-----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, WKm+4qHxbEcjC9K/9pbZ6UmjDDRxIhM/GV8Sauun2ijJoV45fLQXOhmrROOXIIE1 Z/ZXxYwWCQYRg+9PAINhyw== 0000852220-96-000013.txt : 19960816 0000852220-96-000013.hdr.sgml : 19960816 ACCESSION NUMBER: 0000852220-96-000013 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96612195 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 1996 10-QSB SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 - QSB QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-17832 Allstate Financial Corporation (exact name of registrant as specified in its charter) Virginia 54-1208450 (State of Incorporation) (I.R.S. Employer Identification No) 2700 South Quincy Street, Suite 540, Arlington, VA 22206 (address of principal executive offices) (zip code) Registrant's Telephone Number, Including Area Code: (703) 931-2274 Indicate by the check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 and 15 of the Securities and Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] 2,316,853 Common Shares were outstanding as of June 30, 1996. ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Page Number Part I. Financial Information Item 1 - Financial Statements Consolidated Balance Sheets at June 30, 1996 (Unaudited) and December 31, 1995 1-2 Consolidated Statements of Income Three and Six Months Ended June 30, 1996 and 1995 (Unaudited) 3 Consolidated Statements of Shareholders' Equity Three Months Ended June 30, 1996 (Unaudited) and Year Ended December 31, 1995 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 1996 and 1995 (Unaudited) 5-6 Notes to Consolidated Financial Statements 7-9 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Conditions 10-21 Part II. Item 1 - Legal Proceedings 22-23 Item 4 - Submission of Matters To a Vote of Security Holders 23 Item 5 - Other Information 23-24 Item 6 - Exhibits and Reports on Form 8-K 24 Signatures 25 PART I - FINANCIAL INFORMATION
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, 1996 1995 -------- ------------ (Unaudited) ASSETS ------ CURRENT ASSETS: Cash $ 3,019,742 $ 754,295 Receivables: Finance, net 26,222,598 32,670,706 Purchased life insurance contracts, net 4,231,311 4,292,332 Other 2,848,568 2,756,342 Prepaid expenses 194,048 204,823 Prepaid income taxes 1,782,174 722,081 Deferred income taxes 893,000 893,000 ----------- ----------- TOTAL CURRENT ASSETS 39,191,441 42,293,579 PROPERTY AND EQUIPMENT, Net 534,000 537,629 OTHER ASSETS 1,132,549 2,049,323 ----------- ----------- $40,857,990 $44,880,531 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable and accrued expenses $ 639,440 $ 292,602 Notes payable 11,160,128 13,516,938 Note payable-related party 103,000 103,000 Credit balances of factoring clients 2,098,502 2,333,729 ----------- ----------- TOTAL CURRENT LIABILITIES 14,001,070 16,246,269 See Notes to Consolidated Financial Statements
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) June 30, December 31, 1996 1995 -------- ------------ (Unaudited) NONCURRENT PORTION OF NOTES PAYABLE: Related parties 60,174 58,788 Convertible Subordinated Notes 4,986,000 2,838,000 Other 7,110 7,110 ----------- ----------- TOTAL LIABILITIES 19,054,354 19,150,167 ----------- ----------- 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 2,316,853 shares at June 30, 1996 and 2,655,128 at December 31, 1995 40,000 40,000 Additional paid-in-capital 18,852,312 18,852,312 Treasury Stock (785,475 shares at June 30, 1996 and 447,200 shares at December 31, 1995) (5,042,579) (2,871,901) Retained Earnings 7,953,903 9,709,953 ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 21,803,636 25,730,364 ----------- ----------- $40,857,990 $44,880,531 =========== =========== See Notes to Consolidated Financial Statements
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ------------------------------ 1996 1995 1996 1995 ---------- ---------- ---------- ---------- INCOME: Earned discounts $2,722,140 $2,420,653 $5,055,961 $5,298,299 Fees and other income 563,398 649,726 1,115,250 1,056,151 ----------- ---------- ----------- ---------- 3,285,538 3,070,379 6,171,211 6,354,450 ----------- ---------- ----------- ---------- EXPENSES: Compensation and fringe benefits 995,894 753,069 1,846,381 1,560,549 General and administrative expense 941,088 730,759 1,551,722 1,338,997 Interest expense 426,983 166,020 782,343 424,526 Provision for credit losses 3,928,570 610,500 4,552,229 1,911,600 Commission 36,145 72,846 225,786 134,717 ----------- ---------- ----------- ---------- TOTAL EXPENSES 6,428,680 2,333,194 8,958,461 5,370,389 ----------- ---------- ----------- ---------- INCOME/(LOSS) BEFORE INCOME TAX (3,143,142) 737,185 (2,787,250) 984,061 INCOME TAXES/(BENEFIT) (1,162,900) 271,500 (1,031,200) 362,500 ----------- ---------- ----------- ---------- NET INCOME/(LOSS) $(1,980,242) $ 465,685 $(1,756,050) $ 621,561 =========== ========== =========== ========== NET INCOME/(LOSS) PER SHARE $( .85) $ .15 $( .75) $ .20 =========== ========== =========== ========== WEIGHTED AVERAGE NUMBER OF SHARES 2,316,853 3,102,328 2,339,157 3,102,328 ========= ========= ========= ========= See Notes to Consolidated Financial Statements
