - 481,100 ------- ----------- ----------- ---------- Balance - December 31, 1995 $40,000 $18,852,312 $(2,871,901) $9,709,953 ======= =========== =========== ========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- Years Ended December 31, ---------------------------------------------------- 1995 1994 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 481,100 $ 147,540 $ 456,719 Adjustments to reconcile net income to cash provided by operating activities: Depreciation - net 100,093 92,801 110,534 Provision for credit losses 4,981,646 5,359,159 4,858,235 Gain on disposition of investments - - (35,253) Changes in operating assets and liabilities; Decrease/(Increase) in other receivables 632,296 (1,044,840) (947,163) (Increase)/Decrease in prepaid expenses (6,732) 54,030 (74,381) Decrease/(Increase) in other assets 397,760 997,247 (1,086,581) (Decrease)/Increase in accounts payable and accrued expenses (11,236) 83,200 (263,163) Decrease in deferred income taxes - - (157,000) Decrease in income taxes payable - - (448,000) Increase in prepaid income taxes (93,958) (273,271) (354,852) Decrease/(Increase) in deferred income tax asset 16,000 (307,000) (293,000) ------------ ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 6,496,969 5,108,866 1,766,095 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of finance receivables, including repurchases and life insurance contracts (172,311,795) (188,868,852) (179,965,983) Collections of finance receivables, including repurchases and life insurance contracts 162,403,869 177,854,250 179,724,147 Increase/Decrease in credit balances of factoring clients 668,691 (246,290) (2,949,433) Net proceeds from sale of investments - - 160,251 Purchase of property and equipment (158,691) (152,639) (249,486) ------------ ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (9,397,926) (11,413,531) (3,280,504) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net proceeds from sale of common stock and exercise of warrants and options - - 173,473 Proceeds from line of credit and other borrowings 72,153,625 66,975,004 45,614,280 Principal payments on line of credit and other borrowings (70,228,402) (61,691,628) (45,403,070) Treasury Stock Acquisition costs (33,901) - - ------------ ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 1,891,322 5,283,376 384,683 ------------ ------------ ------------ NET DECREASE IN CASH (1,009,635) (1,021,289) (1,129,726) CASH, Beginning of year 1,763,930 2,785,219 3,914,945 ------------ ------------ ------------ CASH, End of year $ 754,295 $ 1,763,930 $ 2,785,219 ============ ============ ============ See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES ----------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (continued) Years Ended December 31, ---------------------------------------------- 1995 1994 1993 ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $1,014,406 $ 631,187 $ 222,109 ========== ========== ========== Taxes paid $ 408,958 $ 667,919 $1,479,280 ========== ========== ========== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfer of finance and other receivables to other assets $ 267,750 $ 62,508 $1,949,100 ========== ========== ========== Issuance of Convertible Subordinated Notes in exchange for common stock $2,838,000 $ - $ - ========== ========== ========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES ----------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ The accounting and reporting policies of Allstate Financial Corporation and its subsidiaries (collectively, the "Company") conform to generally accepted accounting principles and the general practices within the financial services industry. Those policies that materially affect the determination of financial position, results of operations, and cash flows are summarized below. In preparing its financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates shown in the consolidated balance sheet and the statement of income. Actual results could differ significantly from those estimates. Changes in economic conditions and other factors beyond the Company's control could impact the determination of material estimates such as the allowance for credit losses, the valuation of other receivables and the valuation of assets acquired in settlement of Finance and Other Receivables. Consolidation - - - ------------- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all intercompany transactions. No segment of its business, other than factoring and general financing is significant in relation to consolidated total assets and revenues. Finance Receivables and Allowance for Credit Losses - - - --------------------------------------------------- Finance Receivables consist of factored accounts receivable, Collateralized Advances (as defined below), overadvances secured by general liens and non-earning receivables. Factored accounts receivable are stated at the face amount outstanding, net of unearned discounts and an allowance for credit losses. Advances collateralized by inventory, equipment, real estate and other property (collectively, "Collateralized Advances") and overadvances secured by general liens are stated at the aggregate principal amount outstanding plus accrued earnings, net of an allowance for credit losses. Non-earning receivables are stated at the amount advanced by the Company plus earnings accrued to the time the accrual of earnings is suspended, net of an allowance for credit losses. If the Company determines that it is not likely to recover from any source the amount of its initial advance and the earned but unpaid discount, then the Company promptly increases the allowance for credit losses or reduces the carrying value of the non-earning receivable to its estimated fair value and makes a charge to its allowance for credit losses, in an amount equal to the difference between the Company's investment in the non-earning receivable and its estimated fair value. The allowance for credit losses is maintained at a level which, in management's judgment, is sufficient to absorb losses inherent in the finance receivables portfolio. The allowance for credit losses is based upon management review and evaluation of the finance receivables portfolio. Factors considered in the establishment of the allowance for credit losses include management's evaluation of specific finance receivables, the adequacy of underlying collateral, historical loss experience, expectations of future economic conditions and their impact on particular industries and individual clients, and other discretionary factors. The allowance for credit losses is based on estimates of potential future losses, and ultimate losses may vary from the current estimates. These estimates are typically reviewed quarterly and as adjustments become necessary, the effects of the change in estimates are reported in operations in the period in which they become known. Finance receivables may be reclassified on the Company's balance sheet as "other receivables" or "other assets" when, in management's opinion, such a reclassification most accurately reflects the character of the asset. At the time of any such reclassification, the Company usually suspends or discontinues the accrual of earnings for financial statement purposes. If at any time the Company determines it is not likely to recover a finance receivable in full, the receivable is appropriately written down against the allowance. Finance Receivables are fully written off against the allowance when the Company has exhausted its efforts against the client's customer, the client, guarantors and any additional collateral retained by the Company. Effective January 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting By Creditors for Impairment of a Loan." This statement required the Company to measure the value of each impaired loan based on the present value of its expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Effective January 1, 1995, the Company adopted SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." This Statement amends SFAS No. 114, to allow creditors to use existing methods for recognizing interest income on impaired loans. The Company's adoption of these Statements did not have a material impact on its financial position or results of operations. Purchased Life Insurance Contracts - - - ---------------------------------- The Company purchases life insurance contracts, at a discount, from individuals facing life threatening illnesses. The life insurance contracts are purchased after a review of the insured's medical records by an independent physician who verifies the insured's physical condition and estimates his or her life expectancy. Historically, the Company required up to three independent medical reviews but, based on its experience, management no longer believes multiple medical reviews are necessary. Life insurance contracts are purchased from individuals who have an anticipated life expectancy of up to sixty months. Purchase discounts, which are accounted for as unearned discounts, are based on the estimated life expectancy of the insured individual, as determined by the independent physician(s). At the time of purchase, the Company is named beneficiary of the policy. Future insurance policy premiums are usually paid by the Company. Unearned discounts are recorded as income using the interest method over the estimated life expectancy of the individual insured. The Company reviews such life expectancies on a quarterly basis and records adjustments as necessary. Actual result could differ significantly from those estimated based on life expectancies. Factors such as life extending treatments (or a cure) for certain illnesses could impact the recognition of unearned discounts. Most of the life insurance contracts purchased are underwritten by highly rated insurance companies and, in many cases, are backed by state guaranty funds. Accordingly, management does not believe that credit risk is material and, therefore, no allowance for credit losses is maintained with respect to purchased life insurance contracts. Other Receivables - - - ----------------- Other receivables consist primarily of amounts receivable by the Company where the source of payment is expected to be from legal proceedings or other collection efforts instituted against a client's customer, guarantors and/or other third parties. Other receivables typically arise from the reclassification of finance receivables. At the time of reclassification, other receivables are stated at a value estimated by management based on management's assessment of the likelihood of payment or success on the merits, the ability of the third party to pay and other discretionary factors. Also at the time of reclassification, the accrual of earnings is usually suspended or discontinued for financial statement purposes. Write-downs, if any, at the time of reclassification are charged against the allowance for credit losses. Management's estimates of the fair value of other receivables are typically reviewed quarterly and as adjustments become necessary, the effects of the change in estimates are reported in operations in the period in which the adjustment is determined to be necessary. Other receivables are subject to legal and other collection processes and contingencies over which the Company does not have exclusive control. Accordingly, the amounts which the Company ultimately receives in payment of other receivables could differ significantly from management's estimates. Property and Equipment - - - ---------------------- Property and equipment are recorded at cost. Depreciation is computed using straight line and accelerated methods over the estimated useful lives of the related assets. Assets Acquired in Settlement of Finance and Other Receivables - - - -------------------------------------------------------------- At the date of acquisition, assets acquired in settlement of Finance and Other Receivables are recorded at fair value less estimated selling costs. Also at the date of acquisition, the accrual of earnings is usually suspended or discontinued for financial statement purposes. Write-downs to fair value at the date of acquisition are charged to the allowance for credit losses. Subsequent to acquisition, the asset is adjusted to the lower of cost or fair value less estimated costs to sell. Valuation reserves have been provided as necessary to adjust the assets to the lower of cost or fair value less estimated costs to sell. Increases or decreases in the valuation reserves, operating expenses, and gains or losses on disposition of assets acquired in settlement of