-----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, OIJldo2nVbxZT9OqXQi8vgHBBwpSKgVP4bxo97mrwrbEOX61UCjaLOr99F9mumzI ioFbKPCIldTXg4LQuMdnYQ== 0000852220-99-000004.txt : 19990518 0000852220-99-000004.hdr.sgml : 19990518 ACCESSION NUMBER: 0000852220-99-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 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: SEC FILE NUMBER: 000-17832 FILM NUMBER: 99628798 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 FIRST QUARTER 1999 FORM 10Q U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 |_| TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO __________ Commission File Number 0-17832 Allstate Financial Corporation - -------------------------------------------------------------------------------- (Name of small business issuer in its charter) Virginia 54-1208450 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2700 S. Quincy Street, Arlington, VA 22206 (Address of principal executive offices) (Zip Code) (703) 931-2274 - -------------------------------------------------------------------------------- (Issuer's telephone number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- -------- The number of shares outstanding of the issuer's common stock, no par value, as of May 10, 1999, was 2,324,216. Transitional Small Business Disclosure Format (check one): Yes No X ----- ------ ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Page Number Part I - Financial Information Item 1 - Financial Statements Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 1-2 Consolidated Statements of Operations for the Three Months Ended March 31, 1999 and 1998 3 Consolidated Statements of Shareholders' Equity for the Year Ended December 31, 1998 and Three Months Ended March 31, 1999 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 1999 and 1998 5-6 Notes to Consolidated Financial Statements 7-9 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Condition 10-18 Part II - Other Information Item 1 - Legal Proceedings 18 Item 3 - Defaults Upon Senior Securities 18 Item 4 - Submission of Matters To a Vote of Security Holders 18 Item 6 - Exhibits and Reports on Form 8-K 18 Signatures 19 PART I - FINANCIAL INFORMATION ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, - -------------------------------------------------------------------------------- 1999 1998 ---- ---- - ------------------------------------------------------------------------------- (Unaudited) ASSETS Cash $1,432,751 $2,420,644 ---------- ---------- Purchased receivables 12,289,180 22,302,284 Advances receivable 23,198,725 15,652,457 ---------- ---------- 35,487,905 37,954,741 Less: Allowance for credit losses (2,898,582) (2,799,931) ----------- ---------- Total receivables - net 32,589,323 35,154,810 ---------- ---------- Income tax receivable 831,656 831,656 Deferred income taxes 3,800,005 3,960,946 Furniture, fixtures and equipment, net 165,357 166,400 Other assets 211,300 653,957 -------- ------- TOTAL ASSETS $39,030,392 $43,188,413 =========== =========== (Continued) - -------------------------------------------------------------------------------
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
March 31, December 31, - -------------------------------------------------------------------------------- 1999 1998 ---- ---- - -------------------------------------------------------------------------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 592,080 $1,081,655 Credit balances of factoring clients 2,534,667 4,559,570 Notes payable 13,111,848 15,014,717 Convertible subordinated notes 4,957,000 4,958,000 --------- --------- TOTAL LIABILITIES 21,195,595 25,613,942 ---------- ---------- SHAREHOLDERS' EQUITY: Preferred stock, authorized 2,000,000 shares with no par value; no shares issued or outstanding -- -- Common stock, authorized 10,000,000 shares with no par value; 3,105,828 issued; 2,324,216 outstanding at March 31, 1999 and 2,324,083 outstanding at December 31, 1998, exclusive of shares held in treasury 40,000 40,000 Additional paid-in-capital 18,874,182 18,874,182 Treasury stock, 781,612 shares at March 31, 1999 and 781,745 shares at December 31, 1998 (4,981,448) (4,986,520) Retained earnings (restricted) 3,902,063 3,646,809 --------- --------- TOTAL SHAREHOLDERS' EQUITY 17,834,797 17,574,471 ---------- ---------- $ 39,030,392 $43,188,413 ============ =========== (Concluded) - ------------------------------------------------------------- -------------------
See Notes to Consolidated Financial Statements 2 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended March 31, - -------------------------------------------------------------------------------- 1999 1998 ---- ---- - ------------------------------------------------------------- ------------------ REVENUE Earned discounts and interest $1,614,471 $2,436,665 Fees and other revenue 181,574 526,817 ------- ------- TOTAL REVENUE 1,796,045 2,963,482 --------- --------- EXPENSES Compensation and fringe benefits 610,013 812,234 General and administrative 405,293 984,824 Interest expense 375,574 410,331 Provision for credit losses - 547,000 --------- ------- TOTAL EXPENSES 1,390,880 2,754,389 --------- --------- INCOME BEFORE INCOME TAX EXPENSE 405,165 209,093 INCOME TAX EXPENSE 149,911 77,364 ------- ------ NET INCOME $ 255,254 $ 131,729 ========= ========= NET INCOME PER COMMON SHARE Diluted $ 0.11 $ 0.06 ======= ======= Basic $ 0.11 $ 0.06 ======= ======= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Diluted 2,327,016 2,322,160 Basic 2,324,138 2,318,878 - ------------------------------------------------------------- ---------------
See Notes to Consolidated Financial Statements 3 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999
Additional Paid Treasury Retained Common Stock in Capital Stock Earnings Total - ------------------------------------------------------------------------------------------------------------------------------------ Balance - January 1, 1998 ........................... $ 40,000 $ 18,852,312 $ (5,030,594) $ 9,702,322 $ 23,564,040 Amortization of treasury stock acquisition costs ................................... 28,084 28,084 Conversion of Convertible Subordinated Notes to 2,132 shares of common stock ..................................... 15,990 15,990 3,500 Options exercised ............................. 21,870 21,870 Net Loss ............................................ (6,055,513) (6,055,513) ------------ ------------ ------------ ------------ ------------ Balance - December 31, 1998 ........................ $ 40,000 $ 18,874,182 $ (4,986,520) $ 3,646,809 $ 17,574,471 Amortization of treasury stock acquisition costs (unaudited) ....................... 4,074 4,074 Conversion of Convertible Subordinated Notes to 133 shares of common stock (unaudited) ............................ 998 998 Net Income (Unaudited) .............................. 255,254 255,254 ------------ ------------ ------------ ------------ ----------- Balance - March 31, 1999 ............................ $ 40,000 $ 18,874,182 $ (4,981,448) $ 3,902,063 $ 17,834,797 ============ ============ ============ ============ ============
