-----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, HKmOqrqhvxePa7vr42nJT9gty6Qt79MUmXlTQ03E4ALCH9KFunWLpoPsk8guxxYg B+mTmqyk/1rscuIAF/fL0g== 0000852220-00-000009.txt : 20000501 0000852220-00-000009.hdr.sgml : 20000501 ACCESSION NUMBER: 0000852220-00-000009 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000428 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: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-17832 FILM NUMBER: 611896 BUSINESS ADDRESS: STREET 1: 2700 S QUINCY ST STE 540 CITY: ARLINGTON STATE: VA ZIP: 22206 BUSINESS PHONE: 7039312274 MAIL ADDRESS: STREET 1: 2700 S QUINCY STREET STREET 2: STE 540 CITY: ARLINGTON STATE: VA ZIP: 22206 10KSB/A 1 FORM 10KSB/A FOR ALLSTATE FINANCIAL CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A Amended annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1999 Commission File Number 0-17832 Allstate Financial Corporation (Name of Small Business Issuer in Its Charter) Virginia 54-1208450 ------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8180 Greensboro Drive, McLean, VA 22210 --------------------------------- ----- (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (703) 883-9757 Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock - No par value Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. X Revenues for year ended December 31, 1999 were $3,621,336 The aggregate market value of the common stock held by non affiliates as of March 27, 2000 was $1,211,939 computed by reference to the closing market price at which the stock was traded on the OTC Bulletin Board (Symbol ASFN). The number of shares outstanding of the issuer's common stock, as of March 27, 2000 was 2,324,616. Transitional Small Business Disclosure Format (check one): Yes ____ No __X__ - DOCUMENTS INCORPORATED BY REFERENCE. None. Part I This Form 10-KSB may contain certain "forward-looking statements" relating to the Company (defined in Item 1 below) that 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-KSB 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 negatives or other variations 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 growth strategy, competition, and regulatory restrictions relating to potential new activities, certain of which are beyond the Company's control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. Item 1. Description of Business Allstate Financial Corporation (the "Company") was incorporated in 1982 in the Commonwealth of Virginia. The Company is a commercial finance institution that provides financing to small and middle-market businesses through loans secured by accounts receivable, inventory, machinery and equipment, and real estate. In October 1999, the Company sold the factoring business, the portion of the business that purchased discounted invoices with recourse. The Company will continue to receive revenue from this sale for the foreseeable future. In 1997, the Company began a program of purchasing invoices without recourse, assuming the risk that an account debtor may become insolvent. This activity ceased during 1998. 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. The Company incurred net losses of $17.3 million in 1999 and $6.1 million in 1998. As a result, the Company was not in compliance with the covenants in its revolving bank line of credit. Pursuant to a forbearance agreement with its senior lenders, the Company sold a majority of its performing assets in order to repay its bank line of credit. The Company does not have current sources of capital, outside of collections of existing receivables, to fund new advances to clients. The Company's independent auditors issued an unqualified audit opinion and stated that the recurring losses from operations and the March 31, 2000 expiration of the working capital loan raise substantial doubt about the Company's ability to continue as a going concern. The Company is developing a strategic turnaround plan which, if successfully implemented, management believes will enable the Company to continue as a going concern. This plan, which has not yet been finalized and which will be subject to shareholder approval, is discussed in Note M of the notes to the Consolidated Financial Statements contained herein. There can be no assurance that (1) the final terms of the plan can be agreed upon with the holders of the Company's convertible subordinated notes, (2) the Company's shareholders 2 will approve the plan,(3)the plan will be successfully implemented,(4) new financing will be obtained, or (5) the Company will be able to continue as a going concern. Unless the context requires or otherwise permits, all references to the "Company" include Allstate Financial Corporation and its wholly owned subsidiaries. The Company's corporate offices in McLean, Virginia house all of its credit and client administration activities. Business of Company Principal Products The Company's principal products are financing for small and medium-sized businesses, usually those with annual sales of $1 million to $10 million dollars per year. 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. During October 1999, the Company sold its factoring portfolio. The Company will receive a premium over time based on the performance of the Purchased Receivables sold. The Company does not intend to re-enter the factoring business. Distribution Methods The ABL product is marketed through referrals from business consultants, lawyers, accountants, commercial and investment bankers. The Company requires extensive financial information and reporting from clients who seek to qualify for its ABL product, and believes that these kinds of referral sources will be more likely to provide prospects that will qualify for such financing. Through its BusinessFundingUSA site on the World Wide Web, the Company receives applications over the internet for its ABL product directly from prospective borrowers. Competition In its ABL business, the Company faces competition from other asset-based 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. Sources of Capital The Company's requirement for capital is a function of the level of its investment in receivables. The Company funds this investment through its 3 convertible subordinated notes, and internally generated funds. At December 31, 1999, the Company was not able to fund new advances to clients. The Forebearance Agreement (as hereinafter defined) with the Company's revolving bank credit group expired on December 24, 1999. Line of credit availability at December 31, 1999 was zero. The banks were owed $566,279 as of December 31, 1999. The interest rate on the line of credit was equal to the agent lender's base rate plus 4.75%. The loan was repaid in full on January 13, 2000. The Company may seek a replacement for this line of credit. To augment its working capital during the forebearance period Company obtained a $1,000,000 working capital loan from Value Partners, Ltd. ("Value Partners"), a major stockholder. The working capital loan bears a 10% rate of interest, which is payable quarterly, and requires mandatory prepayments of 25% of collections of certain assets. The outstanding balance of the loan is due March 31, 2000. As of December 31, 1999, the Company owed $779,772 on the working capital loan. The Company may seek to extend the due date of the outstanding balance of the loan. The Company also has outstanding $4,954,000 in aggregate principal amount of convertible subordinated notes, of which $357,000 is due in September 2000 and $4,597,000 is due in September 2003. The notes are unsecured and subordinated in payment to all other senior debt of the Company. The notes due in 2000 are convertible into common stock of the Company at $7.50 per share and require interest payments based on a spread over the prime rate. The notes due in 2003 are convertible into common stock of the Company at $6.50 per share and bear a fixed interest rate of 10%. In addition, upon the occurrence of certain change of control events, the holders of the notes have the ability to put their notes back to the Company. The notes due 2003 have financial covenants that are similar to but less restrictive than the covenants in the line of credit. There are no financial covenants in the convertible subordinated debt due September 30, 2000. The Company is currently in default on the interest payment due December 31, 1999, and on certain financial covenants relating to the subordinated debt due September 30, 2003. Unless the Company replaces its line of credit or succeeds in implementing a business plan under which it can return to profitability, the Company does not believe that the proceeds of the convertible subordinated notes and internally generated funds will be sufficient to finance the Company's funding requirements for the near term. Client Base The Company's clients are small- to medium-sized growth and turnaround companies with annual revenues typically between $1 million and $10 million. The Company's clients have not typically qualified for traditional bank financing because they are either too new, too small, undercapitalized (over-leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank lender. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. 4 The following table indicates the composition of the Company's receivables by type of client business as of December 31, 1999 and 1998.
December 31, - ----------------------------------------------------------- ---------------------------- ----------------------------- 1999 1998 ---- ---- - ----------------------------------------------------------- ---------------------------- ----------------------------- Business of Client Receivables Percent Receivables Percent - ------------------ ----------- ------- ----------- ------- - ----------------------------------------------------------- In Thousands In Thousands - ----------------------------------------------------------- Importer and distributor of: - ----------------------------------------------------------- Jewelry and jewelry boxes $4,847 39.7% $8,797 20.6% - ----------------------------------------------------------- Videotapes 610 5.0 1,401 3.3 - ----------------------------------------------------------- Computer components and software (1) 923 7.5 1,414 3.3 - ----------------------------------------------------------- Plastic bags -- -- 12,452 29.2 - ----------------------------------------------------------- Importer, manufacturer and distributor of apparel wear, accessories and other durable goods 147 1.3 3,423 8.0 - ----------------------------------------------------------- Life insurance contracts 1,890 15.5 2,629 6.2 - ----------------------------------------------------------- Provider of trucking and air freight 1,590 13.0 2,668 6.3 - ----------------------------------------------------------- Provider of publishing, direct mail and advertising 1,333 10.9 3,206 7.5 - ----------------------------------------------------------- Contracts for construction and construction Supply 438 3.6 2,228 5.2 - ----------------------------------------------------------- Legal claims receivable 221 1.9 371 0.9 - ----------------------------------------------------------- Food industry 61 0.5 1,036 2.4 - ----------------------------------------------------------- Provider of computer training -- -- 1,350 3.2 - ----------------------------------------------------------- Provider of engineer and health temps -- -- 334 0.8 - ----------------------------------------------------------- Provider of uniform sales & rentals -- -- 125 0.3 - ----------------------------------------------------------- Other 138 1.1 1,215 2.8 --- --- ----- ---------- - ----------------------------------------------------------- Total $12,198 100.0% $42,649 100.0% ======= ====== ======= ====== - ----------------------------------------------------------- 1 Includes a participation of others of $744,435 at December 31, 1999 and $759,424 at December 31, 1998.
[THIS SECTION INTENTIONALLY LEFT BLANK] 5
The following table indicates the composition of the Company's receivables by state of client location as of December 31, 1999 and 1998. 1999 1998 - ------------------------------------------- --------------------- ----------- ------------------ -------------- Client State Receivables Percent Receivables Percent - ------------------------------------------- --------------------- ----------- ------------------ -------------- In Thousands In Thousands - ------------------------------------------- --------------------- ----------- ------------------ -------------- New York $5,779 47.4% $25,963 60.9% - ------------------------------------------- New Jersey 2,396 19.6 5,375 12.6 - ------------------------------------------- Virginia 2,111 17.3 3,000 7.0 - ------------------------------------------- California (1) 1,573 12.9 2,731 6.4 - ------------------------------------------- Pennsylvania 147 1.2 707 1.7 - ------------------------------------------- Wisconsin 124 1.0 125 0.3 - ------------------------------------------- Delaware 68 0.6 404 0.9 - ------------------------------------------- Florida -- -- 1,979 4.6 - ------------------------------------------- North Carolina -- -- 727 1.7 - ------------------------------------------- Connecticut -- -- 423 1.0 - ------------------------------------------- Minnesota -- -- 330 0.8 - ------------------------------------------- District of Columbia -- -- 213 0.5 - ------------------------------------------- Maryland -- -- 208 0.5 - ------------------------------------------- Rhode Island -- -- 204 0.5 - ------------------------------------------- New Mexico -- -- 160 0.4 - ------------------------------------------- Illinois -- -- 50 0.1 - ------------------------------------------- Georgia -- 50 0.1 Total $12,198 100.0% $42,649 100.0% ======= ====== ======= ====== - ------------------------------------------- --------------------- ----------- ------------------ -------------- 2 Includes a participation of others of $744,435 at December 31, 1999 and $759,424 at December 31, 1998.