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1995 AND SIX MONTHS ENDED JUNE 30, 1996 (Unaudited) Common Paid in Treasury Retained Stock Capital Stock Earnings ------ ------- ---------- ---------- BALANCE - January 1, 1995 $40,000 $18,852,312 $ - $9,228,853 Exchange of Convertible Subordinated Notes for 447,200 shares of common stock - - (2,871,901) - Net Income - - - 481,100 ------- ----------- ----------- ---------- BALANCE - December 31, 1995 40,000 18,852,312 (2,871,901) 9,709,953 Exchange of Convertible Subordinated Notes for 338,275 shares of common stock - - (2,170,678) - Net Loss - - - (1,756,050) ------- ----------- ----------- ---------- BALANCE - June 30, 1996 $40,000 $18,852,312 $(5,042,579) $7,953,903 ======= =========== =========== ========== See Notes to Consolidated Financial Statements
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, -------------------------------- 1996 1995 ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $(1,756,050) $ 621,561 Adjustments to reconcile net income/(loss) to cash provided by operating activities: Depreciation - net 1,800 69,114 Provision for credit losses 4,552,229 1,911,600 Changes in operating assets and liabilities: (Increase)/decrease in other receivables (92,226) 244,937 (Increase)/decrease in prepaid expenses and other current assets 10,775 ( 67,659) Decrease in other assets 916,774 66,030 Increase in accounts payable and accrued expenses 346,838 18,953 Increase in settlement payable - 1,400,000 Increase in prepaid income taxes (1,060,093) (22,258) ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,980,047 4,242,278 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts (94,407,704) (81,075,404) Collection of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts 96,364,604 84,025,272 Increase in credit balances of factoring clients (235,227) (256,851) Purchase of property and equipment (58,171) (138,239) ----------- ----------- NET CASH PROVIDED BY INVESTING ACTIVITIES 1,663,502 2,554,778 ----------- ----------- See Notes to Consolidated Financial Statements
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (continued) Six Months Ended June 30, -------------------------------- 1996 1995 ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and other borrowings 29,786,262 30,265,380 Principal payments on line of credit and other borrowings (32,141,686) (37,617,183) Treasury Stock Acquisition Costs (22,678) - ----------- ----------- NET CASH (USED) IN FINANCING ACTIVITIES (2,378,102) (7,351,803) ----------- ---------- INCREASE (DECREASE) IN CASH 2,265,447 ( 554,747) CASH, Beginning of period 754,295 1,763,930 ----------- ----------- CASH, End of period $ 3,019,742 $ 1,209,183 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 781,652 $ 424,526 =========== =========== Income taxes paid $ 28,897 $ - =========== =========== SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES: Transfer of finance and other receivables to other assets $ 560,655 $ - =========== =========== Issuance of Convertible Subordinated Notes in exchange for Common Stock $ 2,148,000 $ - =========== =========== See Notes to Consolidated Financial Statements
6 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. General. The consolidated financial statements of Allstate Financial Corporation (the "Company") included herein are unaudited for all periods ended June 30, 1996 and 1995; however, they reflect all adjustments which, in the opinion of management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Allstate Financial Corporation believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three and six months ended June 30, 1996 are not necessarily indicative of the results of operations to be expected for the remainder of the year. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in Allstate Financial Corporation's Annual Report on Form 10-KSB for the year ended December 31, 1995. 2. Net income/(loss) per share. Net income/(loss) per share of common stock has been computed by dividing net income/(loss) by the weighted average number of common shares outstanding during the periods presented. For the quarters ended June 30, 1996 and 1995, weighted average shares outstanding were 2,316,853 and 3,102,328, respectively. At June 30, 1996 and December 31, 1995 there were 23,400 and 42,167 stock options outstanding, respectively, at exercise prices ranging from $5.375 to $14.00 per share. During the year ended December 31, 1995, 53,470 options were forfeited. There were no options exercised during 1995 or during the six months ended June 30, 1996. 