See Notes to Consolidated Financial Statements 4 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31 - ------------------------------------------------------------------------------------------------- 1999 1998 - ------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income ................................................. $ 255,254 $ 131,729 Adjustments to reconcile net income to cash provided by operating activities: Depreciation - net .................................... 13,000 36,000 Provision for credit losses ........................... -- 547,000 Changes in operating assets and liabilities: Other assets ...................................... 442,657 650,091 Accounts payable and accrued expenses ............. (489,575) 132,503 Income taxes receivable and deferred income taxes ................................. 160,941 (88,800) Income taxes payable .............................. -- (240,226) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 382,277 1,168,297 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of receivables and advances ....................... (63,915,174) (70,968,743) Collection of receivables, including life insurance contracts, and advances ............................... 66,480,661 66,474,575 (Decrease)/Increase in credit balances of factoring clients (2,024,903) 394,436 Purchase of furniture, fixtures and equipment .............. (11,957) (19,069) ------------ ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES ................. 528,627 (4,118,801) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit ............................... 32,592,132 49,565,581 Principal payments on line of credit ....................... (34,495,000) (47,720,112) Treasury stock acquisition costs ........................... 4,071 (5) Options exercised .......................................... -- 5,620 ------------ --------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ................................................. (1,898,797) 1,851,084 ------------ ------------ NET (DECREASE) IN CASH ........................................... (987,893) (1,099,420) CASH, Beginning of period ........................................ 2,420,644 4,200,050 ------------ ------------ CASH, End of period .............................................. $ 1,432,751 $ 3,100,630 ============ ========= (Continued)
5 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Three Months Ended March 31 1999 1998 - -------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 388,691 $ 410,331 ========== ========= Income taxes paid $ 8,529 $ 390,226 ========== ========= SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES Conversion of Factoring Clients to ABL Loans $9,309,511 $ - ========== ====== Issuance of common stock in exchange for convertible subordinated notes $ 998 $ 2,000 ========= ========= (Concluded)
See Notes to Consolidated Financial Statements 6 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General. The consolidated financial statements of Allstate Financial Corporation and subsidiaries (the "Company") included herein are unaudited for the periods ended March 31, 1999 and 1998; however, they reflect all adjustments which, in the opinion of management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Allstate Financial Corporation believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results of operations to be expected for the remainder of the year. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Allstate Financial Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1998. 2. Line of Credit. As of March 31, 1999, the Company had approximately $4,500,000 available under a $25,000,000 secured revolving line of credit. The revolving line of credit contains various sub facilities which limit its use. The entire facility is available for borrowings by the Company secured by Factored Accounts Receivable or Collateralized Advances backed by pledged client receivables; however, the Company may (i) borrow only $5,000,000 secured by Collateralized Advances backed by client machinery and equipment, (ii) borrow only $2,000,000 secured by Collateralized Advances backed by client inventory, and (iii) issue up to $5,000,000 of letters of credit. Borrowings under the credit facility bear interest at a spread over the bank's base rate or a spread over LIBOR, at the Company's election. The Company is subject to covenants which are typical in revolving credit facilities of this type. At March 31, 1999, the Company was in default of the financial covenant related to interest coverage, and has received waivers of those defaults from the participants in the line of credit. The current maturity date of this credit facility is May 12, 2000. 3. Certain Contingencies. The Company was a defendant in Skiba, Trustee (f/k/a White, Trustee) v. Allstate Financial Corporation in the U.S. District Court for the Western District of Pennsylvania. The Company provided receivables financing and advances for Lyons Transportation Lines, Inc. ("Lyons"), which filed a bankruptcy petition subsequent to a leveraged buy-out (the LBO). The Trustee brought suit against the Company making fraudulent conveyance and breach of contract claims and the Company counter-claimed for its attorneys' fees and costs. The case was tried in December 1998, at which time a jury found in the Company's favor both as to the Trustee's claims, as well as on the Company's counter-claim against the Trustee for the Company's legal fees and costs. The court entered a judgment in favor of the Company and against the Trustee. The Trustee noted an appeal on January 11, 1999. There was an indemnification agreement between the Trustee and principal creditor/person of the Lyons Estate, 7 Sherwin-Williams. According to the agreement, Sherwin-Williams was ultimately responsible for payment of such judgement. In connection with the same LBO, the Company was also named in January, 1994 as a defendant in Sherwin-Williams Company v. Robert Castello, et.al. in the United States District Court for the Northern District of Ohio. Sherwin-Williams sued parties involved in the Lyons LBO to recover damages allegedly incurred by Sherwin-Williams in connection with the LBO and Lyons' subsequent bankruptcy. Sherwin-Williams asserted that it had incurred pension fund liabilities and other damages as a result of the Lyons transaction and asserted claims against the Company and its co-defendants for such sums. During the first quarter of 1999, the Company and Sherwin-Williams agreed to settle Sherwin-Williams claims against the Company in return for the Company's agreement to forego the judgment entered in the Company's favor in Skiba, Trustee vs. Allstate Financial Corporation. All parties executed a settlement agreement in March 1999 with mutual releases as to all claims and all parties. The Company filed a joint motion with the Lyons Trustee to have such settlement approved as to the Trustee and the Company in the Western District of Pennsylvania bankruptcy proceeding, and the Court granted it on April 22, 1999. The U.S. District Court for the Northern District of Ohio has now dismissed Sherwin-Williams Company v. Robert Castello, et.al as to all parties as well. The Company is a counterclaim defendant in Allstate Financial Corporation v. A.G. Construction, Inc. (n/k/a A.G. Plumbing, Inc.), American General Construction Corp., Adam Guziczek and Cheryl Lee Guziczek (hereinafter collectively referred to as "AG") pending in the United States Bankruptcy Court for the Southern District of New York. In a 1993 action the Company undertook an attempt to recover against AG. An answer and counterclaim was filed against the Company. The counterclaim asserted claims for usury, diversion of proceeds of public improvement contracts, and overpayments to the Company