The tables above reflect the composition of the Company's receivables by client industry and state of client location at the dates indicated. Tables for the 1998 year include purchased invoices of the Company's factoring activities. Because the Company's major clients tend to change significantly over time, these tables are not likely to reflect the composition of the Company's receivables by client industry or state of location at future points in time. From time to time, a single client or single industry may account for a significant portion of the Company's receivables. For the year ended December 31, 1999, two clients accounted for more than 10% of the Company's gross earnings. The total gross earnings for these two clients accounted for 25.8% of the Company's gross earnings. Two of these clients were written off in full during 1999 and the third repaid its loans outstanding prior to the end of 1999. This compares to the year ended December 31, 1998, where two clients each 6 accounted for 36.6% of the Company's total earned discounts and interest. At December 31, 1999, two clients each accounted for more than 10% of the Company's outstanding gross finance receivables, and those two clients together accounted for 51.53% of the Company's total finance receivables. At December 31, 1998, two clients each accounted for more than 10% of the Company's outstanding gross finance receivables, and those two clients together accounted for 36.9% of the Company's total finance receivables. 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 historically been successful in replacing major clients, the loss of one or more major clients and an inability to replace those clients could have and has had a material adverse effect on the Company. Obligor (Account Debtor) Information The Company sold its factoring portfolio in October 1999 and does not intend to re-enter the factoring business. The quality of the purchased invoices was the Company's primary security against credit losses from its factoring activities. The Company generally did not purchase accounts receivable that had aged significantly. As of December 31, 1999 and 1998, the Company's receivables included zero ($0) and $23.7 million of purchased invoices on which approximately zero (0) and 4,200 entities, respectively, were obligated. If the Company had not received payment on a Factored account receivable within 90 days after its acquisition or if at any time prior to 90 days the Company determines that it is unlikely to receive payment, the Company required the client to repay the amount the Company advanced on the receivable plus the amount of discount earned. If, after 90 days, follow up calls to account debtors led the Company to believe that an invoice is collectable within a reasonable period of time, the Company may have allowed the advance to remain outstanding in return for an additional discount from the client. In that event, the earned discount owed on the original period of the advance was collected from the client at the end of 90 days and earned discounts thereafter accrued as if the account receivable were a new purchase. From time to time, a single account debtor or several account debtors may have been obligated on a significant portion of the Company's gross factored accounts receivable. As of December 31, 1999 and 1998, the largest single account debtor accounted for approximately zero (0%) and 2%, respectively, of the Company's gross purchased invoices. Government Regulation State usury laws generally limit the amount of interest that a creditor may contract for, charge or receive in connection with the lending of money. In the Commonwealth of Virginia (in which the Company's operating offices are located), there are no restrictions on the rates of interest and fees, which may be charged by the Company to commercial borrowers. 7 Employees The Company currently has three full-time employees. None of the Company's employees is a party to any collective bargaining agreement, and management considers its relations with employees to be satisfactory. Item 2. Description of Property The Company's principal offices occupied approximately 8,000 square feet of space in an office building in Arlington, Virginia. The Company's lease on this property expires in December 2001. The cost of renting this office space was approximately $178 thousand in 1999 compared to $184 thousand in 1998. The Company has a right of first refusal to acquire an additional, contiguous 1,500 square feet at its present site when that space becomes available. The Company has made arrangements to assign its lease on the Arlington location to a third party and has obtained a sublease on approximately 1,500 square feet of office space in a commercial building located in McLean, VA. The cost of renting at the new location will be approximately $30 thousand during 2000. The Company is subleasing from, and will share certain of the expenses of occupancy with, Harbourton Financial Corp., a financial services firm which is majority owned by Value Partners, Commencing November 1997, the Company also occupied approximately 2,500 square feet of space in an office building in New York City. The costs of renting this facility were $81 thousand in 1998 and $14 thousand in 1997. The Company elected to terminate the lease in February 1999 for a one-time fee of $35 thousand. At the same time the Company leased an executive suite facility in New York City for a term ending July 1999. The annual rent on the new facility was approximately $26 thousand. The lease was terminated in July 1999. Item 3. Legal Proceedings See Notes to Consolidated Financial Statements-(L)Commitments and Contingencies. Item 4. Submission of Matters To A Vote Of Security Holders None. 8 Part II Item 5. Market For Common Equity and Related Stockholder Matters The Company's common stock is traded on the OTC Bulletin Board (Symbol ASFN). Prior to October 18, 1999, the Company's common stock was traded on the Nasdaq Stock Market. 8 The following table sets forth the range of high and low bids for the Company's common stock in the over the counter market for the periods indicated, as furnished by the National Association of Securities Dealers, Inc. These bids represent prices among dealers, do not include retail markups, markdowns or commissions, and may not represent actual transactions.
Fiscal Years Ended December 31, 1999 1998 - ----------------------- -------------- -------------- ---------------- ------------------- High Low High Low - ----------------------- -------------- -------------- ---------------- ------------------- First Quarter $4.50 $3.50 $9.000 $5.688 - ----------------------- Second Quarter 7.09 2.03 8.375 5.438 - ----------------------- Third Quarter 2.13 0.47 7.250 3.375 - ----------------------- Fourth Quarter 0.56 0.36 4.375 2.625 - ----------------------- -------------- -------------- ---------------- -------------------
On March 16, 2000, there were approximately 38 stockholders of record based on information provided by the Company's transfer agent. The number of stockholders of record does not reflect the actual number of individual or institutional stockholders of the Company because a significant portion of the Company's stock is held in street name. Based on the best information made available to the Company by the transfer agent, there are approximately 790 beneficial holders of the Company's common stock. The Company has not paid a dividend and does not anticipate paying cash dividends to holders of its common stock for the foreseeable future. The Company currently intends to retain any earnings for future capital requirements and growth. Item 6. Management's Discussion and Analysis or Plan of Operation General The Company is a commercial finance institution that provides financing to small and middle-market businesses through Asset-Based Lending, advances secured by accounts receivable, inventory, machinery and equipment, and real estate. Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"), a wholly-owned subsidiary of the Company, was engaged in the business of buying life insurance policies, at a discount, from individuals facing life-threatening illnesses. During 1997, Lifetime Options ceased purchasing policies, and it is now engaged solely in managing its existing portfolio. The Company's clients are small- to medium-sized businesses with annual revenues typically ranging between $1 million and $10 million. The Company's clients have not typically qualified for traditional bank or asset-based financing because 9 they are either too new, too small, undercapitalized (or over-leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank. They are frequently experiencing periods of rapid growth or some level of financial stress. Thus, the Company generally relies on the quality of obligors of the client or the assets the client can pledge as collateral, rather than the financial condition of the client itself. Year ended December 31, 1999 vs. year ended December 31, 1998 During 1999, the Company suffered a high level of credit losses. Due to these losses, the Company was not in compliance with the covenants in its revolving bank line of credit. The Company negotiated an agreement with the bank group which called for the bank group to forebear from exercising its rights to demand payment (that agreement, and successor agreements, are hereinafter called the "Forebearance Agreement(s)") while the Company attempted to obtain sufficient liquidity to repay the bank group. With no other immediate source of financing, the Company, with the concurrence of the bank group, elected to find buyers for the majority of its performing assets. 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 $6 million, 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 $1.5 million. 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 to Metro. The Company did not record any gain or loss on this transaction. At the time of the sale, the Company took a restructuring charge to downsize the operations. In addition, in December 1999, the Company sold the Advances Receivable of one of its ABL relationships. The proceeds of both asset sales were applied to the revolving bank line of credit. In its factoring product line, the Company purchased invoices at their face amount, and made an advance payment to its client against the collection of the invoices. The amount (less negotiated discounts) of the advance payment was based upon the size, age and type of accounts being purchased, the quality of client documentation and the Company's judgment as to the payment history and creditworthiness of the obligors. The Company generated revenue through purchase discounts, which were negotiated on a client-by-client basis. The Company's ABL product line provides asset-based loans to the Company's clients, primarily working capital and equipment loans, at negotiated spreads over the prime rate. In its ABL activities, the Company typically analyzes the accounts receivable collateral, obtains appraisals, based on liquidation value, of the other collateral offered and extends credit based upon a negotiated percentage of the appraised collateral values. Under investment policies in place prior to entering into the Forebearance Agreement, the Company targeted ABL relationships in the $1 million to $3 million range. At December 31, 1999, the Company had performing ABL Advances Receivables of $3.9 million, including the $1.5 million in participations acquired as part of the sale of the factoring portfolio. During January of 2000, a second ABL was paid off, with the proceeds paying the revolving bank line of credit in full. The Company has one remaining larger ($1.5 million) ABL. Due to the reduced level of liquidity because the Company is operating without a bank line of credit, this client has been informed that its line of credit will not be renewed at its March 31, 2000 maturity date. Due to its lack of liquidity and reduced equity position, the Company has revised its lending policies and is targeting borrowing relationships in the $250 thousand range. The Company will continue to service its current accounts, and plans to reinvest the proceeds of collections of performing and nonperforming accounts in such new investments. 10 At December 31, 1999 and 1998, the Company had zero ($0) and $832 thousand in income taxes receivable, and zero ($0) and $4.0 million in deferred income taxes, respectively. Income taxes receivable represent the amounts of taxes refundable for the years then ended. The deferred income taxes represent projected decreases in taxes payable in future years as a result of carryforwards at the end of each year. During 1999, the Company took an allowance of $4.0 million against deferred income taxes since it had become unlikely that the Company would realize these tax savings in the near future. Other assets decreased 93.3%, to $44 thousand from $654 thousand at December 31, 1999 and 1998, respectively. This decrease was the result of a decrease in land and buildings held for resale. 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 Years Ended December 31, 1999 1998 Type of Revenue Earned Revenue Percent Earned Revenue Percent - ------------------------------------ ---------------- ----------- --- ------------------------- ----------- -- Discount on purchased invoices $1,555,359 43.0 % $4,229,332 41.1 % - ------------------------------------ - ------------------------------------ Earnings on advances receivable 1,659,871 45.8 3,719,873 36.1 - ------------------------------------ - ------------------------------------ Earnings on purchased life insurance policies - - 15,000 0.1 - ------------------------------------ - ------------------------------------ Fees and other income 406,106 11.2 2,337,013 22.7 ------- -- ---- --------- ---- - ------------------------------------ - ------------------------------------ Total revenue $3,621,336 100.0 % $10,301,218 100.0 % ========== ===== =========== =====
Total revenue decreased by 65% in 1999 versus 1998, to $3.6 million from $10.3 million. Within total revenue, discounts on purchased invoices decreased 63% in 1999 as compared to 1998. The Company sold its factoring portfolio in October 1999. Earnings on advances receivable decreased by 55% in 1999 versus 1998. This was attributable to a significant reduction in performing loan balances. Fees and other income decreased 83% in 1999 as compared to 1998, to $406 thousand from $2.3 million, respectively. The decrease was because of the decrease in volume and the sale of the factoring portfolio. 11 The following table sets forth certain items of expense for the periods indicated and the percentage relationship of each item to total expenses in the period.
