-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, dROjLlGUbwcEdLbw9o+9lrpVi3N/JV/x8hyWoyg08XT3wXihpEIGxr1iEdNil+RJ tJ0Ze1DLA1k0cG7ngxxDpw== 0000852220-95-000002.txt : 19950814 0000852220-95-000002.hdr.sgml : 19950814 ACCESSION NUMBER: 0000852220-95-000002 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950811 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLSTATE FINANCIAL CORP /VA/ CENTRAL INDEX KEY: 0000852220 STANDARD INDUSTRIAL CLASSIFICATION: SHORT-TERM BUSINESS CREDIT INSTITUTIONS [6153] IRS NUMBER: 541208450 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-17832 FILM NUMBER: 95560964 BUSINESS ADDRESS: STREET 1: 2700 S QUINCY ST STE 540 CITY: ARLINGTON STATE: VA ZIP: 22206 BUSINESS PHONE: 7039312274 MAIL ADDRESS: STREET 1: 2700 S QUINCY STREET STREET 2: STE 540 CITY: ARLINGTON STATE: VA ZIP: 22206 10QSB 1 2ND QTR 1995 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1995 COMMISSION FILE NUMBER 0-17832 Allstate Financial Corporation (exact name of registrant as specified in its charter) Virginia 54-1208450 (State of Incorporation) (I.R.S. Employer Identification Number) 2700 South Quincy Street, Suite 540, Arlington, VA 22206 (address of principal executive offices) (zip code) Registrant's Telephone Number, Including Area Code: (703) 931-2274 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 and 15 of the Securities and Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] 3,102,328 Common Shares were outstanding as of June 30, 1995. ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Part I. Financial Information Page Number Item 1 - Financial Statements Consolidated Balance Sheets at June 30, 1995 (Unaudited) and December 31, 1994 1-2 Consolidated Statements of Income - Three and Six Months Ended June 30, 1995 and 1994 (Unaudited) 3 Consolidated Statements of Shareholders' Equity Three Months Ended June 30, 1995 (Unaudited) and Year Ended December 31, 1994 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 1995 and 1994 (Unaudited) 5-6 Notes to Consolidated Financial Statements 7 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Conditions 8-15 Part II. Item 1 -Legal Proceedings 16-17 Item 4 -Submission of Matters To a Vote of Security Holders 17 Item 5 -Other Information 17 Item 6 -Exhibits and Reports on Form 8-K 17 Signatures 18 PART I - FINANCIAL INFORMATION 1
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, 1995 1994 ---------- ------------ (Unaudited) ASSETS CURRENT ASSETS: Cash $ 1,209,183 $ 1,763,930 Receivables: Finance, net 22,571,917 27,502,806 Purchased life insurance contracts 4,603,373 4,533,952 Other 3,143,701 3,388,638 Prepaid expenses 265,750 198,091 Prepaid income taxes 650,381 628,123 Deferred income taxes 909,000 909,000 ----------- ----------- TOTAL CURRENT ASSETS 33,353,305 38,924,540 PROPERTY AND EQUIPMENT, Net 548,159 479,034 OTHER ASSETS 2,381,053 2,447,083 ----------- ----------- $36,282,517 $41,850,657 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 322,791 $ 303,838 Settlement Payable 1,400,000 - Notes payable 4,239,915 11,591,718 Note payable-related party 103,000 103,000 Credit balances of factoring clients 1,408,187 1,665,038 ----------- ----------- TOTAL CURRENT LIABILITIES 7,473,893 13,663,594 NONCURRENT PORTION OF NOTES PAYABLE: Related parties 58,788 58,788 Other 7,110 7,110 ----------- ----------- TOTAL LIABILITIES 7,539,791 13,729,492 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, authorized 2,000,000 shares with no par value; no shares issued or outstanding - - Common stock, authorized 10,000,000 shares with no par value; issued and outstanding 3,102,328 shares at June 30, 1995 and December 31, 1994 40,000 40,000 Additional paid-in-capital 18,852,312 18,852,312 Retained Earnings 9,850,414 9,228,853 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 28,742,726 28,121,165 ----------- ----------- $36,282,517 $41,850,657 =========== =========== See Notes to Consolidated Financial Statements
2
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- 1995 1994 1995 1994 ----------- ---------- ---------- ---------- Income: Earned discounts $2,420,653 $2,278,236 $5,298,299 $4,250,358 Fees and other income 649,726 409,675 1,056,151 733,758 ---------- ---------- ---------- ---------- 3,070,379 2,687,911 6,354,450 4,984,116 Expenses: Compensation and fringe benefits 753,069 713,986 1,560,549 1,392,115 General and administrative expenses 730,759 586,381 1,338,997 1,067,650 Interest Expense 166,020 91,360 424,526 164,992 Provision for Credit Losses 610,500 508,771 1,911,600 872,126 Commission 72,846 23,585 134,717 48,826 ---------- ---------- ---------- ---------- Total Expenses 2,333,194 1,924,083 5,370,389 3,545,709 ---------- ---------- ---------- ---------- Income Before Income Taxes 737,185 763,828 984,061 1,438,407 Income Taxes 271,500 280,000 362,500 530,000 ---------- ---------- ---------- ---------- Net Income $ 465,685 $ 483,828 $ 621,561 $ 908,407 ========== ========== ========== ========== Net Income Per Share $ .15 $ .16 $ .20 $ .29 ========== ========== ========== ========== Number of Shares Outstanding 3,102,328 3,102,328 3,102,328 3,102,328 ========== ========= ========= ========== See Notes to Consolidated Financial Statements