by AG in excess of $2,000,000 (hereinafter the "Counterclaims"). No specific damage claims amount was set forth in the Counterclaims. No action was ever taken by the trustee in the AG bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the trustee for the AG bankruptcy estate filed a motion to abandon these claims against the Company. On October 7, 1997, New York Surety Company (hereinafter referred to as the "Surety"), which provided the payment and performance bond to AG in connection with the construction jobs performed for the City of New York, filed pleadings objecting to the abandonment of such claims against the Company, asserting that it was subrogated to AG's claims. The proposed complaint adopts the Counterclaims and seeks an accounting. The Surety asserts damages of approximately $4,000,000. On April 9, 1998, the bankruptcy court remanded the matter to state court. On June 24, 1998, the Surety was formally declared insolvent by the Superintendent of Insurance of the State of New York (hereinafter referred to as the "Superintendent") and as such the Superintendent was judicially appointed as rehabilitator of the Surety to conduct its business. At this time, it is uncertain whether the Superintendent will continue to pursue the litigation against the Company. 8 The Company believes it has meritorious defenses to the Counterclaims and intends to vigorously defend all claims. However, the litigation is in the preliminary stage and the probability of a favorable or unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these other proceedings will have a material adverse effect on the Company. 4. Credit Concentrations. For the quarter ended March 31, 1999 three clients accounted for 53.7% of the Company's total earned discounts and interest, as compared to 88.0% for the quarter ended December 31, 1998. At March 31, 1999, these three clients accounted for 28.3% of the Company's total receivables, while at December 31, 1998 these three clients accounted for 48.7%. 5. Subsequent Event. On May 13, 1999, Business Funding of America, Inc. ("BFA"), a wholly owned subsidiary, entered into an agreement with a financial institution (the "Assignment Agreement") to purchase a portfolio of approximately $32,500,000 of asset-based loans. BFA paid a premium of approximately $329,000 to the seller as consideration for the Assignment Agreement. The Company is required to pay the principal amount of the loans outstanding to the seller on or before June 15, 1999, and has applied to several financial institutions for an increased line of credit, on terms which are comparable to those contained in the current agreement, to complete the purchase. Although the Company believes that such a line of credit can be obtained on acceptable terms, there can be no assurance that such financing can be obtained. If the Company fails to pay the amounts due to the seller before June 15, 1999 or the date is not otherwise extended, the premium will be forfeited and such assets will not be transferred to the Company. [THIS SPACE INTENTIONALLY LEFT BLANK] 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION This Form 10-QSB contains certain "forward-looking statements" relating to the Company which represent the Company's current expectations or beliefs, including, but not limited to, statements concerning the Company's operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-QSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intend", "could", "estimate", or "continue", or the negative or other variation thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, seasonally, and variability of quarterly results, ability of the Company to continue its growth strategy, competition, and regulatory restrictions relating to potential new activities, certain of which are beyond the Company's control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. GENERAL The Company is a commercial finance institution which provides financing to small and middle-market businesses, usually those with annual sales of $1 million to $30 million, through the discounted purchase of invoices with recourse to the seller, and through loans secured by accounts receivable, inventory, machinery and equipment, and real estate. In addition, the Company provides other financial assistance to businesses in the form of guarantees and letters of credit. Through its offering of both the purchase of invoices with recourse to the seller ("Recourse Factoring" or "Factoring") and advances secured by accounts receivable, inventory, machinery and equipment, and real estate ("Asset-Based Lending" or "ABL"), the Company provides its clients with the ability to expand their working capital and acquire productive business assets. The Company may also allow a client to use the Company's credit standing by providing a letter of guaranty or by obtaining a letter of credit for the client from the Company's bank. These forms of credit enhancement are used by the clients to acquire inventory for sale to their customers. Through its range of products, the Company believes it offers a single source of financing for these businesses throughout their life cycles. The Company's clients do not typically qualify for traditional bank financing because they are either too new, too small, undercapitalized (over-leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank lender. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. In its Factoring and ABL businesses, the Company faces competition from other factoring companies, asset-based lenders, diversified lenders who offer both products, and commercial banks who offer secured financing. Due to the size of facilities that it offers, the Company 10 competes with both regional sources of financing and large national organizations. Many of these competitors have significant financial, marketing and operational resources, and may have access to capital at lower costs than the Company can obtain. Historically, the Company has not expected to maintain a funding relationship with a client for more than two years. The Company expected that its clients would qualify for more competitively priced bank or asset-based financing within that time period, or would be liquidated. Therefore, the Company's major clients have tended to change significantly over time. Today, however, because the Company is offering a wider range of products, at lower rates than it has historically, it is possible that the length of the Company's funding relationships with its clients may be extended. Although the Company has historically been successful in replacing major clients, the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. The Company's subsidiary Lifetime Options, Inc. manages a portfolio of life insurance policies it purchased from individuals facing life-threatening illnesses. During 1997, Lifetime Options ceased purchasing policies. Other than Lifetime Options, none of the Company's subsidiaries is currently engaged in business, which could have a material effect on the Company. LIQUIDITY AND CAPITAL RESOURCES The Company's requirement for capital is a function of the level of its investment in receivables. The Company funds this investment through its revolving bank credit line, its convertible subordinated notes, and internally generated funds. The Company maintains a $25 million revolving line of credit with a group of banks. The line of credit is secured by substantially all of the Company's