For the Years Ended December 31, 1999 1998 - ---------------------------------------- ----------------- ----------- ----- ---------------- ---------- --------- Type of Expense Amount Percent Amount Percent - ---------------------------------------- ----------------- ----------- ----- ---------------- ---------- --------- Compensation and fringe benefits $2,058,877 12.2 % $3,447,656 17.3 % - ---------------------------------------- - ---------------------------------------- General and administrative 3,000,755 17.8 4,963,636 24.9 - ---------------------------------------- - ---------------------------------------- Interest expense 1,293,217 7.7 1,903,336 9.6 - ---------------------------------------- - ---------------------------------------- Provision for credit losses 10,177,825 60.3 9,598,503 48.2 - ---------------------------------------- - ---------------------------------------- Expenses from discontinued Operations 79,619 0.5 - - - ---------------------------------------- - ---------------------------------------- Restructuring charge 259,221 1.5 ------- --------- - - - ---------------------------------------- - ---------------------------------------- Total expenses $16,869,514 100.0 $19,913,131 100.0 =========== ===== =========== =====
Compensation and fringe benefits decreased $1.4 million, or 40%, due to sale of the factoring portfolio and general downsizing of the business, offset by severance paid to several officers, which was not part of the restructuring. General and administrative expense, in total, decreased $2.0 million, or 40%. The amounts in 1998 included approximately $1.0 million in proxy related professional fees and expenses. The remainder of the decrease was due to the downsizing of the Company. Interest expense decreased $610 thousand, or 32%, due to decreases in the average amount outstanding under the Company's bank line of credit, partially offset by increases in interest rates under the forbearance agreement. The provision for credit losses represented the largest category of expense as a component of revenue in 1999 and 1998. In 1999, the Company provisioned for losses on two large ABL's in the amount of approximately $9.2 million. The Company also provisioned an increase to the valuation allowance on the remaining life insurance policies by $710 thousand, and took a provision of $200 thousand against a client that filed bankruptcy in 1998. During 1998, the Company had charge-offs of $9.6 million, while recovering or reclassifying $59 thousand. Of the charge-offs, approximately $5.3 million were related to accounts placed on non-performing status prior to 1998 and which continued to deteriorate in 1998, including $908 thousand related to the 1998 disposition at a loss of real estate collateral securing an advance and the 12 deterioration of collections on health club notes, $1.3 million due to the bankruptcy of a major obligor during 1998, $890 thousand due to a decision rendered in 1998 adverse to the Company in a lawsuit, and $857 thousand due to the failure of a client during 1998. Of the $4.1 million of charge-offs related to loans placed on non-accrual status in 1998, $3.4 million related to a single client who filed for bankruptcy in 1998. Net charge-offs for 1998 of $9.5 million and the provision of $9.6 million resulted in an allowance for credit losses of $2.8 million, or 7.93% of receivables (net of earned income), exclusive of life insurance policies, outstanding as of December 31, 1998. None of the allowance at December 31, 1998 was allocated to non-performing accounts, which were carried at net realizable value of $3.0 million. 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. In 1999 the Company charged-off $9.2 million, while recovering $536 thousand. The recoveries related primarily to clients that filed bankruptcy in 1998. At December 31, 1999, the allowance for losses, net of amounts allocated to impaired assets, was $329 thousand. This represents 8.31% of the performing ABL portfolio at December 31, 1999. As a percentage of the ABL loans the Company expects to continue to hold, the reserve was 46.27% at December 31, 1999. The Company believes that the allowance for credit losses is adequate in light of the risks inherent in the portfolio at year-end 1999. The Company took a restructuring charge during the third quarter of 1999. The restructuring charge relates to the sale of the factoring portfolio and is comprised of employee severance pay, write-down or write-off of assets, and lease termination payments. As of December 31, 1999, the Company has not expended and continues to accrue $34 thousand related to lease termination payments. The Company continues to negotiate with various lessors of real and personal property and expects to conclude these negotiations by the end of the second quarter of 2000. While the Company expects the accrual to be adequate, there can be no assurance that the accrual will be sufficient and the Company may have to incur further expenses to terminate the leases in question. Liquidity and Capital Resources The Company's requirement for capital is a function of the level of its investment in receivables. The Company funds this investment through its working capital loan, convertible subordinated notes, and internally generated funds. The Company was operating under a forbearance agreement negotiated with its bank lenders. As of December 24, 1999, the forbearance agreement expired. The line of credit availability at December 31, 1999 was zero ($0). Under the forebearance agreement, the interest rate on the line of credit was equal to the agent lender's base rate plus 2.25%. After the expiration of the agreement the rate charged was the agent lender's base rate plus 4.75%. The loan was repaid in full in January 2000. The Company may seek replacement financing. 13 To augment its working capital during the forebearance period the Company obtained a $1,000,000 working capital loan from Value Partners. 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 December 31, 1999, the Company owed $799,772 on the working capital loan. As of December 31, 1997, the Company had convertible subordinated notes (collectively the "Old Notes") outstanding with an aggregate principal of $5.0 million. The Old Notes were issued in exchange for 785,475 shares of the Company's common stock (currently held by the Company as treasury stock). The Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate plus 1.25% per annum (9.75% per annum at December 31, 1999), (iii) are convertible into common stock of the Company at $7.50 per share, and (iv) are subordinated in right of payment to the Company's secured revolving credit facility. The Old Notes had a provision that upon the occurrence of certain "fundamental changes", the holders had the right to have these notes redeemed at par. The election of the new Board of Directors at the May 1998 shareholder meeting was deemed to have constituted a fundamental change under that provision. The Company: - - Advised all noteholders of their right to redeem the notes at par; - - Issued new convertible subordinated notes to Value Partners to provide the Company with a funding source to repurchase all notes tendered under the fundamental change provision; - - Repurchased the tendered notes; and - - Offered all remaining noteholders, that were accredited investors, the opportunity to exchange their Old Notes for newly issued convertible subordinated notes. The old noteholders tendered $2.9 million of Old Notes for repurchase at par. Additionally, Old Notes with a par of $1.7 million were exchanged for the new issue of Convertible Subordinated Notes. During 1998, convertible subordinated notes were issued (collectively the "New Notes") that (i) have a maturity of September 30, 2003, (ii) bear interest at a fixed rate of 10% per annum, (iii) are not redeemable at the option of the Company, (iv) are convertible into the Company's common stock at $6.50 per share and (v) are subordinated in right of payment to the Company's secured revolving credit facility. The New Notes have financial covenants that are similar to, but less restrictive than, the covenants in the Company's revolving line of credit. As of December 31, 1999, the Company had convertible subordinated notes (Old and New Notes) outstanding of $5.0 million. The Company was in default of the interest payment on the New Notes as of December 31, 1999. The Company expended $181 thousand and $52 thousand on premises and equipment in 1999 and 1998, respectively, principally in connection with upgrades to computer equipment, office furniture and equipment. The Company funded such expenditures from internally generated funds or borrowings under the line of credit. The Company does not plan to continue to significantly enhance its management information systems. 14 Impact of Inflation Management believes that inflation has not had a material effect on the Company's income, expenses or liquidity during the past two years. The Company's advances receivable bear interest at a combination of fixed and floating (base) rates, while the majority of its notes payable are at fixed rates. Therefore, an environment of falling interest rates could have adverse affects on the Company's net interest spread. Item 7. Financial Statements See pages 26 to 51. Item 8. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure On May 18, 1999, the Company dismissed Deloitte & Touche, LLP as the Company's auditors. The Company did not have any disagreement with the previous auditor as to any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures. The Form 8-K filed May 24, 1999 is hereby incorporated by reference. On March 14, 2000 the Company appointed McGladrey & Pullen, LLP as auditors. The Form 8-K filed March 14, 2000 is hereby incorporated by reference. Part III Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 ("Exchange Act") requires the Company's officers and directors, and persons who own more than ten percent of its Common Stock, to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "Commission"). Officers, directors and greater than ten percent stockholders are required by the Commission to furnish the Company with copies of all Section 16(a) forms that they file. Based solely on its review of the copies of such forms received by it, and written representations from certain reporting persons, the Company believes that all Section 16(a) filing requirements applicable to its current officers, directors, and 10% shareholders were complied with during 1999. 15 Item 10. Executive Compensation Summary Compensation Table The following table provides certain summary information concerning compensation paid or accrued by the Company for the years ended December 31, 1999, 1998 and 1997, to or on behalf of individuals serving as the Company's Chief Executive Officer, the Company's only other executive officer as of the end of the last fiscal year, and two additional individuals for whom disclosure would have been provided but for the fact that each was not serving as an executive officer at the end of the fiscal year. [THIS SECTION INTENTIONALLY LEFT BLANK] 16
- ---------------------------------- ------------- ---------------- ------------ ---------------- --------------- Awards- All Other Annual Annual Securities Compen- Name and Salary Bonus Underlying sation(1) Principal Position Year ($) ($) Options ($) - ---------------------------------- ------------- ---------------- ------------ ---------------- --------------- Charles G. Johnson 1999 178,222 - 60,000 1,517 Director/CEO 1998 - - - 18,765(2) David W. Campbell 1999 83,032 - - 12,500(3) Director, Interim CEO(4), 1998 90,200 - - 9,964(5) Chairman of the Board 1997 - - 8,000 22,365(6) C. Fred Jackson 1999 178,500 - - - Secretary/Treasurer and CFO, 1998 69,598 - 30,000 - Senior Credit Officer Lawrence M. Winkler 1999 26,315 - - 115,706(7) Secretary/Treasurer and 1998 163,550 17,685 - 4,417 CFO 1997 163,373 23,572 - 3,580 Wade Hotsenpiller 1999 112,852 - - 21,154(8) Sr. VP and COO, 1998 138,096 23,750 - 3,631 Sr. VP and Mgr., Factoring 1997 122,831 12,500 - 2,263
1 Annual compensation does not include amounts attributable to other miscellaneous benefits received by the named executive officers. The costs to the Company of providing such benefits during 1998 did not exceed 10% of the total salary and bonus paid to or accrued for the benefit of such individual executive officer. 2 Represents consulting fees paid during the period prior to becoming an employee. 3 Represents consulting fees of $12,500. 4 Interim CEO from June 29, 1998 to January 21, 1999. 5 Includes directors fees of $8,500. 6 Includes directors fees of $14,500 and consulting fees of $7,865. 7 Represents an amount payable pursuant to an arrangement in connection with termination of employment. 8 Represents an amount payable pursuant to an arrangement in connection with termination of employment. 17 Stock Options Option Grants In Last Fiscal Year
- ---------------------------------- ------------------ ------------------------ --------------- ------------------ Number of Securities Percent of Total Underlying Options Granted to Exercise or Expiration Date Name Options Created Employees in Fiscal Base Price Year Charles G. Johnson 30,000 50.0 $4.00 1/21/2006 Charles G. Johnson 30,000 50.0 $6.50 1/21/2006
Aggregated Option Exercises In Last Fiscal Year And Fiscal Year End Option Values None of the named executive officers exercised any stock options during 1999. - ---------------------------- --------------- ------------ ------------------------------------ ----------------------------------- Name Number of Value Number Of Value Of Unexercised In-The-Money Underlying Realized Securities Underlying Options At Fiscal Year-End Securities ($) Unexercised Options At Fiscal Acquired On Year-End Exercise ---------------- ------------------- --------------- ------------------- Exercisable Unexercisable Exercisable Unexercisable - ---------------------------- --------------- ------------ ---------------- ------------------- --------------- ------------------- Charles G. Johnson -- -- 60,000 -- $ 0 $ 0 David W. Campbell -- -- -- -- 0 0 C. Fred Jackson -- -- 30,000 -- 0 0 Lawrence Winkler -- -- -- -- 0 0 Wade Hotsenpiller -- -- -- -- 0 0