Finance and Other Receivables are recognized in expenses in the period incurred. Included in Commercial property held for sale and Residential property held for sale are collateralized properties for which the Company does not hold title, valued at $147,750 and $910,000 in 1995 and valued at $0 and $1,287,400 in 1994, respectively. The Company holds security liens against these assets in which the client or other obligor has no equity in the collateral at its current estimated fair value. Proceeds for repayment are expected to come only from the sale of the collateral, and either the client or other obligor has abandoned control of the asset or it is doubtful the client or other obligor will rebuild equity in the collateral or repay the receivable by other means in the foreseeable future. The amounts ultimately recovered by the Company from assets acquired in settlement of Finance and Other Receivables could differ materially from the amounts used in arriving at the net carrying value of the assets because of future market factors beyond the Company's control, adversarial actions taken by the client or other owner of the property foreclosed or changes in the Company's strategy for recovering its investment. Fair value of Financial Instruments - - - ----------------------------------- In accordance with the requirements of SFAS No. 107, "Disclosure About Fair Value of Financial Instruments", which requires the disclosure of fair value information about financial instruments when it is practicable to estimate that fair value and excessive costs would not be incurred, the following methods and assumptions were used in estimating the fair value of financial instruments: Cash and Cash Equivalents -- The carrying amounts for cash and cash equivalents approximates fair value. Finance Receivables, Purchased Life Insurance Contracts, and Other Receivables -- The determination of the fair value of these assets is not practicable to estimate as there is no secondary market and the Company holds these assets to maturity. Notes payable and commitments, which are primarily adjustable rate notes, are recorded at book values, which approximate the respective fair values. Unearned and Earned Discounts on Factored Accounts Receivable - - - ------------------------------------------------------------- At the time of purchase, the unearned discount is deducted from the face amount of the account receivable purchased and is recorded as a reduction to such receivable. Unearned discounts are recognized as income in accordance with the terms of the accounts receivable factoring and security agreement. The factoring agreement contains an earnings schedule detailing the discount the Company is entitled to charge at various time intervals (typically a uniform discount during the first 30 days following the purchase and an incrementally higher discount every 15 days thereafter). The Company recognizes discounts on the first day of each time interval. The Company's method of recognizing earned discounts does not differ materially from the interest method. At the time an account receivable is purchased, a due date is set by management based on the anticipated payment date. This anticipated payment date is used to identify past due receivables. The accrual of earned discounts is discontinued when, in the opinion of management, the collection of additional earnings from the client's customer, the client, guarantors or collateral held, if any, is unlikely. Accounts receivable which have been identified as past due may continue to accrue earnings if, in the opinion of management, collection of the earnings from the client's customer, the client, guarantors or collateral held, if any, is likely. When accounts receivable are placed on non-accrual status, earned discounts 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. Earned Discounts on Collateralized Advances and Overadvances Secured by General Liens - - - ------------------------------------------------------------------------- Earned discounts on Collateralized Advances accrue typically on the highest outstanding amount of the advance during each calendar month (or fraction thereof). Earned discounts on overadvances secured by general liens accrue typically on the outstanding amount of the overadvance during successive 15-day intervals. In both cases, accrued earnings are typically required to be paid in full no less frequently than monthly in arrears. Fees and Other Income - - - --------------------- Fee income includes closing or 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. Closing or application fees are paid by clients to the Company to cover the cost of performing credit investigations and field reviews and are recognized when received. Letter of credit and guaranty fees are usually for a sixty- to ninety-day period and are recognized when received. Other income includes supplemental discounts, interest income, gain on sale of investments and miscellaneous income. Income Taxes - - - ------------ The Company recognizes the amount of taxes payable or refundable in the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. In addition, the Company will reduce any deferred tax assets by the amount of any tax benefit that more than likely will not be realized. Net Income Per Share - - - -------------------- Net income per share has been computed by dividing net income by the weighted average number of common shares and common share equivalent outstanding during each period. The Company's convertible subordinated notes payable were anti-dilutive for purposes of calculating earnings per share in 1995. New Accounting Pronouncements - - - ----------------------------- In March 1995, the Financial Accounting Standards Board issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets Disposed Of." This Statement prescribes the accounting for the impairment of long-lived assets, such as property, plant and equipment, identifiable tangible assets and goodwill related to those assets. An impairment loss is recorded when the undiscounted cashflows from the use and eventual disposal of the asset is less than the carrying value of the asset. The Company does not believe that the adoption of this Statement will have a material impact on its financial position or results of operations. The Company plans to adopt this Statement effective January 1, 1996. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement gives the Company the option of either 1) continuing to account for stock options and other forms of stock compensation 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 accounting for all stock compensation arrangements. The Company plans to continue to account for stock options under the current accounting rules and provide the additional disclosures as of January 1, 1996. The Company does not believe that the adoption of this Statement will have a material impact on its financial condition or results of operations. B. RECEIVABLES ----------- Finance receivables consist of the following: December 31, ----------------------------- 1995 1994 ----------- ----------- Factored accounts receivable $25,169,997 $22,241,911 Collateralized Advances 10,842,047 7,215,277 Overadvances and accrued earnings collateralized by general liens 1,407,233 279,111 Non-Earning Receivables 1,588,545 3,586,784 ----------- ----------- Gross Finance Receivables 39,007,822 33,323,083 Less: Unearned discount (3,986,148) (3,309,499) Less: Allowance for credit losse (2,350,968) (2,510,778) ----------- ---------- Finance receivables, net $32,670,706 $27,502,806 =========== =========== Factored accounts receivable usually become due within a maximum of 90 days. After this time, the Company either requires the client to repay the amount advanced on the receivable plus the earned discount under the full recourse provisions of its agreements or, depending on an analysis of collectability, extends the payment terms of the receivable through a process referred to as "repurchasing" the receivable. If at any time the Company determines that it is unlikely to receive payment on a factored account receivable, the Company retains the right to require its clients to repay the amount the Company has advanced on the receivable plus the amount of discount earned. Collateralized Advances secured by fixed assets (e.g., equipment or real estate) are required to be repaid based typically on a 36 month amortization schedule (although the amortization schedule in certain circumstances may be significantly longer) with a final balloon payment due not more than one year after the making of the Collateralized Advance. If at the time the balloon payment is due the Company's funding relationship with the client is extended, the Company will typically renegotiate the balloon payment. Collateralized Advances secured by current assets (e.g. inventory) are subject to a daily or weekly borrowing base formula and come due in a single, lump sum payment not more than one year after the making of the initial such Collateralized Advance. If at the time such payment is due the Company's funding relationship with the client is extended, the Company will typically extend the maturity of the lump sum payment. Overadvances secured by general liens are required to be repaid in full (either in installments or in a single, lump sum payment in as little as one week or as long as six months in accordance with a written agreement between the Company and itc client. Purchased life insurance contracts consist of: December 31, ------------------------ 1995 1994 ---------- ----------- Purchased life insurance contracts $5,155,828 $ 6,241,783 Unearned discount (861,496) (1,415,087) Due other beneficiaries (2,000) (292,744) ---------- ----------- Purchased life insurance contracts, net $4,292,332 $ 4,533,952 ========== =========== Amounts "due other beneficiaries" represents Lifetime Options' obligation to pay amounts to third parties upon its receipt of proceeds from the underlying life insurance policies. Included in purchased life insurance contracts at December 31, 1995 and 1994 are $2.0 million and $3.4 million, respectively, of life insurance contracts insuring individuals with life expectancies in excess of twelve months. Other receivables consist of the following: December 31, ----------------------- 1995 1994 ---------- ---------- Notes receivable $ 68,284 $ 198,871 Notes receivable - related parties - 100,000 Miscellaneous 18,868 33,678 Third party receivables in collection 2,669,190 3,056,089 ---------- ---------- $2,756,342 $3,388,638 ========== ========== Changes in the allowance for credit losses were as follows: BALANCE, January 1, 1993 $ 1,222,773 Provision for credit losses 4,858,235 Receivables charged off (4,143,679) Recoveries 182,798 ----------- BALANCE, December 31, 1993 2,120,127 Provision for credit losses 5,359,159 Receivables charged off (5,015,957) Recoveries 47,449 ---------- BALANCE, December 31, 1994 2,510,778 Provision for credit losses 4,981,646 Receivables charged off (5,193,525) Recoveries 52,069 ----------- BALANCE, December 31, 1995 $ 2,350,968 =========== During 1995, the Company did not experience any impairment of receivables which qualify for treatment under SFAS No. 114, "Accounting by Creditors for Impairment of Loan" and SFAS No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures." C. PROPERTY AND EQUIPMENT ---------------------- The Company's investment in property and equipment consists of the following:
December 31, ------------------------ 1995 1994 -------- -------- Furniture and equipment $1,109,894 $953,666 Automobiles 181,703 181,703 Less: Accumulated depreciation (753,968) (656,335) ----------- -------- $ 537,629 $479,034 ========== ========
The property and equipment are pledged as collateral under a revolving line of credit (see Note F). D. OTHER ASSETS Other assets consist of:
December 31, ---------------------------- 1995 1994 ---------- ---------- Assets acquired in settlement of Finance and Other Receivables: Inventory held for sale $ 20,000 $ 102,508 Commercial property held for sale 862,750 697,500 Investment in residential property 910,000 1,287,400 ---------- ---------- 1,792,750 2,087,408 Condominium, not used in trade or business 232,575 225,100 Deferred loan costs 23,998 95,907 Other - 38,668 ---------- ---------- $2,049,323 $2,447,083 ========== ==========
E. CREDIT BALANCES OF FACTORING CLIENTS At December 31, 1995 and 1994, credit balances of factoring clients consist of: (i) a holdback reserve of $1,242,450 and $1,029,416, respectively, which is deducted from the amount advanced to clients and (ii) excess cash collateral of $1,091,279 and $635,622 respectively, which are funds retained by the Company on cash receipts that are subsequently remitted to clients. F. NOTES PAYABLE Notes payable consist of:
