-----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, SVb6eohCJ0rN9Cw+oIxAqeypgmQn5aC8cy6MD/Yo3PaORW8SgMD+9w3zhWD38eeK MbxmM9D4Y2TQwObCEPjILQ== 0000852220-96-000012.txt : 19960517 0000852220-96-000012.hdr.sgml : 19960517 ACCESSION NUMBER: 0000852220-96-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLSTATE FINANCIAL CORP /VA/ CENTRAL INDEX KEY: 0000852220 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 541208450 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-17832 FILM NUMBER: 96565140 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 10QSB 1 1ST QTR 1996 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1996 COMMISSION FILE NUMBER 0-17832 Allstate Financial Corporation (exact name of registrant as specified in its charter) Virginia 54-1208450 (State of Incorporation) (I.R.S. Employer Identification No) 2700 South Quincy Street, Suite 540, Arlington, VA 22206 (address of principal executive offices) (zip code) Registrant's Telephone Number, Including Area Code: (703) 931-2274 Indicate by the check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 and 15 of the Securities and Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] 2,316,853 Common Shares were outstanding as of March 31, 1996. ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Page Number Part I. Financial Information Item 1 - Financial Statements Consolidated Balance Sheets at March 31, 1996 and December 31, 1995 1-2 Consolidated Statements of Income Three Months Ended March 31, 1996 and 1995 3 Consolidated Statements of Shareholders' Equity Three Months Ended March 31, 1996 and Year Ended December 31, 1995 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 1996 and 1995 5-6 Notes to Consolidated Financial Statements 7-9 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Conditions 10-19 Part II. Item 1 - Legal Proceedings 20 Item 4 - Submission of Matters To a Vote of Security Holders 21 Item 5 - Other Information 21 Item 6 - Exhibits and Reports on Form 8-K 21 Signatures 22 PART I - FINANCIAL INFORMATION ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1996 1995 --------- ------------ (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $ 734,058 $ 754,295 Receivables: Finance, net 34,456,843 32,670,706 Purchased life insurance contracts, net 4,451,548 4,292,332 Other 2,792,662 2,756,342 Prepaid expenses 242,593 204,823 Prepaid income taxes 619,278 722,081 Deferred income taxes 893,000 893,000 ----------- ----------- TOTAL CURRENT ASSETS 44,189,982 42,293,579 PROPERTY AND EQUIPMENT, Net 530,502 537,629 OTHER ASSETS 2,150,809 2,049,323 ----------- ----------- $46,871,293 $44,880,531 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 440,663 $ 292,602 Notes payable 14,414,197 13,516,938 Note payable-related party 103,000 103,000 Credit balances of factoring clients 3,072,799 2,333,729 ----------- ---------- TOTAL CURRENT LIABILITIES 18,030,659 16,246,269 NONCURRENT PORTION OF NOTES PAYABLE: Related parties 58,788 58,788 Convertible Subordinated Notes 4,986,000 2,838,000 Other 7,110 7,110 ----------- ---------- TOTAL LIABILITIES 23,082,557 19,150,167 ----------- ---------- COMMITMENTS AND CONTINGENCIES See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued)
March 31, December 31, 1996 1995 ----------- ------------ (Unaudited) 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 2,316,853 shares at March 31, 1996 and 2,655,128 at December 31, 1995 40,000 40,000 Additional paid-in-capital 18,852,312 18,852,312 Treasury Stock (785,475 shares) (5,037,717) (2,871,901) Retained Earnings 9,934,141 9,709,953 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 23,788,736 25,730,364 ----------- ----------- $46,871,293 $44,880,531 =========== =========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31, ---------------------------- 1996 1995 ---------- ----------- (Unaudited) (Unaudited) INCOME: Earned discounts $2,333,820 $2,877,646 Fees and other income 551,852 406,425 ---------- ---------- 2,885,672 3,284,071 ---------- ---------- EXPENSES: Compensation and fringe benefits 849,055 807,480 General and administrative expense 612,069 608,238 Interest expense 355,360 258,506 Provision for credit losses 623,659 1,301,100 Commission 89,641 61,871 ---------- ---------- TOTAL EXPENSES 2,529,784 3,037,195 ---------- ---------- INCOME BEFORE INCOME TAXES 355,888 246,876 INCOME TAXES 131,700 91,000 ---------- --------- NET INCOME $ 224,188 $ 155,876 ========== ========= NET INCOME PER SHARE $ .09 $ .05 ========== ========= WEIGHTED AVERAGE NUMBER OF SHARES 2,361,461 3,102,328 ========= ========= See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1995 AND THREE MONTHS ENDED MARCH 31, 1996
Common Paid in Treasury Retained Stock Capital Stock Earnings ------- ----------- ----------- ---------- BALANCE - January 1, 1995 $40,000 $18,852,312 $ - $9,228,853 Exchange of Convertible Subordinated Notes for 447,200 shares of common stock - - (2,871,901) - Net Income - - - 481,100 ------- ----------- ----------- ---------- BALANCE - December 31, 1995 40,000 18,852,312 (2,871,901) 9,709,953 Exchange of Convertible Subordinated Notes for 338,275 shares of common stock - - (2,165,816) - Net Income - - - 224,188 ------- ----------- ----------- ---------- BALANCE - March 31, 1996 $40,000 $18,852,312 $(5,037,717) $9,934,141 ======= =========== =========== ========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, ------------------------------ 1996 1995 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 224,188 $ 155,876 Adjustments to reconcile net income to cash provided by operating activities: Depreciation - net 30,900 34,784 Provision for credit losses 623,659 1,301,100 Changes in operating assets and liabilities: (Increase)/decrease in other receivables (36,320) 47,529 (Increase) in prepaid expenses and other current assets (37,770) (51,683) (Increase)/Decrease in other assets (101,486) 47,038 Increase in accounts payable and accrued expenses 148,061 75,855 Increase in settlement payable - 1,400,000 (Increase)/decrease in prepaid income taxes 102,803 (293,758) ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 954,035 2,716,741 ----------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts (44,817,066) (41,357,923) Collection of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts 42,248,054 45,320,351 Increase in credit balances of factoring clients 739,070 179,571 Purchase of property and equipment (23,773) (69,811) ------------ ------------ NET CASH PROVIDED BY (OR USED) BY INVESTING ACTIVITIES (1,853,715) 4,072,188 ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and other borrowings 15,824,877 11,575,275 Principal payments on line of credit and other borrowings (14,927,618) (18,274,070) Treasury Stock Acquisition Costs (17,816) - ------------ ------------ NET CASH PROVIDED BY OR USED IN FINANCING ACTIVITIES 879,443 (6,698,795) ------------ ------------ INCREASE (DECREASE) IN CASH (20,237) 90,134 CASH, Beginning of period 754,295 1,763,930 ------------ ----------- CASH, End of period $ 734,058 $ 1,854,064 ============ =========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 355,015 $ 258,506 ============ =========== Income taxes paid $ 28,897 $ 375,000 ============ =========== Supplemental Schedule of Noncash Activities Transfer of finance and other receivables to other assets $ 280,000 $ - =========== ========== Issuance of Convertible Subordinated Notes in exchange for Common Stock $ 2,148,000 $ - =========== ========== See Notes to Consolidated Financial Statements