Compensation of Directors For the period from January,1999 through June, 1999, directors who are not officers of or consultants to the Company received a fee of $2,000 per board meeting attended in person, plus reimbursement for their expenses associated with attending those meetings. Directors who are not officers of or consultants to the Company also may receive a fee of $500 per board meeting attended by conference telephone call.From July,1999 through December, 1999 the board eliminated such fees. Directors do not receive additional fees to serve on any committee or as chair of any committee 18 Directors who are officers of or consultants to the Company receive no compensation for serving as directors, but are reimbursed for out-of-pocket expenses related to attending board or committee meetings. Mr. Campbell was paid a consulting fee of $2,500 per month as non-executive chairman for the period during which he was not employed by the Company, from July, 1999, through December, 1999. . Employment Agreements and Termination of Employment Agreements The Company is currently a party to employment agreements with Messrs. Johnson and Jackson. The following sets forth their principal terms. Mr. Johnson, the Company's President and CEO, has entered into an employment agreement with the Company dated January 20, 1999. The agreement is for a term of three years from the initial date. However, commencing on January 1, 2001, the term shall be extended one day at the end of every day during its length and the new maturity date of the term shall be increased by that day, unless either party shall notify the other of its intention to stop such extension, in which case the new maturity date shall be one year from the date of such notice. Mr. Johnson's salary was established at $185,000 per annum, subject to periodic increases by the Board of Directors. Mr. Johnson may receive an annual incentive bonus of up to 100% of his annual salary at the sole discretion of the Board. Mr. Johnson received a grant of 60,000 stock options (30,000 with an exercise price equal to $4.00 per share and 30,000 options with an exercise price of $6.50 per share). All of the options have a maturity date of seven years from the date of issuance and are immediately exercisable. Mr. Johnson was provided an automobile allowance of $500 per month, reimbursement of housing expenses up to $15,000, and reimbursement of moving and short-term storage expenses up to $10,000, with the housing and moving expenses to be grossed-up to reflect federal, state and local taxes. The agreement contains confidentiality and non-compete provisions, obligates the Company to include Mr. Johnson in any benefit plans generally made available to employees, provides reimbursement of bona fide business and trade association expenses, and provides for certain death and disability benefits. In addition, if Mr.Johnson's employment is terminated by the Company for other than death, disability or cause or by Mr. Johnson for Good Reason (as defined), then Mr. Johnson will receive severance equal to (1)a lump sum payment equal to his base salary for the greater of one year or the remaining term, (2)various fringe benefits, including his automobile allowance, for one year, and (3)bonuses through and including the year of termination, pro-rated as appropriate. "Good Reason" is defined to include certain adverse actions following a business combination or Change of Control. "Change of Control" is defined to include the acquisition of a controlling interest in the Company, including beneficial ownership of 25% or more of the common stock, by any person or entity other than Value Partners. 19 Mr. Jackson's agreement is dated September 1, 1998, provides for a base salary of $175,000, and has a term of one year that is extended one day at the end of every day during the term, unless either party shall notify the other of its intention to stop such extensions, in which case the closing date of the term shall be one year from the date of such notice. Pursuant to the agreement, Mr. Jackson received a grant of 30,000 incentive stock options with an exercise price of $5.00 per share. Said options will expire upon the earlier of ten years from the date of issuance or termination of employment. The agreement contains confidentiality and non-compete provisions, obligates the Company to provide Mr. Jackson with an automobile allowance of $500 per month, requires the Company to include Mr. Jackson in any benefit plans generally made available to employees, and provides for certain death and disability benefits. In addition, if Mr. Jackson's employment is terminated either by the Company for other than death, disability or cause or by Mr. Jackson following certain adverse actions subsequent to a business combination or Change of Control, then Mr. Jackson will receive severance equal to (1) a lump sum payment equal to his base salary for one year, and (2) various fringe benefits, including his bonuses and automobile allowance, for one year. The definition of Change in Control in Mr. Jackson's agreement is similar to the definition in Mr. Johnson's agreement. Lawrence W. Winkler, formerly Senior Vice President, Secretary and Treasurer of the Company, had a contract with the Company that expired on March 31, 1999. Effective April 1, 1999, the Company and Mr. Winkler agreed that Mr. Winkler's employment would be terminated without cause effective immediately and the Company would pay Mr. Winkler a severance amount of $115,706 upon execution of a Separation and Release Agreement. Wade Hotsenpiller, formerly Senior Vice President and Chief Operating Officer of the Company, had a contract with the Company that expired on March 31, 1999. Effective April 1, 1999, the Company and Mr. Hotsenpiller agreed that if Mr. Hotsenpiller's employment was terminated for other than cause he would receive severance payments. Effective October 8, 1999 the Company and Mr. Hotsenpillar agreed that Mr. Hotsenpiller's employment would be terminated without cause effective immediately and the Company would pay Mr. Hotsenpiller a severance amount of $21,154 upon execution of a Separation and Release Agreement. Item 11. Security Ownership of Certain Beneficial Owners and Management The following table sets forth, as of March 15, 2000, the amount of common stock of the Company beneficially owned by: (i) each person known to the Company to be the beneficial owner of more than 5% of the aggregate shares of the Company's outstanding common stock, (ii) each director of the Company, (iii) each of the current named executive officers in the Summary Compensation Table, and (iv) all executive officers and directors as a group. 20
-------------------------------------------------- ------------------------- ----------------------- Common Shares Name and Address Beneficially Owned Percent of Class - ---------------------------------------------------- --------------------------- -------------------------- Timothy G. Ewing (1, 20 Ewing and Partners Value Partners, Ltd. 4514 Cole Avenue, Suite 808 Dallas, Texas 75201 1,314,060 44.2% Walter P. Carucci(3) Carucci Family Partners Carr Securities Corp. One Penn Plaza, Suite 4720 New York, NY 10014 220,656 9.4% Herzog,Heine,Geduld,Inc. 525 Washington Blvd., 10th Floor Jersey City, NJ 07002 200,571 8.6% Tweedy, Browne Company L.L.C. 52 Vanderbilt Avenue New York, NY 10017 165,150 7.1% Lindsay B. Trittipoe 4208 West Franklin St. Richmond, VA 23221 135,289 5.8% Directors: C. Scott Bartlett, Jr.(4) 13,495 0.6% David W. Campbell 9,000 0 Charles G. Johnson 61,000 2.6% Steven W. Lefkowitz 13,000 0.6% Edward A. McNally 14,000 0.6% William H. Savage (5) 50,385 2.1% 21 Executive Officers who are not Directors: C. Fred Jackson (6) 40,133 1.7% For all Executive Officer and Directors as a Group 335,302 13.4% (8 persons)
21 1 Ewing & Partners, a Texas general partnership, is the general partner of Value Partners. Timothy G. Ewing is the general partner and the Managing Partner of Ewing & Partners. In addition, Ewing Asset Management, L.L.C., a Texas limited liability company ("EAM"), holds a 1% general partnership interest in Ewing & Partners. Mr. Ewing is the Manager and 100% owner of EAM. The principal place of business for Ewing & Partners, EAM, and Mr. Ewing is the same as for Value Partners. 2 Value Partners owns $4,197,000 of Allstate's Convertible Subordinated Notes due September 30, 2003 ("New Notes"), which are currently convertible into 645,692 shares of common stock and are included in the table. Excluding such shares, Value Partners owns 668,368 shares or 28.8% of the issued and outstanding common stock. 3 Walter P. Carucci is the general partner of Carucci Family Partners and President of Carr Securities, Inc. Mr. Carucci personally owns 80,000 shares, Carucci Family Partners owns 120,000 shares, and Carr Securites owns 964 shares. In addition, Carucci Family Partners owns $128,000 of New Notes, which are convertible into 19, 692 shares of stock, which are included in the table. 4 Mr. Bartlett owns $1,000 of New Notes, which are currently convertible into 153 shares of common stock, and are included in the table 5 Mr. Savage owns $100,000 of New Notes, which are currently convertible into 15,385 shares of` common stock, and are included in the table. 6 Mr. Jackson owns $1,000 of the Company's convertible subordinated notes due September 30, 2000, which are convertible into 133 shares of common stock, and are included in the table. The amounts in the above tables are based on filings or other information furnished by the respective individuals or entities. Under applicable regulations, shares are deemed to be beneficially owned by a person if he directly or indirectly has or shares the power to vote or dispose of the shares, whether or not he has any economic interest in the shares. Unless otherwise indicated, the named beneficial owner has sole voting and dispositive power with respect to the shares. Under applicable regulations, a person is deemed to have beneficial ownership of any shares of common stock which may be acquired within 60 days of March 15, 2000 pursuant to the exercise of outstanding stock options or convertible notes. Shares of common stock owned by such person or group are deemed to be outstanding for the purpose of computing the percentage of outstanding common stock owned by such person or group, but not deemed outstanding for the purpose of computing the percentage of common stock owned by any other person or group. The amounts set forth in the table include shares which may be received upon the exercise of stock options within 60 days of March 15, 2000 as follows: Mr. Bartlett, 13,000 shares; Mr. Campbell, none; Mr. Johnson, 60,000 shares; Mr. Lefkowitz, 13,000 shares; Mr. McNally, 13,000 shares; Mr. Savage, 13,000 shares; Mr. Trittipoe, 13,000 shares; Mr. Jackson, 30,000 shares; and all directors and officers as a group, 155,000 shares. 22 Item 12. Certain Relationships and Related Transactions Certain Transactions In September 1998, Value Partners purchased $2,896,000 of Notes for cash from the Company in order to fund the Company's repurchase of a similar amount of subordinated convertible notes due September 30, 2000 ("Old Notes"). The New Notes have a higher interest rate (10% fixed), a lower conversion rate into the common stock ($6.50 per share versus $7.50 per share under the Old Notes), a maturity date of September 30, 2003, and more restrictive financial covenants. The Company made an exchange offer of New Notes to all holders of Old Notes who were accredited investors and who did not have their Old Notes repurchased by the Company, and $1,701,000 of Old Notes (including $1,301,000 held by Value Partners) were exchanged for New Notes. As the holder of over 50% of the new Notes, Value Partners has the right to name, at any time and from time to time so long as the Notes are outstanding, (a) one of the directors of the Company so long as the Board shall have eight or fewer members, including the director named by Value Partners, and (b) two directors of the Company if the Board exceeds eight members, including the first director named by Value Partners. To date, Value Partners has not exercised this right. The Company obtained a $1,000,000 working capital loan from Value Partners. 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. As of December 31, 1999, the Company owed $799,772 on the working capital loan. [THIS SECTION INTENTIONALLY LEFT BLANK] 23 Item 13. Exhibits and Reports on Form 8-K (a) 1. Financial Statements: Page Number The following financial statements are submitted: Independent Auditors' Reports on Consolidated Financial Statements and Schedule 26-27 Consolidated Balance Sheets as of December 31, 1999 and 1998 28 Consolidated Statements of Operations for the years ended years ended December 31, 1999 and 1998 29 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999 and 1998 30 Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998 31-32 Notes to Consolidated Financial Statements 33-50 2. Financial Statement Schedules The following financial statement schedule is filed as part of this report: Schedule IV Indebtedness to Related parties for the years ended December 31, 1999 and 1998. 51 Schedules other than those listed above have been omitted since they are either not required or the information is included elsewhere in the financial statements or notes thereto. Exhibit 3. Articles of Incorporation and By-laws Documents incorporated by reference - See Registration Statement on Form S-1, Registration No. 33-46748 24 Exhibit 4. Instruments Defining the Rights of Security Holders Documents incorporated by reference - See Registration Statement on Form S-1, Registration No. 33-46748 Documents incorporated by reference - See the Company's Annual Report on Form 10-KSB for the Fiscal Year Ended December 31, 1995 Exhibit 10. Material Contracts Waiver and Amendment No. 1 dated as of August 12, 1998 to Amended and Restated Revolving Credit and Security Agreement of May 12, 1997. Waiver and Amendment No. 2 dated as of September 14, 1998 to amended and Restated Revolving Credit and Security Agreement of May 12, 1997. Loan agreement with Value Partners, Ltd. dated August 20, 1999 for $1 million. Form 8-K filed September 7, 1999 is hereby incorporated by reference. Forbearance agreement with bank lenders dated August 1, 1999. Form 8-K filed September 7, 1999 is hereby incorporated by reference. Extension of the Forbearance Agreement dated August 1, 1999. Form 10-QSB for the period ending September 30, 1999 is hereby incorporated by reference. Contract for sale of the factoring portfolio dated October 29, 1999. Form 10-QSB for the period ending September 30, 1999 is hereby incorporated by reference. Exhibit 10.9 Employment Contracts Employment and Compensation Agreement dated January 20, 1999 with Charles G. Johnson incorporated by reference to the Company's filing on Form 10-QSB for the quarter ended March 31, 1999. Employment and Compensation Agreement dated September 1, 1998 with C. Fred Jackson incorporated by reference to the Company's filing on Form 10-QSB for the quarter ended September 30, 1998. Exhibit 21. Subsidiaries of the Company Exhibit 27. Financial Data Schedule 25 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Allstate Financial Corporation and subsidiaries Arlington, Virginia We have audited the accompanying consolidated balance sheet of Allstate Financial Corporation and subsidiaries as of December 31, 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the 1999 information on the financial statement schedule listed in the Index at Item 13(a)2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1999 consolidated financial statements and financial statement schedule referred to above present fairly, in all material respects, the financial position of Allstate Financial Corporation and subsidiaries as of December 31, 1999, and the results of their operations and their cash flows for the year ended December 31, 1999 in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note M to the financial statements, the Company has suffered recurring losses from operations and its line of credit available for working capital expires March 31, 2000. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note M. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. McGladrey & Pullen, LLP Raleigh, NC March 17, 2000 26 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders Allstate Financial Corporation and subsidiaries Arlington, Virginia We have audited the accompanying consolidated balance sheet of Allstate Financial Corporation and subsidiaries as of December 31, 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule for the year ended December 31, 1998 listed in the Index at Item 13(a) 2. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Allstate Financial Corporation and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule for the year ended December 31, 1998, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Deloitte & Touche,LLP Washington,D.C. February 4,1999 (March 30, 1999 as to the obtaining of debt waivers described in Note F) 27