December 31, ------------------------------ 1995 1994 ---------- ---------- Notes payable - related parties; interest at 1% over prime due December 31, 1997 and on demand $ 161,788 $ 161,788 Notes payable; interest payable at 1% over prime due December 31, 1999 and on demand 21,827 21,827 Convertible Subordinated Notes due September 30, 2000 at initial interest rate of 10% annually; total authorized amount - $5,000,000 2,838,000 - Revolving line of credit - interest at 3/4% over the base rate; collateralized by finance receivables and personal property; total line - $25,000,000 12,262,522 10,697,900 Line of credit - interest at 1% over prime, expires December 31, 1996, collateralized by specific purchased life insurance policies; total line $2,000,000 1,239,699 879,101 ----------- ----------- $16,523,836 $11,760,616 =========== ===========
At December 31, 1995, 1994 and 1993, the prime rate was 8.50%, 8.75% and 6.0%, respectively. These notes are classified on the balance sheet as follows:
December 31, ------------------------------ 1995 1994 ----------- ---------- Current portion of notes payable $13,516,938 $11,591,718 Current portion of notes payable - related party 103,000 103,000 Noncurrent portion of notes payable - related parties 58,788 58,788 Noncurrent portion of notes payable - other 2,845,110 7,110 ----------- ----------- $16,523,836 $11,760,616 =========== ===========
Aggregate annual principal payments on notes payable for five years subsequent to December 31, 1995 are as follows: Twelve Months Ending December 31, --------------------------------- 1996 $ 1,357,416 1997 12,262,522 1998 - 1999 65,898 2000 5,000,000* ----------- $18,685,836 =========== * Includes $2,162,000 in additional Convertible Subordinated Notes issued in January 1996. See Note M. In May 1994, the Company paid off its existing $15 million credit facility in full and replaced it with a $25 million secured credit facility with a different lender. As of December 31, 1995, the Company had approximately $12.7 million available for borrowing under the $25.0 million revolving line of credit. Borrowings under the credit facility bear interest at the bank's base rate plus .75%. The current maturity date of the credit facility is May 13, 1997. The credit facility includes a $5 million sub-facility for the issuance of letters of credit and included a $5 million sub-facility the proceeds of which were used to make advances to clients secured by machinery and equipment. The $5 million sub-facility for equipment advances expired on December 31, 1995 and the balance outstanding under the sub-facility is currently being repaid by the Company in accordance with its terms in equal monthly installments based on a 36 month amortization schedule with a balloon payment due May 13, 1997. The Company is having discussions with its lenders with respect to a new equipment sub-facility. The terms of the revolving line of credit require the Company to, among other things: (i) maintain tangible net worth (as defined) and subordinated debt; (ii) maintain a ratio of liabilities and contingent liabilities to tangible net worth plus subordinated debt; (iii) limit investments in certain subsidiaries; (iv) maintain a ratio of earnings before taxes plus interest and certain other items to interest expense; (v) limit advances to clients and obligors; (vi) limit indebtedness (as defined) to other parties; (vii) restrict liens on assets and restrict sales of assets; and (viii) limit expenditures on capital assets. Bank commitment fee expense for the years ended December 31, 1995, 1994 and 1993 was $41.9 thousand, $24.7 thousand, and $31.9 thousand, respectively. During 1994 Lifetime Options, Inc., a Viatical Settlement Company (a wholly-owned subsidiary of the Company), secured a $2 million revolving line of credit with a local federal savings bank. This line of credit was renewed at December 31, 1995. This revolving line of credit: (i) bears interest at the bank's prime rate plus 1%; (ii) is payable on demand or if no demand is made on December 31, 1996; (iii) is collateralized by specific purchased life insurance contracts; and (iv) entitles the bank to receive 50% of collections. As of December 31, 1995, Lifetime Options had approximately $760 thousand available under the line of credit. Convertible Subordinated Notes. On September 11, 1995 the Company issued $2,838,000 in aggregate principal amount of its Convertible Subordinated Notes due September 30, 2000 in exchange for 447,200 shares of the Company's Common Stock (currently held by the Company as treasury stock). The Convertible Subordinated Notes (i) mature on September 30, 2000, (ii) currently bear interest at a rate of 10% per annum, which rate of interest may fluctuate with the prime rate, but may not fall below 8% nor rise above 10% per annum, (iii) are convertible into common stock of the Company at $7.50 per share, (iv) are subordinated in right of payment to the Company's obligations under its secured revolving credit facility and (v) were issued pursuant to an indenture which contains certain covenants which are less restrictive than those contained in the Company's secured revolving credit facility. Upon the occurrence of certain change of control events, the holders of the Convertible Subordinated Notes have the right to have their notes redeemed at par. See Note M. The notes payable to related parties arose from cash advances to the Company and are due to individuals and trusts related to the former principal owners of the Company. Interest expense on notes payable to related parties for the years ended December 31, 1995, 1994 and 1993 was $16.2 thousand, $33.4 thousand, and $50.4 thousand, respectively. G. SHAREHOLDERS' EQUITY -------------------- During 1993, the Company received proceeds of $150,073 from the exercise of 21,165 options. There were no options exercised during 1995 or 1994. In August 1989, the Company, in connection with an initial public offering, sold warrants to purchase an aggregate of 90,000 shares of common stock to the underwriters and finders for a nominal price, exercisable at $7.80 per share. These warrants were exercisable for a period of four years commencing one year after the public sale. During 1993, 3,000 (of the remaining 6,000 unexercised) warrants were exercised with net proceeds of $23,400. The balance of the unexercised warrants (3,000 warrants) expired in 1994. On September 11, 1995, the Company exchanged its Convertible Subordinated Notes for 447,200 shares of its stock currently held in the Company's treasury. Costs incurred in this transaction amounted to $33,901. For details of this transaction, see Note F - Convertible Subordinated Notes and Note M - Subsequent Events. H. STOCK OPTION AND BENEFIT PLANS ------------------------------ The Company has reserved 175,000 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 stock options issued are exercisable beginning two years after the grant date and must be exercised (if at all) within 5 years. The following table summarizes qualified stock option transactions from 1993 through 1995.
Total Option Price Options Per Share ------- ---------------- Outstanding, January 1, 1993 112,870 $ 7.000 to $14.000 Granted 1,200 $ 5.875 to $6.500(1) Forfeited (200) $14.000 Exercised (19,499) $ 7.000 to $ 7.125 ------- Outstanding, December 31, 1993 94,371 $ 7.000 to $14.000 Granted 1,200 $ 5.750 to $ 6.500(1) Forfeited (1,134) $ 6.500 to $14.000(1) ------- Outstanding, December 31, 1994 94,437 $ 5.750 to $14.000 Granted 1,200 $ 5.375 to $ 7.6875 Forfeited 53,470 $ 5.875 to $14.000 ------- Outstanding, December 31, 1995 42,167 ======= Exercisable, December 31, 1995 32,897 =======
(1) In May 1994, 11,200 stock options issued in 1992 and 1993 at $11.6250 to $17.000, were repriced to $6.50. The Company has reserved 50,000 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. The options issued are exercisable two years after the grant date and must be exercised (if at all) within 5 years. The following table summarizes non-qualified stock option transactions from 1992 through 1995:
Total Option Price Options Per Share ------- ------------------ Outstanding, January 1, 1993 23,334 $ 7.125 to $14.000 Exercised (1,666) $ 7.125 ------ Outstanding, December 31, 1993 21,668 $ 7.125 to $14.000 Forfeited (13,000) $ 7.125 to $14.000 ------- Outstanding, December 31, 1994 8,668 $ 7.125 to $14.000 Granted 10,000 $ 5.600 Forfeited (6,668) $ 7.125 ------- Outstanding, December 31, 1995 12,000 ======= Exercisable, December 31, 1995 1,334 =======
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, 1995, 1994 and 1993 was $34,563, $38,100 and $42,924, respectively. I. INCOME TAXES The tax provision consists of:
Years Ended December 31, ---------------------------------------------------- 1995 1994 1993 -------- ---------- ---------- Federal: Current $276,500 $394,500 $699,000 Deferred 16,000 (307,000) (433,000) -------- -------- -------- 292,500 87,500 266,000 -------- -------- -------- State: Current 38,500 - 17,000 Deferred - - (17,000) -------- ------- -------- 38,500 - - -------- ------- -------- TOTAL $331,000 $87,500 $266,000 ======== ======= ========
Years Ended December 31, ----------------------------------------------- 1995 1994 1993 -------- ------- -------- Tax Expense at Statutory Rate $276,100 $79,900 $246,000 Increase (Decrease) Resulting from: State Income Taxes, Net of Federal Income Tax Effect 24,500 - - Non-deductible expense 19,100 7,600 8,000 Other 11,300 - 12,000 -------- ------- -------- $331,000 $87,500 $266,000 ======== ======= ======== Effective Tax Rate 40.8% 37.2% 36.8% ==== ==== ==== December 31, ----------------------------- 1995 1994 -------- -------- Deferred tax asset: Allowance for credit losses $893,000 $909,000 ======== ========
J. RELATED-PARTY TRANSACTIONS -------------------------- Certain members of the immediate families of Eugene Haskin and Leon Fishman, directly or through trusts, have provided financing to Lifetime Options through unsecured loans with interest payable monthly at an annual interest rate of 1% over the prime rate. One percent (1%) over the prime rate is the same rate paid by Lifetime Options to its unaffiliated, bank lender. Lifetime Options' total indebtedness to members of Mr. Haskin's immediate family was $15,146 at December 31, 1995 and 1994. During 1995 and 1994, at the request of members of Mr. Haskin's family, Lifetime Options repaid $-0- and $445,407, respectively, of long term indebtedness. During 1995 and 1994, Lifetime Options paid aggregate interest on these loans of $1,514 and $16,267, respectively. Lifetime Options' total indebtedness to members of Leon Fishman's immediate family was $43,642 at December 31, 1995 and 1994. During 1995 and 1994, Lifetime Options paid aggregate interest of $4,360 and $8,780, respectively. At various times during 1994, Leon Fishman loaned Lifetime Options a total of $265,000 which was repaid in full by December 31, 1994. During the periods of indebtedness, Mr. Fishman received $2,467 of interest. At January 1, 1994, Craig Fishman was owed $18,659 by Lifetime Options. The level of borrowings from Craig Fishman increased at various intervals during 1994 to $97,800. As of December 31, 1994 the indebtedness of $97,800 was paid in full. Craig Fishman received interest from Lifetime Options of $2,610 in 1994. Neither Craig Fishman nor Leon Fishman loaned money to Lifetime Options in 1995 and neither of them received any interest in 1995. In February 1994, the Company made a loan in the amount of $1,000,000 to Eugene Haskin, a director of the Company, and his wife. The loan was unanimously approved by all members of the Board of Directors of the Company (with one director absent and Mr. Haskin abstaining) and conformed to a previous loan to an unrelated party. The loan bore interest at a rate equal to 2% per month, was collateralized by a pledge of securities having a market value of approximately $1,600,000 and was due on or before July 15, 1994. The loan, together with all accrued interest thereon, was repaid on March 24, 1994. Rental payments of $24,000 were received by the Company in 1995, 1994 and 1993, respectively, from its President, for the personal use of a condominium owned by a subsidiary of the Company. K. FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT CONCENTRATIONS -------------------------------------------------------------------- The Company is a party to financial obligations with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial obligations include conditional commitments to purchase receivables, obligations under guaranties issued by the Company and reimbursement obligations under letters of credit issued for the Company's account. These obligations involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company's maximum exposure to credit loss under financial obligations with off-balance sheet risk is represented by the contractual or notional amount of these obligations. The Company uses the same credit policies in making conditional commitments and incurring contingent obligations as it does for on-balance sheet obligations. These commitments have fixed expiration dates or other termination clauses and usually require payment of a fee by the client. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company receives collateral to secure letters of credit and guaranties. Financial obligations whose contract or notional amounts represent credit risk are as follows: December 31, -------------------------- 1995 1994 ----------- ----------- Conditional Commitments to purchase receivables $59,153,000 $57,157,000 Standby letters of credit and guaranties $ 726,967 $ 347,032 For the year ended December 31, 1995, gross earnings from three clients accounted for 37% of the Company's total earned discounts. At December 31, 1995, two clients each accounted for more than 10% of the Company's outstanding gross finance receivables. For the year ended December 31, 1994, gross earnings from one client accounted for 20% of total earned discounts. At December 31, 1994, one client accounted for more than 10% of the Company's outstanding gross finance receivables. For the year ended December 31, 1993, gross earnings from one client accounted for 11% of total earned discounts. At December 31, 1993, no one customer's aggregate gross finance receivables balance exceeded 10% of the Company's gross finance receivables balance. L. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company leases office space under operating leases with Consumer Price Index escalations and rental escalations based on increases in base operating expenses as defined in the agreements. The lease was renegotiated during 1995 and extended for six years from December 1, 1995 at a reduced rental. The Company also pays rent for subsidiaries and storage space. Rent expense was $232,500, $222,000, and $242,000 in 1995, 1994 and 1993, respectively. Future minimum rental payments are as follows: Twelve Months Ended December 31, -------------------------------- 1996 $ 159,000 1997 164,000 1998 169,000 1999 173,000 2000 179,000 2001 184,000 ---------- $1,028,000 ========== The Company is a defendant in White, Trustee v. Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the Western District of Pennsylvania. The Company provided receivables financing and advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991, the Lyon's trustee brought an action against the Company claiming, inter alia, fraudulent transfer and breach of contract. A summary judgment was granted in favor of the Company which reduced the fraudulent transfer claim by $1.6 million. As a consequence, the remaining fraudulent transfer claim was approximately $1,000,000. The trustee has not actively pursued the breach of contract claim. In late 1994, the Company reached a settlement agreement with the Lyons trustee, subject to approval by the bankruptcy court, which would have released the Company from all claims upon the payment of $300,000. In connection with the settlement, the Company paid and added $300,000 to the provision for credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin- Williams Company, objected to the proposed settlement amount and, in March 1995, the objection was sustained by the bankruptcy court. The Company has appealed the order sustaining the objection. The appeal is currently pending. Management does not believe the Company has a material exposure in excess of the previously agreed upon and paid settlement amount. In connection with the same transaction, the Company was also named in January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin-Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. The complaint seeks relief against the Company based upon a claim of "misrepresentation" without a specific identification of the alleged misrepresentation made by the Company. Management does not believe the litigation will have a material effect on the financial position or results of operations of the Company because, in management's opinion, the claims are without merit. The Company has filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery has been granted and the motion to dismiss is currently pending. A hearing date on the motion to dismiss has not yet been set. The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee v. Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court in the District of Massachusetts. The Company factored the accounts receivable of Clearpoint Research Corporation ("CRC") from late 1992 through early 1993. In July 1993 CRC filed a petition in bankruptcy, after the Company had collected all amounts owed to it. The bankruptcy trustee has sued the Company seeking recovery of alleged preferential transfers made during the course of the factoring relationship. The bankruptcy trustee alleges that the Company did not properly perfect its security interest in the accounts receivable. No specific damage amount is specified in the complaint but it is assumed the bankruptcy trustee is seeking recovery of the full amount of accounts receivables collected (approximately $4 million). The Company has filed an answer to the complaint denying the substantive allegations asserted by the bankruptcy trustee. The Company has also filed a motion to remove the action to federal district court. The motion is currently pending. The Company believes it has a number of strong defenses to the complaint and intends to vigorously defend all claims. The litigation is in a preliminary stage and the probability of an unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. As previously disclosed in the Company's Form 10-QSB for the quarter ended March 31, 1995, the Company has reached a settlement with the Trustee in the bankruptcy of Premium Sales Corporation, a former client of one of the Company's wholly-owned subsidiaries. The settlement required the Company and one of its wholly-owned subsidiaries to waive claims totalling approximately $1.5 million and to make a cash payment of $1.4 million. On July 21, 1995, the Company placed the full cash settlement amount in escrow in accordance with the terms of the settlement. The settlement is intended to be a full release of any and all claims between the Company (and its subsidiaries) and the Trustee including, without limitation, any alleged preference liability for the Company and its subsidiaries. The settlement was approved by the bankruptcy court in January 1996. The settlement will become fully effective and the settlement monies will be disbursed at the time a plan of distribution in the Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The impact of this settlement has been reflected in the Company's financial statements. Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these proceedings will have a material effect on the Company. From time to time, the Company is required to initiate litigation to collect amounts owed by former clients, guarantors or obligors. In connection with such litigation, the Company periodically encounters counterclaims by defendant(s) for material amounts. Such counterclaims are typically without any factual basis and, management believes, are usually asserted for defensive purposes by the litigant. M. SUBSEQUENT EVENTS ----------------- On November 28, 1995 the Company commenced an exchange offer pursuant to which the Company offered to issue to shareholders generally up to an aggregate of $2,162,000 in additional Convertible Subordinated Notes in exchange for common stock of the Company. The offer expired by its terms on January 12, 1996 and the Company issued approximately $2,160,000 in additional Convertible Subordinated Notes in exchange for 338,275 shares of the Company's common stock.
SCHEDULE IV INDEBTEDNESS OF AND TO RELATED PARTIES - NOT CURRENT Balance at Balance End of Period Beginning of Amounts --------------------- Name of Debtor Period Additions Paid Current Not Current - - - -------------- ------------ ---------- --------- ------- ----------- Year Ended December 31, 1995: Various $161,788 $ - $ - $103,000 $ 58,788 ======== ======== ======== ======== ======== Year Ended December 31, 1994: Various $602,759 $377,237 $818,208 $103,000 $ 58,788 ======== ======== ======== ======== ======== Year Ended December 31, 1993: Various $803,271 $100,000 $300,512 $ 79,904 $522,855 ======== ======== ======== ======== ========
SIGNATURES Pursuant to the requirements of 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/ Leon Fishman ------------------------------ Leon Fishman Pursuant to the requirements of 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/ Leon Fishman Leon Fishman --------------------------- Date March 28, 1996 President, Chief Executive --------------------------- Officer /s/ Lawrence M. Winkler Lawrence M. Winkler ---------------------------- Date March 20, 1996 Secretary/Treasurer, ---------------------------- Principal Accounting and Chief Financial Officer and Director /s/ Eugene R. Haskin Eugene R. Haskin ----------------------------- Director Date March 19, 1996 ----------------------------- /s/ James Spector James Spector ----------------------------- Date March 22, 1996 Director ----------------------------- /s/ Craig Fishman Craig Fishman ----------------------------- Date March 22, 1996 Sr. Vice President, General Counsel ----------------------------- and Director EX-10 2 Exhibit 10.7 FOURTH AMENDMENT AND WAIVER TO REVOLVING CREDIT AND SECURITY AGREEMENT FOURTH AMENDMENT AND WAIVER ("Fourth Amendment") dated as of March 31, 1995 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the dated hereof and as may be further amended, supplemented, modified or waived from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS") as the lender under the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the "Agent"). BACKGROUND Borrower has requested that Agent and Lenders amend and waive certain provisions of the Loan Agreement 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 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 set forth in Section 4 below, Section 1.2 of the Loan Agreement is amended by deleting the defined term "EBIT" and inserting the following in lieu thereof: "EBIT" shall mean Borrower's and its Subsidiaries' net income before (i) interest and taxes on a consolidated basis and (ii) any provision for credit loss and, without duplication, any allowance for credit loss, in each case, allocable or attributable to losses (or potential losses) related to (x) transactions between the Borrower and/or its Subsidiaries and Premium Sales Corporation (and its affiliates) or (y) claims at any time pending or threatened in connection with the insolvency of Premium Sales Corporation (and its affiliates), provided that under no circumstances shall EBIT at any time be increased pursuant to this clause (ii) by more than $2,000,000.00. 3. Waiver of Specified Defaults and Events of Default. Subject to satisfaction of the conditions set forth in Section 4 below, the Lenders and the Agent hereby waive any and all Defaults or Events of Default which would exist (and any and all rights and remedies which may exist as a consequence thereof) under or with respect to Section 7.19 of the Loan Agreement on or as of the Fourth Amendment Effective Date (as defined in Section 4 below) absent this Fourth Amendment. 4. Conditions of Effectiveness. This Fourth Amendment shall become effective as of the date first above written (the "Fourth Amendment Effective Date") upon receipt by Agent, in form and substance satisfactory to Agent, of three (3) copies of this Fourth Amendment executed by Borrower and consented to by each of the Guarantors. 5. Representations and Warranties. Borrower hereby represents and warrants as of the Fourth Amendment Effective Date as follows: (a) This Fourth Amendment and the Loan Agreement, as amended and waived hereby, constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) After giving effect to this Fourth Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and the Security Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Fourth Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist, in each case, after giving effect to this Fourth Amendment. (d) Borrower has no defense, counterclaim or offset to the Obligations. 