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General. The consolidated financial statements of Allstate Financial Corporation (the "Company") included herein are unaudited for all periods ended March 31, 1996 and 1995; however, they reflect all adjustments which, in the opinion of management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Allstate Financial Corporation believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended March 31, 1996 are not necessarily indicative of the results of operations to be expected for the remainder of the year. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Allstate Financial Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1995. 2. Net income per share. Net income per share of common stock has been computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. For the quarters ended March 31, 1996 and 1995, weighted average shares outstanding were 2,361,461 and 3,102,328, respectively. At March 31, 1996 and December 31, 1995 there were 23,400 and 42,167 stock options outstanding, respectively, at exercise prices ranging from $5.375 to $14.00 per share. During the year ended December 31, 1995, 53,470 options and 0 warrants were forfeited. There were no warrants or options exercised during 1995 or during the three months ended March 31, 1996. 3. Line of credit. As of March 31, 1996 the Company had approximately $11.6 million available under a $25.0 million secured revolving line of credit. 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 restrictive covenants which are typical in revolving credit facilities of this type. As of March 31, 1996 Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"), a wholly owned subsidiary of the Company, had approximately $1 million available under a $2.0 million revolving line of credit and an additional $130,000 available under a $4 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. 4. Convertible Subordinated Notes Payable. As of March 31, 1996, the Company had outstanding $4,986,000 in aggregate principal amount of Convertible Subordinated Notes issued in exchange for 785,475 shares of common stock of the Company. The Notes (i) mature on September 30, 2000; (ii) currently bear interest at the rate of 9.5% per annum which rate may fluctuate in accordance with the prime rate, but may not fall below 8% nor rise above 10% per annum; (iii) are convertible into common stock of the Company at the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as defined) of the Company and (v) were issued pursuant to an indenture which contains certain covenants which are less restrictive than those contained in the Company's secured revolving credit facility. Upon the occurrence of certain change of control events, holders of the Notes have the right to have their Notes redeemed at par. 5. Certain Contingencies. 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 appealed the order sustaining the objection, but in April 1996 the appellate court exercised its discretion not to hear the appeal at that time. The $300,000 previously paid by the Company was returned to the Company in April 1996. Management expects this litigation to resume in the District Court, but does not believe at this time that the Company has a material exposure on the fraudulent transfer claim in excess of the previously agreed upon settlement amount. In connection with the same transaction, the Company was also named in January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin-Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. The complaint 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 filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery was granted and, in March 1996, a federal magistrate recommended to the District Court that the Company's motion to dismiss be granted. 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 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. 6. Subsequent Event. The Company was a plaintiff in Allstate Financial Corporation v. Comerica Bank ("Comerica"). The Company alleged that Comerica committed intentional fraud by inducing the Company to pay Comerica out of one of its credits, while withholding from the Company material, negative information about that credit. On May 13, 1996, a jury found that Comerica is not liable to the Company. Under Michigan law applicable in the case, the Company may be liable for Comerica's legal fees and expenses, which fees and expenses have not at this time been quantified. The adverse jury verdict may also result in a write down of "other receivables" appearing on the Company's balance sheet. The foregoing events could have a material adverse effect on the Company's earnings during the second quarter of 1996. 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 advances collateralized by inventory, equipment and real estate (collectively, "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 funding and such funding is not readily available from many of the Company's competitors. As of March 31, 1996, Collateralized Advances constituted approximately 26% of the Company's portfolio of finance receivables. On occasion, the Company will 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 usually 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 requires personal guaranties (either unlimited guaranties or validity guaranties limited to the validity and collectibility of factored accounts receivable) from its clients' principals; (vi) the Company actively monitors its portfolio of purchased 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 enable the Company to recover all amounts due in full. Lifetime Options, a wholly-owned subsidiary of the Company, provides financial assistance to individuals facing life-threatening illnesses 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), 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, 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 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 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 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. Competition Continuing competition within the marketplace from banks and asset-based lenders and newly created finance companies has encroached upon the Company's potential client base and has negatively affected earned discounts. Additionally, the Company continues to attract 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, however, the Company is, where necessary and appropriate, offering lower rates than it has historically. The Company believes that increased competition may level off or decline somewhat over time but will for the foreseeable future 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 its emphasis on funding relationships which include (in addition to the factoring of accounts receivable) the making of Collateralized Advances. Historically, the Company did not expect 