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, - ------------------------------------------------------------------------------- ------------------------ -------------------- 1999 1998 - ------------------------------------------------------------------------------- ------------------------ -------------------- ASSETS - ------------------------------------------------------------------------------- Cash $ 353,962 $2,420,644 --------- ---------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Purchased receivables 2,110,454 22,302,284 - ------------------------------------------------------------------------------- Advances receivable 9,329,366 15,652,457 --------- ---------- - ------------------------------------------------------------------------------- 11,439,820 37,954,741 - ------------------------------------------------------------------------------- Less: Allowance for credit losses (4,316,399) (2,799,931) ----------- ---------- - ------------------------------------------------------------------------------- Total receivables - net 7,123,421 35,154,810 --------- ---------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Income tax receivable - 831,656 - ------------------------------------------------------------------------------- Deferred income taxes - 3,960,946 - ------------------------------------------------------------------------------- Furniture, fixtures and equipment, net 151,375 166,400 - ------------------------------------------------------------------------------- Other assets 43,643 653,957 ------ ------- - ------------------------------------------------------------------------------- TOTAL ASSETS $7,672,401 $43,188,413 ========== =========== - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------- Accounts payable and accrued expenses $1,009,921 $1,081,655 - ------------------------------------------------------------------------------- Credit balances of factoring clients - 4,559,570 - ------------------------------------------------------------------------------- Notes payable 1,366,051 15,014,717 - ------------------------------------------------------------------------------- Convertible subordinated notes 4,954,000 4,958,000 --------- --------- - ------------------------------------------------------------------------------- TOTAL LIABILITIES 7,329,972 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 December - ------------------------------------------------------------------------------- 31, 1999 and 2,324,083 outstanding at December 31, 1998, - ------------------------------------------------------------------------------- Exclusive of shares held in treasury 40,000 40,000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Additional paid-in-capital 18,874,182 18,874,182 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Treasury stock, 781,212 shares at December 31, 1999 - ------------------------------------------------------------------------------- and 781,745 shares at December 31, 1998 (4,967,472) (4,986,520) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (Deficit) Retained earnings (13,604,281) 3,646,809 ------------ --------- - ------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 342,429 17,574,471 ------- ---------- - ------------------------------------------------------------------------------- $ 7,672,401 $43,188,413 =========== =========== - ------------------------------------------------------------------------------- ------------------------ -------------------- See Notes to Consolidated Financial Statements
28
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 1999 - -------------------------------------------------------------------------------- ------------------------ -------------------- 1999 1998 - -------------------------------------------------------------------------------- ------------------------ -------------------- REVENUE - -------------------------------------------------------------------------------- Earned discounts and interest $ 3,215,230 $7,964,205 - -------------------------------------------------------------------------------- Fees and other revenue 340,536 2,337,013 - -------------------------------------------------------------------------------- Revenue from discontinued operations 65,570 - ------ ---------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TOTAL REVENUE 3,621,336 10,301,218 --------- ---------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPENSES - -------------------------------------------------------------------------------- Compensation and fringe benefits 2,058,877 3,447,656 - -------------------------------------------------------------------------------- General and administrative 3,000,755 4,963,636 - -------------------------------------------------------------------------------- Interest expense 1,293,217 1,903,336 - -------------------------------------------------------------------------------- Provision for credit losses 10,177,825 9,598,503 - -------------------------------------------------------------------------------- Expenses from discontinued operations 79,619 - - -------------------------------------------------------------------------------- Restructuring Charge 259,221 - ------- --------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TOTAL EXPENSES 16,869,514 19,913,131 ---------- ---------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LOSS BEFORE INCOME TAX EXPENSE (13,248,178) (9,611,913) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT) 4,002,912 (3,556,400) --------- ----------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET LOSS $(17,251,090) $(6,055,513) ============= ============ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NET LOSS PER COMMON SHARE - -------------------------------------------------------------------------------- Basic and Diluted $ (7.42) $ (2.61) ========== ========= - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - -------------------------------------------------------------------------------- Basic and Diluted 2,324,616 2,322,222 ========= ========= - ---------------------------------------------------------------------------------- ------------------------ --------------------
See Notes to Consolidated Financial Statements 29
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1998 AND 1997 - ------------------------------- --------------- -------------------- -------------------- ------------------- ------------------- Additional Common Paid in Treasury Retained Stock Capital Stock Earnings Total - ------------------------------- --------------- -------------------- -------------------- ------------------- ------------------- Balance - January 1, 1998 $40,000 $18,852,312 $(5,030,594) $9,702,322 $23,564,040 - ------------------------------- Amortization of Treasury 28,084 28,084 Stock Costs - ------------------------------- Conversion of Convertible 15,990 15,990 Subordinated Notes to 2,132 shares of common stock - ------------------------------- 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 15,050 15,050 Stock Costs - ------------------------------- Conversion of Convertible 3,998 3,998 Subordinated Notes to 533 shares of common stock - ------------------------------- Net Loss - - (17,251,090) (17,251,090) ----------- ------------------- ------------------- ------------ ------------ - ------------------------------- Balance - December 31, 1999 $40,000 $18,874,182 $(4,967,472) $(13,604,281) $ 342,429 ======= =========== ============ ============= ========= See notes to Consolidated Financial Statements
30
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, - ---------------------------------------------------------------------------------------------------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Loss $(17,251,090) $(6,055,513) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depreciation - net 69,759 112,334 Impairment of software - 218,202 Loss on disposition of furniture, equipment, and Automobiles 113,895 49,487 Provision for credit losses 10,177,825 9,598,503 Changes in operating assets and liabilities: Other assets 610,314 1,748,150 Accounts payable and accrued expenses (71,734) 661,299 Income taxes receivable 831,656 - Deferred income taxes 3,960,946 (3,976,142) --------- ----------- NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (1,558,429) 2,356,320 ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of receivables and advances (117,988,306) (202,674,562) Collection and sale of receivables, including life insurance contracts, and advances 135,841,870 197,126,096 (Decrease)/Increase in credit balances of factoring clients (4,559,570) 834,314 Sale of furniture, fixtures, and equipment 12,765 - Purchase of furniture, fixtures and equipment (181,394) (52,183) --------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,125,365 (4,766,335) ---------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit 82,768,908 100,417,016 Proceeds from subordinated debt - 4,597,000 Proceeds from working capital loan 1,000,000 - Principal payments on line of credit (97,217,346) (99,820,361) Principal payments on subordinated debt (4,000) (4,613,000) Principal payments on working capital loan (200,228) - Treasury stock acquisition costs 19,048 28,084 Options exercised 21,870 --------- ------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (13,633,618) 630,609 ------------ ------- NET DECREASE IN CASH (2,066,682) (1,779,406) CASH, Beginning of period 2,420,644 4,200,050 --------- --------- (Continued)
31
CASH, End of period $ 353,962 $ 2,420,644 ========= =========== Interest paid $1,295,214 $ 1,802,979 ========== =========== Income taxes paid $ 32,466 $ 419,742 ======== ========= 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 $ 15,990 (Concluded)
See Notes to Consolidated Financial Statements [THIS SECTION INTENTIONALLY LEFT BLANK] 32 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of Allstate Financial Corporation and its subsidiaries (collectively, the "Company") conform to generally accepted accounting principles and the general practices within the financial services industry. Those policies that materially affect the determination of financial position, results of operations, and cash flows are summarized below. In preparing its financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates shown in the consolidated balance sheets and the statements of income. Actual results could differ significantly from those estimates. In the normal course of business, the Company encounters economic risks. Economic risk is comprised of interest rate risk, credit risk, and market risk. Interest rate risk is the risk that unfavorable discrepancies will occur between the rates of interest earned by the Company on its receivables portfolio and its own costs of borrowing funds in the market. Credit risk is the risk of default on the Company's purchased receivable and advance portfolio that results from the borrowers' inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying purchased receivable and advance receivables and the valuation of the Company's owned real estate. The determination of the allowance for credit losses is based on estimates that are susceptible to significant changes in the economic environment and market conditions. Management believes that, as of December 31, 1999, the allowance for credit losses is adequate based on the information currently available. A worsening in the state of the general economy or a protracted economic decline could increase the likelihood of losses due to credit and market risks and could create the need for substantial additions to the allowance for credit losses. Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all material inter-company transactions. During 1999 due to the Company shedding significant assets, the Lifetime Options Inc. A Viatical Settlement Company subsidiary now comprises a significant portion of total assets. Purchased and Advance Receivables and Allowance for Credit Losses Purchased receivables consist of invoices and insurance claims, which have been purchased with or without recourse to the seller, and life insurance policies. Invoices are stated at the face amount outstanding, net of unearned discounts and participations. Insurance claims are stated at the agreed amount of the settlement assigned to the Company, net of unearned discounts. Life insurance policies are stated at the purchase price paid for the policies plus accrued earnings, net of an allowance based on management's estimate of the discounted present value of the expected cash flows from the contracts. Because most of the purchased life insurance policies are underwritten by highly rated insurance companies (and, in many cases, backed by state guaranty funds), management believes that credit risk is not material. 