3. Line of credit. As of June 30, 1996, the Company had approximately $14.7 million available under a $25.0 million secured revolving line of credit. Borrowings under the credit facility bear interest at the bank's base rate plus .75%. The current maturity date of this credit facility is May 13, 1997. The Company is subject to restrictive covenants which are typical in revolving credit facilities of this type. As of June 30, 1996, Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"), a wholly owned subsidiary of the Company, had approximately $1.1 million available under a $2.0 million revolving 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, 1996; (ii) bears interest at the prime rate of interest plus 1%; and (iii) is collateralized by specific purchased life insurance contracts. 7 4. Convertible Subordinated Notes Payable. As of June 30, 1996, the Company had outstanding $4,986,000 in aggregate principal amount of Convertible Subordinated Notes issued in exchange for 785,475 shares of common stock of the Company. The Notes (i) mature on September 30, 2000; (ii) currently bear interest at the rate of 9.5% per annum which rate may fluctuate in accordance with the prime rate, but may not fall below 8% nor rise above 10% per annum; (iii) are convertible into common stock of the Company at the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as defined) of the Company and (v) were issued pursuant to an indenture which contains certain covenants which are less restrictive than those contained in the Company's secured revolving credit facility. Upon the occurrence of certain change of control events, holders of the Notes have the right to have their Notes redeemed at par. 5. Certain Contingencies. The Company is a defendant in White, Trustee v. Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the Western District of Pennsylvania. The Company provided receivables financing and advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991, the Lyon's trustee brought an action against the Company claiming, among other things, fraudulent transfer and breach of contract. A summary judgement was granted in favor of the Company which reduced the fraudulent transfer claim by $1.6 million. As a consequence, the remaining fraudulent transfer claim was approximately $1,000,000. The trustee has not actively pursued the breach of contract claim. In late 1994, the Company reached a settlement agreement with the Lyons trustee, subject to approval by the bankruptcy court, which would have released the Company from all claims upon the payment of $300,000. In connection with the settlement, the Company paid and added $300,000 to the provision for credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin-Williams Company, objected to the proposed settlement amount and, in March 1995, the objection was sustained by the bankruptcy court. The Company appealed the order sustaining the objection, but in April 1996 the appellate court exercised its discretion not to hear the appeal at that time. The $300,000 previously paid by the Company was returned to the Company in April 1996. Management expects this litigation to resume in the District Court, but does not believe at this time that the Company has a material exposure on the fraudulent transfer claim in excess of the previously agreed upon settlement amount. In connection with the same transaction, the Company was also named in January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin-Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. The complaint asserts, among other things, that the purchasers of Lyons breached their purchase agreement with Sherwin-Williams by pledging the assets of Lyons to the Company to obtain the down payment. The Company was not a party to the purchase agreement. The complaint seeks relief against the Company based upon a claim of "acting in concert" and "misrepresentation" in connection with this purchase agreement without a specific identification of the alleged misrepresentation made by the Company. The Company filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery was granted and, in March 1996, a federal magistrate recommended to the District Court that the Company's motion to dismiss be granted. Prior to the District Court ruling on the magistrate's recommendation, Sherwin-Williams filed an amended complaint. The amended complaint retains the claims for "acting in concert" and "misrepresentation" and adds two additional claims for "civil conspiracy" and "tortious interference with contract". The two new claims arise from essentially the same allegations set 8 forth in the earlier claims, i.e., that the Company assisted in the breach of the purchase agreement. 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 is a defendant in Harold B. Murphy, Chapter 7 Trustee v. Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court in the District of Massachusetts. The Company factored the accounts receivable of Clearpoint Research Corporation ("CRC") from late 1992 through early 1993. In July 1993 CRC filed a petition in bankruptcy, after the Company had collected all amounts owed to it. The bankruptcy trustee has sued the Company seeking recovery of alleged preferential transfers made during the course of the factoring relationship. The bankruptcy trustee alleges that the Company did not properly perfect its security interest in the accounts receivable. No specific damage amount is specified in the complaint but it is assumed the bankruptcy trustee is seeking recovery of the full amount of accounts receivables collected (approximately $4 million). The Company has filed an answer to the complaint denying the substantive allegations asserted by the bankruptcy trustee. The Company has removed the action to federal district court. The motion is currently pending. The Company believes it has a number of strong defenses to the complaint and intends to vigorously defend all claims. The litigation is in a preliminary stage and the probability of an unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. As previously disclosed in the Company's Form 10-QSB for the quarter ended June 30, 1995, the Company has reached a settlement with the Trustee in the bankruptcy of Premium Sales Corporation, a former client of one of the Company's wholly-owned subsidiaries. The settlement is intended to be a full release of any and all claims between the Company (and its subsidiaries) and the Trustee including, without limitation, any alleged preference liability of the Company and its subsidiaries. The settlement was approved by the bankruptcy court in January 1996. The settlement will become fully effective and the settlement monies will be disbursed at the time a plan of distribution in the Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The impact of this settlement has been reflected in the Company's financial statements. Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these proceedings will have a material adverse effect on the Company. From time to time, the Company is required to initiate litigation to collect amounts owed by former clients, guarantors or obligors. In connection with such litigation, the Company periodically encounters counterclaims by defendant(s) for material amounts. Such counterclaims are typically without any factual basis and, management believes, are usually asserted for defensive purposes by the litigant. 6. Resolution of Subsequent Event. As disclosed in the Company's Form 10-QSB for the quarter ended March 31, 1996, on May 13, 1996, the Company lost a lawsuit as plaintiff against Comerica Bank. Due to the adverse result in that lawsuit, the Company has in the second quarter of 1996 taken a $950,000 charge against the allowance for credit losses (including approximately $350,000 allocable to the legal fees and expenses of Comerica Bank and write off of approximately $600,000 in "other receivables" appearing on the Company's balance sheet at March 31, 1996). 9 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, 1996, Collateralized Advances constituted approximately 41% of the Company's portfolio of finance receivables. On occasion, the Company will provide other specialized financing structures which satisfy the unique requirements of the Company's clients. The Company also provides its clients with letters of guaranty, arranges for the issuance of letters of credit for its clients and provides other related financial services. The Company's clients are small- to medium-sized businesses with annual revenues typically ranging between $600,000 and $50,000,000. The Company's clients do not typically qualify for traditional bank or asset-based financing because they are either too new, too small, undercapitalized (or over-leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank or traditional, asset-based lender. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. The Company addresses these risks in various ways, including: (i) the Company thoroughly evaluates the collateral to be made available by each client; (ii) the Company usually collects its factored accounts receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) the Company purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) the Company takes, whenever available, blanket liens on all of its clients' other assets and, when making Collateralized Advances, the Company employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) the Company usually requires personal guaranties (either unlimited guaranties or validity guaranties limited to the validity and collectibility of factored accounts receivable) from its clients' principals; (vi) the Company actively monitors its portfolio of purchased accounts receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral securing Collateralized Advances and (vii) the Company maintains loss reserves which management believes are adequate and appropriate for its business. Notwithstanding the foregoing, clients (and account debtors) may fail and the collateral available to the Company (together with personal guaranties) may prove insufficient to enable the Company to recover all amounts due in full. Lifetime Options, a wholly-owned subsidiary of the Company, provides financial assistance to individuals facing life-threatening