3
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1994 AND SIX MONTHS ENDED JUNE 30, 1995 (Unaudited) Common Paid in Retained Stock Capital Earnings ------- ----------- ---------- BALANCE - January 1, 1994 $40,000 $18,852,312 $9,081,313 Net Income - - 147,540 ------- ----------- ---------- BALANCE - December 31, 1994 40,000 18,852,312 9,228,853 Net Income - - 621,561 ------- ----------- ---------- BALANCE - June 30, 1995 $40,000 $18,852,312 $9,850,414 ======= =========== ========== See Notes to Consolidated Financial Statements
4
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, ------------------------------ 1995 1994 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 621,561 $ 908,407 Adjustments to reconcile net income to cash provided by operating activities: Depreciation - net 69,114 73,296 Provision for credit losses 1,911,600 872,126 Changes in operating assets and liabilities: Decrease in other receivables 244,937 7,658 (Increase) in prepaid expenses (67,659) (106,683) (Increase)/Decrease in other assets 66,030 (162,775) Increase/(Decrease) in accounts payable and accrued expenses 18,953 (24,588) Increase in Settlement payable 1,400,000 - (Increase)/Decrease in prepaid income taxes (22,258) 252,569 ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 4,242,278 1,820,010 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of finance receivables, including repurchases and life insurance contracts (81,075,404) (80,707,206) Collections of finance receivables, including repurchases and life insurance contracts 84,025,272 74,680,042 Increase/(Decrease) in credit balances of factoring clients (256,851) 558,810 Purchase of property and equipment (138,239) (142,558) ------------ ------------ NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 2,554,778 (5,610,912) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and borrowings 30,265,380 28,548,249 Principal payments on line of credit and borrowings (37,617,183) (26,673,145) ------------ ------------ NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES (7,351,803) 1,875,104 (DECREASE) IN CASH (554,747) (1,915,798) CASH, Beginning of period 1,763,930 2,785,219 ------------ ------------ CASH, End of period $ 1,209,183 $ 869,421 ============ ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 424,526 $ 156,385 ============ ============ Taxes paid $ - $ 277,431 ============ ============ See Notes to Consolidated Financial Statements
5 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General. The consolidated financial statements of Allstate Financial Corporation (the "Company") included herein are unaudited for all periods ended June 30, 1995 and 1994; however, they reflect all adjustments which, in the opinion of management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Allstate Financial Corporation believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the six months ended June 30, 1995 are not necessarily indicative of the results of operations to be expected for the remainder of the year. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Allstate Financial Corporation's Annual Report for the year ended December 31, 1994. 2. Net income per share. Net income per share of common stock has been computed by dividing net income by the weighted average number of common shares outstanding during the periods presented. At December 31, 1994 there were 94,437 stock options outstanding, at exercise prices ranging from $5.75 to $14.00 per share. During the year ended December 31, 1994, 1,134 options and 3,000 warrants were forfeited. There were no warrants or options exercised for the six months ended June 30, 1995. 3. Line of credit. As of June 30, 1995 the Company had approximately $22.2 million available under a $25.0 million secured revolving line of credit. Borrowings under the credit facility bear interest at the bank's base rate plus .75%. The current maturity date of this credit facility is May 13, 1997. The Company is subject to covenants which are typical in revolving credit facilities of this type. As of June 30, 1995 Lifetime Options, Inc., a Viatical Settlement Company, a wholly owned subsidiary of the Company, had approximately $600 thousand available under a $2.0 million line of credit and an additional $1.5 million available under a $4.0 million availability from the Company. Lifetime Options' revolving line of credit: (i) is payable on demand and, if no demand is made, on December 31, 1995; (ii) bears interest at the prime rate of interest plus 1%; and (iii) is collateralized by specific purchased life insurance contracts. 