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 relationships 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. Results of Operations The following table sets forth certain items of income and expense for the periods indicated and indicates the percentage relationship of each item to total income. For the Three Months Ended March 31, ------------------------------------ 1996 1995 ----------------- --------------- (Unaudited) (Unaudited) INCOME Earned discounts $2,333,820 80.9% $2,877,646 87.6% Fees and other income 551,852 19.1 406,425 12.4 ---------- ----- ----------- ------ TOTAL INCOME 2,885,672 100.0% 3,284,071 100.0% ---------- ----- ----------- ----- EXPENSE Compensation and fringe benefits 849,055 29.4 807,480 24.6 General and administrative expense 612,069 21.2 608,238 18.5 Interest expense 355,360 12.3 258,506 7.9 Provision for credit losses 623,659 21.6 1,301,100 39.6 Commissions 89,641 3.1 61,871 1.9 ---------- ----- ---------- ----- TOTAL EXPENSES 2,529,784 87.8 3,037,195 92.5 ---------- ----- ---------- ----- INCOME BEFORE INCOME TAXES 355,888 12.4 246,876 7.5 INCOME TAXES 131,700 4.6 91,000 2.8 ---------- ----- ---------- ----- NET INCOME $ 224,188 7.8% $ 155,876 4.7% ========== ===== ========== ===== NET INCOME PER SHARE $ .09 $ .05 ========== ========== WEIGHTED AVERAGE NUMBER OF SHARES 2,361,461 3,102,328 ========== ==========
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 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 Three Months Ended March 31, ----------------------------------------- 1996 1995 ------------------ ------------------- % of % of Earned Total Earned Total Income Income Income Income ---------- ------ ---------- ------ Discount on Factored Accounts Receivable $1,183,864 41.0% $1,619,406 49.3% Earnings on Collateralized Advances 775,908 26.9 785,934 23.9 Earnings on Purchased Life Insurance Policies 155,605 5.4 227,386 6.9 Other Earnings 218,443 7.6 244,920 7.5 ---------- ----- ---------- ----- Total 2,333,820 80.9 2,877,646 87.6 Fees and Other Income 551,852 19.1 406,425 12.4 ---------- ----- ---------- ----- Total Income $2,885,672 100.0% $3,284,071 100.0% ========== ===== ========== ===== Total income decreased 12.1% in the first three months of 1996 as compared to the same period in 1995, from $3.3 million to $2.9 million. Earned discounts from factored accounts receivable decreased 26.9% in the first quarter of 1996 as compared to 1995, from $1.6 million to $1.2 million. Earned discounts from factored accounts receivable in the first quarter of 1996 as a percentage of total factored accounts receivable purchased in the first quarter of 1996 were 3.3%. The comparable percentage in 1995 was 4.99%, a decrease of 33.8% from 1995 to 1996. The reduction during the first quarter of 1996 versus 1995 in the average earned discount from factored accounts receivable is attributable, in large part, to the timing of fundings during the respective quarters. Stronger business flow during the middle and late part of the first quarter of 1996 did not enable the Company to recognize the income from that business in full during the first quarter. In contrast, stronger business flow during the early part of the first quarter of 1995 enabled the Company to recognize the income from that business in full during that period. The reduction during the first quarter of 1996 versus 1995 in the average earned discount from factored accounts receivable also reflects the downward pressure on pricing from competition in the Company's core factoring business. In the first quarters of 1996 and 1995, earned discounts from factored accounts receivable accounted for 41.0% and 49.3%, respectively, of total income. Earned discounts from Collateralized Advances decreased 1.3% in the first quarter of 1996 as compared to the same period in 1995, from $786,000 to $776,000. In the first quarters of 1996 and 1995, earned discounts from Collateralized Advances accounted for 26.9% and 23.9%, respectively, of total income. 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 Provision for Credit Losses below. As of March 31, 1996 and December 31, 1995, factored accounts receivable included on the Company's balance sheet were $27.7 million (67.3%) and $25.2 million (64.5%), respectively, of gross finance receivables. As of March 31, 1996 and December 31, 1995, Collateralized Advances included on the Company's balance sheet were $10.5 million (25.5%) and $10.8 million (27.8%), respectively, of gross finance receivables. The Company intends to pursue its strategy of making Collateralized Advances in conjunction with its core factoring business. Fees and other income increased 40.5% in the first quarter of 1996 compared to 1995 from $406,000 to $552,000. The increase in 1996 is attributable primarily to increased application and facility fees. Compensation and Fringe Benefits. Compensation and fringe benefits were $849,000 (29.4% of total income) and $807,000 (24.6% of total income) in the first quarters 1996 and 1995, respectively. Executive compensation in the first quarter of 1996 was $295,000 (10.2% of total income) versus $237,000 (7.2% of total income) in 1995. The increase in executive compensation in the first quarter of 1996 is attributable to salary continuation payments associated with the termination of a key employee and costs associated with replacing that employee. General and Administrative Expense. In the first quarter of 1996, general and administrative expense was $612,000 (21.2% of total income) as compared to $608,000 (18.5% of total income) in the first quarter of 1995. The small increase in the first quarter of 1996 was primarily attributable to a rise in professional fees offset by decreases in licenses and taxes and credit and filing fees. In the first quarter of 1996,professional fees were $247,000 (8.6% of total income) as compared to $174,000 (5.3% of total income) in the first quarter of 1995. Professional fees increased, in part, due to on-going litigation and, in part, due to the final resolution of legal proceedings instituted in prior years. Interest Expense. Interest expense was $355,000 (12.3% of total income) versus $259,000 (7.9% of total income) in the first quarter of 1996 and 1995, respectively. The rise in interest expense is attributable to interest expense related to the Company's Convertible, Subordinated Notes issued in September 1995 and January 1996. Interest expense on the Convertible Subordinated Notes was $110,000 in the first quarter of 1996. The average daily outstanding balance on the Company's revolving lines of credit was $9.5 million and $9.8 million for the first quarters of 1996 and 1995, respectively and the average interest rate paid on the Company's revolving lines of credit was 9.2% in the first quarter of 1996 compared to 9.4% in the first quarter of 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 from $1.3 million (39.6% of total income) in the first quarter of 1995 to $624,000 (21.6% of total income) in the first quarter of 1996. The Company's provision for credit losses in the first quarter of 1995 was attributable to a settlement reached by the Company with the bankruptcy trustee of Premium Sales Corporation, a former client of a wholly-owned subsidiary of the Company. The settlement is intended to be a full release of any and all claims between the Company (and its subsidiaries) and the Trustee. 