-----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, GlnIeYNwwhZmC318JnRxCHFCaAIJOZnIvfRYrni0urb5YSHlb5Ojf5eF1nvyvP72 YBGE8YODTUS9smnsogIigg== 0000852220-99-000013.txt : 19991117 0000852220-99-000013.hdr.sgml : 19991117 ACCESSION NUMBER: 0000852220-99-000013 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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: 99755867 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 FORM 10QSB - SEPTEMBER 30, 1999 U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 For the quarterly period ended September 30, 1999 Commission File Number 0-17832 ALLSTATE FINANCIAL CORPORATION - -------------------------------------------------------------------------------- (Name of registrant as specified in its charter) VIRGINIA 54-1208450 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 2700 S. Quincy Street, Arlington, VA 22206 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (703) 931-2274 - -------------------------------------------------------------------------------- (Registrant's telephone number) Indicate by check mark 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 November 5, 1999, was 2,324,616. [THIS SECTION INTENTIONALLY LEFT BLANK] ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Page Number PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets at September 30, 1999 and December 31, 1998 4 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999 and 1998 5 Consolidated Statements of Shareholders' Equity for the Nine Months Ended September 30, 1999 and the Year Ended December 31, 1998 6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999 and 1998 7 Notes to Consolidated Financial Statements 8-11 Item 2 - Management's Discussion and Analysis or Plan of Operation 12-22 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 23 Item 3 - Defaults Upon Senior Securities 23 Item 6 - Exhibits and Reports on Form 8-K 23 Signatures 24 2 PART I - FINANCIAL INFORMATION 3 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1999 1998 ---- ---- (UNAUDITED) ASSETS CASH ................................................................................. $ 492,243 $ 2,420,644 ------------ ----------- Purchased receivables ................................................................ 6,763,944 22,302,284 ADVANCES RECEIVABLE .................................................................. 20,161,557 15,652,457 ------------ ------------ 26,925,501 37,954,741 LESS: ALLOWANCE FOR CREDIT LOSSES .................................................... (11,787,839) (2,799,931) ------------ ----------- TOTAL RECEIVABLES - NET .............................................................. 15,137,662 35,154,810 ------------ ------------ Income tax receivable ................................................................ 8,824 831,656 Deferred income taxes ................................................................ -- 3,960,946 Furniture, fixtures and equipment, net ............................................... 222,267 166,400 OTHER ASSETS ......................................................................... 26,327 653,957 - -------------------------------------------------------------------------------------- ------------ ------------ TOTAL ASSETS ......................................................................... $ 15,887,323 $ 43,188,413 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses ................................................ $ 796,754 $ 1,081,655 Credit balances of factoring clients ................................................. 413,144 4,559,570 Notes payable ........................................................................ 7,570,666 15,014,717 CONVERTIBLE SUBORDINATED NOTES ....................................................... 4,954,000 4,958,000 - -------------------------------------------------------------------------------------- ------------ ------------ TOTAL LIABILITIES .................................................................... 13,734,564 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; 2,324,616 outstanding at September 30, 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, 781,212 shares at September 30, 1999 and 781,745 shares at December 31, 1998 .......................................... (4,970,301) (4,986,520) (DEFICIT) RETAINED EARNINGS ........................................................ (11,791,122) 3,646,809 ------------ ------------ TOTAL SHAREHOLDERS' EQUITY ........................................................... 2,152,759 17,574,471 - -------------------------------------------------------------------------------------- ------------ ------------ $ 15,887,323 $43,188,413 ============ =========== See Notes to Consolidated Financial Statements
4 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30, 1999 1998 1999 1998 ---- ---- ---- ---- (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) REVENUE ................................. Earned discounts and interest ......... $ 592,511 $ 1,831,083 $ 2,805,244 $ 6,846,331 FEES AND OTHER REVENUE ................ 34,736 244,966 359,182 1,253,401 TOTAL REVENUE ....................... 627,247 2,076,049 3,164,426 8,099,732 EXPENSES Compensation and fringe benefits ...... 523,171 700,026 1,786,867 2,640,356 General and administrative ............ 563,375 1,712,599 2,318,024 4,803,356 Interest expense ...................... 319,874 482,308 1,030,839 1,341,463 Provision for credit losses ........... 800,000 3,865,502 9,176,057 9,323,503 RESTRUCTURING CHARGE .................. 259,221 -- 259,221 -- TOTAL EXPENSES ...................... 2,465,641 6,760,435 14,571,008 18,108,678 LOSS BEFORE INCOME TAX EXPENSE .......... (1,838,394) (4,684,386) (11,406,582) (10,008,946) INCOME TAX EXPENSE (BENEFIT) ............ 9,500 (1,732,913) 4,031,349 (3,703,000) NET LOSS ................................ $ (1,847,894) $ (2,951,473) $(15,437,931) $ (6,305,946) NET LOSS PER COMMON SHARE - BASIC ...... $ (0.79) $ (1.27) $ (6.64) $ (2.72) WEIGHTED AVERAGE NUMBER OF SHARES - BASIC 2,324,616 2,320,966 2,324,400 2,321,195 See Notes to Consolidated Financial Statements
5 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
COMMON STOCK ADDITIONAL TREASURY RETAINED TOTAL PAID IN STOCK EARNINGS/ CAPITAL (DEFICIT) Balance - January 1, 1998 .... $ 40,000 $ 18,852,312 $ (5,030,594) $ 9,702,322 $ 23,564,040 Amortization of treasury stock 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 12,221 12,221 Conversion of Convertible Subordinated Notes to 533 shares of common stock 3,998 3,998 NET LOSS (UNAUDITED) ......... (15,437,931) (15,437,931) BALANCE - SEPTEMBER 30, 1999 . $ 40,000 $ 18,874,182 $ (4,970,301) $(11,791,122) $ 2,152,759 See Notes to Consolidated Financial Statements
6 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30 1999 1998 CASH FLOWS FROM OPERATING ACTIVITIES: (UNAUDITED) (UNAUDITED) Net Loss $(15,437,931) $(6,305,946) Adjustments to reconcile net loss to cash provided by operating activities: Depreciation - net 53,587 313,000 Loss on disposition of furniture, equipment, and Automobiles 65,440 51,497 Provision for credit losses 9,176,057 9,323,503 Changes in operating assets and liabilities: Other assets 627,630 4,078,056 Accounts payable and accrued expenses (284,901) 1,408,795 INCOME TAXES RECEIVABLE AND DEFERRED INCOME TAXES 4,783,778 (4,122,740) NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (1,016,340) 4,746,165 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of receivables and advances (106,562,864) (169,947,755) Collection of receivables, including life insurance contracts, and advances 117,403,655 156,445,190 (Decrease)/Increase in credit balances of factoring clients (4,146,426) 2,904,273 Sale of automobiles 6,800 PURCHASE OF FURNITURE, FIXTURES AND EQUIPMENT (181,394) (50,197) NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,519,771 (10,648,489) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit 76,427,897 101,014,904 Principal payments on line of credit (83,871,948) (96,509,963) Treasury stock acquisition costs 12,219 - OPTIONS EXERCISED - 21,860 NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (7,431,832) 4,526,801 NET DECREASE IN CASH (1,928,401) (1,375,523) CASH, BEGINNING OF PERIOD 2,420,644 4,200,050 CASH, END OF PERIOD $ 492,243 $ 2,824,527 INTEREST PAID $ 283,111 $ 1,341,463 INCOME TAXES PAID $ - $ 418,051 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 $ 3,998 $ 12,990 See Notes to Consolidated Financial Statements
7 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 September 30, 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 nine months ended September 30, 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. SENIOR AND SUBORDINATED DEBT. The Company is operating under a forbearance agreement negotiated with its bank lenders. The line of credit availability at September 30, 1999 is limited to the lesser of $10,000,000 and a percentage of the Company's collateral position less a fixed amount. The $10,000,000 line of credit is reduced as collections of certain assets are received. As of September 30, 1999 the Company had approximately $1,300,000 available. The interest rate on the line of credit is equal to the agent lender's base rate plus 2.25%. The agreement was scheduled to expire October 31, 1999, at which time all amounts under the line of credit was to become due. The Company is seeking to obtain replacement financing or to sell some of its assets to repay the lenders in whole or in part, and the Company obtained an extension of the forbearance period to November 30, 1999. See Note 7. The Company has obtained a $1,000,000 working capital loan from a major stockholder. The working capital loan bears a 10% rate of interest, which is payable quarterly, and repayment terms of 25% of collections of certain assets. The outstanding balance of the loan is due March 31, 2000. The Company may seek to extend the due date of the outstanding balance of the loan. As of September 30, 1999, the Company owed $1,000,000 on the working capital loan. The Company also has outstanding $4,954,000 in aggregate principal amount of convertible subordinated notes, of which $357,000 are due in September 2000 and $4,597,000 are due in September 2003. The Company is currently in default on certain financial covenants relating to the subordinated debt due September 30, 2003. There are no financial covenants in the convertible subordinated debt due September 30, 2000. 3. CERTAIN CONTINGENCIES. 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 8 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 Surety's complaint adopts the Counterclaims and seeks an accounting. The Surety asserts damages of approximately $4,000,000. On April 9, 1998, the bankruptcy court remanded the matter to state court. On June 24, 1998, the Surety was formally declared insolvent by the Superintendent of Insurance of the State of New York (hereinafter referred to as the "Superintendent") and as such the Superintendent was judicially appointed as rehabilitator of the Surety to conduct its business. At this time, it is uncertain whether the Superintendent will continue to pursue the litigation against the Company. The Company believes it has meritorious defenses to the Counterclaims and intends to vigorously defend all claims. However, the litigation is in the preliminary stage and the probability of a favorable or unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. Except as described above, the Company is not a 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 nine months ended September 30, 1999, three clients accounted for 30.9% of the Company's total earned discounts and interest as compared to 50.3% for the same period in 1998. For the quarter ended September 30, 1999, three clients accounted for 39.0% of the Company's total earned discounts and interest, as compared to 60.9% for the quarter ended September 30, 1998. At September 30, 1999, three clients accounted for 49.5% of the Company's total receivables, while at December 31, 1998 three clients accounted for 48.7%. All three of the Company's largest clients at September 30, 1999 are non-performing. 