6. Effect on the Loan Agreement. (a) Upon the effectiveness of Sections 2 and 3 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 and waived hereby. (b) Except as specifically amended and waived hereby, the Loan Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Fourth Amendment shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor constitute a waiver of any provision of the Loan Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 7. Governing Law. This Fourth 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 Fourth Amendment are included herein for convenience of reference only and shall not constitute a part of this Fourth Amendment for any other purpose. 9. Counterparts; Telecopy Signatures. This Fourth Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Fourth Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY, as Agent and Lender By Alfred J. Scoyni Name: Alfred J. Scoyni Title:Assistant Vice President ALLSTATE FINANCIAL CORPORATION By Craig Fishman Name: Craig Fishman Title: Vice President CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By Craig Fishman Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. SETTLEMENT SOLUTIONS, INC. By Craig Fishman By Craig Fishman Name: Craig Fishman Name: Craig Fishman Title: Vice President Title: Vice President RECEIVABLE FINANCING CORPORATION By Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF FLORIDA, INC. By Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF AMERICA, INC. By Craig Fishman Name: Craig Fishman Title: Vice President AFC HOLDING CORPORATION By Craig Fishman Name: Craig Fishman Title: Vice President EX-10 3 Exhibit 10.7 FIFTH AMENDMENT TO REVOLVING CREDIT AND SECURITY AGREEMENT FIFTH AMENDMENT ("Fifth Amendment") dated as of June 13, 1995 to Revolving Credit and Security Agreement dated as of May 13, 1994, (as amended to the date hereof and as may be further amended, supplemented or modified from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS") as the lender under the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for Lenders (IBJS, in such capacity, the "Agent"). BACKGROUND Borrower has consented to IBJS assigning to National Canada Finance Corp. ("NCFC") a forty percent (40%) interest in IBJS's rights under the Loan Agreement, the Revolving Credit Note, the Other Documents, and all other instruments and documents related thereto. In order to induce NCFC to assume the obligations of IBJS as Lender to the extent of the Commitment Percentage assigned, it has requested certain amendments be made to the Loan Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrower by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendment to Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 3 below, the Loan Agreement is hereby amended as follows: (a) Section 1.2 of the Loan Agreement is hereby amended as follows: (i) clause (p) of the defined term "Eligible Receivables" is amended by deleting "Stroudsburg Dyeing & Finishing Company and Ellis Graphics Corporation" appearing therein and inserting "S.O.S. Enterprises, Ltd." in lieu thereof. (ii) the following defined terms are hereby amended in their entirety to provide as follows: "Required Lenders" shall mean, at any time for the determination thereof, Lenders holding sixty six and two thirds percent (66 2/3%) or more of the outstanding Advances at such time or, if no Advances are outstanding at such time, sixty six and two thirds percent (66 2/3%) or more of the Commitment Percentages of all Lenders. "Revolving Credit Note" shall mean the promissory note(s) referred to in Section 2.1(a) hereof and all replacements, substitutions and amendments of such promissory note, including any promissory note(s) issued to any Lender. (iii) Clause (t) of the definition of "Eligible Receivables" is hereby amended in its entirety to provide as follows: "(t) notwithstanding (a) through (s) above, that is otherwise acceptable to Required Lenders as determined in good faith by Required Lenders in the exercise of their discretion in a reasonable manner." (b) Section 2.1(a) of the Loan Agreement is hereby amended by amending the last two sentences thereof in their entirety to provide as follows: "The sum of the amounts derived from Section 2.1.(a) (y) (i) at any time and from time to time shall be referred to as the "Borrowing Base". The Revolving Advances shall be evidenced by the Revolving Credit Note in substantially the form attached hereto as Exhibit 2.1(a) issued by Borrower to each Lender in an amount equal to such Lender's Commitment Percentage of the Maximum Revolving Advance Amount." (c) Section 2.1(e) of the Loan Agreement is hereby amended in its entirety to provide as follows: "(b) Discretionary Rights. The Advance Rates may be (i) decreased by Agent at any time and from time to time in the exercise of its reasonable discretion or (ii) increased by Required lenders at any time and from time to time in the exercise of their reasonable discretion. Borrower consents to any such increases or decreases and acknowledges that decreasing the Advance Rates may limit or restrict Advances requested by Borrower. Agent shall give Borrower five (5) days prior written notice of any decrease in the Advance Rates." (d) Section 2.12 (e) of the Loan Agreement is hereby amended by adding the following at the end thereof: "In the event Agent Fails to remit to any Lender such Lender's pro rata share of interest or fees to which such Lender is entitled in a prompt manner but in any event within one (1) Business Day of the payment of same by Borrower to Agent, Agent shall pay to such Lender on Demand for each day there is a delay in payment an amount equal to the product of (i) the Federal Funds Rate (computed on the basis of a year of 360 days), times (ii) such amount." (e) The third sentence of Section 2.12 (h) is hereby amended by deleting the reference to "this paragraph (e)" appearing therein and inserting a reference to "this paragraph (h)" in lieu thereof. (f) Section 9.11 of the Loan Agreement is hereby amended by adding the following in the second line thereof after "Fiscal Year" the phrase ", furnish Agent". (g) Section 11.1 of the Loan Agreement is hereby amended by (i) deleting "at the option of Agent" in the seventh line thereof and inserting in its place and stead "upon the declaration of the Agent with the consent of or at the direction of Required Lenders", and (ii) inserting in the eighth line thereof before the word "Agent" the phrase "with the consent of or at the direction of Required Lenders". (h) Section 13.1 of the Loan Agreement is hereby amended by (i) amending the second sentence thereof in its entirety so that it provides "The Term shall be automatically extended for successive periods of one (1) year each unless (except as provided in the next sentence) terminated by Borrower or the Required Lenders at the end of such initial Term or any successive Term by giving the other parties not less than thirty (30) days prior written notice, provided, however, if the initial Term (or any extension thereof) is extended in accordance with the terms hereof and any Lender (a "Terminating Lender") shall have given Borrower not less than thirty (30) days notice prior to such extension that such Lender does not want the Term (or any extension thereof) extended, Borrower shall, on or before the date of such extension, pay in full all principal amounts due the Terminating Lender (based on such Terminating Lender's Commitment percentage of all outstanding Advances (other than Letters of Credit) plus all accrued interest and fees payable for the benefit of such Terminating Lender), provided that (x) the Maximum Revolving Advance Amount shall at the time of such payment be reduced by an amount equal to the Terminating Lender's Commitment Percentage of the Maximum Revolving Advance Amount as in effect immediately prior to such extension, (y) the Commitment Percentage of each remaining Lender shall be adjusted to equal a fraction (1) the numerator of which is such Lender's Commitment Percentage (before give effect to any adjustment) and (2) the denominator of which is the sum of all remaining Lenders' Commitment percentages before giving effect to any adjustment), and (z) Borrower shall pay to Agent an amount equal to the amount, if any, by which outstanding Advances exceed the maximum amount of Advances which can be outstanding pursuant to the terms of this Agreement and (ii) inserting in the fourteenth line thereof after the word "pays" the phrase "to Agent for the ratable benefit of Lenders". (i) Section 14.3 of the Loan Agreement is hereby amended by inserting in the twelfth line thereof after the word "by" the phrase "or on behalf of". (j) Section 14.9 of the Loan Agreement is hereby amended by inserting in the second line thereof after the word "from" the phrase "or on behalf of". (k) Section 15.2(b) of the Loan Agreement is hereby amended by amending clauses (i) through (iv) in their entirety to provide as follows: "(i) increase or decrease the amount of the Commitment Percentage of any Lender, it being understood and agreed that this Section 15.2 (b)(i) does not (and shall not be deemed to) require the consent of any Lender (other than a transferor Lender or Purchasing Lender) to an increase or a decrease in the Commitment Percentage of a transferor Lender or a Purchasing Lender in connection with an assignment effected in accordance with Section 15.3 (d) hereof. (ii) change the maturity of the Revolving Credit Note, or increase the Maximum Revolving Advance Amount, the Maximum Equipment Value Advance Amount or the sublimit with respect to Letters of Credit, or reduce the rate or extend the time of payment of interest or of any fee payable by Borrower to Agent for the ratable benefit of Lenders pursuant to this Agreement. (iii) alter the definition of the term Required Lenders or the eligibility standards applied by Agent to the determination of which Receivables are Eligible Receivables. (iv) alter, amend or modify this Section 15.2(b) or release Collateral having a fair market value of in excess of $100,000, it being understood and agreed that this Section 15.2(b) (iv) does not (and shall not be deemed to) require the consent of any Lender (or all of the Lenders) in connection with a sale, transfer, conveyance, assignment or other disposition of any of Borrower's properties or assets (or any of the Collateral) to the extent any such sale, transfer, conveyance, assignment or other disposition is authorized or permitted by the terms of this Agreement or any Other Document. (l) Section 15.6(B) of the Loan Agreement is hereby amended in its entirety to provide as follows: "(B) If to any Lender other than Agent, as specified in the applicable Commitment Transfer Supplement (or a schedule thereto)." 3. Conditions of Effectiveness. This Fifth Amendment shall become effective (the "Fifth Amendment Effective Date") upon the receipt by Agent, in form and substance satisfactory to Agent, of each of the following: (i) four (4) copies of this Fifth Amendment executed by Borrower and consented to by each of the Guarantors, (ii) two (2) executed Revolving Credit Notes (one payable to the order of IBJS in the principal amount of $15,000,000 and the other payable to the order of National Canada Finance Corp. in the principal amount of $10,000,000) which shall replace the Second Amended and Restated Revolving Credit Note, and (iii) a Commitment Transfer Supplement duly executed by the Borrower, Agent, IBJS and National Canada Finance Corp. in form and substance satisfactory to Agent. Promptly following the effectiveness of this Fifth Amendment, Agent shall deliver to Borrower the original Second Amended and Restated Revolving Credit Note marked "Replaced and Cancelled". In the event this Fifth Amendment does not become effective by June 16, 1995 the replacement notes shall be returned to Borrower and the Second Amended and Restated Note shall remain in full force and effect. 