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 March 31, 1996 and December 31, 1995 the allowance for credit losses was 6.5% ($2.7 million) and 6.0% ($2.4 million) of gross finance receivables, respectively. At March 31, 1996 the accrual of earnings was suspended on $1.8 million of gross finance receivables as compared to $1.6 million of gross finance receivables at December 31, 1995. In addition, "other receivables" and "other assets" appearing on the Company's balance sheet typically do not accrue earnings for financial statement purposes. The following table provides a summary of the Company's gross finance receivables (which includes primarily factored accounts receivable, Collateralized Advances and non-earning receivables), "other receivables" and "other assets" and information regarding the allowance for credit losses as of the dates indicated. As of March 31, ------------------------ 1996 1995 --------- --------- (Dollars in thousands) Gross Finance Receivables, Other Receivables and Other Assets Data: - -------------------------------------- Gross Finance Receivables $41,198 $25,969 Non-Earning Receivables (also included in Gross Finance Receivables) 1,760 3,580 Other Receivables 2,793 3,341 Other Assets $ 1,912 $ 2,085 (excluding miscellaneous) Allowance for credit losses: - -------------------------------- Balance, January 1 $2,351 $2,511 Provision for credit losses 624 1,301 Receivables charged off (284) (1,410) Recoveries - 15 ------ ------ Balance, March 31 $2,691 $2,417 ====== ====== Allowance for Credit Losses as a percent of: - -------------------------------- Gross Finance Receivables 6.53% 9.31% Non-Earning Receivables 152.90% 67.51% Non-Earning Receivables, Other Receivables and Other Assets 41.62% 26.84% As a percent of the sum of Gross Finance Receivables, Other Receivables and Other Assets: - -------------------------------- Non-Earning Receivables 3.83% 11.40% Other Receivables 6.08% 10.64% Other Assets 4.17% 6.64% 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. 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 $90,000 (3.1% of total income) in the first quarter of 1996 as compared to $62,000 (1.9% of total income) in the first quarter of 1995. The increase was the result of a larger portion of gross finance receivables acquired in 1996 being generated by commissioned brokers and other professionals to whom the Company paid referral fees. Impact of Inflation Management believes that inflation has not had a material effect on the Company's income, expenses or liquidity during the past three years. Changes in interest rate levels do not generally affect the income earned by the Company in the form of discounts charged. Rising interest rates would, however, increase the Company's cost of borrowed money based on its current borrowing arrangements which are prime or base rate adjusted credit facilities. Changes in Financial Condition The Company's total assets increased 4.4% to $46.9 million at March 31, 1996 from $44.9 million at December 31, 1994. The increase is primarily the result of an increase in net finance receivables. Liquidity and Capital Resources. The Company's principal funding sources are the collection of factored accounts receivable, retained cash flow and external borrowings. As of March 31, 1996, the Company had approximately $11.6 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, as of April 1996, a new $2 million sub-facility (which under certain circumstances may increase to $4 million) the proceeds of which may be used by the Company to make advances to clients secured by machinery and equipment and a new $2.5 million sub-facility the proceeds of which may be used by the Company to make advances to clients secured by inventory. Borrowings under the credit facility bear interest at 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 March 31, 1996, Lifetime Options had approximately $1.0 million available under a $2.0 million revolving line of credit and an additional $130,000 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 March 31, 1996 and December 31, 1995, the Company had outstanding approximately $4,986,000 and $2,838,000, respectively, in aggregate principal amount of Convertible Subordinated Notes issued in exchange for shares of the Company's common stock. The Convertible Subordinated Notes outstanding at December 31, 1995 were issued in exchange for 447,200 shares of common stock and the Convertible Subordinated Notes outstanding at March 31, 1996 were issued in exchange for 785,475 shares of common stock (including the 447,200 shares of common exchanged prior to December 31, 1995). The Notes (i) mature on September 30, 2000; (ii) currently bear interest at the rate of 9.5% per annum which rate may fluctuate in accordance with the prime rate, but may not fall below 8% nor rise above 10% per annum; (iii) are convertible into common stock of the Company at the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as defined) of the Company and (v) were issued pursuant to an indenture which contains certain covenants which are less restrictive than those contained in the Company's secured revolving credit facility. Upon the occurrence of certain change of control events, holders of the Notes have the right to have their Notes redeemed at par. At March 31, 1996 and December 31, 1995, the Company had working capital of $26.2 million and $26.0 million, respectively, and a ratio of current assets to current liabilities of 2.45 to 1 and 2.60 to 1, respectively. Subsequent to March 31, 1996, the Company's lenders provided the Company with a new $2.5 million inventory sub-facility and a new $2.0 equipment sub- facility (which under certain circumstances may increase to $4.0 million), in each case, within the Company's $25.0 million secured revolving line of credit. The Company believes that internally generated funds and borrowings under its current or a replacement credit facility will be sufficient to finance the Company's future funding requirements for the near term. If, however, an unexpectedly high portion of the Company's potential new business includes Collateralized Advances (especially Collateralized Advances secured by assets other than equipment), internally generated funds and borrowings under the Company's existing credit facility may not be sufficient to fund such new business. Under such circumstances the Company would attempt to negotiate the borrowing base in its existing credit facility to allow the Company to borrow greater amounts from its primary lender(s) and thereby support the growth in Collateralized Advances. If those negotiations were unsuccessful, there is no assurance that the Company could attract sufficient capital to enable the Company to pursue its strategy of making additional Collateralized Advances. PART II -OTHER INFORMATION ITEM 1. -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 appealed the order sustaining the objection, but in April 1996 the appellate court exercised its discretion not to hear the appeal at that time. The $300,000 previously paid by the Company was returned to the Company in April 1996. Management expects this litigation to resume in the District Court, but does not believe at this time that the Company has a material exposure on the fraudulent transfer claim in excess of the previously agreed upon settlement amount. In connection with the same transaction, the Company was also named in January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin-Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. The complaint 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 filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery was granted and, in March 1996, a federal magistrate recommended to the District Court that the Company's motion to dismiss be granted. 