5. STOCK OPTIONS. The Company maintains two stock option plans: (1) an Incentive Stock Option Plan (Qualified), and (2) a Non-Qualified Stock Option Plan (Non-Qualified). The Company continues to account for stock options under APB 25 and provides the additional disclosures as required by SFAS No. 123. QUALIFIED PLAN The Company has reserved 275,000 shares of common stock for issuance under its qualified stock option plans. Options to purchase common stock are granted at a 9 price equal to the fair market value of the stock on the date of grant or 110% of fair market value of the stock at the date of grant for stockholders owning 10% or more of the combined voting stock of the Company. NON-QUALIFIED PLAN The Company has reserved 150,000 shares of common stock for issuance under its non-qualified stock option plan. Options to purchase shares of common stock are granted at a price equal to the fair value of the stock at the date of grant except in the case of options granted to directors, in which case the minimum price is the greater of $7.00 or 110% of fair value at the time of grant. The table below summarizes the option activity for both the Qualified and Non-Qualified Stock Option plans for the nine months ended September 30, 1999: Nine Months Ended September 30, 1999 Outstanding January 1 219,600 Granted 155,000 Exercised - FORFEITED OR EXPIRED (87,200) OUTSTANDING 287,400 EXERCISABLE 272,021 The weighted average fair value at the date of grant for options granted during 1999 was $0.77. The fair value of options at the date of grant was estimated using the Black-Scholes model with an expected option life of 3.0 years, zero dividend yield, interest rates of 5.70% and volatility of 161%. Nine Months Ended September 30, 1999 Per share Outstanding January 1 $6.37 Granted 6.03 Exercised - FORFEITED OR EXPIRED (5.74) OUTSTANDING $6.28 EXERCISABLE $6.34 The Company's net loss would have been increased by $100,218 or $0.04 per share basic and dilutive for the nine months ended September 30, 1999, in stock-based compensation cost for the Company's qualified and non-qualified stock option plans if the cost of the plans had been determined based on the fair value at the grant dates for awards under the plans. 6. NEW ACCOUNTING PRONOUNCEMENT. IN JUNE OF 1998, THE FASB ISSUED SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities. It requires a company to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. This statement is effective for fiscal years beginning after June 10 15, 2000. Management is in the process of evaluating the potential impact of this standard on the Company's financial position and results of operations. 7. SUBSEQUENT EVENTS. The Company's board of directors elected to evaluate alternatives to increase shareholder value, including investigating strategic and financial partners or purchasers for the factoring and ABL businesses. On October 29, 1999 the Company sold the Purchased Receivables and the Advances Receivable related to its Factoring business to Metro Factors, Inc. ("Metro"), for $5,990,252, a price that approximated the carrying value of the assets involved. Simultaneous with the sale, the Company purchased a participation in certain of the Advances Receivable associated with the Factoring clients for $1,528,796. Metro will act as the servicer with regard to these participations. The Company will receive a premium over time based on the performance of the Purchased Receivables sold. The Company did not record any gain or loss on this transaction. See the Proforma financial statements in Management's Discussion and Analysis of Financial Condition and Results of Operations under the Subsequent Events section. Management has also met with potential purchasers of other assets, and continues to explore a sale or refinancing. On November 8, 1999, the Company's lenders agreed to extend the Forebearance Agreement into which they and the Company had entered on August 1, 1999. The term of the agreement was extended to November 30, 1999, and the amount of the facility was decreased to $3,500,000 or the availability as defined in the revolving credit agreement, whichever is less. The interest rate on the facility is a rate equal to the agent lender's base rate plus 2.25%. The Company plans to use a portion of the proceeds of the sale of other assets to repay the lenders before the expiration of the agreement. In the event that the Company is not able to repay the lenders, there can be no assurance that the Company will be able to continue to operate on an independent basis or that the shareholders will receive any distributions if the Company is liquidated. [THIS SECTION INTENTIONALLY LEFT BLANK] 11 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, seasonality, and variability of quarterly results, ability of the Company to continue its business plan, 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. SUBSEQUENT EVENTS The Company's board of directors elected to evaluate alternatives to increase shareholder value, including investigating strategic and financial partners or purchasers for the factoring and ABL businesses. On October 29, 1999 the Company sold the Purchased Receivables and the Advances Receivable related to its Factoring business to Metro Factors, Inc. (Metro), for a price that approximated the carrying value of the assets involved. Simultaneous with the sale, the Company purchased a participation in certain of the Advances Receivable associated with the Factoring clients. Metro will act as the servicer with regard to these participations. The net consideration received by the Company was approximately $4.5 million, plus a premium to be received over time based on the performance of the Purchased Receivables sold. The Company did not record any gain or loss on this transaction. Management has also met with potential purchasers of other assets. [THIS SECTION INTENTIONALLY LEFT BLANK] 12 Pro-Forma Financial Statement The following tables shows the Company's Pro-forma Condensed Balance Sheet and Statement of Operations as of September 30, 1999 adjusted by the sale of the purchased receivables. Pro-forma Balance Sheet BEFORE SALE SALE OF AFTER SALE OF OF ASSETS ASSETS ASSETS Cash ..................................... $ 493 4,407 $ 4,900 Total Receivables, net ................... 15,138 (4,758) 10,380 OTHER ASSETS ............................. 257 -- 257 TOTAL ASSETS ............................. $15,888 $ (351) $15,537 ======= ======= ======= Total liabilities ........................ $13,735 $ (351) $13,384 TOTAL SHAREHOLDERS' EQUITY ............... 2,153 -- 2,153 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $15,888 $ (351) $15,537 ======= ======= ======= Pro-forma Statement of Operations
BEFORE SALE OF SALE OF ASSETS AFTER SALE OF ASSETS ASSETS REVENUE Earned discounts and interest ..................... $ 2,805 $ (1,093) $ 1,712 Fees and other revenue ............................ 359 (313) 46 INCOME FROM DISCONTINUED OPERATIONS ............... -- 141 141 TOTAL REVENUE ................................... 3,164 (1,265) 1,899 EXPENSES Compensation and fringe benefits .................. 1,787 (568) 1,219 General and administrative ........................ 2,318 (513) 1,805 Interest expense .................................. 1,031 (438) 593 Provision for credit losses ....................... 9,176 -- 9,176 Restructuring Charge .............................. 259 (259) -- INCOME TAX EXPENSE ................................ 4,031 -- 4,031 Total Expenses .................................. 18,602 (1,778) 16,824 NET LOSS ............................................ $ (15,438) $ 513 $ (14,925) =========== =========== =========== NET LOSS PER COMMON SHARE - Basic ................... $ (6.64) $ 0.22 $ (6.42) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - BASIC 2,324,400 2,324,400 2,324,400 =========== =========== ===========
ASSUMPTIONS Balance Sheet - The Pro-forma Balance Sheet adjusts the September 30, 1999 13 Balance Sheet by the sale of the factoring portfolio. Since the portfolio sale took place on October 29, 1999 and the Balance Sheet is dated September 30, 1999, there were some immaterial fluctuations between the book balances of the factoring portfolio on September 30, 1999 and October 29, 1999. Therefore, the Pro-forma Balance Sheet does not represent actual account balances on any date. Statement of Operations - The Pro-forma Statement of Operations adjusts the Statement of Operations for the nine months ending September 30, 1999 as if the sale of the factoring portfolio took place on January 1, 1999. The sale of assets column in this pro-forma are management's estimates as to what revenue and expenses would and would have been earned or incurred had the sale of the factoring portfolio taken place on January 1, 1999. The proceeds of the sale were used to reduce the Company's line of credit, in accordance with the forbearance agreement. This paydown in the Company's line of credit is not reflected in the above Pro-forma Balance Sheet. Subsequent events, continued On November 8,1999, the Company's lenders agreed to extend the Forebearance Agreement into which they and the Company had entered on August 1, 1999. The term of the agreement was extended to November 30, 1999, and the amount of the facility was decreased to $3.5 million or the availability as defined in the revolving credit agreement, whichever is less. The interest rate on the facility is a rate equal to the agent lender's base rate plus 2.25%. The Company plans to use a portion of the proceeds of the sale of other assets to repay the lenders before the expiration of the agreement. In the event that the Company is not able to repay the lenders, there can be no assurance that the Company will be able to continue to operate on an independent basis or that the shareholders will receive any distributions if the Company is liquidated. GENERAL The Company is a commercial finance institution, which provides financing to small businesses, usually those with annual sales of $1 million to $10 million. Through its offering of 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'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 bank lenders. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. The Company faces competition from factoring companies, asset-based lenders, diversified lenders, and commercial banks that offer secured financing. Due to the size of facilities that it offers, the Company competes with both regional sources of financing and large national organizations. Many of these competitors have significant financial, marketing and operational resources, and may have access to capital at lower costs than the Company can obtain. 