4. Representations and Warranties. Borrower hereby represents and warrants as of the Fifth Amendment Effective Date as follows: (a) This Fifth Amendment, the replacement Revolving Credit Notes 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) Upon the effectiveness of this Fifth Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement to the extent the same are not amended hereby and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Fifth Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Fifth 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 or provided for 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 Fifth Amendment shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 6. Governing Law. This Fifth 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 Fifth Amendment are included herein for convenience of reference only and shall not constitute a part of this Fifth Amendment for any other purpose. 8. Counterparts; Telecopy Signatures. This Fifth Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same agreement. Any signature delivered (BALANCE OF PAGE INTENTIONALLY LEFT BLANK) by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Fifth Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY as Agent and Lender By: David G. Goodall Name: David G. Goodall Title: Vice President ALLSTATE FINANCIAL CORPORATION By:Craig Fishman Name: Craig Fishman Title: Vice President CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By: Craig Fishman Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. By: Craig Fishman Name: Craig Fishman Title: Vice President RECEIVABLE FINANCING CORPORATION By: Craig Fishman Name: Craig Fishman Title: Vice President SIGNATURES CONTINUED ON NEXT PAGE BUSINESS FUNDING OF AMERICA, INC. By: Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF FLORIDA, INC. By: Craig Fishman Name: Craig Fishman Title: Vice President AFC HOLDING CORPORATION By: Craig Fishman Name: Craig Fishman Title: Vice President SETTLEMENT SOLUTIONS, INC. By: Craig Fishman Name: Craig Fishman Title: Vice President EX-10 4 Exhibit 10.7 SIXTH AMENDMENT AND WAIVER TO REVOLVING CREDIT AND SECURITY AGREEMENT SIXTH AMENDMENT AND WAIVER ("Sixth Amendment") dated as of September 7, 1995 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended to the date hereof and as may be further amended, supplemented or modified from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS") and the other lenders party to the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for Lenders (IBJS, in such capacity, the "Agent"). BACKGROUND In order to enable Borrower to issue from time to time, up to an aggregate principal amount of $5,000,000.00 in convertible, senior subordinated notes in exchange for shares of Borrower's common stock, Borrower has requested that Agent and the Required Lenders amend and waive certain provisions of the Loan Agreement, and Agent and the Required Lenders are willing to do so on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore and hereafter made to or for the account of Borrower by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendments to and Waivers of Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 3 below, the Loan Agreement is hereby amended and waived as follows: (a) Section 1.2 of the Loan Agreement is hereby amended by inserting the following defined terms in the appropriate alphabetical order: "Convertible, Senior Subordinated Notes" shall mean up to an aggregate principal amount of $5,000,000.00 in convertible, senior subordinated notes issued by Borrower from time to time pursuant to an Indenture of Trust dated as of September 11 , 1995 between Borrower and Shawmut Bank Connecticut, National Association (as modified, supplemented or amended from time to time in accordance with the terms thereof, the "Indenture"), which notes (i) shall bear interest at a rate not to exceed 10% per annum payable quarterly in arrears, (ii) shall not call for any scheduled repayment of principal prior to September 30, 2000, (iii) shall at all times be unsecured, (iv) shall be subordinated in right of payment in a manner acceptable to the Agent and the Required Lenders (as evidenced by their execution and delivery of the Sixth Amendment) to the payment or repayment of the Obligations, and (v) may, as specified therein, be converted from time to time into common Stock of Borrower. "Sixth Amendment" shall mean the Sixth Amendment and Waiver to Revolving Credit and Security Agreement dated as of September 7, 1995. (b) Section 7.1(a) of the Loan Agreement is hereby amended by inserting ", 7.7" immediately after the reference to "Section 7.4" appearing therein. (c) Section 7.7 of the Loan Agreement is hereby amended by (i) deleting from subsection (a) thereof the reference to "(a)" immediately before the phrase "subsequent to the receipt by Agent of Borrower's annual audited financial statements", (ii) inserting in subsection (a) thereof the word "Section" immediately before the reference to "9.6" appearing therein, and (iii) replacing the word "and" appearing immediately before subsection (d) thereof with "," and inserting new subsections "(e)", "(f)", and "(g)" to read in their entirety as follows: "(e) Borrower may from time to time acquire, purchase, redeem or otherwise retire common Stock of Borrower in exchange for Convertible, Senior Subordinated Notes, (f) Borrower may make regularly scheduled payments of principal and interest in respect of the Convertible, Senior Subordinated Notes in accordance with (and subject to) the terms thereof and of the Indenture, and (g) Borrower may from time to time issue common Stock of Borrower upon the proper exercise of the conversion rights contained in the Convertible, Senior Subordinated Notes and in the Indenture (whether or not Borrower is deemed to have received reasonably equivalent value in connection with any such conversion)." (d) The Agent and the Required Lenders hereby waive the "ordinary course of business" limitation contained in Section 7.8(vii) of the Loan Agreement to the extent (but only to the extent) necessary to enable Borrower to issue from time to time the Convertible, Senior Subordinated Notes. (e) The Agent and the Required Lenders hereby waive Section 7.10 of the Loan Agreement to the extent (but only to the extent) necessary to enable Borrower (i) to issue from time to time the Convertible, Senior Subordinated Notes, (ii) to make regularly scheduled payments of principal and interest in respect of the Convertible, Senior Subordinated Notes in accordance with (and subject to) the terms thereof and of the Indenture, and (iii) to issue from time to time common Stock of Borrower upon the proper exercise of the conversion rights contained therein. (f) Section 7.17 of the Loan Agreement is hereby amended by inserting the following provision immediately before the period appearing at the end thereof: "or repurchase, redeem, retire or otherwise acquire, in whole or in part, the Convertible, Senior Subordinated Notes prior to their final stated maturity in the year 2000, provided that nothing contained in this Section 7.17 shall (or shall be deemed to) restrict or impair Borrower's ability to issue from time to time common Stock of Borrower upon the proper exercise of the conversion rights contained in the Convertible, Senior Subordinated Notes and in the Indenture." (g) Subsection (a) of Section 7.19 of the Loan Agreement is hereby deleted in its entirety and the following new subsection "(a)" is inserted to read in its entirety as follows: "(a)(i) On the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended June 30, 1994, the ratio of (A) EBIT to (B) interest expense (other than interest expense in respect of the Convertible, Senior Subordinated Notes), for the four Fiscal Quarters then ended (taken as one accounting period) shall not be less than 3:1; and (ii) On the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended September 30, 1995, the ratio of (A) EBIT to (B) total interest expense, for the four Fiscal Quarters then ended (taken as one accounting period) shall not be less than 2:1; provided that, in the case of preceding clauses (i) and (ii), in the event the Base Rate exceeds 8 1/2% per annum for any period of determination hereunder then the applicable ratio shall be reduced by a percentage equal to the percentage by which the Base Rate exceed 8 1/2% per annum; provided further, that in no event shall the applicable ratio be reduced below 1.75:1." (h) Subsection (c) of Section 7.19 of the Loan Agreement is hereby deleted in its entirety and the following new subsection "(c)" is inserted to read in its entirety as follows: "(c) Tangible Net Worth shall equal or exceed $27,000,000 on December 31, 1993, and on the last day of any Fiscal Quarter thereafter, the sum of (i) Tangible Net Worth and (ii) the aggregate principal amount of Convertible, Senior Subordinated Notes then outstanding, shall equal or exceed the sum of (x) $27,000,000 and (y) $225,000 times the number of Fiscal Quarters elapsed from December 31, 1993 to the end of such Fiscal Quarter." (i) Clauses (i) and (ii) of subsection (d) of Section 7.19 of the Loan Agreement are hereby deleted in their entirety and the following new clauses "(i)" and "(ii)" are inserted to read as follows: "(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 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; 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." (j) Section 10.10 of the Loan Agreement is hereby deleted in its entirety and the following new Section 10.10 is inserted to read in its entirety as follows: "10.10 An "Event of Default" under (and as defined in) the Indenture shall have occurred and be continuing;" 3. Conditions of Effectiveness. This Sixth Amendment shall become effective as of the date first above-written (the "Sixth Amendment Effective Date") when each of the following conditions has been satisfied: (i) Agent shall have received for (4) copies of this Sixth Amendment duly executed by Borrower and the Required Lenders and consented to by each of the Guarantors, (ii) Agent shall have received an execution form of the Indenture which form of Indenture shall be in form and substance reasonably satisfactory to the Agent and (iii) Borrower shall have issued the first Convertible, Senior Subordinated Note. 4. Representations and Warranties. Borrower hereby represents and warrants as of the Sixth Amendment Effective Date as follows: (a) This Sixth 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) Upon the effectiveness of this Sixth Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement to the extent the same are not amended hereby and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Sixth Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Sixth Amendment. (d) Borrower has no defense, counterclaim or offset to the Obligations. 5. Effect on the Loan Agreement and Other Documents. (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 and each reference in the Other Documents to the Loan Agreement (or the Agreement) shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended or provided for 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 Sixth Amendment shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor (except as expressly set forth herein) constitute a waiver of any instruments or agreements executed and/or delivered under or in connection therewith. 6. Governing Law. This Sixth 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 Sixth Amendment are included herein for convenience of reference only and shall not constitute a part of this Sixth Amendment for any other purposes. 8. Counterparts; Telecopy Signatures. This Sixth Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same agreement. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Sixth Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY, As Agent and Lender By: Alfred J. Scoyni Name: Alfred J. Scoyni Title: Assistant Vice President NATIONAL CANADA FINANCE CORP., A Lender By: Richard P. Brown Name: Richard P. Brown Title: VP ALLSTATE FINANCIAL CORPORATION By: Craig Fishman Name: Craig Fishman Title: CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By:Craig Fishman Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. By:Craig Fishman Name: Craig Fishman Title: Vice President RECEIVABLE FINANCING CORPORATION By:Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF AMERICA, INC. By:Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF FLORIDA, INC. By:Craig Fishman Name: Craig Fishman Title: Vice President AFC HOLDING CORPORATION By:Craig Fishman Name: Craig Fishman Title: Vice President SETTLEMENT SOLUTIONS, INC. By:Craig Fishman Name: Craig Fishman Title: Vice President EX-10 5 Exhibit 10.6 SEVENTH AMENDMENT TO REVOLVING CREDIT AND SECURITY AGREEMENT SEVENTH AMENDMENT ("Seventh Amendment") dated as of November 1, 1995 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the dated hereof and as may be further amended, supplemented, modified or waived from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the "Agent"). BACKGROUND Borrower has requested that Agent and Lenders amend certain provisions of the Loan Agreement 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 Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendments to Loan Agreement. Subject to satisfaction of the conditions set forth in Section 3 below, the Loan Agreement is hereby amended as follows: (a) The definition of "Maximum Equipment Value Advance Amount" appearing in Section 1.2 of the Loan Agreement is hereby amended by deleting the date "November 18, 1995" each place it appears therein and inserting in lieu thereof the date "December 31, 1995". (b) Section 2.2(a) of the Loan Agreement is hereby amended by deleting the date "November 18, 1995" appearing therein and inserting in lieu thereof the date "December 31, 1995". 