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 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 None ITEM 5. -OTHER INFORMATION None. ITEM 6(a). -EXHIBITS Amendment to Exhibit 10.7 - Revolving Credit and Security Agreement dated as of May 13, 1994, among the Company, the Lenders party thereto and IBJ Schroder Bank & Trust Company (as Lender and as Agent), as amended to March 4, 1996. Ninth Amendment dated as of April 26, 1996 ITEM 6(b). -REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, The Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLSTATE FINANCIAL CORPORATION Date: May 14, 1996 Lawrence M. Winkler ------------ ------------------- Lawrence M. Winkler Secretary/Treasurer Chief Financial Officer EX-27 2
5 0000852220 ALLSTATE FINANCIAL CORPORATION 3-MOS DEC-31-1996 MAR-31-1996 734058 0 41701053 2690498 0 44189982 1315371 784868 46871293 18030659 0 0 0 40000 23748736 46871293 0 2885672 0 0 1550765 623659 355360 355888 131700 224188 0 0 0 224188 .09 .09
EX-99 3 Exhibit 10.7 NINTH AMENDMENT TO REVOLVING CREDIT AND SECURITY AGREEMENT NINTH AMENDMENT ("Ninth Amendment") dated as of April 26, 1996 to (i) Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the date hereof and as may be further amended, supplemented, modified or waived from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the "Agent") and (ii) Security Agreement dated as of May 13, 1994 (as amended and waived to the date hereof and as may be further amended, supplemented, modified or waived from time to time, the "Security Agreement") by and among Agent and RECEIVABLE FINANCING CORPORATION, LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY, BUSINESS FUNDING OF AMERICA, INC., PREMIUM SALES NORTHEAST, INC., BUSINESS FUNDING OF FLORIDA, INC., SETTLEMENT SOLUTIONS, INC. and AFC HOLDING CORPORATION (each of which individually is referred to as a "Guarantor" and, collectively, the "Guarantors"). BACKGROUND Borrower has requested that Agent and Lenders amend certain provisions of the Loan Agreement and the Agent and the Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrower by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendment to Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 4 below, the Loan Agreement is hereby amended as follows: (a) Section 1.2 of the Loan Agreement is hereby amended as follows: (i) the following defined terms are hereby added in their appropriate alphabetical order: "Additional Equipment Value Advances" shall mean the Advances made pursuant to Section 2.2A(a) hereof. "Additional Equipment Value Borrowing Period" shall have the meaning set forth in Section 2.2A(a) hereof. "Eligible Client Funded Inventory" shall have the meaning set forth in Section 2.2B(a) hereof. "Inventory Borrowing Base" shall have the meaning set forth in Section 2.2B(a). "Inventory Collateral Assignment of Security" shall mean the agreement executed by Borrower in favor of Agent pursuant to which all rights of Borrower under each Inventory Collateral Funding Repayment Agreement and related documents (including all UCC-1 Financing Statements) are collaterally assigned to Agent for its benefit and the benefit of the Lenders. "Inventory Collateral Funding Repayment Agreement" shall mean an Inventory Collateral Funding Repayment Agreement and such other agreements in substantially the forms attached hereto as Exhibit 1.2(d) entered into between Borrower and a Client, together with such modifications thereto as Borrower may from time to time deem appropriate or desirable and such other agreements to be approved by Agent in its sole reasonable discretion; provided, however, that, no such modifications can be made without Agent's approval following the occurrence and during the continuance of an Event of Default, such approval not to be unreasonably withheld. "Inventory Value Advances" shall mean Advances made pursuant to Section 2.2B(a) hereof. "Inventory Value Borrowing Period" shall have the meaning set forth in Section 2.2B(a) hereof. "Maximum Additional Equipment Value Advance Amount" shall mean (i) during the Additional Equipment Value Borrowing Period, the sum of (x) $2,000,000 and (y) an amount equal to the actual principal amount of Equipment Value Advances repaid (other than regularly scheduled monthly amortization payments) or prepaid during the Additional Equipment Value Borrowing Period not to exceed $2,000,000 and (ii) on and after April 1, 1996, the aggregate outstanding principal amount of Additional Equipment Value Advances made pursuant to Section 2.2A. "Maximum Inventory Value Advance Amount" shall mean $2,500,000. "Ninth Amendment" shall mean the Ninth Amendment to Revolving Credit and Security Agreement dated as of April 26, 1996. "Ninth Amendment Effective Date" shall mean the date on which all of the conditions set forth in Section 4 of the Ninth Amendment are satisfied or waived in writing by Agent. (ii) the following defined terms are hereby amended in their entirety to provide as follows: "Advances" shall mean and include, without duplication, the Revolving Advances, the Inventory Value Advances, the Equipment Value Advances, the Additional Equipment Value Advances and Letters of Credit. "Maximum Revolving Advance Amount" shall mean $25,000,000.00 less the sum of (x) outstanding Equipment Value Advances, (y) outstanding Additional Equipment Value Advances and (z) outstanding Inventory Value Advances. "Other Documents" shall mean the Revolving Credit Note, Stock Pledge Agreements, Guaranty, Security Agreement, Collateral Assignment of Security, Equipment Collateral Assignment of Security, Inventory Collateral Assignment of Security and any and all other agreements, instruments and documents, including, without limitation, guaranties, pledges, powers of attorney, consents, and all other writings heretofore, now or hereafter executed by Borrower and/or delivered to Agent or any Lender in respect of the transactions contemplated by this Agreement. "Revolving Advances" shall mean Advances made other than Letters of Credit but inclusive of Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances. (iii) Clause (p) of the definition of "Eligible Receivables" is hereby amended by deleting the words "15% of Tangible Net Worth" appearing therein and inserting in lieu thereof the words "15% of the sum of Tangible Net Worth and the aggregate principal amount of outstanding Convertible, Senior Subordinated Notes". (b) Section 2.1(a) of the