4. Settlement Payable. In April 1995 the Company reached a tentative settlement with the Trustee in the bankruptcy of Premium Sales Corporation. The terms of the settlement call for the Company to pay $1.4 million in cash. On July 21, 1995, the Company placed the full amount of the settlement in escrow in accordance with the terms of the settlement. The settlement is intended to be a full release of any and all claims between the Company and the Trustee and remains subject to court approval. 6 Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's principal business is the discounted purchase of accounts receivable, usually on a full recourse, full notification basis. In addition, the Company also makes advances collateralized by inventory, equipment, and real estate (collectively, "Collateralized Advances"). The Company has elected to more aggressively pursue the making of Collateralized Advances, as it perceives the need by its targeted customers for such funding and such funding is not readily available from many of the Company's competitors. As of June 30, 1995, Collateralized Advances constituted approximately 34% of the Company's portfolio of finance receivables. The Company also provides its clients with letters of guaranty, arranges for the issuance of letters of credit for its clients and provides other related financial services. The Company's clients are small- to medium-sized businesses with annual revenues typically ranging between $600 thousand and $50 million. The Company's clients do not typically qualify for traditional bank or asset-based financing because they are either too new, too small, undercapitalized (or over- leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank or traditional, asset-based lender. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. The Company addresses these risks in various ways, including: (i) the Company thoroughly evaluates the collateral to be made available by each client; (ii) the Company collects its clients' accounts receivable directly from its clients' account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) the Company purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) the Company takes, whenever available, blanket liens on all of its clients' assets and, when making Collateralized Advances, the Company employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) the Company requires personal guaranties (either unlimited guaranties or validity guaranties) from its clients' principals; (vi) the Company actively monitors its portfolio of purchased accounts receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral and (vii) the Company maintains loss reserves which management believes are adequate and appropriate for its business. Notwithstanding the foregoing, clients (and account debtors) may fail and the collateral available to the Company (together with personal guaranties) may prove insufficient to enable the Company to recover all amounts due in full. Lifetime Options, a wholly-owned subsidiary of the Company, provides financial assistance to individuals facing life-threatening illness by purchasing their life insurance policies at a discount from face value. The amount of the discount is determined by Lifetime Options based on the size of the policy being purchased, the maximum life expectancy of the insured, the amount of the anticipated premiums payable with respect to the policy being purchased and the anticipated financing cost associated with purchasing and carrying the policy. In general, the purchase price for a policy is between 55% and 85% of the benefits payable under the policy. Because most of the life insurance policies purchased by Lifetime Options are underwritten by highly rated insurance companies (and, in many cases, backed by state guaranty funds), management of Lifetime Options believes that credit risk is not material to its business. 7 Before purchasing each policy, Lifetime Options has each insured's medical records reviewed by at least one (and typically three) independent physician(s) who provide(s) Lifetime Options with an opinion(s) of the insured's life expectancy. To date, the physicians engaged by Lifetime Options have provided life expectancies which, on average, fairly approximate actual lifespans. However, there is no assurance that the physicians engaged by Lifetime Options will in the future be able to perform as they have in the past. If the physicians engaged by Lifetime Options were to systematically underestimate life expectancies or if life extending treatments (or a cure) were found for AIDS (almost all of the life insurance policies purchased by Lifetime Options to date have been purchased from individuals with AIDS), there would be a material adverse effect on the earnings of Lifetime Options. Other than Lifetime Options, none of the Company's subsidiaries is currently engaged in business which could have a material effect on the Company. Competition Continuing