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. Although the Company has 14 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 was materially adversely affected when the financial condition of its three largest clients deteriorated in June 30, 1999 quarter. The curtailment of the Company's credit line according to the terms of the forebearance agreement limited the Company's ability to replace those clients, which has had 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 any 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 levels of its investment in receivables and its operating results. The Company funds these needs through its revolving credit line, its working capital loan, its convertible subordinated notes, and internally generated funds. The Company is operating under a forbearance agreement negotiated with its bank lenders. The line of credit availability at September 30,1999 was limited to $10 million or a percentage of the Company's collateral position less a fixed amount. The $10 million line of credit was reduced by the sale proceeds from the Purchased Receivables as collections of certain assets were received. As of September 30, 1999 the Company had approximately $1.3 million available under a $9.9 line of credit. The interest rate on the line of credit is equal to the agent lender's base rate plus 2.25%. The agreement expired October 31, 1999, at which time the Company requested and received an extension to November 30, 1999. The Company is still seeking to obtain replacement financing or to sell other assets to repay the lenders in whole or in part. See the subsequent events sections in the notes to the financial statement and management's discussion and analysis. The Company has obtained a $1 million working capital loan from a major stockholder. The working capital loan bears a 10% rate of interest, which is payable quarterly, and repayment terms of 25% of collections of certain assets. The outstanding balance of the loan is due March 31, 2000. The Company may seek to extend the due date of the outstanding balance of the loan. As of September 30, 1999, the Company owed $1 million on the working capital loan. The Company is also seeking to obtain replacement financing or to sell some of its assets to repay the lenders in whole. There can be no assurance that these efforts will be successful. Given the Company's current cash position and the restrictions on the use of the line of credit imposed by the lenders, the Company is not in a position to fund or acquire new clients. The Company is currently working with its current ABL clients to meet their needs. In addition, because of the amount of non performing assets in the portfolio, the Company is not operating profitably, and does not expect to return to profitability unless it can add new performing assets to the portfolio, which is dependent on the Company's ability to obtain replacement financing. The Company is currently reviewing options to cut costs and increase liquidity, including selling all or a portion of the ABL portfolio, and using the proceeds to repay the lenders, and has contacted new sources of financing. The Company has met with several potential buyers of this portfolio. Should the Company sell the portfolio, the 15 Company may incur costs to eliminate the positions associated with the portfolio sold. The Company had expended approximately $500 thousand in the first six months of 1999 relating to acquiring a $30 million ABL portfolio and a $5 million ABL company. Since the Company has decided not to pursue either the portfolio or company, no further funds will be expended for these purposes during the second half of 1999. The Company also has outstanding approximately $5 million in aggregate principal amount of convertible subordinated notes, of which $357 thousand are due in September 2000 and $4.6 million are due in September 2003. The Company is currently in default on certain financial covenants relating to the subordinated debt due September 30, 2003. There are no financial covenants in the convertible subordinated debt due September 30, 2000. The Company believes that the proceeds of the working capital loan, borrowings under its current credit facility (as modified by the forbearance agreement,) and internally generated funds from the collection of non-performing assets will be sufficient to finance the Company's working capital requirements for the remainder of 1999. Further, the Company believes that, given the results of efforts to date to obtain new financing or to sell assets to increase liquidity, it will generate sufficient funds to repay the existing lenders. However, there can be no assurance that collections from non-performing assets or sale of other assets can be accomplished in the required time frames, or that sufficient replacement financing can be obtained to restore the portfolio to a level where the Company can operate profitably. 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 date-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 or upgrade 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 completed. Each new system selected is "off the shelf", and is certified Year 2000 compliant, and, therefore, the third phase, installation and testing, will be limited and is expected to be completed by November 30, 16 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 December 31, 1999. The cost of becoming Year 2000 compliant through acquisition of new systems is estimated at $50 thousand, all of which has been incurred. 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 has evaluated their responses. 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. Due to the Company's reduced size, the Company has determined that such possible events are unlikely to have a material adverse effect on its financial condition. The Company will continue to analyze the uncertainty through monitoring the Year 2000 compliance efforts of clients and obligors. 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. Nine Months Ended September 30 1999 1998 (UNAUDITED) (UNAUDITED) REVENUE .......................... % % Earned discounts and interest .. $ 2,805,244 88.6 $ 6,846,331 84.5 FEES AND OTHER REVENUE ......... 359,182 11.4 1,253,401 15.5 TOTAL REVENUE ................ 3,164,426 100.0 8,099,732 100.0 EXPENSES Compensation and fringe benefits 1,786,867 56.5 2,640,356 32.6 General and administrative ..... 2,318,024 73.3 4,803,356 59.3 Interest expense ............... 1,030,839 32.6 1,341,463 16.6 Provision for credit losses .... 9,176,057 290.0 9,323,503 115.1 RESTRUCTURING CHARGE ........... 259,221 8.1 -- -- TOTAL EXPENSES ............... 14,571,008 460.5 18,108,678 223.6 LOSS BEFORE INCOME TAX EXPENSE ... (11,406,582) (360.5) (10,008,946)(123.6) INCOME TAX EXPENSE (BENEFIT) ..... 4,031,349 127.4 (3,703,000) (45.7) NET LOSS ......................... $(15,437,931) (487.9) $ (6,305,946) (77.9) ============ ===== ============ ===== NET LOSS PER COMMON SHARE - BASIC $ (6.64) $ (2.72) ============ ============= WEIGHTED AVERAGE NUMBER OF SHARES 2,324,400 2,321,195 17 TOTAL REVENUE. Total revenue consists of (i) discounts on purchased invoices earned in the Company's factoring business from the purchase of accounts receivable and 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 those clients "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 Nine Months Ended September 30, 1999 1998 TYPE OF REVENUE % % Discount on purchased invoices $ 982,183 31.0 $3,733,476 46.1 Earnings on advances ......... 1,823,061 57.6 3,112,855 38.4 FEES AND OTHER REVENUE ....... 359,182 11.4 1,253,401 15.5 TOTAL REVENUE ................ $3,164,426 100.0 $8,099,732 100.0 ========== ===== ========== ===== For the Three Months Ended September 30, 1999 1998 TYPE OF REVENUE % % Discount on purchased invoices $ 288,910 46.1 $1,117,357 53.8 Earnings on advances ......... 303,601 48.4 713,726 34.4 FEES AND OTHER REVENUE ....... 34,736 5.5 244,966 11.8 TOTAL REVENUE ................ $ 627,247 100.0 $2,076,049 100.0 ========== ===== ========== ===== Total revenue decreased by 60.9% in the nine months ended September 30, 1999 versus the same period in 1998, to $3.2 million from $8.1 million. In the three months ended September 30, 1999, total revenue decreased by 69.8% versus the same period in 1998, to $627 thousand from $2.1 million. Within total revenue, discounts on purchased invoices decreased 73.7% and 74.1% in the September 30, 1999 nine month and three month periods as compared to the 18 same periods in the prior year. The volumes of invoices purchased were $35.2 million and $9.9 million in the nine and three months ending September 30, 1999 as compared to $107.4 million and $30.7 million in the nine and three month periods ending September 30,1998, representing 67.2% and 67.8% decreases, respectively. The major reasons for the decreases were a conversion of a significant client from a factoring relationship to an Asset Based Loan relationship and a reduced flow of factoring business as the Company emphasized its ABL line in 1999. The average earned discounts as a percentage of total invoices purchased in the nine and three months ended September 30, 1999 were 2.8% and 2.9%. The comparable average percentages in the 1998 periods were 3.2% and 3.6%, representing decreases of 12.5% and 19.4%. The decreases were the result of the default of a client in 1998. Earnings on advances receivable decreased by 41.4% and 57.5% in the nine and three month periods ending September 30, 1999 versus the comparable year earlier periods. The earnings decreases were attributable to the three largest clients defaulting on their loans during the second quarter of 1999. Fees and other revenue decreased in the nine and three months ended September 30, 1999 by 71.3% and 85.8% as compared to the September 30, 1998 periods. Two of the same clients that defaulted on their loans during 1999 caused the majority of the reduction in transaction fees in 1999 as compared to 1998. The downward trend in revenue is highly likely to continue throughout the remainder of the year. Given the Company's liquidity position as discussed earlier, the Company cannot acquire or fund new clients. The sale of the Factoring portfolio will decrease future earnings, and the Company may incur certain costs in reducing staff levels in addition to the restructuring charge, if other portions of the portfolio are sold. COMPENSATION AND FRINGE BENEFITS. In the nine-month period ending September 30, 1999, compensation expense was $853 thousand lower than in the comparable period in 1998. Compensation as a percentage of revenue was up by 73.3% due to the significantly lower revenue. In the three-month period ending September 30, 1999, compensation expense was $177 thousand lower than in the comparable period in 1998, while compensation as a percentage of revenue was up, by 147.5%, again due to lower revenue. 