3. Conditions of Effectiveness. This Seventh Amendment shall become effective as of the date first above written (the "Seventh Amendment Effective Date") upon receipt by Agent of a copy of this Seventh Amendment duly executed by Borrower and the Required Lenders and consented to by each of the Guarantors. 4. Representations and Warranties. Borrower hereby represents and warrants as of the Seventh Amendment Effective Date as follows: (a) This Seventh Amendment and the Loan Agreement, as amended and waived hereby, constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) After giving effect to this Seventh Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and the Security Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Seventh Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist, in each case, after giving effect to this Seventh 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 hereby, the Loan Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Seventh Amendment shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor constitute a waiver of any provision of the Loan Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 6. Governing Law. This Seventh 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 Seventh Amendment are included herein for convenience of reference only and shall not constitute a part of this Seventh Amendment for any other purpose. 8. Counterparts; Telecopy Signatures. This Seventh Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Seventh Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY, as Agent and Lender By Peter Thompson Name:Peter Thompson Title: VP NATIONAL CANADA FINANCE CORP., a Lender By Richard P. Brown Name: Richard P. Brown Title: VP By Michael E. Williams Name: Michael E. Williams Title: VP ALLSTATE FINANCIAL CORPORATION By Craig Fishman Name: Craig Fishman Title: Senior Vice President CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By Craig Fishman Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. SETTLEMENT SOLUTIONS, INC. By Craig Fishman By Craig Fishman Name: Craig Fishman Name: Craig Fishman Title: Vice President Title: Vice President RECEIVABLE FINANCING CORPORATION By Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF FLORIDA, INC. By Craig Fishman Name: Craig Fishman Title: Vice President BUSINESS FUNDING OF AMERICA, INC. By Craig Fishman Name: Craig Fishman Title: Vice President AFC HOLDING CORPORATION By Craig Fishman Name: Craig Fishman Title: Vice President EX-10 6 Exhibit 10.7 EIGHTH AMENDMENT AND WAIVER TO REVOLVING CREDIT AND SECURITY AGREEMENT EIGHTH AMENDMENT AND WAIVER ("Eighth Amendment") dated as of March 4, 1996 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the date hereof and as may be further amended, supplemented, modified or waived from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the "Agent") BACKGROUND Borrower has requested that Agent and Lenders amend and waive certain provisions of the Loan Agreement and the Agent and the Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrower by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendment to Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 4 below, Section 7.19(c) of the Loan Agreement is hereby amended by inserting the following immediately before the period appearing at the end thereof: ", provided that notwithstanding the foregoing, commencing on December 31, 1995, and on the last day of any Fiscal Quarter thereafter, the sum of (i) Tangible Net Worth and (ii) the aggregate principal amount of Convertible, Senior Subordinated Notes then outstanding shall equal or exceed the sum of (x) $28,300,000 and (y) $225,000 times the number of Fiscal Quarters elapsed from December 31, 1995 to the end of such Fiscal Quarter". 3. Waiver of Specified Defaults and Events of Default. Subject to satisfaction of the conditions set forth in Section 4 below, the Lenders and the Agent hereby waive any and all Defaults or Events of Default which would exist (and any and all rights and remedies which may exist as a consequence thereof) under or with respect to Section 7.19 of the Loan Agreement on or as of December 31, 1995 (and thereafter) absent this Eighth Amendment. 4. Conditions of Effectiveness. This Eighth Amendment shall become effective as of the date first above written (the "Eighth Amendment Effective Date") upon (i) receipt by the Agent of this Eighth Amendment duly executed by Borrower and the Required Lenders and consented to by each of the Guarantors and (ii) payment to the Agent for the ratable benefit of the Lenders of an amendment fee in the amount of $10,000. 5. Representations and Warranties. Borrower hereby represents and warrants as of the Eighth Amendment Effective Date as follows: (a) This Eighth Amendment and the Loan Agreement, as amended and waived hereby constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) After giving effect to this Eighth Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Eighth Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Eighth Amendment. (d) Borrower has no defense, counterclaim or offset to the Obligations. 6. Effect on the Loan Agreement and the Security Agreement. (a) Upon the effectiveness of Sections 2 and 3 hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as amended and waived hereby. (b) Except as specifically amended and waived herein, the Loan Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Eighth Amendment shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor constitute a waiver of any provision of the Loan Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 7. Governing Law. This Eighth 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 Eighth Amendment are included herein for convenience of reference only and shall not constitute a part of this Eighth Amendment for any other purpose. 9. Counterparts; Telecopy Signatures. This Eighth Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Eighth Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY as Agent and Lender By: Alfred J. Scoyni Name: Alfred J. Scoyni Title: Vice President NATIONAL CANADA FINANCE CORP., a Lender By:_______________________ Name: Title: By:_______________________ Name: Title: ALLSTATE FINANCIAL CORPORATION By: Craig Fishman Name: Craig Fishman Title: Senior Vice President [SIGNATURES CONTINUED ON NEXT PAGE] CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By: Craig Fishman Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION By: Craig Fishman By: Craig Fishman Name: Craig Fishman Name: Craig Fishman Title: Senior Vice President Title: Senior Vice President RECEIVABLE FINANCING CORPORATION By: Craig Fishman Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF FLORIDA, INC. By: Craig Fishman Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF AMERICA, INC. By: Craig Fishman Name: Craig Fishman Title: Senior Vice President SETTLEMENT SOLUTIONS, INC. By: Craig Fishman Name: Craig Fishman Title: Senior Vice President EX-10 7 Exhibit 10.8 PERSONAL AND CONFIDENTIAL As of December 13, 1995 Mr. Bret Kelly 225 Marlborough Pl. Rd. Stafford, VA 22554 Dear Bret: This letter (as in effect from time to time, the "Agreement") sets forth the terms of our mutual understanding concerning the termination of your employment with Allstate Financial Corporation ("Allstate"). Accordingly, we have agreed to the following terms: 1. Termination of Employment. We mutually agree that your employment with Allstate terminated, effective as of November 3, 1995. You agree to furnish promptly to Allstate any requested letter documenting your resignation as an officer of Allstate. 2. Salary Continuation. We mutually agree that Allstate paid to you (i) on November 15, 1995, a gross payment of $15,211.73 ($12,151.22 of which was for salary continuation) net of applicable federal, state and local withholding and payroll taxes and other necessary deductions and (ii) on November 29, 1995, a gross payment of $2,711.54 (all of which was for salary continuation) net of applicable federal, state and local withholding and payroll taxes and other necessary deductions. We further mutually agree that Allstate will pay to you, (x) on December 15, 1995, a gross amount for salary continuation of $15,211.73 net of applicable federal, state and local withholding and payroll taxes and other necessary deductions and (y) commencing on December 27, 1995 and ending on November 1, 1996, an additional gross amount for salary continuation of $190,425.51 in the aggregate payable in installments of $8,279.37 every two weeks on Allstate's regular pay days, each such payment to be paid net of all applicable federal, state and local withholding and payroll taxes and such other withholdings as may be required or permitted by this Agreement or applicable law. For purposes of this Agreement, "Severance Period" shall mean the period commencing on November 3, 1995 and ending on November 1, 1996. 3. Insurance Benefits. Allstate will provide you during the Severance Period (at no cost to you) with the same group health benefits as Allstate provides from time to time to its employers. Upon the expiration of the Severance Period, you will be entitled to continue such health benefits, at your cost, for the balance of the time for which you are entitled to coverage pursuant to federal COBRA law. The COBRA period begins on December 1, 1995. Your group life insurance coverage has terminated. You have received information concerning an option to convert that insurance to an individual policy. 4. Company Car. Allstate agrees to transfer to you title to the 1993 Mercury Sable automobile (the "Vehicle") which you currently possess, at no cost other than (i) applicable transfer of title fees and any sales taxes or other similar charges and (ii) income taxes resulting from your receipt of the Vehicle, all of which shall be your sole responsibility. If you fail for any reason to pay any applicable transfer of title fees and any sales taxes or other similar charges when due as contemplated in the immediately preceding sentence, the amount you fail to pay may be deducted by Allstate from your salary continuation payments at such time(s) as Allstate elects. Allstate agrees to maintain insurance on the Vehicle until the date the title document to the Vehicle is tendered to you. 5. Benefit Plans. No further contributions to Allstate's 401(k) plan may be made by you or Allstate after November 29, 1995. You have received information concerning your withdrawal and other rights under that plan. See also Paragraph 2 below - "Indebtedness to 401(K) Plan". 6. Stock Options. Allstate agrees to issue to you (as soon as reasonably possible following your execution of this Agreement) 10,000 non-qualified options (the "Options") to acquire Allstate common stock at $5.60 per share, 5,000 of which Options shall first be exercisable on or after November 3, 1997 and 5,000 of which Options shall first be exercisable on or after November 3, 1998. All unexercised options will expire on November 3, 1999. The common stock issuable upon exercise of the Options will not be registered under any federal or state securities laws. Accordingly, there may be restrictions on your ability to sell or otherwise dispose of such stock. Allstate encourages you to obtain legal advice in connection with the foregoing. You agree that any and all options which you currently own are hereby cancelled effective as of the date of this Agreement. 