assets. The total facility may be used by the Company to fund the purchase of invoices or advances secured by accounts receivable. There are sublimits available for the funding of advances secured by client inventory and machinery and equipment, and for issuance of letters of credit by the bank group. Borrowings under the line of credit bear interest at the agent bank's base rate or a margin over the London Interbank Offering Rate, at the Company's option. The credit line has covenants of the type which are typical of those required of borrowers in the Company's business line. At March 31, 1999, the Company was in default of the financial covenant related to interest coverage, and has received waivers of those defaults from the participants in the line of credit. The maturity date of the line of credit is May 12, 2000. The Company also has outstanding approximately $5 million in aggregate principal amount of convertible subordinated notes of which $361 thousand are due in September 2000 and $4.6 million are due in September 2003. The Company believes that borrowings under its current credit facility, the proceeds of the convertible subordinated notes, and internally generated funds will be sufficient to finance the Company's funding requirements for the near term. 11 YEAR 2000 DISCLOSURES The Year 2000 issue is the result of computer programs being written using two digits rather than four digits to define the applicable year. Computer equipment, software and other devices with embedded technology that are time-sensitive may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in other normal business activities. The inability of business processes to function correctly in 2000 could have serious adverse effects on companies and entities throughout the world. Management has determined that the consequences of its Year 2000 issues could have a material adverse effect on the Company's business, results, or financial condition if the Company and certain material third parties do not become Year 2000 compliant. The Company has identified all significant information technology ("IT") applications that are not Year 2000 compliant. Management does not believe it has any non-IT systems, (those other than computers or software which include microprocessors), which are not certified by their vendors as compliant. The Company has determined to replace all of the non-compliant IT applications and hardware with applications and hardware certified by third party vendors as compliant and tested for compliance. The first phase of Year 2000 remediation, identifying the appropriate replacement applications, has been completed. The second phase, purchasing or contracting to license or purchase the applications, is expected to be completed prior to May 31, 1999. Each new system selected is "off the shelf", and is certified Year 2000 compliant, so, therefore, the third phase, installation and testing, will be limited and is expected to be completed by July 31, 1999. The fourth phase, limited conversion of certain existing data to the replacement systems, is expected to be substantially completed at the end of the testing phase, and finally completed before September 30, 1999. The cost of becoming Year 2000 compliant through acquisition of new systems is estimated at $100 thousand, of which $5 thousand has been incurred for the quarter ended March 31,1999. The funds for these expenditures are available from the Company's expected cash flows during the periods of expenditure. The Company's IT systems are not interdependent with those of any third party. Major suppliers, who are primarily telecommunications companies, financial institutions and public utilities, have disclosed that they do not expect any significant interruptions in their businesses. The Company has sent questionnaires to its clients and material obligors, and will evaluate their responses prior to September 30, 1999. If a material client or obligor has a business interruption, the Company's operations could be affected. In the most likely worst case Year 2000 scenario, the Company will not be able to determine whether certain clients and obligors have unresolved Year 2000 issues, and some clients and obligors may have business interruptions even though the Company believes they will be compliant. In these cases, the Company may have to cease doing business with clients or obligors that could have a material adverse effect on the Company's financial condition. The Company has not determined whether such possible events may have a material adverse effect on its financial condition, but is continuing to analyze the uncertainty through monitoring the Year 2000 compliance efforts of clients and obligors. 12 A contingency plan has not yet been developed for dealing with the most reasonably likely worst case scenario. The Company expects to complete its analysis and contingency planning by September 30, 1999. RESULTS OF OPERATIONS The following table sets forth certain items of revenue and expense for the periods indicated and indicates the percentage relationships of each item to total revenue.
Three Months Ended March 31, - ---------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) REVENUE Earned discounts and interest ............... $1,614,471 89.9% $2,436,665 82.2% Fees and other revenue ...................... 181,574 10.1 526,817 17.8 ---------- -------- ---------- ------- TOTAL REVENUE ............................. 1,796,045 100.0% 2,963,482 100.0% ---------- ------- --------- ------- EXPENSES Compensation and fringe benefits ............ 610,013 33.9 812,234 27.4 General and administrative .................. 405,293 22.5 984,824 33.2 Interest expense ............................ 375,574 21.0 410,331 13.8 Provision for credit losses ................. -- -- 547,000 18.5 - ----------------------------------------------- ---------- ---- ---------- ----- TOTAL EXPENSES ............................ 1,390,880 77.4 2,754,389 92.9 ---------- ---- ---------- ----- INCOME BEFORE INCOME TAX EXPENSE .............. 405,165 22.6 209,093 7.1 INCOME TAX EXPENSE ............................ 149,911 8.3 77,364 2.6 - ----------------------------------------------- ---------- ---- ---------- ----- NET INCOME .................................... $ 255,254 14.3% $ 131,729 4.5% ========== ===== ======= ========= NET INCOME PER COMMON SHARE Diluted ..................................... $ 0.11 $ 0.06 ======= ========= Basic ....................................... $ 0.11 $ 0.06 ======= ========= WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING Diluted ..................................... 2,327,016 2,322,160 Basic ....................................... 2,324,138 2,318,878 ---------- -------------
13 Total Revenue. Total revenue consists of (i) discounts on purchased invoices earned in the Company's factoring business from the purchase of accounts receivable, interest earnings on ABL advances receivable, and (ii) fees and other revenue, which consist primarily of application fees, commitment or facility fees, other transaction related financing fees and supplemental discounts paid by clients who do not sell the minimum volume of accounts receivable required by their contracts with the Company (including "graduating" to a lower cost source of funding). The following table breaks down total revenue by type of transaction for the periods indicated and the percentage relationship of each type of transaction to total revenue.