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 $2.5 million (51.7%) to $2.3 million from $4.8 million for the nine month period ended September 30, 1999 compared with 1998, and by $1.1 million (67.1%) to $600 thousand from $1.7 for the three month period then ended compared with the previous year. Client litigation expenses were $452 thousand and $136 thousand for the nine and three month periods ending September 30, 1999 compared to $914 thousand and $284 thousand in the corresponding periods the previous year. Other professional fees increased $118 thousand for the nine months and decreased $109 thousand for the three months ending September 30, 1999 versus the same periods in 1998. Included in G&A expense for the nine months ended September 30, 1999 was approximately $500 thousand in fees and expenses paid in connection with the planned purchase of a loan portfolio. The Company decided not to pursue the portfolio. INTEREST EXPENSE. Interest expense was $1.0 million versus $1.3 million for the nine months ended September 30, 1999 and 1998, respectively, and $181 thousand and $482 thousand respectively for the three months ended September 30, 1999 and 1998. Interest expense for the nine-month period ended September 30, 1999 includes a one-time payment of $20 thousand in non-operating interest due to a 19 tax agency. The decrease in interest expense is primarily attributable to a decrease in the average amount outstanding and, for the nine-month period only, a lower average interest rate on the Company's line of credit. The average daily outstanding balances on the Company's line of credit were $10.4 million and $15.6 million for the nine-month periods and $7.3 million and $18.5 million for the three-month periods ended September 30, 1999 and 1998, respectively. The average interest rate paid on the Company's line of credit decreased to 7.83% for the nine months ended September 30, 1999 from 8.07% during the comparable period in 1998, and increased to 9.63% from 8.05% during the three-month periods then ended. The increase in the quarter ending September 30, 1999 was due to an increase of 2 percentage points by the lender on the bank line of credit and interest on the working capital loan which bears an interest rate of 10%. Interest expense on the Convertible Subordinated Notes was comparable in the nine months and three months ended September 30, 1999 to that in the comparable periods of 1998. PROVISION FOR CREDIT LOSSES. During the three months ended September 30, 1999, the Company had charge-offs of $11 thousand, while recovering $39 thousand, as compared to 1998, when the comparable figures were $3.7 million and $40 thousand, respectively. The Company provided $800 thousand for estimated losses during the three months ended September 30, 1999, compared to a $3.9 million provision in third quarter of 1998. For the nine-month period ending September 30, 1999, the Company took a provision of $9.2 million as compared to $9.3 million for the same period in 1998. Charge-offs for the nine months ended September 30, 1999 were $96 thousand as compared to $3.7 million for 1998. The provision taken during 1999 is in accordance with the Company's policy of increasing reserves when it becomes apparent that the Company's collateral position has deteriorated and the Company will not realize the entire amount of the loan outstanding. The Company has a policy of charging-off amounts when the loss amount is reasonably determinable. The allowance for credit losses ended at a balance of $11.8 million at September 30, 1999 as compared to a balance of $7.9 million at September 30, 1998. The following table provides a summary of activity in the Company's allowance for losses for the three-month periods ending September 30, 1999 and 1998, in dollars and percentages of the receivable portfolio. Three Months Ended 1999 1998 (IN THOUSANDS) % (IN THOUSANDS) % ALLOWANCE FOR CREDIT LOSSES Balance Beginning of Period $ 10,960 40.7 $ 2,739 6.6 Additions ................. 800 3.0 8,823 21.2 Write-Offs ................ (11) -- (3,740) (9.0) RECOVERIES ................ 39 0.1 40 0.1 BALANCE - END OF PERIOD ... $ 11,788 43.8 $ 7,862 18.9 ======== ==== ======== ==== The Company's three largest clients, all classified as non-performing, experienced severe financial problems in the three month and nine month periods 20 ending September 30, 1999. On September 30, 1999, one client refinanced its obligations to the Company with two notes. The first note is secured by a second lien on all of the client's assets, and requires monthly interest plus principal amortization. The second note is an obligation of the client's principals, and is secured by their stock in the client's parent company. Both notes bear interest at rates that are lower than the original contractual rates. The client defaulted on the first note during the month of November 1999. The Company is working with the client to resolve this default and attempt collection on both notes. There can be no assurance that the Company will realize any payments of principal and interest and may have to incur further provisions and write-downs of this asset. The other two clients, who are related through common ownership, have ceased operations. The Company is pursuing legal action against the clients and related guarantors to liquidate collateral and recover amounts due. The Company has allocated $11.5 million of its allowance for losses against the $13.5 million amount of the assets involved with these three clients, which management deems impaired. However, management has not made a final determination as to the amount of the losses that will actually be incurred. The remaining non-performing assets have previously been written down to net realizable value. 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. Based on this analysis, the Company believes the allowance for credit losses, net of the amounts allocated to specific impaired accounts, is adequate in light of the risks inherent in the performing portfolio at September 30, 1999. RESTRUCTURING CHARGE During the three-month period ending September 30, 1999 the Company developed a plan to sell certain finance assets to cut its outstanding senior debt and lower its cost. As a result, the Company expected to incur certain costs of employee severance, termination of office and equipment leases. The total of these costs was estimated at $259 thousand, and the Company provided for these expenses through a charge to earnings in the period. As of November 8, 1999 the Company has disbursed $202 thousand of the total. The balance is expected to be substantially disbursed for the purposes intended by December 31, 1999. [THIS SECTION INTENTIONALLY LEFT BLANK] 21 RECEIVABLES Receivables consist of the following: September 30, 1999 December 31, 1998 Invoices .................. $ 5,868,409 $ 23,731,826 Less: Unearned discount . (1,248,235) (3,299,175) Less: Participations .... -- (759,424) LIFE INSURANCE POLICIES ... 2,143,770 2,629,057 TOTAL PURCHASED RECEIVABLES $ 6,763,944 $ 22,302,284 ============ ============ Advances receivable ....... $ 20,909,855 $ 16,288,673 Less: Participations .... (748,298) -- LESS: UNEARNED DISCOUNT . -- (636,216) TOTAL ADVANCES RECEIVABLE . $ 20,161,557 $ 15,652,457 ============ ============ Life insurance policies purchased are stated net of a valuation allowance of $760 thousand at September 30, 1999 and $275 thousand at December 31, 1998. The Company periodically updates information on the life expectancies of the insureds, and computes an allowance for the difference between the carrying value of the policies and the policy benefit amounts discounted to the date of the calculation. Non-performing receivables included within the above totals were $14.1 million at September 30, 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 nine-month periods ended September 30, 1999 and 1998. In addition, three clients' portion of total receivables outstanding increased to 49.5% of the portfolio as of September 30, 1999 as compared to 48.7% of the portfolio as of December 31, 1998. During 1998, the Company adopted a policy to generally restrict the size of any one new client to a maximum of $3 million. Although the Company carefully monitors client and industry concentration, the risks associated with client or industry concentration could have a material adverse effect on the Company. The Company was materially adversely affected when the financial condition of its three largest clients deteriorated in the nine-month period ended September 30, 1999. INCOME TAXES The provision for income taxes of $4.0 million for the nine months ended September 30, 1999 relates to a valuation allowance which completely offsets the deferred tax asset. The Company recorded the valuation allowance as of June 30, 1999, because it concluded that it was unlikely to generate significant taxable income for the foreseeable future. NEW ACCOUNTING PRONOUNCEMENT IN JUNE OF 1998, THE FASB ISSUED SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This statement establishes accounting and 22 reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, and for hedging activities. It requires a company to recognize all derivatives as either assets or liabilities in the balance sheet and to measure those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000. Management is in the process of evaluating the potential impact of this standard on the Company's financial position and results of operations. [THIS SECTION INTENTIONALLY LEFT BLANK] 23 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 on several financial covenants with respect to its $10 million line of credit. The Company is operating under an extension of its forbearance agreement that will expire November 30, 1999 with the lenders. The Company believes that, given the results of efforts to date to obtain new financing or to sell assets to increase liquidity, it will generate sufficient funds to repay the existing lenders. However, there can be no assurance that collections from non-performing assets or sale of other assets can be accomplished in the required time frames ITEM 6(a). - EXHIBITS Exhibit 10.1 Material Contract. Agreement for Purchase and Sale of Financing Arrangements, between Allstate Financial Corporation and Metro Factors, Inc., dated October 29,1999. Portions of the exhibit have been omitted pursuant to a request for confidential treatment. Exhibit 10.2 Material Contract. Extension of the Forbearance Agreement dated August 1, 1999. Exhibit 27. Financial Data Schedule ITEM 6(b). - REPORTS ON FORM 8-K Form 8-K filed September 7, 1999 is hereby incorporated by reference. The Company announced a short-term working capital loan of $1 million from a large shareholder. The Company also announced that it had entered into a forbearance agreement with its senior debt lenders. No financial statements were required to be filed. Form 8-K filed October 15, 1999 is hereby incorporated by reference. The Company reported that is was delisted from the Nasdaq National Stock Market. No financial statements were required to be filed. 