Loan Agreement is hereby amended by inserting "(other than Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances)" after the words "Revolving Advances" appearing in the third line thereof. (c) Section 2.2(a) of the Loan Agreement is hereby amended by deleting the last sentence thereof in its entirety and inserting the following in lieu thereof: "Any repayment (other than regularly scheduled monthly amortization payments) or prepayment of Equipment Value Advances made after the end of the Equipment Value Borrowing Period shall be applied in inverse order of maturity to the then remaining monthly amortization of Equipment Value Advances." (d) Section 2.2(b) of the Loan Agreement is hereby amended by (x) replacing clause (ii)(1) thereof in its entirety with "(i) the aggregate principal amount of Equipment Value Advances outstanding shall not exceed the lesser of" and (y) by deleting the word "and" appearing immediately before clause (ii)(2) thereof and inserting immediately after the figure "$25,000,000" appearing at the end thereof the following: ", and (3) the sum of the aggregate principal amount of Equipment Value Advances outstanding and the aggregate principal amount of Additional Equipment Value Advances outstanding shall not exceed $4,924,167 less regularly scheduled monthly amortization payments on and after the Ninth Amendment Effective Date with respect to Equipment Value Advances and Additional Equipment Value Advances". (e) The Loan Agreement is hereby amended by inserting the following new Sections 2.2A and 2.2B immediately after Section 2.2: "2.2A Additional Equipment Value Advances. (a) Subject to the terms and conditions of this Agreement, each Lender, severally and not jointly, agrees to make loans to Borrower ("Additional Equipment Value Advances") to permit Borrower to make loans or advances to Clients secured by Client Funded Equipment in aggregate amounts outstanding at any time equal to such Lender's Commitment Percentage of the lesser of (i) the Maximum Additional Equipment Value Advance Amount, (ii) eighty- five percent (85%) of the aggregate amount from time to time outstanding of actual cash advances by Borrower to Clients which is secured by Client Funded Equipment or (iii) sixty percent (60%) of the liquidation value of such Client Funded Equipment; provided, however, that under no circumstances shall Additional Equipment Value Advances be made against Client Funded Equipment unless Borrower has recorded on its books and records and actually made advances or loans to a Client pursuant to the applicable Collateral Funding Repayment Agreement. Additional Equipment Value Advances shall only be made on and after the Ninth Amendment Effective Date and on or prior to March 31, 1997 (the "Additional Equipment Value Borrowing Period"). During the Additional Equipment Value Borrowing Period, Borrower may use the Additional Equipment Value Advances by borrowing, repaying and reborrowing, all in accordance with the terms and conditions hereof. The proceeds of each Additional Equipment Value Advance requested by Borrower shall, to the extent Lenders make such Additional Equipment Value Advance, be made available to Borrower on the day so requested by way of credit to Borrower's Operating Account, or such other bank as Borrower may designate following notification to Agent, in immediately available federal or other immediately available funds. The aggregate principal amount of Additional Equipment Value Advances outstanding on the last day of the Equipment Value Borrowing Period will be amortized on the basis of a thirty-six (36) month amortization schedule and shall be payable in equal monthly installments commencing on March 31, 1997 and on the last day of each month thereafter with the balance payable upon the expiration of the Term, subject to acceleration upon the occurrence of an Event of Default under this Agreement or termination of this Agreement. Any repayment or prepayment of Additional Equipment Value Advances made after the end of the Additional Equipment Value Borrowing Period shall be applied in direct order of maturity to the then remaining monthly amortization of Additional Equipment Value Advances. (b) The agreement of Lenders to make each Additional Equipment Value Advance is subject to satisfaction of the following conditions precedent: (i) receipt by Agent of (1) copies of all documentation and appraisals required to be delivered by a Client to Borrower pursuant to the applicable Collateral Funding Repayment Agreement, (2) evidence that such Client has obtained insurance covering the theft, destruction or other loss of the Client Funded Equipment and (3) such other documentation and evidence that Agent may reasonably request, including, without limitation, copies of UCC-1 financing statements filed in accordance with Section 6.10 hereof or evidence that such financing statements have been filed in accordance therewith and (ii) after giving effect thereto (1) the aggregate principal amount of Additional Equipment Value Advances outstanding shall not exceed the lesser of (i) the Maximum Additional Equipment Value Advance Amount, (ii) eighty-five percent (85%) of the aggregate amount from time to time outstanding of actual cash advances made by Borrower to Clients which is secured by Client Funded Equipment in accordance with the Collateral Funding Repayment Agreement or (iii) sixty percent (60%) of the liquidation value of such Client Funded Equipment, (2) the aggregate outstanding Advances shall not exceed $25,000,000, and (3) the sum of the aggregate principal amount of Equipment Value Advances outstanding and the aggregate principal amount of Additional Equipment Value Advances outstanding shall not exceed $4,924,167 less regularly scheduled monthly amortization payments on and after the Ninth Amendment Effective Date with respect to Equipment Value Advances and Additional Equipment Value Advances." "2.2B Inventory Value Advances. (a) Subject to the terms and conditions of this Agreement, each Lender, severally and not jointly, agrees to make loans to Borrower ("Inventory Value Advances") to permit Borrower to make loans or advances to Clients secured by Eligible Client Funded Inventory (as defined below) in aggregate amounts outstanding at any time equal to such Lender's Commitment Percentage of the lesser of (i) the Maximum Inventory Value Advance Amount or (ii) (x) to the extent (but only to the extent) that the aggregate amount from time to time outstanding of actual cash advances by Borrower to Clients which is secured by Eligible Client Funded Inventory is equal to or less than fifty percent (50%) of the liquidation value of such Eligible Client Funded Inventory, thirty percent (30%) of the aggregate amount from time to time outstanding of such actual cash advances by Borrower to Clients secured by such Eligible Client Funded Inventory and (y) to the extent (but only to the extent) that the aggregate amount from time to time outstanding of actual cash advances by Borrower to Clients which is secured by Eligible Client Funded Inventory exceeds 50% of the liquidation value of such Eligible Client Funded Inventory, twenty-five percent (25%) of the aggregate