For the Three Months Ended March 31, 1999 1998 - ------------------------------------------ ----------------- -------------------- ----------------- ---------------- Type of Revenue Earned Revenue Percent Earned Revenue Percent - ------------------------------------------ ----------------- -------------------- ----------------- ---------------- Discount on purchased invoices $ 380,691 21.2% $1,308,990 44.2% Earnings on advances Receivable 1,233,780 68.7 1,127,675 38.0 Fees and other revenue 181,574 10.1 526,817 17.8 ------- ---- ------- ---- Total revenue $1,796,045 100.0% $2,963,482 100.0% ========== ===== ========== =====
Total revenue decreased by 39.4% in the three months ended March 31, 1999 versus the same period in 1998, to $1.8 million from $3.0 million. Within total revenue, discounts on purchased invoices decreased 70.9% in the March 31, 1999 quarter as compared to the March 31, 1998 quarter. The volume of invoices purchased was $13.1 million in the three months ending March 31, 1999 as compared to $44.2 million in the comparable period in 1998, a $31.1 million decrease. The major reasons for the decrease include: (1) the Company converted two large clients from factoring relationships to asset based loans; and (2) a client whose volume was included in the March 31, 1998 volume in the amount of $36.7 million has filed for bankruptcy. The average earned discount as a percentage of total invoices purchased in the three months ended 1999 was 2.9%. The comparable average percentage in the same period in 1998 was 2.5%, representing an increase of 16.0%. As the composition of the Company's client base may change over time, there is no assurance that the increased discount level can be maintained. Earnings on advances receivable increased by 9.4% in the three months ending March 31, 1999 versus the same period in 1998. The earnings increase was attributable to a higher average balance of advances receivable, $23.8 million in the March 31, 1999 quarter versus $19.9 million in the March 31, 1998 quarter due to the client conversions from factoring to ABL relationships previously noted, and a higher yield on the portfolio, 15.6% versus 12.9%, respectively. As a result of the Company's intent to increase its ABL business to decrease the risk in the portfolio, the composition of the Company's ABL client base may change over time, and there is no assurance that the increased yield level can be maintained. 14 Fees and other revenue decreased 65.6% in three months ended March 31, 1999 as compared to the same period in 1998, to $182 thousand from $527 thousand, respectively. The difference was due to the reduction in transaction fees related to the decreased volume of Purchased Receivables. COMPENSATION AND FRINGE BENEFITS. In three months ended March 31, 1999 and 1998, compensation and fringe benefits were $610 thousand (34.0% of total revenue) and $812 thousand (27.4% of total revenue), respectively. The lower compensation and fringe benefits during 1999 were chiefly the result of a decrease in the number of employees. GENERAL AND ADMINISTRATIVE EXPENSE. Total general and administrative expense decreased by $579 thousand (58.9%) to $405 thousand from $984 thousand for the three month periods ended March 31, 1999 compared with 1998. Rent, office, and selling expenses were down 29%, 39%, and 71%, respectively, due to closing an office the Company had maintained in New York. Client litigation and professional fees decreased 78% and 68%, respectively, due to a decrease in open legal cases. INTEREST EXPENSE. Interest expense was $376 thousand (21.0% of total revenue) versus $410 thousand (13.9% of total revenue) for the three months ended March 31, 1999 and 1998, respectively. The decrease in interest expense is primarily attributable to a decrease in the average interest rate on the Company's line of credit. The average interest rate paid on the Company's line of credit decreased to 7.5% for the three months ended March 31, 1999 from 8.1% during the comparable period in 1998. The average daily outstanding balance on the Company's line of credit was $13.2 million and $13.4 million for the three-month periods ended March 31, 1999 and 1998, respectively. Interest expense on the Convertible Subordinated Notes was comparable in the three months ended March 31 1999 to that in the comparable period of 1998. PROVISION FOR CREDIT LOSSES. During the three months ended March 31, 1999, the Company had charge-offs of $78 thousand, while recovering $177 thousand. Net recoveries for the three months ended March 31, 1999 of $99 thousand resulted in an increase to allowance for credit losses, bringing it to $2.9 million, or 8.9% of total receivables (net of earned income), exclusive of life insurance policies, outstanding as of March 31, 1999. None of the allowance at March 31, 1999 was allocated to non-performing accounts, which are carried at net realizable value of $2.9 million. During the three months ended March 31, 1998, the Company had charge-offs of $274 thousand while recovering $13 thousand, resulting in net charge-offs of $261 thousand. The Company's provision for credit losses of $547 thousand in the three months ended March 31, 1998 brought the allowance for credit losses to $2.8 million, or 8.0% of receivables (net of earned income). 15 The following table provides a summary of activity in the Company's allowance for losses for the three-month periods ending March 31, 1999 and 1998. Three Months Ended March 31, 1999 1998 ----- ---- (In Thousands) Allowance for Credit Losses Balance Beginning of Period 2,800 7.8% 2,739 7.2% Additions - 547 1.4 Write-Offs (78) (0.2) (274) (0.7) Recoveries 177 0.5 13 0.0 --- --- -- --- Balance - End of Period $ 2,899 8.2% $ 3,025 8.0% ======= ==== ======= ==== At March 31, 1999, the Company is maintaining a larger reserve for losses (in an absolute amount and as a percentage of receivables net of life insurance polices and unearned revenue) than at December 31, 1998. There has been a deterioration in the collateral position of the Company's largest client, an asset-based borrower, which has caused the amount of their advance as of March 31, 1999 to be larger than the amount to which they were entitled based on their agreed collateral formula. The Company determines overall reserve levels based on an analysis which takes into account a number of factors including a determination of the risk involved with each individual client, plus additional considerations based on concentration and asset class, such as the "overformula" advance cited above. Based on this analysis, the Company believes the allowance for credit losses is adequate in light of the risks inherent in the portfolio at March 31, 1999. The Company is carefully monitoring the overformula advance and working with its client to correct it, but there can be no assurance that the overformula situation, particularly as it is concentrated with a single large client, could not have a material adverse effect on the Company. [THIS SPACE INTENTIONALLY LEFT BLANK] 16 RECEIVABLES Receivables consist of the following: March 31, 1999 December 31, 1998 - ---------------------------------------------------------------------------- Invoices $11,829,274 $23,731,826 Less: Unearned discount (1,409,726) (3,299,175) Less: Participations (759,425) (759,424) Life Insurance policies 2,629,057 2,629,057 --------- --------- Total Purchased receivables $12,289,180 $22,302,284 ============= =========== Advances receivable $23,746,383 $16,288,673 Less: Unearned discount (547,658) (636,216) -------- -------- Total Advances receivable $23,198,725 $15,652,457 ============= =========== - -------------------------------------------------- ---------------------- Non-performing receivables included within the above totals were $2.9 million at March 31,1999 and $3.8 million at December 31,1998. From time to time, a single client or single industry may account for a significant portion of the Company's receivables. As detailed in Note 4 to the Financial Statements, three clients each accounted for more than 10% of total earned discounts