24 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: NOVEMBER 15, 1999 /S/ CHARLES G. JOHNSON ---------------------- Charles G. Johnson Chief Executive Officer DATE: NOVEMBER 15, 1999 /S/ C. FRED JACKSON ------------------- C. Fred Jackson Chief Financial Officer EX-10.1 2 EXHIBIT 10.1 EXECUTED 10/28/99 AGREEMENT FOR PURCHASE AND SALE OF FINANCING ARRANGEMENTS This Agreement for Sale and Purchase of Financing Arrangements (this "Agreement") is made as of the 29th day of October 1999 by and between Metro Factors, Inc., a Texas corporation ("Buyer") and Allstate Financial Corporation, a Virginia corporation ("Seller"). I. RECITALS WHEREAS, Seller desires to offer for sale to Buyer and Buyer desires to purchase from Seller, on the terms and subject to the conditions set forth herein, all rights and certain obligations of Seller pursuant to those certain factoring and other lending agreements by and between Seller and Assigned Clients as identified herein (the "Financing Agreements"). WHEREAS, Buyer and Seller are each in the business of, among other things, originating, buying, servicing and selling, and otherwise dealing in, factoring of accounts receivable in the ordinary course of each of their respective businesses, and lending on an occasional basis. WHEREAS, Buyer and Seller desire to enter into this Agreement to govern the sale and purchase of such Financing Arrangements. NOW, THEREFORE, in consideration of the above recitals and the mutual covenants contained herein, the parties hereto agree as follows: II. INCORPORATION BY REFERENCE The Recitals to this Agreement are incorporated herein by this reference thereto as though restated in their entirety herein. III. DEFINITIONS Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: A. ACCOUNTS: All presently existing and hereafter created accounts, accounts receivable, contract rights and general intangibles relating thereto, notes, drafts and other forms of obligations owed to or owned by any Assigned Client arising or resulting from the sale of goods or the rendering of services by any such Assigned Client, all proceeds thereof, all guaranties and security therefor, and all goods and rights represented thereby or arising therefrom including, but not limited to, the right of stoppage in transit, replevin and reclamation. B. ACCOUNT DEBTOR: The person, firm, corporation or other entity that is obligated to make payment on an Account. C. ACCOUNT DEBTOR CREDITS: Open credits reflected on Seller's books which cannot be allocated to a specific unpaid Account and may be payable to Account Debtors, also referred to as "Exchanges" on Seller's FMIS Reports. D. ACCOUNT PAYMENTS: All payments on Accounts by Account Debtors or others. E. ACCOUNT PURCHASE PRICE: The price paid by Seller for an Assigned Client's Account(s) pursuant to the terms of a Factoring Agreement, which price is reflected on Seller's FMIS Reports as "Gross Purchase." F. AFFILIATE GUARANTIES: Those certain guaranties of the Assigned Clients' affiliated entities pursuant to which the collections of the Assigned Clients' Accounts are guaranteed. G. AGREEMENT: Shall mean this Agreement as same may be amended and supplemented from time to time. The parties agree that this Agreement shall be used as the master sale and purchase agreement for those Financing Arrangements purchased by Buyer from Seller in the future, unless otherwise agreed in writing by the parties. H. AMOUNT AT RISK: The Account Purchase Price, less collections to date as reflected on Seller's FMIS Reports as "Collections", less any unpaid holdbacks,less discounts owed, plus uncollected adjustments, plus or minus any items in the Assigned Client's general ledger accounts as reflected on the "Net Out Report" generated by Seller's FMIS Reports, plus the balance of Assigned Client Loans, the subtotal of which is the "Net Out Subtotal" on the "Net Out Report" ($6,044,937.44 as at October 28, 1999), less fifty percent (50%) of the Earned Discounts ($54,685.13 as at October 28, 1999). * I. AMOUNT DUE ASSIGNED CLIENTS: The credit balance reflected on Seller's books which is due to Assigned Clients as of such date, or which, with the passage of time or otherwise, may become due by Seller to such Assigned Clients arising out of the purchase of Accounts pursuant to Financing Agreements, also referred to as the "Discount Owed" on Seller's FMIS Reports. J. ASSIGNED CLIENT: Any entity included in Assigned Client Group One, Assigned Client Group Two, or Assigned Client Group Three. K. ASSIGNED CLIENT GROUP ONE: * L. ASSIGNED CLIENT GROUP TWO: * M. ASSIGNED CLIENT GROUP THREE: * SCHEDULE A attached hereto, sets forth a general description of each of the above Assigned Client Financing Arrangements. * N. BASE LENDING RATE: The Base Lending Rate from time to time published as the "Prime Rate" in The Wall Street Journal, on the date such Base Lending Rate must be determined. O. ASSIGNED CLIENT LOANS: * ASSIGNED CLIENT LOANS ( Con't): * P. CLOSING DATE: shall mean October 29, 1999. Q. COLLATERAL: shall mean the property which is the security for the Accounts, the Accounts Purchase Price, Client Loans and all other Obligations R. DEDUCTIBLE COSTS AND EXPENSES: Those costs and expenses incurred by Buyer in connection with the Financing Arrangements limited to the following; and with respect items 2 through 10 below, only to the extent they are specifically charged to Assigned Clients, in each case: 1) Interest at the Base Lending Rate with allowance for the same number of collection days as provided in the Financing Arrangements. 2) Buyer's cost of wire transfers and ACH transfers as same may be increased of decreased after the Closing Date. Such fees as of the Closing Date are $8.50 for domestic wire transfers, $25.00 for international wire transfers, and $2.00 for ACH transfers. 3) Per diem charges of field auditor per Factoring Agreement. 4) Buyer's out-of-pocket expenses incurred in connection with field auditor related to the Financing Arrangements. 5) Buyer's out-of-pocket professional fees and expenses incurred in connection with the interpretation or enforcement of the Financing Arrangements including, but not limited to, attorney's, accountants, and expert witnesses. If Buyer's in-house general counsel is used in lieu of an outside independent attorney, such in-house general counsel's time shall be charged at the rate of $25.00 per quarter hour or part thereof. 6) Buyer's cost of expedited delivery services and postage at current postage rate. 7) Long distance telephone expense at the rate of $.50 per call for purposes of collection of Accounts related to the Financing Arrangements. 8) $.50 per invoice or past due statement mailed to Account Debtors in connection with the Financing Arrangements. 9) Buyer's cost of credit agency reports incurred in connection with Performing credit checks of Account Debtors related to die Financing Arrangements. 10) Buyer's cost of public records search and filing fees related to the Financing Arrangements. S. EARNED DISCOUNTS: That discount due Seller pursuant to the Financing Agreements with the following Assigned Clients: * T. EARNED INTEREST: All interest due and payable pursuant to the Financing Arrangements. U. FACTORING OBLIGATIONS: Outstanding liabilities and commitments (contingent or otherwise) of Seller for advances and other financial accommodations to the Assigned Clients pursuant to the Financing Agreements. V. FINANCING AGREEMENTS: The Agreements between Seller and the Assigned Clients pursuant to which the Financing Arrangements are specified. W. FINANCING ARRANGEMENTS: The servicing of Assigned Clients' Accounts pursuant to the terms and conditions of the Financing Agreements and Assigned Client Loans, with the Assigned Clients. X. FINANCING ARRANGEMENT FILES: All legal documents and credit files in connection with the Financing Arrangements, more particularly described in Article IV.A herein. Y. FMIS REPORTS: Computer software program used by Seller to record transactions related to Accounts, payments on Accounts, and Client Loans. Z. GROSS INCOME: All fees and expenses of every kind and character including, but not limited to, the following: 1) Factor's commission/discount 2) Interest 3) Wire transfer fees 4) ACH transfer fees 5) Renewal fees 6) Commitment fees 7) Prefunding fees 8) Charge back fees 9) Repurchase fees 10) Same day advance fees 11) A.M. advance fees 12) Per diem field audit fees 13) Assigned Client field audit expenses 14) Handling fees including postage at current postage rates, and any charges for long-distance phone usage 15) Public records search and filing fees 16) Professional fees and expenses (i.e., attorneys, accountants, and expert witnesses) 17) Expedited delivery fees 18) Supplemental Discount fees 19) Credit investigation fees 20) Minimum invoice fee 21) Concentration fee 22) Sticker and stamp fee AA. GUARANTIES: The Individual Guaranties, the Corporate Guaranties collectively and the Validity Guaranties. CC. INDIVIDUAL GUARANTIES: Those certain Guaranties of the Assigned Clients' principals pursuant to which the collections of the Assigned Clients' Accounts are guaranteed. DD. OBLIGATIONS: All advances, debts, liabilities, obligations, covenants and duties owing by an Assigned Client to Seller, direct or indirect , absolute or contingent, due or to become due, now existing or hereafter arising, including, without limitation, invoices for goods or services purchased by an Assigned Client from any company whose accounts are factored or financed by Seller and indebtedness arising under any guaranty made by an Assigned Client or issued by Seller on an Assigned Client's behalf pursuant to the Financing Agreements. EE. PREFUNDING OR PREFUNDED: Amounts advanced by Seller to Assigned Clients for which no invoice representing an amount due for goods delivered or services rendered exists. FF. PREMIUM INCOME: The Gross Income received by Buyer from Assigned Client Group One, Assigned Client Group Two, and Assigned Client Group Three after subtracting Deductible Costs and Expenses. GG. PURCHASE PRICE (BASE): The purchase price for the Financing Arrangements shall be the aggregate of the Amount at Risk for the Assigned Clients as of the close of business Wednesday, October 27, 1999. ($5,990,252.31) HH. PURCHASE PRICE (PREMIUM). * II. REPURCHASED ACCOUNTS: Accounts designated on Seller's FMIS Reports for which the payment terms have been extended and the Account re-verified. II. UNPAID ACCOUNTS: Accounts that the Account Debtor or other party has not paid Seller in full. JJ. VALIDITY GUARANTIES: Those certain guaranties of the Assigned Clients as to the Accounts' existence and validity and the bona fide obligations of the Account Debtors for the Accounts. IV. PURCHASE AND SALE OF FINANCING ARRANGEMENTS A. CONVEYANCE OF FINANCING ARRANGEMENTS: For each Financing Arrangement with an Assigned Client, the Seller hereby sells, transfers, assigns, sets over and otherwise conveys to Buyer as of the Closing Date, without recourse but subject to the terms of this Agreement, all the right, title, interest, duties and obligations of Seller in and to the Financing Arrangements; including, but not limited to, those open and Unpaid Accounts listed on the Aged Trial Balances as of the opening of business on October 28, 1999, copies of which will be supplied to Buyer by 9:00 AM Eastern Time on the Closing Date (any Prefunded amounts appearing thereon shall be conspicuously indicated on the face of such Aged Trial Balance), the Financing Arrangement Files, the Obligations, the Collateral, the Factoring Obligations, the Amount due Assigned Clients, the Account Debtor Credits, and the Client Loans. Contemporaneously with such