illnesses by purchasing their life insurance policies at a discount from face value. The amount of the discount is determined by Lifetime Options based on the size of the policy being purchased, the maximum life expectancy of the insured, the amount of the anticipated premiums payable with respect to the policy being purchased and the anticipated financing cost associated with purchasing and carrying the policy. In general, the purchase price for a policy is between 55% and 85% of the benefits payable 10 under the policy. Because most of the life insurance policies purchased by Lifetime Options are underwritten by highly rated insurance companies (and, in many cases, backed by state guaranty funds), management of Lifetime Options believes that credit risk is not material to its business. Before purchasing each policy, Lifetime Options has each insured's medical records reviewed by at least one independent physician who provides Lifetime Options with an opinion of the insured's life expectancy. Historically, Lifetime Options typically required up to three independent reviews but, based on its experience, management of Lifetime Options no longer believes multiple medical reviews are necessary. To date, the physician engaged by Lifetime Options has provided life expectancies which, on average, fairly approximate actual lifespans. However, there is no assurance that the physician engaged by Lifetime Options will in the future be able to perform as he has in the past. If the physician engaged by Lifetime Options were to systematically underestimate life expectancies or if life extending treatments (or a cure) were found for AIDS (almost all of the life insurance policies purchased by Lifetime Options to date have been purchased from individuals with AIDS), there would be a material adverse effect on the earnings of Lifetime Options. Lifetime Options relies on its independent physician to assist in monitoring medical advances (and potential medical advances). In particular, Lifetime Options' independent physician is closely monitoring the effects of a relatively new family of drugs known as protease inhibitors. These drugs, while not a cure for AIDS, may extend the lives of certain individuals infected with HIV. Other than Lifetime Options, none of the Company's subsidiaries is currently engaged in business which could have a material effect on the Company. Competition Continuing competition within the marketplace from banks and asset-based lenders and newly created finance companies has encroached upon the Company's potential client base and has negatively affected earned discounts. Additionally, the Company continues to attract larger clients which often increases the amount of time needed to negotiate and fund new business. Also, Collateralized Advances require more in-depth and diverse due diligence which can further delay the funding of new business. Nonetheless, the Company believes that its ability to respond quickly and to provide specialized, flexible and comprehensive financing structures to its clients enables it to compete effectively. In order to remain competitive, however, the Company is, where necessary and appropriate, offering lower rates than it has historically. The Company believes that increased competition may level off or decline somewhat over time but will for the foreseeable future continue to exert downward pressure on pricing, especially in the Company's core factoring business. To counter the downward pressure on pricing, the Company intends to continue to diversify its sources of income, primarily by continuing its emphasis on funding relationships which include (in addition to the factoring of accounts receivable) the making of Collateralized Advances. Historically, the Company did not expect to maintain a funding relationship with a client for more than two years; the Company expected that its clients would ultimately qualify for more competitively priced bank or asset-based financing within that time period. Therefore, the Company's major clients have tended to change significantly over time. Today, however, because the Company is, where necessary and appropriate, offering lower rates and making 11 Collateralized Advances, it is possible that the duration of the Company's funding relationships with its clients may be extended. Even if the Company succeeds in extending the duration of its funding relationships with its clients, there will not be a corresponding increase in non-current assets on the Company's balance sheet. This is because it is anticipated that the Company's funding relationships with its clients will continue to renew no less frequently than once a year. Although the Company has historically been successful in replacing major clients, the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. Results of Operations The following table sets forth certain items of income and expense for the periods indicated and indicates the percentage relationship of each item to total income.