and interest for the three month periods ended March 31, 1999 and December 31, 1998. These three clients portion of total revenue declined 39.0% for the quarter ended March 31, 1999 as compared to the quarter ended December 31, 1998. In addition, these three clients portion of total receivables outstanding decreased 23.3% from December 31, 1998 to March 31, 1999. During 1998, the Company adopted a policy to generally restrict the size of any one new client to a maximum of $3 million, and to take steps to reduce the size of the two existing clients who are currently over that limit. Although the Company carefully monitors client and industry concentration, there can be no assurance that the risks associated with client or industry concentration could not have a material adverse effect on the Company. SUBSEQUENT EVENT As detailed in note 4 to the consolidated financial statements for the period ended March 31, 1999 as presented in form 10-QSB, the Company has entered into an agreement to acquire a portfolio of asset based loans. The purchase, if completed, would substantially increase the size of the Company's ABL portfolio. The Company expects that an increase in personnel experienced in negotiating and servicing ABL relationships will be required to administer the accounts. Appropriate staff has been identified and arrangements have been made to open a loan servicing office in Illinois. The receivables to be acquired consist of borrowers that are primarily located in the Midwest. The Company expects that the acquisition 17 will improve the geographic dispersion of the ABL portfolio, most of which is currently concentrated in four East Coast states and California, and that the increase in the overall size of the receivable base will lessen the reliance on a small number of clients for substantial portions of total interest and discount revenue, as well as decreasing the risks of asset concentration. PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS For details regarding legal proceedings, see Note 3 to the unaudited financial statements contained in this Form 10-QSB. ITEM 3. - DEFAULTS UPON SENIOR SECURITIES As discussed in Note 2 to the unaudited financial statements, the Company was in default of certain financial covenants related to interest coverage requirements with respect to its line of credit. The Company has received waivers of such defaults. There can be no assurance that such defaults will not re-occur in the future or that any future defaults will also be waived. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's proxy statement on Schedule 14A dated April 15, 1999 is incorporated by reference. ITEM 6(a). - EXHIBITS EXHIBIT 10. EMPLOYMENT CONTRACTS Employment and Compensation Agreement with Charles G. Johnson dated as of January 20, 1999. EXHIBIT 27. FINANCIAL DATA SCHEDULE ITEM 6(b). - REPORTS ON FORM 8-K None. 18 SIGNATURES In accordance with the requirements of the Securities and Exchange Act of 1934, the Company caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLSTATE FINANCIAL CORPORATION Date: May 17, 1999 /s/ Charles G. Johnson --------------------------------- Charles G. Johnson Chief Executive Officer Date: May 17, 1999 /s/ C. Fred Jackson --------------------------------- C. Fred Jackson Chief Financial Officer 19 EX-27 2 MARCH 31, 1999
5 0000852220 ALLSTATE FINANCIAL CORP 12-MOS DEC-31-1999 MAR-31-1999 1432751 0 35487905 2898582 0 38858555 667743 502386 39030392 16238595 0 0 0 40000 17794794 39030392 0 1796045 0 0 1015306 0 375574 405165 149911 255254 0 0 0 255254 .11 .11
EX-10 3 EMPLOYMENT CONTRACT WITH CHARLES JOHNSON EMPLOYMENT AND COMPENSATION AGREEMENT This EMPLOYMENT AND COMPENSATION AGREEMENT ("Agreement") is made as of the 20th day of January, 1999, by and between ALLSTATE FINANCIAL CORPORATION, a Virginia corporation, having its principal place of business at 2700 South Quincy Street, Suite 540, Arlington, Virginia 22206 (the "Company"), and Charles G. Johnson, an individual having a residence at 11 Harleston Green, Hilton Head, SC 29928 (the "Employee"). The Company and the Employee in consideration of the mutual premises contained herein, mutually agree as follows: 1. Employment. The Company employs the Employee and the Employee agrees to serve the Company as President and Chief Executive Officer of the Company. It is intended that the Employee shall serve as a member of the board of directors of the Company (the "Board"). The Employee shall devote the Employee's full business time and best efforts to Company business. Employee shall perform such other duties commensurate with the Employee's position as may be specified from time to time by the Chairman of the Board or the Board. 2. Term. The initial term of this Agreement shall commence on the date set forth above, and shall end at the close of business on December 31, 2001, (the "Term"). Notwithstanding the foregoing, commencing on January 1, 2001, the Term shall extend one day at the end of every day during its length, and the new closing date of the term shall be that additional day, unless either party shall notify the other of its intention to stop such extensions, in which case the closing date of the Term shall be one year from the date of such notice. 3. Salary. During the Term, the Company shall pay to the Employee a base salary at a rate of One Hundred Eighty Five Thousand dollars ($185,000) per annum, which amount may be increased from time to time at the discretion of the Board. 4. Benefits and Other Compensation. The Company shall provide the Employee with the following additional compensation during the Term: (a) Subject to meeting eligibility provisions, any and all existing and future general Employee benefit plans, including without limitation, medical, health, life and disability insurance, pension and profit sharing plans, now or hereafter granted by the Company to the employees of the Company as a group, or to the executive officers of the Company as a group, shall be granted to the Employee. If a disability insurance plan is not provided to all employees, the Company will provide a reasonable substitute for Employee. (b) An annual management incentive bonus to be paid to Employee at the discretion of the Board of Directors of the Company in an amount up to 100% of Employee's then current base annualized salary, predicated on the achievement of the company's business plan. Such bonus shall be paid in a combination of Company stock and cash, with the cash portion to be at least 50% unless the Employee elects a lesser amount be paid in cash. Bonus for any calendar year shall be deemed fully accrued as of December 31 of the applicable year (or, if later, the date of the Board determines the amount of such bonus) and shall be paid no later than March 31 of the following year. (c) Receipt of an automobile allowance of $500 per month. (d) Employee shall receive on the date of execution of this Agreement, options (which shall be incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1966, as amended) under the Allstate Financial Corporation Stock Option Plan (a copy of which has been provided to Employee) (the "Plan") to purchase 30,000 shares at a price equal to $6.50 and 30,000 shares at a price equal to the higher of (i) $4.00, or (ii) the average trading price of such shares over the five (5) trading days immediately preceding the date of issuance of such options (according to the NASDAQ). All 60,000 share options shall be exercisable upon issuance. Said options will expire on the earlier of (i) seven years from the date of issuance or (ii) in connection with any termination of Employee's employment, the date provided under the terms and provisions of the Plan or subparagraph 9(c) hereunder. (e) Interim housing expense reimbursement prior to Employee's permanent relocation to the Company's headquarters office location. Such housing expenses shall be limited to $15,000. (f) Reimbursement for the movement and short term storage (if necessary) of household goods from Employee's residence to the Company's headquarters location. Such moving expenses shall be limited to $10,000. (g) Housing and moving reimbursements provided for in subparagraphs 4(e) and 4(f) shall be "gross-up" to provide tax equalization of any taxable income interpreted by Federal, State, or local taxing authorities as taxable income. 