transfer, Buyer agrees to make available, and Seller agrees to purchase, a one hundred percent (100%) participation interest in the Client Loans, such participation being more particularly described in Article XII hereof. Each Financing Arrangement File shall be delivered by Seller to Buyer or a custodian designated by Buyer, in exchange for a receipt therefor. Each Financing Arrangement File shall contain the following documents: 1) The original Factoring Agreement; 2) The original notes and/or agreements evidencing Assigned Client Loans, properly endorsed to Buyer and all related documentation; 3) All original Individual Guaranties, if applicable; 4) All original Affiliate Guaranties, if applicable; 5) All original Validity Guaranties, if applicable, 6) The original resolutions of the Assigned Client and any Affiliate Guarantor authorizing their actions in connection with the Financing Arrangements; 7) Original UCC-2 or UCC-3 Assignments, as applicable, assigning the interests in personal property security and any other collateral security secured by all UCC-1 Financing Statements relating to the obligations signed by Seller in blank in form for filing in the applicable public recording office; 8) Any and all amendment modifications, supplements, and waivers related to any of the foregoing; 9) All notification letters; 10) All Account Debtor credit files; 11) The operative documents creating the Client Loans, if any, and 12) Any and all other documents, instruments, collateral agreements, and assignments and endorsements for all documents, instruments and collateral agreements, referred to in the Financing Agreements, or related thereto, including, without limitation and without duplication of items 1 through 11 hereof and all files, books, papers, ledger cards, reports and records including , without limitation, loan applications, Borrower financial statements, credit reports and appraisals, relating to the Financing Agreements, all cash receipts records related to the Financing Arrangements for the period commencing 60 days prior to the Closing Date and any other documents, certificates, papers or records relating to the Financing Arrangements in Seller's possession as of the Closing Date. Seller shall not destroy or fail to maintain control of and accessibility to any other records relating to the Financing Arrangements in Seller's possession as of the Closing Date without giving Buyer at least ten (10) business days advance written notice of its intent to do so, in which case Buyer may take possession of all such records. Notwithstanding the foregoing, in the event that, in connection with any Financing Arrangement, Seller cannot deliver an original counterpart of any of the documents required to be delivered pursuant to Articles IV.A. 1-7 above, Seller shall deliver, or cause to be delivered, to Buyer a duplicate original or true copy of such document certified by Seller. Notwithstanding the foregoing, in the event that Seller cannot deliver to Buyer any UCC-2 or UCC-3 Assignment with the filing information of the UCC-1 Financing Statement being assigned, solely because of a delay caused by the public filing office where such UCC-1 Financing Statement has been delivered for filing, Seller shall deliver or cause to be delivered to Buyer a photocopy of such UCC-2 or UCC-3 Assignment with the filing information left blank. Seller, promptly upon receipt of the applicable filing information of the UCC-1 Financing Statement being so assigned, shall deliver to Buyer the original UCC-2 or UCC-3 Assignment with all appropriate filing information set forth thereon. B. ADDITIONAL SELLER CLOSING DELIVERIES. In addition to the items to be delivered by Seller to Buyer under Article IV.A. Seller shall deliver or cause to be delivered to Buyer the following: 1) A Limited Power of Attorney from Seller in favor of Buyer which covers Buyer's ability to endorse, as Buyer deems necessary or appropriate, any checks received payable to Seller in connection with the Accounts which shall be satisfied by delivery of this Agreement containing such power of attorney in Article X. 2) UCC-2 or UCC-3 Amendments reasonably deemed necessary by Buyer to properly reflect the transactions contemplated by this Agreement. 3) Release from IBJ Whitehall Business Credit Company f/k/a IBJ Schroder Bank & Trust Company (Bank) of Bank's security interest in all of the Financing Arrangements sold and assigned to Buyer pursuant to this Agreement in such form and substance as is acceptable to Buyer. C. REFERRALS. Seller hereby agrees, for a period of two (2) years after the Closing Date, to refer to Buyer all inquiries made to Seller for the factoring services formerly provided by Seller that fall within Buyer's defined parameters for such transactions. Such referrals shall be transmitted via facsimile to the attention of Richard Worthy at (214) 987-7306 in exchange for normal commissions. Buyer agrees, for a period of two (2) years after the Closing Date, to refer to Seller all asset based lending inquiries made of Buyer falling within Seller's defined parameters for such loans. Such referrals shall be transmitted via facsimile to the attention of Charles G. Johnson at (703) 931-2034 in exchange for normal commissions. D. PAYMENT ARRANGEMENTS. The Purchase Price (Base) shall be paid before 3:00 PM Eastern Time on the Closing Date, in immediately available funds, less the aggregate Assigned Client Loan balance on such date ($1,528,796.16), by wire transfer in the amount of $4,461,456.16 to the following account: IBJ Whitehall Bank & Trust Co. ABA No. 026 00 7825 Account: Allstate Financial Corporation No. 43589603 Upon payment of the Purchase Price (Base), all assignments to Buyer under this Agreement shall be deemed to have FINALLY AND CONCLUSIVELY OCCURRED. THE PURCHASE PRICE (PREMIUM) SHALL BE PAID BY THE FIFTEENTH (15TH) business day of the month immediately following the month for which such payments are due and shall be accompanied by a report on a per Assigned Client basis listing all amounts of Gross Income and Deductible Costs and Expenses by category. Buyer shall timely make scheduled payments of principal and interest to Seller for Assigned Client Loans as set forth in Article III.O of this Agreement, provided such Assigned Clients are not in default to Buyer and provided that such payments shall be from funds due to the Assigned Client by Buyer. Payments of the Purchase Price (Premium) and Assigned Client Loans shall be by wire transfer in immediately available funds sufficient to cover the funding of Assigned Clients which is approved by Buyer. Seller shall then wire transfer the amount of funding approved by Buyer to the respective Assigned Clients as soon as possible after Seller's receipt of funds from Buyer. Seller shall not purchase any invoices received from the Assigned Clients on or after the Closing Date. All such invoices shall be purchased or not purchased at Buyer's discretion. Nowtwithstanding the payment of the Purchase Price (Base), Seller shall continue to purchase accounts under the Financing Arrangements for the period October 28, and October 29, 1999. Buyer shall wire transfer to Seller on such dates funds an amount equal to the advances to be made to the Assigned Clients. Seller shall not enter accounts purchased on such dates into the FMIS reports, and as between Seller and Buyer, such accounts shall be deemed to have been purchased by Buyer from the Assigned Clients effective the Closing Date. Such funds shall be wired transferred to Seller as follows: Bank of America ABA No: 151-000-017 ACCOUNT: Allstate Financial Corporation No. 000-1064-7097 E. PAYMENT OF CHARGES. As between Buyer and Seller, Buyer will be liable for, and will pay directly, all charges imposed as a result of the purchase of the Financing Arrangements hereunder for invoices purchased directly from Assigned Clients by Buyer on or after Closing Date including, without limitation, sales or use taxes, transfer or other taxes and governmental charges or levies exclusive of charges imposed upon, or measured by, the net income attributable to the factoring business of Seller, and Buyer shall indemnify and hold harmless Seller from and against any reasonable loss, cost, expense, penalty or damage arising out of or relating to the failure of Buyer to pay the such charges. V. ALLOCATION OF COLLECTIONS A. All monies received by wire transfer, or otherwise and posted to the FMIS Reports by Seller prior to the close of business on October 27, 1999 in connection with the Assigned Clients shall be the property of Seller. B. All monies received by wire transfer, or otherwise, and posted to the FMIS Reports by Seller on or after the close of business on October 28, 1999 or received by Seller but not posted to the FMIS Reports in connection with the Assigned Clients (excluding funds wired to Seller by Buyer for the purpose of funding Assigned Clients on October 28 and 29, 1999) shall be the property of Buyer and shall be forwarded to Buyer on the next business day following their receipt. C. Seller shall, on the day of receipt, send to Buyer all checks and correspondence related to the Assigned Clients received by Seller on or after the Closing Date via Federal Express "next business day"' service and charge such delivery fees to Buyer's account. D. If Seller receives any funds related to the Assigned Clients on or after the Closing Date, Seller shall immediately cause to have the amount of such funds wire transferred to Buyer. Buyer shall reimburse Seller the cost of such wire transfer and include such payment with payments made pursuant to Article IV.D of this Agreement. Further, Seller shall immediately deliver to Buyer via Federal Express any documentation Seller has which explains the application of such funds. E. Seller agrees to cooperate with Buyer in transferring control from Seller to Buyer of the Lockbox established for the collection of Accounts purchased from Joseph J. Sheeran, Inc. and until such change of control is accomplished, Seller agrees to timely forward all funds received in such Lockbox and copies of checks received therein together with all other correspondence received in connection therewith. VI. REPRESENTATIONS AND WARRANTIES OF THE SELLER A. REPRESENTATIONS AND WARRANTIES OF SELLER -- GENERAL. It is understood and agreed by Seller and Buyer that as a material inducement to Buyer to enter into this Agreement, Seller hereby represents and warrants to Buyer as follows: 1) Seller is duly organized, validity existing and in good standing under the laws of the state in which it is domiciled, and is duly qualified to do business in all jurisdictions wherein the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary. 2) The execution and delivery of the Agreement by Seller and the performance by Seller of the obligations to be performed by it hereunder have been duly authorized by all necessary corporate or other similar action. At least one(1) business day prior to the Closing Date, Seller shall have delivered to Buyer certified copies of relevant corporate or similar resolutions. 3) The execution and delivery of this Agreement by Seller and the performance by Seller of the obligations to be performed by it hereunder do not, and will not, violate any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination oil or award presently in effect having applicability to Seller of to the character or bylaws of Seller. 