For the Three Months Ended June 30, ----------------------------------------------------- 1996 1995 -------------------- -------------------- (Unaudited) INCOME Earned discounts $ 2,722,140 82.9% $2,420,653 78.8% Fees and other income 563,398 17.1 649,726 21.2 ----------- ----- ---------- ----- TOTAL INCOME 3,285,538 100.0 3,070,379 100.0 ----------- ----- ---------- ----- EXPENSE Compensation and fringe benefits 995,894 30.3 753,069 24.5 General and administrative expense 941,088 28.6 730,759 23.8 Interest expense 426,983 13.0 166,020 5.4 Provision for credit losses 3,928,570 119.6 610,500 19.9 Commissions 136,145 4.2 72,846 2.4 ----------- ----- ---------- ----- TOTAL EXPENSES 6,428,680 195.7 2,333,194 76.0 ----------- ----- ---------- ----- INCOME/(LOSS) BEFORE INCOME TAXES (3,143,142) (95.7) 737,185 24.0 INCOME TAXES/(BENEFIT) (1,162,900) (35.4) 271,500 8.8 ----------- ----- ---------- ----- NET INCOME/(LOSS) $(1,980,242) (60.3)% $ 465,685 15.2% =========== ===== ========== ===== NET INCOME/(LOSS) PER SHARE $ (0.85) $ .15 =========== ========== WEIGHTED AVERAGE NUMBER OF SHARES 2,316,853 3,102,328 ========= =========
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For the Six Months Ended June 30, ----------------------------------------------------- 1996 1995 -------------------- -------------------- (Unaudited) INCOME Earned discounts $ 5,055,961 81.9% $5,298,299 83.4% Fees and other income 1,115,250 18.1 1,056,151 16.6 ----------- ----- ---------- ----- TOTAL INCOME 6,171,211 100.0 6,354,450 100.0 ----------- ----- ---------- ----- EXPENSE Compensation and fringe benefits 1,846,381 29.9 1,560,549 24.6 General and administrative expense 1,551,722 25.1 1,338,997 21.1 Interest expense 782,343 12.7 424,526 6.7 Provision for credit losses 4,552,229 73.8 1,911,600 30.0 Commissions 225,786 3.7 134,717 2.1 ----------- ----- ---------- ----- TOTAL EXPENSES 8,958,461 145.2 5,370,389 84.5 ----------- ----- ---------- ----- INCOME (LOSS) BEFORE INCOME TAXES (2,787,250) (45.2) 984,061 15.5 INCOME TAXES/(BENEFIT) (1,031,200) (16.7) 362,500 5.7 ----------- ----- ---------- ----- NET INCOME/(LOSS) $(1,756,050) (28.5)% $ 621,561 9.8% =========== ===== ========== ===== NET INCOME/(LOSS) PER SHARE $ (0.75) $ .20 =========== ========== WEIGHTED AVERAGE NUMBER OF SHARES 2,339,157 3,102,328 ========= =========
Total Income. Total income consists of (I) earned discounts and (ii) fees and other income. "Earned discounts" consist primarily of income from the purchase of accounts receivable and life insurance policies and income from Collateralized Advances. "Fees and other income" consist primarily of application fees, commitment or facility fees, other related financing fees and supplemental discounts paid by clients who do not sell the minimum volume of accounts receivable required by their contracts with the Company (including as a result of "graduating" to a lower cost source of funding). 13 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, ------------------------------------------------------- 1996 1995 ------------------------ ------------------------ Earned % of Total Earned % of Total Income Income Income Income ---------- ---------- ---------- ---------- Discount on Factored Accounts Receivable $1,378,380 42.0% $1,128,465 36.8% Earnings on Collateralized Advances 884,727 26.9 769,619 25.1 Earnings on Purchased Life Insurance Policies 186,467 5.7 283,441 9.2 Other Earnings 272,566 8.3 239,128 7.7 ---------- ----- ---------- ----- Total 2,722,140 82.9 2,420,653 78.8 Fees and Other Income 563,398 17.1 649,726 21.2 ---------- ----- ---------- ----- Total Income $3,285,538 100.0% $3,070,379 100.0% ========== ===== ========== =====
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For the Six Months Ended June 30, ------------------------------------------------------- 1996 1995 ------------------------ ------------------------ Earned % of Total Earned % of Total Income Income Income Income ---------- ---------- ---------- ---------- Discount on Factored Accounts Receivable $2,562,245 41.5% $2,747,871 43.2% Earnings on Collateralized Advances 1,660,635 26.9 1,555,553 24.5 Earnings on Purchased Life Insurance Policies 342,072 5.5 510,827 8.1 Other Earnings 491,009 8.0 484,048 7.6 ---------- ----- ---------- ----- Total 5,055,961 81.9 5,298,299 83.4 Fees and Other Income 1,115,250 18.1 1,056,151 16.6 ---------- ----- ---------- ----- Total Income $6,171,211 100.0% $6,354,450 100.0% ========== ===== ========== =====