33 Advances Receivable are interest-bearing loans collateralized by clients' pledged assets and general liens and are stated at the aggregate principal amount outstanding plus accrued earnings. The allowance for credit losses represents the provision charged to operations, less purchased receivables or advances receivables charged off, net of recoveries. The allowance for credit losses is maintained at a level that, in management's judgment, is sufficient to absorb losses inherent in the receivable portfolio. The allowance for credit losses is based upon management's review and evaluation of the receivable portfolio. Factors considered in the establishment of the allowance for credit losses include management's evaluation of specific receivables, the adequacy of underlying collateral, historical loss experience, expectations of future economic conditions and their impact on particular industries and individual clients, and other discretionary factors. The allowance for credit losses is based on estimates of potential future losses, and ultimate losses may vary from the current estimates. These estimates are typically reviewed quarterly and as adjustments become necessary, the effects of the change in estimates are charged against the allowance for credit losses in the period in which they become known. When any receivable becomes doubtful as to collection of discount or interest income, the account is placed on non-performing status and, in accordance with The Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure, is considered by management to be "impaired". When a receivable becomes non-performing the Company discontinues the accrual of earnings for financial statement purposes. If the Company determines that it is not likely to recover, from any source, the amount of its initial advance and the earned but unpaid discount or interest thereon, then the Company increases the allowance for credit losses or reduces the carrying value of the non-performing, receivable to its estimated fair value and makes a charge to its allowance for credit losses in an amount equal to the difference between the Company's investment in the non-performing receivable and its estimated fair value. Purchased and advance receivables are fully charged off against the allowance when the Company has exhausted its efforts against the client's customer, the client, guarantors, other third parties and any additional collateral retained by the Company. Furniture, Fixtures and Equipment Furniture, fixtures and equipment are recorded at cost. Depreciation is computed using straight line and accelerated methods over the estimated useful lives of the related assets. Other Assets At the date of acquisition, other assets are recorded at fair value less estimated selling costs. Write-downs, if any, to fair value at the date of acquisition are charged against the allowance for credit losses. Subsequent to acquisition, the asset is adjusted to the lower of cost or fair value less estimated costs to sell and adjustments, if any, are charged against the allowance for credit losses. Operating expenses pertaining to other assets are expensed in operations in the period in which they are incurred. Gains or losses 34 on the disposition of other assets are first reflected in the allowance for credit losses. Any gain which exceeds the amount, if any, previously written-off is reflected in current income. The amounts ultimately recovered by the Company from other assets could differ materially from the amounts used in arriving at the net carrying value of the assets because of future market factors beyond the Company's control, adversarial actions taken by the client or other owners of the foreclosed property or changes in the Company's strategy for recovering its investment. Fair Value of Financial Instruments In accordance with the requirements of SFAS No. 107, Disclosure About Fair Value of Financial Instruments, which requires the disclosure of fair value information about financial instruments when it is practicable to estimate that fair value and excessive costs would not be incurred, the following methods and assumptions were used in estimating the fair value of financial instruments: Cash and Cash Equivalents--The carrying amounts for cash and cash equivalents approximate fair value. Purchased, advance receivables and commitments - The carrying amount of receivables approximate fair value because of the short maturity of these instruments. Notes payable, consisting of adjustable and fixed rate notes, are recorded at book values, which approximate the respective fair values. Convertible subordinated notes payable are primarily fixed rate. The carrying amount of these notes approximates fair value because the interest rate, conversion price, and period to maturity have not significantly changed since the dates that the notes were issued. Unearned and Earned Discounts on Purchased Receivables At the time of purchase, the unearned discount is deducted from the face amount of the invoice and is recorded as a reduction to such invoice. Unearned discounts are recognized as income in accordance with the respective terms of the agreements between the Company and each of its clients. The Company recognizes discounts on the first day of each time interval. The Company's method of recognizing earned discounts does not differ materially from the interest method. At the time an invoice is purchased, a due date is set based on the client's sales terms. This due date is used to identify past due receivables. The accrual of earned discounts is discontinued when, in the opinion of management, the collection of additional earnings from the client's customer, the client, guarantors or collateral held, if any, is unlikely. Invoices which have been identified as past due may continue to accrue earnings if, in the opinion of management, collection of the earnings from one or more of the above sources is likely. When invoices are placed on non-performing status, earned discounts theretofore accrued in the current year are charged against current year's earnings if, in 35 the opinion of management, the collection of such earnings is unlikely. Earned discounts accrued in prior years are charged to the allowance for credit losses if, the opinion of management, the collection of such earnings is unlikely. Interest and Discounts Earned on Advances Receivable Interest and discounts earned on advances receivable accrue on the average monthly or semi-monthly outstanding amount or on the daily balance of the advance. Accrued earnings are typically required to be paid in full no less frequently than monthly in arrears. Fees and Other Income Fee income includes application fees, letter of credit and guaranty fees, and commitment or facility fees received from clients. Commitment and facility fees are deferred and recognized over the term of the commitment or facility on a straight-line basis. Application fees are paid by clients to the Company to cover the cost of performing credit investigations and field examinations and are recognized when received. Letter of credit and guaranty fees are usually for a sixty- to ninety-day period and are recognized when the letter of credit or letter of guaranty is issued. Other income includes supplemental discounts (i.e., early termination fees), interest income and miscellaneous income. Revenue from discontinued operations Revenue from discontinued operations includes amounts received and accrued from the purchaser of the Company's previous factoring clients. The amounts are calculated by the purchaser as a percentage of net interest income and remitted monthly in arrears. Income Taxes Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liablities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. [THIS SECTION INTENTIONALLY LEFT BLANK] 36
B. RECEIVABLES Receivables consist of the following at December 31: - ---------------------------------------------- ----------------------- ------------------------ 1999 1998 - ---------------------------------------------- ----------------------- ------------------------ Invoices and insurance claims $ 234,445 $23,731,826 - ---------------------------------------------- Less: Unearned discount (13,953) (3,299,175) - ---------------------------------------------- Less: Participations - (759,424) - ---------------------------------------------- Life Insurance policies 1,889,962 2,629,057 --------- --------- - ---------------------------------------------- - ---------------------------------------------- Total Purchased receivables - net $2,110,454 $22,302,284 ========== =========== - ---------------------------------------------- - ---------------------------------------------- Advances receivable $10,073,989 $16,288,673 - ---------------------------------------------- Less: Unearned discount - (636,216) - ---------------------------------------------- Less: Participations (744,623) - --------- -------------- - ---------------------------------------------- - ---------------------------------------------- Total Advances receivable - net $9,329,366 $15,652,457 ========== =========== - ----------------------------------------------
Invoices purchased usually become due within a maximum of 90 days. After this time, the Company generally requires the client to repay the amount advanced on the receivable plus the earned discount under the full recourse provisions of its agreements. If at any time the Company determines that it is unlikely to receive payment on a purchased invoice, the Company retains the right to require its clients to repay the amount the Company has advanced on the receivable plus the amount of discount earned. Advances receivable may be made on a revolving basis or require monthly amortization. Revolving advances receivable secured by current assets (e.g. accounts receivable or inventory) are subject to a daily or weekly borrowing base formula and come due in a single, lump sum payment at the maturity of the agreement between the Company and its client. Changes in the allowance for credit losses were as follows:
- -------------------------------------------------------------- --------------------------- - -------------------------------------------------------------- --------------------------- BALANCE, January 1, 1998 2,738,931 - -------------------------------------------------------------- Provision for credit losses 9,598,503 - -------------------------------------------------------------- Receivables charged off (9,596,124) - -------------------------------------------------------------- Recoveries 58,621 ------ - -------------------------------------------------------------- - -------------------------------------------------------------- BALANCE, December 31, 1998 2,799,931 - -------------------------------------------------------------- Provision for credit losses 10,177,825 - -------------------------------------------------------------- Receivables charged off (9,197,053) - -------------------------------------------------------------- Recoveries 535,696 ------- - -------------------------------------------------------------- - -------------------------------------------------------------- BALANCE, December 31, 1999 $4,316,399 ==========
37 Impaired loans recognized in conformity with SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires the Company to measure the value of each impaired loan based on the present value of its expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent; as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures, which allows the Company to use existing methods for recognizing interest income on impaired loans, are as follows:
December 31, - ------------------------------------------------------------------ ------------------ ------------------ 1999 1998 - ------------------------------------------------------------------ ------------------ ------------------ Total recorded investment in impaired loans $5,354,476 $2,633,856 - ------------------------------------------------------------------ - ------------------------------------------------------------------ Amount of recorded investment in impaired loans for which there is no related allowance $367,455 $2,633,856 - ------------------------------------------------------------------ - ------------------------------------------------------------------ Amount of recorded investment in impaired loans for which there is a related allowance $4,987,021 - - ------------------------------------------------------------------ - ------------------------------------------------------------------ Related allowance for impaired loans $3,987,021 - - ------------------------------------------------------------------ ------------------ ------------------
The average recorded investment in impaired loans during 1999 and 1998 was $7,809,301 and $2,065,105, respectively. See note J-Financial obligations with off-balance sheet risk and credit concentrations.
C. FURNITURE, FIXTURES AND EQUIPMENT The Company's investment in furniture, fixtures, and equipment consists of the following: December 31, - ------------------------------------------------------------ -------------------- ---------------------- 1999 1998 - ------------------------------------------------------------ -------------------- ---------------------- - ------------------------------------------------------------ Furniture, fixtures and equipment $447,800 $ 634,296 - ------------------------------------------------------------ Automobiles - 21,290 - ------------------------------------------------------------ Less: Accumulated depreciation (296,425) (489,186) - --------- --------- - ------------------------------------------------------------ $151,375 $ 166,400 ======== =========
Furniture, fixtures and equipment is pledged as collateral under a revolving line of credit (see Note F). [THIS SECTION INTENTIONALLY LEFT BLANK] 38
D. OTHER ASSETS Other assets consist of: December 31, - ------------------------------------------------- ------------------------------ --------------------------- 1999 1998 - ------------------------------------------------- ------------------------------ --------------------------- Land held for sale $ - $375,000 - ------------------------------------------------- Condominium held for sale - 172,575 - ------------------------------------------------- Employee advance - 6,000 - ------------------------------------------------- Prepaid expenses - 42,602 - ------------------------------------------------- Miscellaneous receivables 43,643 57,780 ------ ------ - ------------------------------------------------- $43,643 $653,957 ======= ======== - ------------------------------------------------- ------------------------------ ---------------------------
E. CREDIT BALANCES DUE CLIENTS At December 31, 1999 and 1998, credit balances of factoring clients consisted of: (i) a holdback reserve of zero ($0) and $3,139,873, respectively, which is payable to clients upon the collection of receivables, (ii) a factors reserve of zero ($0) and $7,250 in 1999 and 1998 (which represents amounts due to factoring clients subject to contractual limitation) and (iii) cash collateral of zero ($0) and $1,412,447, respectively.