7. Indemnification. Allstate's indemnification obligations vis a vis its officers may change from time to time. Allstate agrees to indemnify you against losses arising from any matter (within the scope of your employment) in which you were involved during your employment relationship with Allstate but only if and to the extent that, at the time a claim for indemnification arises, the loss would at such time be indemnifiable if it were incurred by a then current officer of Allstate. The intent of the foregoing is to entitle you to the same indemnification rights as active officers of Allstate may from time to time be entitled. Notwithstanding anything to the contrary contained in this paragraph 7 or otherwise, the foregoing indemnification does not apply to any losses incurred by you as a result of any action (or threatened action) between you and Allstate. 8. Release. Except as to such rights or claims as may be created by, under or in connection with this Agreement, Allstate hereby releases and forever discharges you from all causes of action or claims of any kind that it may now have or could have had in contract, tort or otherwise. 9. Employment References. As long as you have not defaulted under or in connection with this Agreement, Allstate will, upon your request to Craig Fishman, provide potential employers with a written reference in the form of Exhibit A attached hereto. Allstate will not provide verbal references, provided that Allstate will provide potential employers with verbal confirmation of (i) the length of your employment with Allstate, i.e., 11 years and (ii) your ending salary of $220,500.00. 10. Nondisparagement; Nondisclosure. Allstate agrees that its officers and directors will not, and it will use its reasonable efforts to cause its other employees not to, make statements which may reasonably be expected to impair your ability to obtain or maintain employment. Allstate will refrain from making any written news release or other written public announcement disclosing the terms, conditions, provisions and/or existence of this Agreement except as may be required by applicable federal or state law, rule or regulation. 11. No Additional Benefits. You acknowledge that no additional severance benefits or other compensation, except as specifically set forth above, are payable by Allstate to you. In consideration of the foregoing benefits which are over and above those to which you would otherwise be entitled, you agree as follows: 1. Release. Except as to such rights or claims as may be created by, under or in connection with this Agreement, you hereby release and forever discharge Allstate, all of its subsidiaries and affiliated entities and all of its and their officers, directors, and employees from all causes of action or claims of any kind that you may now have or could have had whether in contract, tort or otherwise, including specifically (but without limitation) any claims of discrimination that you may claim in connection with your employment or the termination thereof. This includes, but is not limited to, claims arising under the federal, state or local laws prohibiting discrimination on the basis of one's sex, race, age, handicap, national origin, color or religion, or claims growing out of any legal restriction on Allstate's right to terminate its employees. 2. Indebtedness to 401(k) Plan. You acknowledge that as of November 30, 1995 you are indebted to the Allstate 401(k) plan in the amount of $45,476.44. You are hereby notified that the full amount of such indebtedness is due and payable immediately. If you do not repay this indebtedness in full, you will be deemed to have received a distribution from the 401(k) plan, which distribution may be subject to income tax and a penalty for early withdrawal. Allstate will issue to you a Form 1099 reflecting the amount of the deemed distribution. Allstate encourages you to consult a tax advisor in connection with the foregoing. 3. Nondisclosure. You agree that you will refrain from disclosing to any person or entity (other than tax advisers, retained legal counsel and your spouse) the terms, conditions, provisions and/or existence of this Agreement, and neither you nor any person acting on your behalf shall make any written or oral statements, news release or other announcement or publication relating to this Agreement. 4. Confidential Information. You acknowledge that in the course of your employment with Allstate, you have acquired Confidential Information. "Confidential Information" as used in this Agreement means any confidential or proprietary information pertaining to Allstate, its subsidiaries and/or affiliates, its and their officers, directors, employees, shareholders and lenders, including without limitation, information received from third parties under confidential or proprietary conditions, information subject to Allstate's attorney-client or work-product privilege, and other technical, business or financial information, the use or disclosure of which might reasonably be construed to be contrary to Allstate's interest. You agree that, except as you may otherwise be directed under this Agreement or as required by law, regulation or legal proceeding, you (1) will keep such Confidential Information confidential at all times, (2) will not disclose or communicate Confidential Information to any third party, and (3) will not make use of Confidential Information on your behalf or on behalf of any third party. In the event that you become legally compelled to disclose any Confidential Information, you agree to provide Allstate with prompt written notice of such request or demand so that Allstate may seek a protective order or other appropriate legal remedy to which it may be entitled. 5. Nondisparagement. Without limiting the generally of preceding paragraph 4, you agree that you will not make any statements or disclose any items of information which are or which may reasonably be considered to be adverse to the interests of Allstate and further, that you will not disparage (i) Allstate, any of its subsidiaries or affiliated entities, (ii) its or their executives, officers, directors or employees or (iii) its or their products, services or business practices. 6. Nonsolicitation. You agree that for a period of two (2) years from the date of your termination, you will not: (1) Solicit any business from or have any business dealings with, either directly or indirectly or through corporate or other entities or associates, any customer or client of Allstate (or any subsidiary or affiliate of Allstate) or, if known to you, any person or firm that has contacted or has been contacted by Allstate (or any subsidiary or affiliate of Allstate) as a potential customer or client of Allstate; and (2) Initiate any action, either directly or indirectly or through corporate or other entities or associates, which would reasonably be expected to encourage or to induce any employee of Allstate or of any subsidiary or affiliate of Allstate to leave the employ of Allstate or of any such subsidiary or affiliate; and (3) Solicit any business from or have any business dealings whatsoever with, either directly or indirectly or through corporate entities or associates, any of the specified brokers and referral sources listed on Exhibit B attached hereto. You agree that to the extent Exhibit B hereto identifies a named individual, the limitations set forth in this sub-paragraph 3 shall extend to any corporation or other entity with which such individual may at any time be or become associated. 7. Cooperation. You agree that during the Severance Period and thereafter you will cooperate fully with Allstate on all matters for which your assistance is requested including, but not limited to, trial preparation and testimony, and transition issues. You agree to be available to Allstate in this connection for at least an average of five (5) hours per week during the Severance Period and you will use your best efforts to be available for additional reasonable periods of time as requested by Allstate (whether during the Severance Period or thereafter). You will receive no additional compensation for any such cooperation and assistance, provided that, in connection with your performing under this paragraph 7, Allstate will (at Allstate's option) either (i) arrange (and pay for) your travel, hotels and meals, if any, at no cost to you or (ii) pay or reimburse you for all reasonable, out-of-pocket travel and travel-related expenses, but only to the extent such expenses have been approved in advance by Allstate in writing. 8. Rights and Remedies. Notwithstanding anything to the contrary contained in this Agreement, in addition to any other rights Allstate may have, should you breach any of the terms of this Agreement, Allstate will have the right to cease any and all payments or provision of benefits hereunder. 9. Entire Agreement. The terms and conditions stated herein constitute the entire agreement between the parties and supersede any prior agreements or understandings, whether written or oral, of any nature whatsoever. This Agreement may not be modified other than in writing and signed by both parties. 10. Severability. If any one or more of the provisions of this Agreement shall be held illegal or unenforceable, no other provision shall be affected. 11. Choice of Law. This Agreement shall be subject to and governed by the laws of the Commonwealth of Virginia without regard to its conflicts of law principles. 12. Successors and Assigns. Allstate's rights and obligations hereunder shall inure to the benefit of, and be binding on, Allstate's successors and assigns. Allstate encourages you to carefully review the terms of this Agreement and encourages you to seek advice and counsel from any party you wish, including your attorney and tax advisor, before signing this Agreement. If you find the terms of this Agreement acceptable after such review, please sign the enclosed duplicate original and return it to me. ALLSTATE FINANCIAL CORPORATION ______________________ By ________________________________ Dated Its I acknowledge that I have read this Agreement, that I fully understand its content and effect, that I have been given the opportunity to consult with an attorney and other advisors of my choosing and that I am knowingly and voluntarily entering into this Agreement, without duress or coercion. __________________ ________________________________ Date of Execution Bret Kelly EXHIBIT A to Letter Agreement Dated as of December 13, 1995 between Bret Kelly and Allstate Financial Corporation Form of Reference Letter Dear : Mr. Kelly was employed by Allstate Financial Corporation ("Allstate") for ten and one half years. Mr. Kelly began his career with Allstate as the supervisor of our Verification Department, where he demonstrated analytical and problem solving capabilities. Mr. Kelly was then promoted to the Marketing Department. While in the Marketing Department, Mr. Kelly developed into one of Allstate's most successful sales representatives, with his accounts comprising a significant portion of the company's portfolio at the time. Mr. Kelly was promoted to Vice President and National Marketing Director. In connection with a significant restructuring of Allstate's management team in 1989, and because of his knowledge and understanding of Allstate's systems and procedures, Mr. Kelly was promoted to Senior Vice President and Chief Operating Officer. In that capacity, Mr. Kelly was responsible for the day to day operations of the corporation, reporting directly to the President. Mr. Kelly was an important contributor to the growth and success of Allstate Financial Corporation and was a true asset to the company. Sincerely, ALLSTATE FINANCIAL CORPORATION Leon Fishman President EXHIBIT B to Letter Agreement Dated as of December 13, 1995 between Bret Kelly and Allstate Financial Corporation Anthony Anish Marty Ballen Joan Carlton Randall Carter David Wayne Case Joel Flig John Fudge Ned Gelband Marvin Geller Daniel H. Glick Butch Goldstein Russell Hindin Lawrence N. Hurwitz Bruce H. Jones Walter Kolker Charles Lane Holly Landau Mark J. Locher Leonard Maclis Michael A. Maidy Stanton C. Marcus Dave Menashe Gina M. Mcaveeney Barry G. Morganstern Howard J. Mullin David Niefeld Paul Pintarch Larry Rosenbloom Steve Scott Steven Smith Thomas J. Stolz Jeffry D. Sweet R. M. Torre Loran Walter Bruce Weinstein Asset Growth Partners Financial Solutions Group Select Capital Advisors EX-21 8 Exhibit 21 to 1995 10-KSB Allstate Financial Corporation Wholly-owned Subsidiary List State of Name Incorporation Receivable Financing Corporation Virginia Business Funding of Florida, Inc. Florida Business Funding of America, Inc. Virginia Premium Sales Northeast, Inc. Virginia Lifetime Options, Inc., a Viatical Settlement Company Maryland Settlement Solutions, Inc Virginia AFC Holding Corporation Delaware EX-27 9
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