5. Reimbursement. Bona fide business expenses incurred by the Employee in connection with the performance of the Employee's duties hereunder shall be reimbursed by the Company. Such allowances shall, without limitation, include expenses such as travel, meals, hotels, telephone, telegraph, postage and other normal and customary business expenses. 6. Commercial Finance Association. During the Term of this Agreement, Company shall continue to be a member in good standing of the Commercial Finance Association ("CFA"), the trade association of secured lenders and factors, and Employee shall serve as the Company's Director Representative to CFA. Employee's involvement in CFA activities may include serving as an Officer, Director, Committee Member, Committee Chairman, President and Chairman of CFA. During the Term, while Employee holds national office as a member of the Management Committee of CFA, Company shall support and encourage Employee to fulfill the duties of such CFA offices by providing reimbursement to the Employee for bona fide travel and entertainment expenses incurred in conjunction with CFA activities up to $25,000 annually. 7. Vacation. During the term, Employee shall be entitled to four (4) weeks paid vacation per year. The dates of any vacation periods shall be arranged in order that such vacation days shall not materially hinder the normal functioning of the Company's business activities. 8. Trade Secrets; Non-Competition: (a) In the course of the Employee's employment, the Employee will have access to confidential records, data, pricing information, lists of clients and prospective clients, lists of vendors, books and promotional literature, leases and agreements, policies and similar material and information of the Company or used in the course of its business (hereinafter collectively referred to as "Confidential Information"). All such Confidential Information which the Employee shall use or come into contact with shall remain the sole property of the Company. The Employee will not, directly or indirectly, disclose or use any such Confidential Information, except as required in the course of such employment. The Employee shall not for a period of one (1) year following the end of the Term, disclose or use in any fashion any Confidential Information of the Company or any of its subsidiaries or affiliates, whether such Confidential Information is in the Employee's memory or embodied in writing or other physical form, provided, that the foregoing requirements shall not apply to any information (i) that (prior to disclosure by the Employee) has been disclosed by the Company or any third party or (ii) that Employee discloses (A) to any branch, agency or regulatory authority of any federal, state or local government to comply with any statute, regulation, rule, order or ordinance or (B) to any federal, state or local court, tribunal or other adjudicatory body in connection with any suit, claim or question arising before such court, tribunal or other adjudicatory body or otherwise. In the event of a breach or a threatened breach by the Employee of the provisions of this subparagraph (a), the Company shall be entitled to an injunction restraining the Employee from disclosing any of the aforementioned Confidential Information. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach or threatened breach, including the recovery of damages from the Employee. Subject to subparagraph (c) below, this provision shall survive the termination of this Agreement. (b) The Employee further agrees that, during the Term (or, if the Employee's employment is terminated prior to the end of the Term (whether by the Company or the Employee), during the period prior to such termination, and for a period of one (1) year thereafter, the Employee will not, except with the prior written consent of the Board of Directors, (i) be employed as an employee, consultant, officer or director, by any other commercial finance or factoring company, (ii) solicit any business from or have any business dealings with, either directly or indirectly or through corporate or other entities or associates, any client of the Company, or (iii) initiate any action, either directly or indirectly or through corporate or other entities or associates, that would reasonably be expected to encourage or to induce any employee of the Company or of any subsidiary or affiliate of the Company to leave the employ of the Company or of any such subsidiary or affiliate. The Employee specifically acknowledges the necessity for this subparagraph (b), given the nature of the Company's business. The Employee agrees that the Company shall be entitled to injunctive relief in the event of a breach of the provisions of this subparagraph (b), the legal remedies being inadequate to fully protect the Company. Nothing contained herein shall be construed as prohibiting the Company from pursuing any other remedies available to the Company for such breach, including the recovery of damages from the Employee. Subject to subparagraph (c) below, this provision shall survive the termination of this Agreement. (c) In the event of a Business Combination or Change of Control (as defined below) involving the Company (whether or not the Company's Board of Directors recommends such Business Combination or Change of Control for approval by the Company's shareholders), subparagraphs (a) and (b) of this Paragraph 8 shall, at the time such Business Combination or Change of Control is consummated, but only in the event Employee's employment is terminated or the employee's Salary, Benefits and Other Compensation and/or duties and responsibilities are substantially reduced and/or changed in connection therewith under the terms of subparagraph 9(c) below, be null and void and of no further force or effect. For purposes of this Agreement, "Business Combination" shall mean (i) a merger, a consolidation or any other business combination of the Company with any non-affiliated party, (ii) the disposition of all or substantially all of the securities, business or assets of the Company or (iii) a joint venture, reorganization or other transaction (or series of transactions) as a result of which all or substantially all of the business or assets of the Company are transferred, with or without a Change of Control, or any other similar corporate combination or transaction (or series of related transactions). For purposes of this Agreement, a "Change of Control" shall mean a transaction (or series of transactions) or other event (or series of events) that results in the acquisition of a Controlling Interest in the Company by a person or entity (or group of persons and/or entities) that did not have a Controlling Interest in AFC prior to such transaction (or series of transactions) or event (or series of events). As used in the preceding sentence, the term "Controlling Interest" means possession, directly or indirectly, of power to direct or cause the direction of management or policies (whether through ownership of voting securities, by contract or otherwise); provided that, in any event, any person or entity (or group of persons and/or entities) which beneficially acquires, directly or indirectly, 25% or more (in number of votes) of the securities having ordinary voting power for the election of directors of the Company shall be conclusively presumed to have a Controlling Interest in the Company. This provision shall be construed so that if a Business Combination or Change of Control (as defined herein) occurs on more than one occasion, the terms and provisions of this Agreement shall apply to the most recent Business Combination or Change of Control. 