F. NOTES PAYABLE AND CONVERTIBLE SUBORDINATED NOTES Notes payable consist of: December 31, - -------------------------------------------------------------------- ----------------- -------------------- 1999 1998 - -------------------------------------------------------------------- ----------------- -------------------- Notes payable; due on demand; interest payable at1/4% over prime; unsecured $ - $ 14,717 - -------------------------------------------------------------------- Revolving line of credit; due immediately, interest at prime plus 4.75% and .5%,in 1999 and 1998, respectively 566,279 15,000,000 - -------------------------------------------------------------------- Note payable, due March 31, 2000, interest at 10%, unsecured 799,772 - - -------------------------------------------------------------------- - -------------------------------------------------------------------- Total notes payable $1,366,051 $15,014,717 ========== =========== - -------------------------------------------------------------------- - -------------------------------------------------------------------- Convertible Subordinated Notes; due September 30, 2000; interest payable at 1.25% over prime; unsecured $357,000 $361,000 - -------------------------------------------------------------------- - -------------------------------------------------------------------- Convertible Subordinated Notes; due September 30, 2003; interest payable at 10% fixed; unsecured 4,597,000 4,597,000 --------- --------- - -------------------------------------------------------------------- Total convertible subordinated notes $4,954,000 $4,958,000 ========== ==========
39 At December 31, 1999 and 1998, the prime rate was 8.50% and 7.75%, respectively. Aggregate annual principal payments on notes payable for the five years subsequent to December 31, 1999, are as follows:
- -------------------------------------------------------------------- -------------------------------------- Years Ending December 31, Amount - -------------------------------------------------------------------- -------------------------------------- - -------------------------------------------------------------------- 2000 $ 1,723,051 - -------------------------------------------------------------------- 2001 - - -------------------------------------------------------------------- 2002 - - -------------------------------------------------------------------- 2003 4,597,000 - -------------------------------------------------------------------- 2004 - - - -------------------------------------------------------------------- Total $6,320,051 ========== - -------------------------------------------------------------------- --------------------------------------
As of December 31, 1998, the Company had $1,217,407 available under a $25,000,000 million secured revolving line of credit from a group of banks. The revolving line of credit contained various sub facilities that limited its use. The entire facility could be used for borrowing to finance the purchase of invoices or advances secured by accounts receivable. However, the Company could (i) borrow only $5,000,000 collateralized by advances secured by machinery and equipment, (ii) borrow only $2,500,000 collateralized by advances secured by inventory, and (iii) issue only up to $5,000,000 of Letters of Credit. Borrowings under the credit facility bore interest at a spread over the bank's base rate or a spread over LIBOR, at the Company's election. The Company was subject to covenants that are typical in revolving credit facilities of this type. At December 31, 1998, the Company was in default of the covenants, which related to interest coverage and the maximum amount of funds which may be advanced to any one client. Waivers of the defaults were received from the members of the bank group. As of December 31, 1999, the Company was operating under a forbearance agreement negotiated with its bank lenders. As of December 24, 1999, the forbearance agreement expired. The line of credit availability at December 31, 1999 was zero. The interest rate on the line of credit was equal to the agent lender's base rate plus 4.75%. The loan was repaid in full in January 2000. The Company may seek replacement financing. To augment its working capital during the forebearance period the Company obtained a $1,000,000 working capital loan from Value Partners. 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 December 31, 1999, the Company owed $799,772 on the working capital loan. As of December 31, 1997, the Company had convertible subordinated notes (collectively the "Old Notes") outstanding with an aggregate principal of $4,974,000. The Old Notes were issued in exchange for 785,475 shares of the Company's common stock (currently held by the Company as treasury stock). The Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate plus 1.25% per annum, (iii) are convertible into common stock of the Company at $7.50 per share, and (iv) are subordinated in right of payment to the Company's secured revolving credit facility. 40 The Old Notes had a provision that upon the occurrence of certain "fundamental changes", the holders had the right to have these notes redeemed at par. The election of the new Board of Directors at the May 1998 shareholder meeting was deemed to have constituted a fundamental change under that provision. The Company: - - Advised all noteholders of their right to redeem the notes at par. - - Issued new convertible subordinated notes to Value Partners to provide the Company with a funding source to repurchase all notes tendered under the fundamental change provision. - - Repurchased the tendered notes. - - Offered all remaining noteholders, that were accredited investors, the opportunity to exchange their Old Notes for newly issued convertible subordinated notes. The old noteholders tendered $2,896,000 of Old Notes for repurchase at par. Additionally, Old Notes with a par of $1,701,000 were exchanged for the new issue of convertible subordinated notes. During 1998, convertible subordinated notes were issued (collectively the "New Notes") that (i) have a maturity of September 30, 2003, (ii) bear interest at a fixed rate of 10% per annum, (iii) are not redeemable at the option of the Company, (iv) are convertible into the Company's common stock at $6.50 per share and (v) are subordinated in the right of payment to the Company's secured revolving credit facility. The New Notes have financial covenants that are similar to, but less restrictive than, the covenants in the Company's revolving line of credit. At December 31, 1999, the Company was in default of several of the covenants of the New Notes. The Company is negotiating with the debt holders to resolve these defaults. There can be no assurance that an agreement will be reached. As of December 31, 1999 and 1998, the Company had convertible subordinated notes (Old and New Notes) outstanding of $4,954,000 and $4,958,000, respectively. G. STOCK OPTION AND BENEFIT PLAN Stock Option Plans In October 1995, FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. This Statement gives the Company the option of either: 1)continuing to account for stock options and other forms of stock compensation paid to employees under the current accounting rules (APB No. 25, Accounting for Stock Issued to Employees) while providing the disclosures required under SFAS No. 123, or 2) adopting SFAS No. 123. The Company continues to account for stock options under APB No. 25 and provides the additional disclosures as required by SFAS No. 123. 41 Qualified Plan The Company has reserved 275,000 shares of common stock for issuance under its qualified stock option plan, which expires February 7, 2000. Options to purchase common stock are granted at a price equal to the fair market value of the stock at the date of grant or 110% of fair market value of the stock at the date of grant for stockholders owning 10% or more of the combined voting stock of the Company. The following table summarizes qualified stock option transactions for the years ended December 31, 1999 and 1998.
- -------------------------------------------------- ------------------- -------------------------------------- Number of Options Option Price Per Share - -------------------------------------------------- ------------------- -------------------------------------- Outstanding, January 1, 1998 148,800 $5.37 to $7.75 - -------------------------------------------------- Granted 30,200 $5.00 to $7.75 - -------------------------------------------------- Exercised (3,500) $5.62 to $6.50 - -------------------------------------------------- Forfeited or expired (57,900) $5.62 to $14.00 -------- - -------------------------------------------------- - -------------------------------------------------- Outstanding, December 31, 1998 117,600 $5.00 to $7.75 - -------------------------------------------------- Granted 95,000 $4.00 to $6.54 - -------------------------------------------------- Exercised - - - -------------------------------------------------- Forfeited or expired (112,000) $4.00 to $7.75 --------- - -------------------------------------------------- - -------------------------------------------------- Outstanding, December 31, 1999 100,600 $4.00 to $6.50 ======= - -------------------------------------------------- Exercisable, December 31, 1999 90,501 ======
Non-Qualified Plan The Company has reserved 150,000 shares of common stock for issuance under its non-qualified stock option plan, which expires February 7, 2000. 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 and 110% of fair value at the time of grant. The following table summarizes non-qualified stock option transactions from 1998 through 1999:
- -------------------------------------------------- ------------------- -------------------------------------- Number of Options Option Price Per Share - -------------------------------------------------- ------------------- -------------------------------------- Outstanding, January 1, 1998 69,000 $7.00 to $14.00 - -------------------------------------------------- Granted 35,000 $7.00 - -------------------------------------------------- Forfeited or expired (2,000) $14.00 ------- - -------------------------------------------------- - -------------------------------------------------- Outstanding, December 31, 1998 102,000 $7.00 - -------------------------------------------------- Granted 30,000 $7.00 - -------------------------------------------------- Forfeited or expired (67,000) $7.00 -------- - -------------------------------------------------- - -------------------------------------------------- Outstanding, December 31, 1999 65,000 $7.00 ====== - -------------------------------------------------- Exercisable, December 31, 1999 65,000 $7.00 ======
42 Qualified and Non-Qualified Plans The table below summarized the option activity for both plans for the years ended December 31:
- ------------------------------------------------------------- -------------------- ----------------- 1999 1998 - ------------------------------------------------------------- -------------------- ----------------- - ------------------------------------------------------------- Outstanding at January 1 219,600 217,800 - ------------------------------------------------------------- Granted 125,000 65,200 - ------------------------------------------------------------- Exercised - (3,500) - ------------------------------------------------------------- Forfeited or expired (179,000) (59,900) --------- -------- - ------------------------------------------------------------- Outstanding at December 31 165,600 219,600 ======= ======= - ------------------------------------------------------------- Exercisable at December 31 155,501 151,201 ======= =======
The weighted average fair value at date of grant for options granted during 1999 and 1998 was $1.85 and $0.98, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with an expected option life of 1.5-3.0 years and 2.5 years in 1999 and 1998, respectively, and the following weighted average assumptions, respectively, for 1999 and 1998: dividend yield - none either year; interest rate - 6.29% and 6.86%; volatility 65.00% and 38.00% for the respective year. Weighted average option exercise price information (both plans) for years ended December 31:
- ------------------------------------------------------------ -------------------- ----------------- 1999 1998 - ------------------------------------------------------------ -------------------- ----------------- Per Share Outstanding at January 1 $6.37 $6.24 - ------------------------------------------------------------ Granted 5.76 5.01 - ------------------------------------------------------------ Exercised - 6.25 - ------------------------------------------------------------ Forfeited or Expired 6.26 5.76 - ---- ---- - ------------------------------------------------------------ - ------------------------------------------------------------ Outstanding at December 31 $5.84 $6.37 ===== ===== - ------------------------------------------------------------ - ------------------------------------------------------------ Exercisable at December 31 $5.94 $6.49 ===== =====
The Company's net loss would have increased by $166,614 or $0.07 per share basic and dilutive for 1999, in stock-based compensation cost for the Company's qualified and non-qualified stock option plans if the plan had been determined based on the fair value at the grant dates for awards under the plans. The Company's net loss would have been increased by $88,335 or $0.04 per share basic and dilutive for 1998. Retirement Plan Effective January 1, 1990, the Company adopted the Allstate Financial Corporation 401(k) Retirement Plan (the "Plan") for the benefit of the Company's employees. The Plan provides for the deferral of up to 15% of a participating employee's salary, subject to certain limitations, and a discretionary contribution by the Company. The Company's contribution is allocated to 43 participating employees based on relative compensation. The Company's contribution for the years ended December 31, 1999 and 1998 was zero ($0) and $46,701, respectively. During 1999, the plan was terminated and all monies were distributed. Effective April 1, 1999, the Company became a participant in a nationally managed 401(k) plan (1999 plan) for the benefit of the Company's employees. The 1999 plan provides for the deferral of up to 17% of a participant's salary, subject to certain annual limitations, and a matching contribution of up to 3% by the Company. The Company's contribution for the year ended December 31, 1999 was $18,233. H. INCOME TAXES Income tax expense (benefit) consists of:
Years Ended December 31, ----------------------------------------------------- ------------------------- -------------------- 1999 1998 ----------------------------------------------------- ------------------------- -------------------- Federal: ----------------------------------------------------- Current $ 32,466 $ 45,187 ----------------------------------------------------- Deferred 3,683,680 (3,366,887) --------- ----------- ----------------------------------------------------- 3,716,146 (3,321,700) --------- ----------- ----------------------------------------------------- ----------------------------------------------------- State: ----------------------------------------------------- Current 9,500 - ----------------------------------------------------- Deferred 277,266 (234,700) ------- --------- ----------------------------------------------------- 286,766 (234,700) ------- --------- ----------------------------------------------------- ----------------------------------------------------- Total income tax expense (benefit) $4,002,912 $(3,556,400) ========== ============ ----------------------------------------------------- ----------------------------------------------------- Tax (benefit) expense at statutory rate $(4,504,040) $(3,268,050) ----------------------------------------------------- Change in (benefit) expense resulting from: State income taxes, net of Federal income tax effect (428,023) (154,903) ----------------------------------------------------- Valuation Allowance 9,232,642 ----------------------------------------------------- Other (297,667) (133,447) --------- --------- ----------------------------------------------------- $4,002,912 $(3,556,400) ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- Effective tax rate 37.0% 37.0% ===== =====
[THIS SECTION INTENTIONALLY LEFT BLANK] 44
The deferred tax asset consists of: December 31, --------------------------------------------------------- --------------------- ---------------- 1999 1998 ------------------------------------------------ ------------------ ---------------- Deferred tax asset: --------------------------------------------------------- Operating Loss Carryforwards 7,506,082 2,750,273 --------------------------------------------------------- Allowance for credit losses $1,726,560 $1,124,030 --------------------------------------------------------- Fixed assets 86,644 ------------- ------ --------------------------------------------------------- 9,232,642 3,960,946 --------------------------------------------------------- Valuation allowance (9,232,642) - --------------------------------------------------------- - $ - $3,960,946 ======= ========== --------------------------------------------------------- Total
The Company has reduced all deferred tax assets to zero by utilizing a valuation allowance because the deferred tax assets more than likely will not be realized. The Company's net operating loss ("NOL") at December 31, 1999, amounted to $18,765,205. The Company's use of the NOL's prior to the expirations of their carry-forward periods may be limited by the provisions of Section 382 of the Internal Revenue Code of 1986 ("the Code"), if it is determined that it has undergone a change of ownership, as defined by the section. The carry-forward period associated with the NOL expires according to the following schedule: ------------------------------ --------------------------------- Year of expiration Amount ------------------------------ --------------------------------- ------------------------------ --------------------------------- 2018 $6,875,682 2019 11,889,523 - ---------- Total $18,765,205 =========== ------------------------------ --------------------------------- I. RELATED-PARTY TRANSACTIONS In 1998 the "Allstate Financial Corporation Independent Shareholders/Directors Committee" (the "Committee"), which was composed of Value Partners, Ltd., a major shareholder; David W. Campbell, William H. Savage, Edward A. McNally, and Lindsay B. Trittipoe, independent directors of the Company; and C. Scott Bartlett, a former director of the Company, proposed the election of a slate of directors in opposition to the nominees proposed by the Company's management. In their proxy filing, the Committee advised shareholders that, if successful in the election, they would seek reimbursement for their expenses from the Company. The Company paid directly or reimbursed Value Partners, Ltd. for expenses incurred by the Committee in the amount of $397,318 in 1998. This reimbursement was recorded in the consolidated statement of operations as a general and administrative expense. Value Partners, Ltd., was paid approximately $314,000 and $207,000 in 1999 and 1998, respectively, ininterest on convertible subordinated notes.Value Partners, Ltd. held convertible subordinated notes of $4,197,000 at December 31, 1999 and 45 1998. In addition, the Company owes Value Partners, Ltd., interest of $104,000 that was due December 31, 1999. As stated in Note F, the Company is working with the holders of the New Notes to resolve this default situation. There can be no assurance that an agreement will be reached. In September 1999, Value Partners, Ltd. made a $1 million loan to the Company. The note bears interest at 10%, payable quarterly, and is due in full on March 31, 2000. Also, the Company is required to made principal payments on this debt as certain assets are received in cash. Value Partners, Ltd. received $12,161 in intereston this loan during 1999. As of December 31, 1999 the loan balance was $799,772. J. FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT CONCENTRATIONS The Company is a party to financial obligations with off-balance sheet risk in the normal course of business to meet the financing needs of its clients. These financial obligations include conditional commitments to purchase receivables, obligations under guaranties issued by the Company and reimbursement obligations under letters of credit issued for the Company's account. These obligations involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheet. The Company's maximum exposure to credit loss under financial obligations with off-balance sheet risk is represented by the contractual or notional amount of these obligations. The Company uses the same credit policies in making conditional commitments and incurring contingent obligations as it does for on-balance sheet obligations. These commitments have fixed expiration dates or other termination clauses and usually require payment of a fee by the client. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company receives collateral to secure letters of credit and guarantees. The Company no longer engages in this line of business. Financial obligations whose contract or notional amounts represent credit risk are as follows: December 31, 1999 1998 --------------------- --------------------- ------------------------ Conditional Commitments to purchase Receivables $ - $47,810,000 ======= =========== For the year ended December 31, 1999, three clients accounted for 25.8% of the Company's total earned discounts and interest. Two of these clients were written-off during 1999 and the third client paid off all outstanding balances prior to the end of 1999. At December 31, 1999, two clients accounted for 51.53% of the Company's total receivables. One of these clients is classified as non-performing and the Company has allocated specific reserves for this client. 46 For the year ended December 31, 1998, three clients accounted for 46.4% of the Company's total earned discounts and interest. At December 31, 1998, three clients accounted for 48.7% of the Company's total receivables. Although the Company monitors account debtor concentration and regularly evaluates the credit worthiness of account debtors, there can be no assurances that account debtor concentration could not have a material adverse effect on the Company. K. NET INCOME PER SHARE In March 1997, FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128 supersedes APB No. 15 to conform earnings per share to international standards as well as to simplify the complexity of the computation under APB No. 15. SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. For the years ending December 31, 1999 and 1998, there is no difference between the basic and diluted earnings per share. The following table details the calculation of the basic and diluted earnings per share.