competition within the marketplace from banks and asset-based lenders (previously not in competition with the Company) and newly created finance companies have infringed on the Company's potential client base and have negatively affected earned discounts. Additionally, the Company continues to attract larger clients which often increases the amount of time needed to negotiate and fund new business. Also, Collateralized Advances require more in- depth and diverse due diligence which can further delay the funding of new business. Nonetheless, the Company believes that its ability to respond quickly and to provide specialized, flexible financing structures to its clients enables it to compete effectively. In order to remain competitive, however, the Company has, where necessary and appropriate, offered lower rates than it has historically. The Company believes that increased competition will continue for the foreseeable future and will continue to exert downward pressure on pricing, especially in the Company's core factoring business. To counter the downward pressure on pricing, the Company intends to try to diversify its sources of income, primarily by continuing its emphasis on funding relationships which include (in addition to the factoring of accounts receivable) the making of Collateralized Advances. Historically, the Company did not expect to maintain a funding relationship with a client for more than two years; the Company expected that its clients would ultimately qualify for more competitively priced bank or asset based financing. Therefore, the Company's major clients have tended to change significantly over time. Today, however, because the Company is, where necessary and appropriate, offering lower rates and providing Collateralized Advances, it is possible that the duration of the Company's funding relationships with its clients may be extended. Although the Company has historically been successful in replacing major clients, the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. 8 Results of Operations The following table sets forth certain items of income and expense for the periods indicated and the percentage relationship of each item to total income.
For the Three Months Ended June 30, ------------------------------------------- 1995 1994 ------------------- ------------------ (Unaudited) INCOME Earned discounts $2,420,653 78.8% $2,278,236 84.8% Fees and other income 649,728 21.2 409,675 15.2 ---------- ----- ---------- ----- TOTAL INCOME 3,070,381 100.0 2,687,911 100.0 EXPENSE Compensation and fringe benefits 753,069 24.5 713,986 26.6 General and administrative expense 730,759 23.8 586,381 21.8 Interest expense 166,020 5.4 91,360 3.4 Provision for credit losses 610,500 19.9 508,771 18.9 Commissions 72,846 2.4 23,585 .9 ---------- ----- ---------- ----- TOTAL EXPENSES 2,333,194 76.0 1,924,083 71.6 ---------- ----- ---------- ----- INCOME BEFORE INCOME TAXES 737,187 24.0 763,878 28.4 INCOME TAXES 271,500 8.8 280,000 10.4 ----------- ----- ----------- ----- NET INCOME $ 465,687 15.1% $ 483,828 18.0% =========== ===== =========== ===== NET INCOME PER SHARE $ .15 $ .16 =========== =========== SHARES OUTSTANDING 3,102,328 3,102,328 =========== ===========
For the Six Months Ended June 30, -------------------------------------------- 1995 1994 ------------------- ------------------- (Unaudited) INCOME Earned discounts $5,298,299 83.4% $4,250,358 85.3% Fees and other income 1,056,151 16.6 733,758 14.7 ---------- ----- ---------- ----- TOTAL INCOME 6,354,450 100.0 4,984,116 100.0 ---------- ----- ---------- ------ EXPENSE Compensation and fringe benefits 1,560,549 24.6 1,392,115 27.9 General and administrative expense 1,338,997 21.1 1,067,650 21.4 Interest expense 424,526 6.7 164,992 3.3 Provision for credit losses 1,911,600 30.0 872,126 17.5 Commissions 134,717 2.1 48,826 1.0 TOTAL EXPENSES 5,370,389 84.5 3,545,709 71.1 ---------- ----- ----------- ----- INCOME BEFORE INCOME TAXES 984,063 15.5 1,438,407 28.9 INCOME TAXES 362,500 5.7 530,000 10.6 ---------- ----- ----------- ----- NET INCOME $ 621,561 9.8% $ 908,407 18.3% ========== ===== =========== ===== NET INCOME PER SHARE $ .20 $ .29 ========== ========== SHARES OUTSTANDING 3,102,328 3,102,328 ========== ==========
9 Total Income. Total income consists of (i) earned discounts and (ii) fees and other income. "Earned discounts" consist primarily of income from the purchase of accounts receivable and life insurance policies and income from Collateralized Advances. "Fees and other income" consist primarily of closing fees, commitment fees, other related financing fees and supplemental discounts paid by clients who do not sell the minimum volume of accounts receivable required by their contracts with the Company. The following table breaks down total income by type of transaction for the periods indicated and the percentage relationship of each type of transaction to total income.