amount from time to time outstanding of such actual cash advances by Borrower to Clients secured by such Eligible Client Funded Inventory (the sum of preceding clauses (ii)(x) and (y), the "Inventory Borrowing Base"); provided, however, that under no circumstances shall Inventory Value Advances be made against Eligible Client Funded Inventory unless Borrower has recorded on its books and records and actually made advances or loans to a Client pursuant to the applicable Inventory Collateral Funding Repayment Agreement. "Eligible Client Funded Inventory" shall mean, with respect to any Client, all of such Client's raw materials inventory and finished goods inventory to the extent (i) Borrower provides Agent with a written description thereof in reasonable detail and a written request that such inventory be treated as Eligible Client Funded Inventory and (ii) Agent does not, within two business days of its receipt of such description and request, notify Borrower in writing that, in the exercise of Agent's sole, reasonable discretion, such inventory (or a specified portion thereof) does not constitute Eligible Client Funded Inventory. Notwithstanding the foregoing, Borrower acknowledges and agrees that dynamic random access memory chips shall not constitute Eligible Client Funded Inventory unless Agent (in the exercise of its sole and absolute discretion) affirmatively consents thereto in writing. Inventory Value Advances shall only be made on and after the Ninth Amendment Effective Date and on or prior to the last day of the Term (the "Inventory Value Borrowing Period"). During the Inventory Value Borrowing Period, Borrower may use the Inventory Value Advances by borrowing, repaying and reborrowing, all in accordance with the terms and conditions hereof. The proceeds of each Inventory Value Advance requested by Borrower shall, to the extent Lenders make such Inventory Value Advance, be made available to Borrower on the day so requested by way of credit to Borrower's Operating Account, or such other bank as Borrower may designate following notification to Agent, in immediately available federal or other immediately available funds. The aggregate principal amount of Inventory Value Advances outstanding on the last day of the Term shall be payable in full upon the expiration of the Term, subject to acceleration upon the occurrence of an Event of Default under this Agreement or termination of this Agreement. (b) The agreement of Lenders to make each Inventory Value Advance is subject to satisfaction of the following conditions precedent: (i) receipt by Agent of (1) copies of all documentation and appraisals required to be delivered by a Client to Borrower pursuant to the applicable Inventory Collateral Funding Repayment Agreement, (2) evidence that such Client has obtained insurance covering the theft, destruction or other loss of the Client Funded Inventory, (3) a copy of a duly executed inventory management or inventory control agreement among Borrower, the applicable Client and DiversiCorp, Inc. (or another third party collateral monitoring firm selected by Borrower and reasonably satisfactory to Agent) and (4) such other documentation and evidence that Agent may reasonably request, including, without limitation, copies of UCC-1 financing statements filed in accordance with Section 6.10 hereof or evidence that such financing statements have been filed in accordance therewith and (ii) after giving effect thereto (1) the aggregate principal amount of Inventory Value Advances outstanding shall not exceed the lesser of (i) the Maximum Inventory Value Advance Amount or (ii) the Inventory Borrowing Base, and (2) the aggregate outstanding Advances shall not exceed $25,000,000." (f) Section 2.4 of the Loan Agreement is hereby amended in its entirety to provide as follows: "2.4 Maximum Advances (other than Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances). The aggregate balance of Advances (other than Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances) outstanding at any time shall not exceed the lesser of (x) the Maximum Revolving Advance Amount and (y) the Borrowing Base." (g) The Loan Agreement is hereby amended by inserting the following new Sections 2.5A and 2.5B immediately after Section 2.5: "2.5A Maximum Additional Equipment Value Advances. The aggregate balance of the Additional Equipment Value Advances outstanding at any time shall not exceed the lesser of (i) the Maximum Additional Equipment Value Advance Amount, (ii) eighty-five percent (85%) of the aggregate amount from time to time outstanding of actual cash advances by Borrower to Clients secured by Client Funded Equipment or (iii) sixty percent (60%) of the liquidation value of such Client Funded Equipment." "2.5B Maximum Inventory Value Advances. The aggregate balance of the Inventory Value Advances outstanding at any time shall not exceed the lesser of (i) the Maximum Inventory Value Advance Amount or (ii) the Inventory Borrowing Base." (h) Section 2.6 of the Loan Agreement is hereby amended in its entirety to provide as follows: "2.6 Repayment of Excess Advances. The aggregate balance of Advances (other than Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances), Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances, as the case may be, outstanding at any time in excess of the maximum permitted under Section 2.4, Section 2.5, Section 2.5A or Section 2.5B, as applicable, shall be immediately due and payable without the necessity of any demand, at the Payment Office, whether or not a Default or Event of Default has occurred." (i) Clause (i) of Section 2.8 of the Loan Agreement is hereby amended by inserting "(other than Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances)" after the words "Revolving Advances" appearing therein. (j) The second sentence of Section 2.10(c) of the Loan Agreement is hereby amended by inserting "(other than Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances)" after the words "Revolving Advances" appearing therein. (k) Section 2.12(a) of the Loan Agreement is hereby amended by deleting the words "and/or Equipment Value Advance" after the words "Revolving Advance" appearing in the first sentence thereof and inserting in lieu thereof the words ", Equipment Value Advance, Additional Equipment Value Advance and/or Inventory Value Advance". (l) Section 2.12 (e) of the Loan Agreement is hereby amended by deleting the words "and, subject to Section 2.2 hereof, Equipment Value Advances, as applicable," after the words "Revolving Advances" appearing in the first sentence thereof and inserting in lieu thereof the words "and, subject to Sections 2.2, 2.2A and 2.2B hereof, to Equipment Value Advances, Additional Equipment Value Advances and Inventory Value Advances, as the case may be, as applicable,". (m) Clauses (i), (ii), (iii) and (iv) of Section 2.12(f) of the Loan Agreement and Sections 2.12(g) and 2.12(h) of the Loan Agreement are hereby amended by inserting the words ", Equipment Value Advances, Additional Equipment Value Advances and/or Inventory Value Advances (as the case may be)" immediately after the words "Revolving Advances" each place they appear therein. (n) Clauses (i), (vi), (vii), (viii) and (xi) of Section 4.15(f)(2) of the Loan Agreement are hereby amended by inserting ", the Inventory Collateral Funding Repayment Agreements, if any," after the words "the Collateral Funding Repayment Agreements, if any," each place they appear. (o) Section 4.15(g) of the Loan Agreement is hereby amended by inserting the words ", the Inventory Collateral Funding Repayment Agreements, if any," after the words ", the Collateral Funding Repayment Agreements, if any," appearing in the second sentence thereof. (p) Section 4.16 (c) of the Loan Agreement is hereby amended by (x) redesignating clause (iii) thereof as clause (v) and (y) inserting the following new clauses (iii) and (iv) after clause (ii) thereof: ", (iii) deposit proceeds of Additional Equipment Value Advances made pursuant to Section 2.2A hereof for use in accordance with the provisions of Section 2.2A hereof, (iv) deposit proceeds of Inventory Value Advances made pursuant to Section 2.2B hereof for use in accordance with Section 2.2B hereof" (q) Section 6.10 of the Loan Agreement is hereby amended by deleting the words "and applicable Collateral Funding Repayment Agreement, if any" and inserting the words ", applicable Collateral Funding Repayment Agreement and/or applicable Inventory collateral Funding Repayment Agreement, if any," in lieu thereof. (r) Section 7.5(d) of the Loan Agreement is hereby amended by deleting the words "or Collateral Funding Repayment Agreements" appearing before clause (i) thereof and inserting the words ", Collateral Funding Repayment Agreements, if any, or Inventory Collateral Funding Repayment Agreements, if any," in lieu thereof. (s) Section 7.5(d)(ii) of the Loan Agreement is hereby amended by deleting the words "or Collateral Funding Repayment Agreement, as the case may be" and inserting the words "or, if applicable, its Collateral Funding Repayment Agreement or its Inventory Collateral Funding Repayment Agreement," in lieu thereof. (t) Section 8.2(c) of the Loan Agreement is hereby amended by deleting the words "or Section 2.5 hereof, as applicable" and inserting the words ", Section 2.5, Section 2.5A or Section 2.5B, as applicable" in lieu thereof. (u) Section 9.2 of the Loan Agreement is hereby amended by replacing the word "and" immediately before subsection "(d)" with "," and inserting a new subsection "(e)" to read in its entirety as follows: "and (e) a schedule of loans made by Borrower to its Clients which are secured by Eligible Client Funded Inventory stating the name of the Client to which such loans are made and the dollar amount thereof". (v) Section 10.13 of the Loan Agreement is hereby amended by inserting the words "or Inventory Collateral Assignment of Security," after the words "Equipment Collateral Assignment of Security". (w) Clause (ii) of Section 15.2(b) of the Loan Agreement is hereby amended by inserting the words ", the Maximum Additional Equipment Value Advance Amount, the Maximum Inventory Value Advance Amount" after the words "Maximum Equipment Value Advance Amount" appearing therein. 3. Subject to satisfaction of the conditions precedent set forth in Section 4 below, the Security Agreement is hereby amended as follows: (a) Section 3(b) of the Security Agreement is hereby amended by inserting the words "and Inventory Collateral Funding Repayment Agreement" after the words "Collateral Funding Repayment Agreement". (b) Clauses (i), (vi), (vii), (viii) and (xi) of Section 6(2) of the Security Agreement are hereby amended by inserting the words "Inventory Collateral Funding Repayment Agreements, if any," after the words "Collateral Funding Repayment Agreements, if any," each place they appear. 4. Conditions of Effectiveness. This Ninth Amendment shall become effective as of the date first above written (the "Ninth Amendment Effective Date") upon receipt by the Agent of (i) this Ninth Amendment duly executed by Borrower and the Required Lenders and consented to by each of the Guarantors, (ii) three (3) copies of the Inventory Collateral Assignment of Security duly executed by Borrower, (iii) a copy of the Inventory Collateral Funding Repayment Agreement in the form attached as Exhibit A hereto (which form shall, on the Ninth Amendment Effective Date, be deemed to be Exhibit 1.2(d) attached to the Loan Agreement (without further action by Borrower, Agent or any Lender)) and (iv) a payment for the ratable benefit of the Lenders of an amendment fee in the amount of $7,500. 5. Representations and Warranties. Borrower hereby represents and warrants as of the Ninth Amendment Effective Date as follows: (a) This Ninth Amendment and the Loan Agreement, as amended hereby constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) After giving effect to this Ninth Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Ninth Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Ninth Amendment. (d) Borrower has no defense, counterclaim or offset to the Obligations. 6. Effect on the Loan Agreement and the Security Agreement. (a) Upon the effectiveness of Sections 2 and 3 hereof, each reference in the Loan Agreement or the Security Agreement, as the case may be, to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement or the Security Agreement, as the case may be, as amended hereby. (b) Except as specifically amended herein, the Loan Agreement, the Security Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Ninth Amendment shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor constitute a waiver of any provision of the Loan Agreement, the Security Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 7. Governing Law. This Ninth Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and shall be governed by and construed in accordance with the laws of the State of New York. 8. Headings. Section headings in this Ninth Amendment are included herein for convenience of reference only and shall not constitute a part of this Ninth Amendment for any other purpose. 9. Counterparts; Telecopy Signatures. This Ninth Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Ninth Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY as Agent and Lender By:_______________________ Name: Title: NATIONAL CANADA FINANCE CORP., a Lender By:_______________________ Name: Title: By:_______________________ Name: Title: ALLSTATE FINANCIAL CORPORATION By: ___________________________ Name: Craig Fishman Title: Senior Vice President [SIGNATURES CONTINUED ON NEXT PAGE] CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By: ___________________________ Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION By: ___________________________ By:______________________________ Name: Craig Fishman Name: Craig Fishman Title: Senior Vice President Title: Senior Vice President RECEIVABLE FINANCING CORPORATION By: ___________________________ Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF FLORIDA, INC. By: ___________________________ Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF AMERICA, INC. By: ___________________________ Name: Craig Fishman Title: Senior Vice President SETTLEMENT SOLUTIONS, INC. By:______________________________ Name: Craig Fishman Title: Senior Vice President -----END PRIVACY-ENHANCED MESSAGE-----