9. Payments Upon Termination. The Company shall pay to the Employee upon termination of employment during the Term, as follows: (a) If the Employee's employment is terminated by death, the Company shall continue to pay and provide to the estate of the Employee for a period equal to three months, Employee's then applicable base salary pursuant to the provisions of Paragraph 3 for such period, in semi-monthly installments. In addition, the Company, as soon as reasonably possible, but not past the end of the fiscal year of the death of the Employee, shall also pay to the estate of the Employee (on a pro rata basis up to the date of the Employee's death) the Benefits and Other Compensation otherwise due and unpaid to the Employee as of the date of, or in connection with, the Employee's death, pursuant and subject to the provisions of subparagraphs 4(a), 4(b) and 4(c) herein. In addition, the Board will consider in good faith the payment of an incentive bonus for the calendar year in which the termination occurs, taking into account the portion of the year completed prior to such termination, the Company's performance for the year, and the Employee's contributions to that performance. (b) In the event the Employee's employment is terminated because of permanent disability (as defined below), then following such termination the Company shall continue to pay and provide to the Employee for a period equal to six months, the Employee's then applicable salary for such period in semi-monthly installments, pursuant to the provisions of Paragraph 3 herein, and the Benefits and Other Compensation for such period as if the Employee were still employed to be paid not later than the last day of such period under subparagraphs 4(a), 4(b) and 4(c) herein. In addition, the Board will consider in good faith the payment of an incentive bonus for the calendar year in which the termination occurs, taking into account the portion of the year completed prior to such termination, the Company's performance for the year, and the Employee's contributions to that performance. As used herein, the Employee shall be deemed to be permanently disabled in the event that the Employee has not been able (due to mental or physical illness or incapacity) to render services required by this Agreement for a period of ninety (90) consecutive days. Any salary payments to be made by the Company under the provisions of this subparagraph (b) are to be offset by payments, if any, made to the Employee under any disability insurance plan maintained by the Company. (c) In the event the Employee's employment is terminated (i) by the company other than for the Cause, or (ii) by the Employee for Good Reason, as defined in Section 9(d) below, the Employee shall receive: (1) a lump sum payment, payable within thirty (30) days following such termination without discount, equal to the Employee's then current base salary otherwise payable through the later of the end of the Term, or one year; (2) continuation of the benefits described in Paragraphs 4(a) and 4(c) above for a period of one year following termination of employment (provided that if the Company cannot continue the Employee's participation under the terms of any applicable plan it shall pay the employee an amount equal to the cost the Company would have incurred in providing such participation); (3) any declared but unpaid bonus for any prior calendar year, and (4) bonus, for the year in which such termination occurs, in an amount no less than the bonus declared or paid, as the case may be, for the prior year, pro-rated to reflect the number of weeks in which the Employee was employed in the calendar year of termination, such bonus to be paid within thirty (30) days following such termination. (d) For this purpose Good Reason shall mean: (i) any material breach of this Agreement by the Company at any time, including (A) loss of the Employee's position as President and Chief Executive Officer, (B) failure to elect, or re-elect the Employee as a member of the Board, (C) breach of the provisions of Paragraph 6, or (D) attempted reduction in Employee's Salary, Benefits and Other Compensation. (ii) failure of the Company to obtain the agreement of any successor to perform this agreement at least ten (10) days prior to a Business Combination or Change in Control in which the Company will not be the surviving entity; or (iii) following a Business Combination or Change in control, assignment of duties inconsistent with Employee's position or any reduction in Employee's authority or direct support. (e) Notwithstanding anything else contained in subparagraph (c) above, no compensation shall be payable under subparagraph (c) above if the Employee's employment was or is terminated for Cause (as defined below). As used herein, the term "Cause" shall mean (i) the Employee's conviction of (or entry of a plea of nolo contendere with respect to) a felony or other crime involving moral turpitude or (ii) a willful, substantial and continual failure by the Employee in breach of this Agreement to perform the lawful duties, responsibilities or obligations assigned to the Employee pursuant to the terms hereof and the failure to cure such breach within fifteen (15) days following written notice from the Company containing specific findings by the Board of Directors of the Company detailing such failures. 10. Validity. In the event that any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions and portions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by law. 11. Amendment and Waiver. This Agreement constitutes the entire agreement between the parties as to employment by the Company of the Employee and may not be changed orally but only by a written document signed by both parties. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of any other breach by such party at that time or any other time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. 12. Arbitration. Any dispute whatsoever relating to the interpretation, validity, or performance of this Agreement and any other dispute arising out of this Agreement which cannot be resolved by the parties to such a dispute shall, upon thirty (30) days written notice by either party, be settled upon application of any such party by arbitration in Arlington County, Virginia, in accordance with the rules then prevailing of the American Arbitration Association, and judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. The cost of any arbitration proceedings under this paragraph shall be shared equally by the parties to such a dispute. Nothing contained in this paragraph shall limit the Company's rights to obtain injunctive relief to enforce the provisions of paragraphs 8(a) and 8(b) above. 13. Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia (without regard to conflicts of law principles). 14. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, legal representatives, successors and assigns and shall become effective upon execution by the Company. 15. Notice. All notices and other communications made pursuant to this Agreement shall be made in writing and shall be deemed to have been given if delivered personally or mailed, postage prepaid, to the applicable party hereto at the applicable address first above written, or in either case, to such other address as the Company or Employee shall have specified by written notice to the other party. 16. Paragraph Headings. All paragraph headings are included herein for convenience and are not intended to affect in any way the meaning or interpretation of this Agreement. 17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. Prior Agreements Superseded. In the event that the Employee has heretofore entered into an employment agreement with the Company, then this Agreement hereby revokes, replaces and supersedes the prior employment agreement between the Company and the Employee. IN WITNESS WHEREOF, the parties have executed this agreement, the Company acting herein by its duly authorized officer, the day and year first above written. ALLSTATE FINANCIAL CORPORATION By: /s/ David W. Campbell --------------------- David W. Campbell, Chairman of the Board /s/ Charles G. Johnson ---------------------- EMPLOYEE: Charles G. Johnson -----END PRIVACY-ENHANCED MESSAGE-----