For the Three Months Ended June 30, ---------------------------------------- 1995 1994 --------------- ----------------- (Unaudited) Earned % of Total Earned % of Total Type of Transaction Discounts Income Discounts Income - ---------------------------------- ---------- --------- ---------- ---------- Purchase of Accounts Receivable $1,128,465 36.8 $1,742,338 64.8 Purchase of Life Insurance Policies 283,441 9.2 149,967 5.6 Collateralized Advances 808,281 26.3 226,664 8.4 Other 200,466 6.5 159,267 6.0 ---------- ----- ---------- ----- Total Earned Discount 2,420,653 78.8 2,278,236 84.8 Fees and Other Income 649,726 21.2 409,675 15.2 ---------- ----- ---------- ----- Total Income $3,070,379 100.0 $2,687,911 100.0 ========== ===== ========== =====
For the Six Months Ended June 30, --------------------------------------- 1995 1994 ------------- -------------- (Unaudited) Earned % of Total Earned % of Total Type of Transaction Discounts Income Discounts Income - ---------------------------------- --------- ---------- --------- ---------- Purchase of Accounts Receivable $2,747,871 43.2 $3,247,072 65.1 Purchase of Life Insurance Policies 510,827 8.1 259,093 5.2 Collateralized Advances 1,594,215 25.1 447,365 9.0 Other 445,386 7.0 296,828 6.0 ---------- ----- ---------- ----- Total Earned Discount 5,298,299 83.4 4,250,358 85.3 Fees and Other Income 1,056,151 16.6 733,758 14.7 ---------- ----- ---------- ----- Total Income $6,354,450 100.0 $4,984,116 100.0 ========== ===== ========== =====
10 In the first half of 1995 total income increased 27.5% over the same period in 1994, from $5.0 million to $6.4 million; total income increased 14.2% for the second quarter of 1995 over the same period in 1994, from $2.7 million to $3.1 million. Earned discounts from the purchase of accounts receivable and life insurance policies decreased approximately 7.1% in the first half of 1995 versus the first half of 1994, from approximately $3.5 million to approximately $3.3 million. Earned discounts in the first halves of 1995 and 1994 from the purchase of accounts receivable and life insurance policies constituted approximately 51.3% and 70.3%, respectively, of total income. In the second quarter of 1995, earned discounts from the purchase of accounts receivable and life insurance policies decreased approximately 25.4% versus the comparable period in 1994, from approximately $1.9 million to approximately $1.4 million. Earned discounts in the second quarter of 1995 and 1994 from the purchase of accounts receivable and life insurance policies constituted approximately 46.0% and 70.4%, respectively, of total income. These percentages reflect management's decision to pursue the making of Collateralized Advances, in addition to the Company's core factoring business. Earned discounts from Collateralized Advances increased approximately 256.4% in the first half of 1995 over the comparable period in 1994, from approximately $447 thousand to $1.6 million and increased approximately 256.6% in the second quarter of 1995 over the same quarter in 1994, from approximately $227 thousand to $808 thousand. In the first halves of 1995 and 1994, earned discounts from Collateralized Advances constituted approximately 25.1% and 9.0%, respectively, of total income. In the second quarters of 1995 and 1994, earned discounts from Collateralized Advances constituted 26.3% and 8.4%, respectively, of total income. These changes again reflect management's decision to pursue the making of Collateralized Advances, in addition to the Company's core factoring business. Collateralized Advances currently bear interest at a rate, on average, of approximately 2% per month calculated on the amount of the Collateralized Advance. Earned discounts from Collateralized Advances are required to be paid in cash monthly in arrears. Fees and other income increased approximately 43.9% in the first half of 1995 over the first half of 1994, from approximately $733 thousand to $1.1 million. In the second quarter of 1995, fees and other income increased approximately 58.6% over the second quarter of 1994, from approximately $410 thousand to $650 thousand. The increases for the first half and second quarter of 1995 over the comparable periods in 1994 are largely attributable to growth in closing fees and supplemental discounts. As of June 30, 1995 and 1994, purchased accounts receivable included on the Company's balance sheet were $13.9 million (50.4%) and $28.0 million (80.0%), respectively, of gross finance receivables. As of June 30, 1995 and 1994, Collateralized Advances included on the Company's balance sheet were $9.3 million (33.7%) and $2.2 million (6.2%), respectively, of gross finance receivables. The relative increase from the end of the first half of 1994 to the end of the first half of 1995 in the percentage of gross finance receivables comprised of Collateralized Advance reflects management's decision to pursue the making of Collateralized Advances, in addition to the Company's core factoring business. 