- -------------------------------------------- -------------------- ----------------------- ------------------ Income (Loss) Shares (Denominator) Per-Share ------------- (Numerator) Amount - -------------------------------------------- -------------------- ----------------------- ------------------ Year Ended December 31, 1998 - -------------------------------------------- Basic EPS Net (loss) $(6,055,513) 2,322,222 $(2.61) - -------------------------------------------- Effect of dilutive securities Stock options - - - - -------------------------------------------- Diluted EPS Net (loss) plus assumed Conversions $(6,055,513) 2,322,222 $(2.61) ============= ========= ======= - -------------------------------------------- Year Ended December 31, 1999 - -------------------------------------------- Basic EPS Net (loss) $(17,251,090) 2,324,616 $(7.42) - -------------------------------------------- Effect of dilutive securities Stock options - - - -------------------------------------------- Diluted EPS Net (loss) plus assumed Conversions $(17,251,090) 2,324,616 $(7.42) ============= ========= =======
47 During 1999 and 1998, respectively, there were various options to purchase 165,600 and 103,700 shares of common stock which were not included in the computation of the diluted EPS because the options' exercise price was greater than the average market price of the common shares. The Company incurred net losses for the years ended December 31, 1999 and 1998. Since the inclusion of stock options in the computation of diluted EPS would have had an antidilutive effect, the common shares associated with the options were excluded from the computation. The convertible subordinated notes, which convert into the Company's common stock at $6.50 and $7.50 per share, were also excluded from the computation of the diluted EPS because the conversion price was greater than the market price at any given point during which they were outstanding for the two years ended December 31, 1999. L. COMMITMENTS AND CONTINGENCIES The Company leases office space under operating leases with Consumer Price Index escalations and rental escalations based on increases in base operating expenses as defined in the agreements. The Company's headquarters lease was renegotiated during 1995 and extended for six years to December 1, 2001 at a reduced rental. The Company also pays rent for storage space and office equipment. The Company is currently negotiating with the landlord to reduce or eliminate the space the Company is occupying. There can be no assurance that the situation will be resolved. Future minimum rental payments are as follows: ----------------------------------------- ------------------------ Years Ending December 31, Amount ----------------------------------------- ------------------------ 2000 $215,000 ----------------------------------------- 2001 189,000 ----------------------------------------- 2002 - ----------------------------------------- 2003 - ----------------------------------------- 2004 - ---------- total $404,000 ======== ----------------------------------------- ------------------------ Rental expense for the years ended December 31, 1999 and 1998 was $184,768 and $330,226, respectively. 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 recoveragainst AG. An answer and counterclaim was filed against the Company. The counterclaim asserted claims for usury, diversion of proceeds of public improvement contracts, and overpayments to the Company by AG in excess of $2,000,000 (hereinafter the "Counterclaims").No specific damage claims amount was set forth in the Counterclaims. 48 No action was ever taken by the trustee in the AG bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the trustee for the AG bankruptcy estate filed a motion to abandon these claims against the Company. On October 7, 1997, New York Surety Company (hereinafter referred to as the "Surety"), which provided the payment and performance bond to AG in connection with the construction jobs performed for the City of New York, filed pleadings objecting to the abandonment of such claims against the Company, asserting that it was subrogated to AG's claims. The proposed complaint adopts the Counterclaims and seeks an accounting. The Surety asserts damages of approximately $4,000,000. On April 9, 1998, the bankruptcy court remanded the matter to state court. On June 24, 1998, the Surety was formally declared insolvent by the Superintendent of Insurance of the State of New York (hereinafter referred to as the "Superintendent") and as such the Superintendent was judicially appointed as rehabilitator of the Surety to conduct its business. At this time, it is uncertain whether the Superintendent will continue to pursue the litigation against the Company. The Company believes it has meritorious defenses to the Counterclaims and intends to vigorously defend all claims. However, the litigation is in the preliminary stage and the probability of a favorable or unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these other proceedings will have a material adverse effect on the Company. M. UNCERTAINTIES The Company has incurred net losses of $17 million and $6 million in the years ending December 31, 1999 and 1998, respectively. During the last four years, the Company has incurred severe loan losses that caused the Company's bank lenders to restrict the line of credit and request repayment. The Company was forced to sell assets to comply with the lenders' request. The need to use the proceeds of sales to repay the bank lenders made it impractical for the Company to solicit and make loans to new clients. The Company is also in default on its New Notes, and has outstanding litigation (see Note L) which presents additional contingent liabilities. In response to this situation, the Company has taken several steps in an effort to return the Company to profitability. The Company has consummated the sale of the factoring portfolio and certain ABL loans, reduced staffing and other expenses, repaid the bank lenders, and moved to smaller office space. The Company is also developing a strategic turnaround plan (the "Plan") that contemplates, among other things, a recapitalization of the Company in the form 49 of the exchange of the New Notes for common stock. The board of directors has appointed a committee of outside directors to negotiate with the holders of the New Notes over the terms of the exchange. Other major elements of the Plan include: o A limitation on transfers of common stock by existing or potential holders of over 4.9% of outstanding shares, thereby helping to preserve the NOL's for future use. o An increase in the number of authorized shares to facilitate the conversion and enable the Company to consider possible acquisitions of, or business combinations with, firms in financial services involving the issuance of new shares. o The possible re-incorporation of the Company under Delaware law to take advantage of provisions favorable to the Plan. The Company has held preliminary discussions with Value Partners, Ltd., a large shareholder of the Company and the holder of a majority of the New Notes, with respect to the Plan.Value Partners is supportive of the of the major elements of the Plan and has encouraged the company to finalize the details and present the Plan for approval by the Board and recommendation to the shareholders the annual meeting. The actual exchange rate at which the New Notes will be converted into common stock will be negotiated by the committee of the board of directors. In addition, the final terms of the Plan will depend in part upon an analysis of the effects of Section 382 of the Code and the preservation of the Company's NOL carry-forwards. See Note H - Income Taxes. Certain elements of the plan will require shareholder approval and will be presented to the shareholders for a vote at the Company's annual meeting. The board of directors has postponed the date of the annual meeting in order to allow sufficient time for the Plan to be finalized. The Company believes that when the Plan is approved by the shareholders and implemented, the Company will be positioned for future growth. The Company believes the conversion of the New Notes to equity will reduce the Company's interest costs and position it to more effectively obtain new senior funding to expand its loan portfolio. The satisfactory completion of the Plan is essential, as the Company has insufficient cash flow to service the interest payments on the New Notes. However, there can be no assurance that the Plan will be approved by the shareholders, that the final terms of the conversion can be agreed upon, that the Company will be successful in redeploying the amounts it currently has invested in nonperforming assets into new ABL relationships, or that new financing will be obtained. If the plan can be accomplished, management believes that the Company will continue as a going concern. 50
SCHEDULE IV INDEBTEDNESS TO RELATED PARTIES - ------------------------------------------- ------------------- ------------------ --------------- ------------------- Balance at Balance at Beginning of Amounts End of Name of Creditor Period Additions Paid Period - ------------------------------------------- ------------------- ------------------ --------------- ------------------- Year Ended December 31, 1999: - ------------------------------------------- - ------------------------------------------- All directors and officers as a - ------------------------------------------- Group $ 102,000 $ - $ - $ 102,000 - ------------------------------------------- Value Partners, Ltd. 4,197,000 1,000,000 200,228 4,996,772 - --------- --------- ------- --------- - ------------------------------------------- $4,299,000 $1,000,000 $200,228 $5,098,772 ========== ========== ======== ========== - ------------------------------------------- - ------------------------------------------- Year Ended December 31, 1998: - ------------------------------------------- - ------------------------------------------- All directors and officers as a - ------------------------------------------- Group $ - $ 102,000 $ - $ 102,000 - ------------------------------------------- Various other related parties 156,216 157,098 -- 882 - ------------------------------------------- Value Partners, Ltd. 1,301,000 2,896,000 -- 4,197,000 --------- --------- ------ --------- - ------------------------------------------- $1,457,216 $2,998,882 $157,098 $4,299,000 ========== ========== ======== ==========
[THIS SECTION INTENTIONALLY LEFT BLANK] 51 SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLSTATE FINANCIAL CORPORATION By: _______/s/_______ Charles G. Johnson President and CEO In accordance with the Securities Exchange Act of 1934, the following persons on behalf of the registrant and in the capacities and on the dates indicated have signed this report below. ________/s/_________Charles G. Johnson Date April 28, 2000 President, Chief Executive Officer, Director _______/s/_________C. Fred Jackson Date April 28, 2000 Secretary/Treasurer, Chief Financial Officer _______/s/_________David W. Campbell Date April 28, 2000 Chairman, Director ________/s/________ William H. Savage Date April 28, 2000 Director _______/s/_________Edward A. McNally Date April 28, 2000 Director ________/s/_________Lindsay B. Trittipoe Date April 28, 2000 Director ________/s/_________C. Scott Bartlett Date April 28, 2000 Director ________/s/_________Steven Lefkowitz Date April 28, 2000 Director -----END PRIVACY-ENHANCED MESSAGE-----