4) The execution and delivery of this Agreement by Seller and the performance by Seller of the obligations to be performed by it hereunder do not and will not result in a breach of, or constitute a default under, any indenture or local or credit agreement or any other agreement, lease or instrument to which Seller is a party or by which it or its properties may be bound or affected. 5) This Agreement constitutes, when duly executed and delivered by Seller, a legal, valid and binding obligation of Seller enforceable against Seller according to its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium, or similar laws affecting creditors' rights in general, including equitable remedies. 6) Seller has not engaged the services of a broker or other representative for the purpose of selling the Financing Arrangements and no commission or other fee is due to any other party in connection with the sale of the Financing Arrangements hereunder. 7) At least one(1) business day prior to the Closing Date Seller shall have delivered to Buyer original copies of written consents to this Agreement duly executed by any and all parties who have a lien and/or a security interest in any of the Financing Arrangements which are sold and assigned to Buyer hereunder together with such parties' agreement to execute any and all UCC-2 or UCC-3 forms or other documents necessary to evidence termination of such parties' lien and/or security interests in all of such Financing Arrangements upon payment by Buyer of that portion of the Purchase Price (Base) specified in Article IV.D above. B. REPRESENTATIONS AND WARRANTIES OF SELLER AS TO EACH FINANCING ARRANGEMENT. It is understood and agreed by Seller and Buyer that as a material inducement to Buyer to enter into this Agreement, Seller hereby represents and warrants the following to Buyer as of the Closing Date; 1) Seller is the sole owner of and has good title to the Financing Arrangements. Seller has not sold, assigned or otherwise transferred any right or interest in or to any of the Financing Arrangements to any party other than Bank. 2) Seller represents and warrants to Buyer that each of the Financing Arrangements to be sold by Seller to Buyer at the Closing Date will be genuine, legal, valid and binding obligations of each of the Assigned Clients thereto and that all subordinations necessary for Buyer to have a first lien security interest in all of Assigned Client's presently existing and hereafter acquired accounts receivable exist or will be granted by any holder of a security interest or lien in or on such accounts receivable that is superior to Buyer's security interest absent such subordination. 3) That as of the Closing Date, the Amount at Risk for each Assigned Client shall not exceed the contractual advance rate as stipulated in the related FactoringAgreement, i.e., there will exist no "over advance" to any Assigned Client other than the Client Loans and over advances specifically approved by Buyer. 4) Seller represents and warrants that all of the Financing Arrangements and Accounts are assignable without the consent of the Assigned Clients. VII. REPRESENTATIONS AND WARRANTIES OF BUYER It is understood and agreed by Seller and Buyer that as a material inducement to Seller to enter into this Agreement Buyer hereby represents and warrants to Seller, as follows: A. Buyer is an organization as set forth in the introductory article and is duly organized, validly existing and in good standing under laws applicable to its organization's existence. B. The execution and delivery of this Agreement by Buyer and the performance by Buyer of the obligations by it to be performed hereunder have been duly authorized by all necessary corporate resolutions. C. The execution and delivery of this Agreement by Buyer and the performance by Buyer of the obligations by it to be performed hereunder do not, and will not, violate any provision of any law, rule, regulations, order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to Buyer or to the charter or bylaws of Buyer. D. This Agreement constitutes, when duly executed and delivered by Buyer, a legal, valid and binding obligation of Buyer enforceable against Buyer according to its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or similar laws affecting creditors' rights in general, including equitable remedies. E. Buyer has not engaged the services of a broker or other representative for the purpose of buying the Financing Arrangements and no commission or other fee is due to any other party in connection with the sale of the Financing Arrangements hereunder. F. Buyer is a sophisticated investor and his extensive experience in consummating transactions similar to those contemplated hereunder. Buyer fully understands and hereby acknowledges that it is fully and exclusively assuming the risk that the face amount of the Accounts may not be collected. The transactions contemplated by this Agreement are exempt from all state and federal securities laws. VIII. INDEMNIFICATION A. Seller agrees to protect, indemnify, and hold Buyer and its employees, officers, directors and agents (the "'Buyer Indemnities") harmless against, and in respect of, any and all losses, liabilities, costs and EXPENSES (INCLUDING REASONABLE ATTORNEY'S FEES), JUDGMENTS, DAMAGES, CLAIMS, counterclaims, demands, actions or proceedings, by whomsoever asserted, including but not limited to the Assigned Clients or Account Debtors, against any Buyer Indemnities or the settlement or compromise of any of the foregoing, providing, however, only if any of the foregoing arises out of, is connected with or results from: (i) any breach of any representations, covenant or warranties made by Seller hereunder, (ii) Seller's misapplication of credits for Collections; (iii) data entry errors made by Seller on the FMIS Reports prior to the Closing Date; (iv) any actions or omissions by Seller that is the basis of any claim or cause of action against Buyer by or on behalf of any Assigned Client or Account Debtor; and (v) Seller having advanced monies to an Assigned Client or Assigned Clients after the earlier of forty-five (45) days after the filing of a government tax lien or Seller's actual knowledge of the filing of such a lien. B. Buyer agrees to protect, indemnify, and hold Seller and its employees, officers, directors and agents (the "Seller Indemnities") harmless against, and in respect of, any and all losses, liabilities, costs and expenses (including reasonable attorney's fees), judgments, damages, claims, counterclaims, demands, actions or proceedings, by whomsoever asserted, including but not limited to, the Assigned Clients or Account Debtors, against any Seller Indemnities or the settlement or compromise of any of the foregoing, providing, however, any of the foregoing arises out of, is connected with or results from: (i) any breach of any representations, covenants or warranties made by Buyer hereunder, (ii) Buyers retention of any monies that do not constitute Collections of Accounts beyond the time period permitted hereunder (iii) all Collections returned for insufficient funds within thirty (30) days of October 27, 1999; and (iv) any actions or omissions by Buyer that is the basis of any claim or cause of action against Seller by or on behalf of any Assigned Client or Account Debtor. IX. COVENANT NOT TO SOLICIT CLIENTS For a period of two (2) years from and after the Closing Date, neither Seller, any of its affiliates, its parent nor any other related entity will solicit any Assigned Client for any factoring services. X. BUYER'S LIMITED POWER OF ATTORNEY Seller hereby irrevocably appoints Buyer as its attorney-in-fact for the limited and exclusive purpose of endorsing Collections received by Buyer after the Closing Date. Buyer hereby acknowledges that this power of attorney is limited only to Collections and Buyer agrees to indemnify and hold Seller harmless for Buyer's endorsement of any items that do not constitute Collections. XI. ADDITIONAL COVENANTS A. ADDITIONAL BUYERS COVENANTS. In addition to the other agreements and obligations of Buyer hereunder, Buyer hereby agrees to: 1) Within five (5) business days after the Closing Date, file with the appropriate United States Bankruptcy Courts, notices pursuant to Federal Rules of Bankruptcy Procedure, Rule 3001, to the effect that the Financing Arrangements have been assigned to Buyer for those Assigned Clients that have file proceedings under Chapter 11 of Title II of the United States Code, if any, Buyer shall provide Seller with copies of all such notices, within five (5) business days after filing. 2) Within ten (10) business days after the Closing Date, file all necessary or appropriate notices or documents with the appropriate departments of the United States government in order to receive consent from such United States Government Department of the assignment of any Account purchased hereunder for which the Account Debtor is the United States Government of any department or sub-division thereof, if any. Buyer shall use all reasonable best efforts to obtain all such necessary consents to assignment within sixty (60) business days after the Closing Date. Buyer shall provide Seller with copies of all such documents or notices within five (5) business days after their transmittal. 3) Prepare and deliver, at Buyer's expense, to Seller for execution within thirty (30) business days after the Closing Date all (UCC-2 or UCC-3 Assignments necessary to assign Seller's security interests in the Collateral to Buyer. 4) As soon as possible after the Closing Date, Buyer shall initiate procedures to redirect all payments of collections to Buyer's address. 5) At closing, provide to Seller for its execution, a letter to the Assigned Clients and Account Debtors constituting notice of due sale of the Financing Arrangements to Buyer with a directive to remit all Account Payments to Buyer. 