11 Compensation and Fringe Benefits. In the first halves of 1995 and 1994, compensation and fringe benefits were $1.6 million (24.6% of total income) and $1.4 million (27.9% of total income), respectively. For the second quarters of 1995 and 1994, compensation and fringe benefits were $753 thousand (24.5% of total income) and $714 thousand (26.6% of total income), respectively. The absolute dollar increase is chiefly the result of an increase in sales personnel. Executive compensation decreased slightly in the first half of 1995 as compared to the same period in 1994, from $495 thousand (9.9% of total income) to $474 thousand (7.5% of total income). Similarly, executive compensation decreased slightly in the second quarter of 1995 as compared to the same period in 1994, from $255 thousand (9.5% of total income) to $237 thousand (7.7% of total income). General and Administrative Expense. General and administrative expense was $1.3 million (21.0% of total income) as compared to $1.1 million (21.4% of total income) for the first halves of 1995 and 1994, respectively. For the second quarters of 1995 and 1994, general and administrative expense was $731 thousand (23.8% of total income) and $586 thousand (21.8% of total income), respectively. The increase for the first halves and second quarters of 1995 was primarily attributable to a rise in professional fees, licenses and taxes and duplicating expense. Professional fees increased to $419 thousand (6.7% of total income) in the first half of 1995 versus $265 thousand (5.3% of total income) in the first half of 1994 and increased to $245 thousand (8.0% of total income) in the second quarter of 1995 versus $130 thousand (4.8% of total income) in the first quarter of 1994. The increase in professional fees was attributable, in part, to on-going litigation and, in part, to the final resolution of legal proceedings instituted in prior years. Increased license and tax expenses were incurred in connection with maintaining certain of the Company's assets acquired in settlement of finance and other receivables. Other charges contributing to the increase in general and administrative expense were insurance, postage, telephone, stockholder related expenses and travel and entertainment which were offset by decreases in loan amortization, office supplies and credit and filing costs. Interest Expense. Interest expense was $425 thousand (6.7% of total income) versus $165 thousand (3.3% of total income) for the first halves of 1995 and 1994, respectively, and $166 thousand (5.4% of total income) versus $168 thousand (6.3% of total income) for the second quarters of 1995 and 1994, respectively. The rise in interest expense is attributable to an increase in the average daily balance outstanding on the Company's revolving lines of credit and the rise in the prime rate of interest from 1994 to 1995. The average daily outstanding balance on the Company's revolving lines of credit was $8.6 million and $3.0 million for the first halves of 1995 and 1994, respectively, and $7.3 million and $3.0 million for the three months ended June 30, 1995 and 1994, respectively. The average interest rate paid on the Company's revolving lines of credit rose to 9.38% during the first half of 1995 as compared to 7.54% during the first half of 1994 and to 9.38% during the second quarter of 1995 as compared to 7.89% during the second quarter of 1994. 12 Provision for Credit Losses. Credit loss experience, the adequacy of underlying collateral, changes in the character and size of the Company's receivables portfolio and management's judgement are factors used in determining the provision for credit losses and the adequacy of the allowance for credit losses. Other factors given consideration in determining the adequacy of the allowance are the level of related credit balances of factoring clients and the current and anticipated impact of economic conditions on the creditworthiness of the Company's clients and account debtors. To mitigate the risk of credit loss, the Company, among other things: (i) thoroughly evaluates the collateral to be made available by each client; (ii) collects its factored accounts receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) takes, whenever available, blanket liens on all of its clients' assets and, when making Collateralized Advances, it employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) requires personal guaranties (either unlimited guaranties or validity guaranties) from its clients' principals, and (vi) actively monitors its portfolio of factored accounts receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral. The provision for credit losses was $1.9 million (30.0% of total income) for the first half of 1995 versus $872 thousand (17.5% of total income) for the first half of 1994 and $611 thousand (19.9% of total income) for the second quarter of 1995 versus $509 thousand (18.9% of total income) for the second quarter of 1994. The increase in the Company's provision for credit losses in the first six months of 1995 as compared to the first six months of 1994 was principally attributable to the settlement reached by the Company early in the second quarter of 1995 with the Trustee in the bankruptcy of Premium Sales Corporation. The settlement remains subject to Bankruptcy Court approval. The allowance for credit losses was 10.5% ($2.9 million) and 7.5% ($2.5 million) of gross finance receivables at June 30, 1995 and December 31, 1994, respectively. The allowance at June 30, 1995 is net of the $1.4 million settlement payable in connection with the Premium Sales Corporation matter. At June 30, 1995 the accrual of earnings was suspended on $3,574,424 of gross finance receivables as compared to $3,608,164 of gross finance receivables at December 31, 1994. Although the Company maintains an allowance for credit losses in an amount deemed by management to be adequate to cover potential losses, no assurance can be given that the allowance will in fact be adequate or that an inadequacy, if any, in the allowance could not have a material adverse effect on the Company's earnings in future periods. In addition, management recognizes that Collateralized Advances may entail greater risk to the Company than the factoring of accounts receivable. Although management believes that the Company has (or third parties acting on behalf of the Company have) the requisite skill to evaluate, monitor and manage such risks, there can be no assurance that the Company will in fact be successful in doing so. 13 Commissions. Commission expense rose to $135 thousand (2.1% of total income) in the first half of 1995 from $49 thousand (1.0% of total income) in the first half of 1994 and to $73 thousand (2.4% of total income) in the second quarter of 1995 from $24 thousand (.9% of total income) in the second quarter of 1994. The increase was the result of a larger portion of gross receivables purchased in 1995 being generated by commissioned brokers and other professionals to whom the Company paid referral fees. Impact of Inflation Management believes that inflation has not had a material effect on the Company's income, expenses or liquidity during the past three years. Changes in interest rate levels do not generally affect the income earned by the Company in the form of discounts charged. Rising interest rates would, however, increase the Company's cost of borrowed money based on its current borrowing arrangements which are prime or base rate adjusted credit facilities. Changes in Financial Condition The Company's total assets decreased 13.3% to $36.3 million at June 30, 1995 from $41.9 million at December 31, 1994. The decrease for the quarter is primarily the result of the decrease in net finance receivables and reduction in notes payable. Liquidity and Capital Resources. The Company's principal funding sources are the collection of purchased receivables, retained cash flow and external borrowings. As of June 30, 1995 the Company had approximately $22.2 million available under a $25.0 million secured revolving line of credit. Borrowings under the credit facility bear interest at the bank's base rate plus 0.75%. The current maturity date of this credit facility is May 13, 1997. The Company is subject to covenants which are typical in revolving credit facilities of this type. As of June 30, 1995 Lifetime Options had approximately $1.1 million available under a $2.0 million line of credit and an additional $1.5 million available under a $4 million availability from the Company. Lifetime Options' revolving line of credit: (i) is payable on demand and, if no demand is made, on December 31, 1995; (ii) bears interest at the prime rate of interest plus 1% and (iii) is collateralized by specific purchased life insurance contracts. At June 30, 1995 the Company had working capital of $25.9 million and a ratio of current assets to current liabilities of 4.46 to 1 as compared to December 31, 1994 working capital of $25.3 million and a ratio of current assets to current liabilities of 2.85 to 1. 