6) Prior to the Closing Date, not attempt to renegotiate the terms or conditions of any Financing ARRANGEMENT WITH ANY ASSIGNED CLIENT AND NOT INDICATE ITS INTENTION TO renegotiate any terms or conditions of any Financing Arrangement with any Assigned Client, except as may be approved in writing by Seller. B. ADDITIONAL SELLER'S COVENANTS. In addition to the other agreements and obligations of Seller hereunder, Seller hereby agrees to comply with all reasonable requests for information or assistance by Buyer with respect to Buyer's covenant in Article X.A.2 herein. XII. PARTICIPATION On the Closing Date, Seller shall purchase a one hundred percent (100%) participation interest in all Client Loans and in the Collateral, in form and substance acceptable to the parties; it being understood and agreed, however, that in the event of a default by the Assigned Client and liquidation of the Collateral, the proceeds therefrom shall be distributed as follows until the parties shall have been paid in full: 1) The proceeds of all Accounts shall be distributed first to Buyer until Buyer has been paid in full, with the balance, if any, to be paid to Seller until paid in full. 2) The proceeds of all machinery, equipment, inventory and all other tangible assets shall be distributed first to Seller until Seller shall has been paid in full, with the balance, if any, to be paid to Buyer until paid in full. XIII. MISCELLANEOUS A. CONFIDENTIALITY. Buyer and Seller agree to keep the terms of this Agreement confidential except as required by legal process, until the Closing Date, provided, however that Buyer may disclose to the Assigned Clients that it is scheduled to purchase their Financing Arrangements on the Closing Date if such is done in the process of attempting to renegotiate any Financing Arrangements. B. ARBITRATION. Any dispute, controversy or claim arising under or in relation to this Agreement or any modification thereof, shall be settled only by arbitration which shall be held in the City of Arlington, Virginia in accordance with the laws of the State of Virginia and the rules of the American Arbitration Association. The parties hereto consent to the jurisdiction of the courts of the State of Virginia and of the United States District Court for the District of Virginia and further consent that any process or notice or other application to any court or a judge thereof may be served within or without the State of Virginia or the District of Virginia by certified mail or by personal service, provided a reasonable time for appearance is allowed. Judgment upon the award rendered by the Arbitrator(s) may be entered in any State or Federal court having jurisdiction thereof C. WAIVER OF JURY TRIAL. Each of the parties hereto agrees that if any issue, claim, controversy or other matter arising under or out of this Agreement is tried in a court of law in any jurisdiction, such trial or other proceeding shall be without a jury, and each of the parties hereto expressly waives its right to a trial by jury in connection with any such trial or other proceeding. D. SURVIVAL OF COVENANTS, AGREEMENTS, REPRESENTATIONS AND WARRANTIES: SUCCESSORS AND ASSIGNS. All warranties, representations and covenants made by either party in this Agreement or in any other instrument delivered by either party to the other, shall he considered to have been relied upon by die other party (unless otherwise agreed in writing by the parties) and shall survive the Closing Date. E. SEVERABILITY. If any provision, or part thereof, of this Agreement is invalid or unenforceable under any law, such provision, or part thereof, is and will be totally ineffective to that provision, but the remaining provisions, or pan thereof, will be unaffected. F. ATTORNEYS' FEES. Anything to the contrary notwithstanding, in the event of any action at law, in equity, arbitration or otherwise between the parties in relation to this Agreement or any Loan or other instrument or agreement required or purchased or sold hereunder, the non-prevailing party, in addition to any other sums which such party shall be required to pay pursuant to the terms and conditions of this Agreement, at law, equity, arbitration of otherwise shall also be required to pay to the prevailing party all costs and expenses of such litigation, including reasonable attorney fees. G. WAIVERS. No waiver of any term, provision or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as a further or continuing waiver of any such term, provision or condition, or any other term, provision or condition of this Agreement. H. NOTICE. Any notice or other communication in this Agreement provided or permitted to be given by one party to the other must be in writing and given by personal delivery by depositing the same in the United States mail (certified mail, return receipt requested), addressed to the other party to be notified, postage prepaid or by facsimile transmission. For purposes of notice, the addresses of the parties shall be as follows: SELLER: ALLSTATE FINANCIAL CORPORATION 2700 S. Quincy Street Suite 540 Arlington, Virginia 22206 ATTENTION: Charles G. Johnson, President (703) 931-2034 (fax) (703) 931-2274 (phone) BUYER: METRO FACTORS, INC. Walnut Glen Tower 8144 Walnut Hill Lane Suite 900 Dallas, Texas 752314316 ATTENT1ON: Richard Worthy, President (214) 987-7306 (fax) (214) 987-7315 (phone) The above address may be changed from time to time by written notice from one party to the other. I. ASSIGNMENT. Neither Buyer nor Seller shall without the prior written consent of the other, assign any of its rights or obligations hereunder except that Buyer may assign its rights in the Financing Arrangements to its secured lenders. J. CAPTIONS. Article or other headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. K. ENTIRE AGREEMENT. This Agreement and the documents referred to herein or executed concurrently herewith constitute the entire agreement between the parties hereto with regard to the subject matter hereof, and there are no prior agreements, understandings, restrictions, warranties or representations between the parties with respect thereto. L. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia. This Agreement shall be interpreted fairly in accordance with its provisions and without regard to which party drafted it. M. SOLICITATION OF EMPLOYEES. Seller agrees to cooperate with Buyer, at Buyer's election, in its efforts TO SECURE THE EMPLOYMENT SERVICES OF THOMAS FEVOLA AND TIMOTHY HAFFIELD on terms and conditions acceptable to Buyer. This Agreement, however, is not contingent upon such employment. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. [SIGNATURE PAGE FOLLOWS] SELLER: ALLSTATE FINANCIAL CORPORATION, a Virginia Corporation By:___________/s/__________________ Charles G. Johnson, President Date: October 28,1999 WIRE TRANSFER INSTRUCTIONS: Bank of America ABA No. 151-000-017 Account: Allstate Financial Corporation No. 000-1064-7097 BUYER: METRO FACTORS, INC., a Texas corporation By:___________/s/_______________ Richard G. Worthy, President Date: October 28,1999 WIRE TRANSFER INSTRUCTIONS: KeyBank National Association ABA No. 041001039 Account: Metro Factors, Inc. No. 1000598694 EX-10.2 3 EXHIBIT 10.2 IBJ WHITEHALL BUSINESS CREDIT CORPORATION ONE STATE STREET NEW YORK, NEW YORK 10004 As of October 29, 1999 Allstate Financial Corporation 2700 South Quincy Street Arlington, Virginia 22206 Re: Forbearance Agreement Gentlemen: Reference is made to that certain (i) Amended and Restated Revolving Credit and Security Agreement dated as of May 17, 1997, (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ WHITEHALL BUSINESS CREDIT CORPORATION ("IBJWBCC") and NATIONAL BANK OF CANADA ("NBC") (IBJWBCC and NBC each a "Lender" and collectively the "Lenders") and IBJWBCC as agent for the Lenders (IBJWBCC, in such capacity, the "Agent") and (ii) Forbearance Agreement dated as of August 1, 1999 among Agent, Lenders, Borrower and the Guarantors (as amended, modified or supplemented from time to time the "Forbearance Agreement"), pursuant to which Agent agreed, among other things, to forbear from exercising any remedies under the Loan Agreement until October 31, 1999. Capitalized terms not otherwise defined herein shall have the meanings set forth in the Loan Agreement or the Forbearance Agreement. Borrower has advised Agent that its will not be able to complete the sale of its asset based lending business by October 31, 1999 (the "ABL Sale"). In order to assist Borrower in completing the ABL Sale and paying off the Obligations in full, Borrower has requested Agent to, among other things, extend the Forbearance Period to November 30, 1999, and Agent and Lenders are willing to do so upon the terms herein stated. Subject to the satisfaction of the conditions precedent set forth in paragraph 5 hereof, the parties hereby agree as follows: 1. Borrower affirms and acknowledges that (i) as of the end of business on the date hereof there is due and owing to Agent and Lenders, under the Loan Agreement (after giving effect to the proceeds of the Factoring Sale as hereafter defined), approximately $2,427,523.78 in principal amount of Advances (inclusive of the undrawn amount of outstanding Letters of Credit) together with accrued interest thereon and costs and expenses; (ii) all such Obligations are valid obligations of Borrower and there are no claims, setoffs or defenses to the payment by Borrower of the Obligations; and (iii) the Loan Agreement and the Other Documents are and shall continue to be legal, valid and binding obligations and agreements of Borrower enforceable in accordance with their respective terms. 2. The Forbearance Period set forth in paragraph 4(i) of the Forbearance Agreement is hereby extended to November 30, 1999. 3. The Maximum Revolving Advance Amount shall equal $3,500,000. 4. Effective on the date hereof, Advances shall bear interest at the Revolving Interest Rate plus two percent (2%). Upon the occurrence and during the continuance of a Forbearance Default (including if the Obligations are not repaid in full by the end of the Forbearance Period), the Advances shall bear interest at the applicable Revolving Interest Rate plus four and three quarters percent (4.75%). 5. This amendment shall become effective upon the receipt by Agent of each of the following: (i) four (4) copies of this amendment signed by Borrower and each Guarantor, (ii) a forbearance extension fee payable to Agent for the ratable benefit of Lenders equal to $20,000, which fee shall be charged to Borrower's Account on the date hereof and (iii) an administration fee payable to Agent for its own account and not for the benefit of Lenders equal to $5,000. Except as specifically amended herein, the Loan Agreement, the Forbearance 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. Kindly acknowledge your agreement with the foregoing by signing where indicated below. This agreement may be executed in any number of and by different parties hereto on separate counterparts, all of which when so executed shall be deemed an original, but all such counterparts shall constitute one and the same agreement. Any signature delivered by a party via facsimile transmission shall be deemed an original signature hereto. Very truly yours, IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as Agent and as Lender By: /s/ Name: Adam Moskowitz Title: Vice President NATIONAL BANK OF CANADA, as Lender By: /s/ Name: Michael Williams Title: Vice President ACKNOWLEDGED AND AGREED TO: ALLSTATE FINANCIAL CORPORATION By: /s/ Name: C. Fred Jackson Title: Senior Vice President LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By: /s/ Name: C. Fred Jackson Title: Senior Vice President SETTLEMENT SOLUTIONS, INC. By: /s/ Name: C. Fred Jackson Title: Senior Vice President AFC HOLDING CORPORATION By: /s/ Name: C. Fred Jackson Title: Senior Vice President PREMIUM SALES NORTHEAST, INC. By: /s/ Name: C. Fred Jackson Title: Senior Vice President BUSINESS FUNDING OF AMERICA, INC. By: /s/ Name: C. Fred Jackson Title: Senior Vice President RECEIVABLE FINANCING CORPORATION By: /s/ Name: C. Fred Jackson Title: Senior Vice President BUSINESS FUNDING OF FLORIDA, INC. By: /s/ Name: C. Fred Jackson Title: Senior Vice President EX-27 4 FINANCIAL DATA SCHEDULE
5 0000852220 ALLSTATE FINANCIAL CORP 12-MOS DEC-31-1999 SEP-30-1999 492243 0 26925501 11787839 0 15665056 344855 122588 15887323 9137564 0 0 0 40000 2112759 15887323 0 3164426 0 0 1015306 0 1030839 (11406582) 4031349 (15437931) 0 0 0 (15437931) (6.64) (6.64)
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