15 The Company believes that internally generated funds and borrowings under its current or a replacement credit facility will be sufficient to finance the Company's future funding requirements for the balance of 1995. Under certain circumstances, however, this may not be the case. Borrowings under the Company's existing revolving credit facility are predicated on a borrowing base comprised primarily of accounts receivable acquired by the Company from its clients. If in 1995 an unexpectedly high portion of the Company's potential new business includes Collateralized Advances, internally generated funds and borrowings under the Company's existing credit facility may not be sufficient to fund such new business. Under such circumstances the Company would attempt to negotiate the borrowing base in its existing credit facility to allow the Company to borrow greater amounts from its primary lender(s) and thereby support the growth in Collateralized Advances. If those negotiations were unsuccessful there is no assurance that the Company could attract sufficient capital to enable the Company to pursue its strategy of making additional Collateralized Advances. 16 PART II - OTHER INFORMATION ITEM 1. - LEGAL PROCEEDINGS The Company is a defendant in White, Trustee v. Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the Western District of Pennsylvania. The Company provided receivables financing and advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged buy- out and has since filed a bankruptcy petition. The Company had agreed to a settlement with the Lyons trustee, subject to approval by the bankruptcy court, which would have released the Company from all claims upon the payment of $300,000. In connection with the settlement, the Company added $300,000 to the provision for credit losses in 1994 and then charged off the full settlement amount. A creditor in the bankruptcy proceeding, Sherwin-Williams Company, objected to the proposed settlement and, in March 1995, the objection was sustained by the bankruptcy court. The Company has appealed the order sustaining the objection. The appeal is currently pending. Management does not believe the Company has a material exposure in excess of the previously agreed upon settlement amount. In connection with the same transaction, the Company has also been named as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin- Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. Management does not believe the litigation will have a material effect on the financial position or results of operations of the Company because, in management's opinion, the claims are without merit. The Company has filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery has been granted and the motion to dismiss is currently pending. A hearing date on the motion to dismiss has not yet been set. As previously disclosed in the Company's Form 10-QSB for the quarter ended March 31, 1995, the Company has reached a settlement with the Trustee in the bankruptcy of Premium Sales Corporation, a former client of one of the Company's wholly-owned subsidiaries. On July 21, 1995, the Company placed the full cash settlement amount of $1.4 million in escrow in accordance with the terms of the settlement. The settlement is intended to be a full release of any and all claims between the Company and the Trustee. The settlement remains subject to court approval. The impact of this settlement has been reflected in the Company's financial statements. From time to time, the Company is required to initiate litigation to collect amounts owed by former clients, guarantors or obligors. In connection with such litigation, the Company periodically encounters counterclaims by defendant(s) for material amounts. Such counterclaims are typically without any factual basis and, management believes, are usually asserted for defensive purposes by the litigant. 17 Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these proceedings will have a material effect on the Company. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. - OTHER INFORMATION None. ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K None. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities and Exchange Act of 1934, The Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLSTATE FINANCIAL CORPORATION Date: Aug 10, 1995 Lawrence M. Winkler ------------ -------------------- Lawrence M. Winkler Secretary/Treasurer Chief Financial Officer EX-27 2
5 THIS SCHEDULE CONTAINS INFORMATION EXTRACTED FROM THE SECOND QUARTER 10-QSB AND THE YEAR ENDED 1994 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000852220 ALLSTATE FINANCIAL CORP 6-MOS DEC-31-1995 JUN-30-1995 1209183 0 30318991 2898870 0 33353305 1283607 735448 36282517 7473893 0 40000 0 0 28702726 36282517 0 6354450 0 0 3034263 1911600 424526 984061 362500 621561 0 0 0 621561 .20 .20
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