Total income decreased 2.9% in the first half of 1996 from the same period in 1995, from $6.4 million to $6.2 million; total income increased 7.0% for the second quarter of 1996 over the same period in 1995, from $3.1 million to $3.3 million. Earned discounts from factored accounts receivable decreased 6.8%, from $2.7 million to $2.6 million in the first half of 1996 versus the first half of 1995. In the second quarter earned discounts from factored accounts increased 22.1% to $1.4 million from $1.1 million. Earned discounts from factored accounts receivable as a percentage of total factored accounts receivable purchased were 3.4% and 4.4% in the first halves of 1996 and 1995, respectively; in the second quarters of 1996 and 1995, earned discounts were 3.5% and 3.7%, respectively, of factored accounts receivable purchased. The reduction during the first half of 1996 versus 1995 in the average earned discount from factored accounts receivable reflects the downward pressure on pricing from competition in the Company's core factoring business. In the first half of 1996 and 1995, earned discounts from factored accounts receivable accounted for 41.5% and 43.2%, respectively, of total income. In the second quarters of 1996 and 1995 earned discounts from factored accounts receivable accounted for 42.0% and 36.8%, respectively, of total income. Earned discounts from Collateralized Advances increased approximately 6.8% in the first half of 1996 over the comparable period in 1995, from approximately $1.6 million to $1.7 million and increased approximately 15.0% in the second quarter of 1996 over the same quarter in 1995, from approximately $770 thousand to $885 thousand. In the first halves of 1996 and 1995, earned discounts from Collateralized Advances constituted approximately 26.9% and 24.5%, respectively, of total income. In the second quarters of 1996 and 1995, earned discounts from Collateralized Advances constituted 26.9% and 25.1%, respectively, of total income. Collateralized Advances currently bear interest at a rate, on average, of approximately 2% per month calculated generally on the highest outstanding amount of the Collateralized Advance during the month. Earned discounts from Collateralized Advances are required to be paid in 15 cash monthly in arrears. See Provision for Credit Losses below. As of June 30, 1996 and December 31, 1995, factored accounts receivable included on the Company's balance sheet were $16.6 million (53.5%) and $25.2 million (64.5%), respectively, of gross finance receivables. As of June 30, 1996 and December 31, 1995, Collateralized Advances included on the Company's balance sheet were $12.7 million (41.0%) and $10.8 million (27.8%), respectively, of gross finance receivables. The Company intends to pursue its strategy of making Collateralized Advances in conjunction with its core factoring business. Fees and other income remained relatively flat, approximately $1.1 million, in the first half of 1996 as compared to the same period in 1995. In the second quarter of 1996, fees and other income decreased approximately 13.3% from the second quarter of 1995, from approximately $650 thousand to $563 thousand. The decrease for the second quarter of 1996 from the comparable period in 1995 is largely attributable to a reduction in application fees partially offset by an increase in facility fees. In addition, in the second quarter of 1995, the Company collected a one-time brokerage fee of $25,000 which accounts for approximately 28.0% of the decrease. Compensation and Fringe Benefits. In the first halves of 1996 and 1995, compensation and fringe benefits were $1.8 million (29.9% of total income) and $1.6 million (24.6% of total income), respectively. For the second quarters of 1996 and 1995, compensation and fringe benefits were $996 thousand (30.3% of total income) and $753 thousand (24.5% of total income), respectively. Within compensation and fringe benefits, executive compensation increased in the first half of 1996 as compared to the same period in 1995, from $474 thousand (7.5% of total income) to $714 thousand (11.6% of total income). Executive compensation also increased in the second quarter of 1996 as compared to the same period in 1995, from $237 thousand (7.7% of total income) to $419 thousand (12.8% of total income). All of the increases in 1996 in compensation and fringe benefits (including executive compensation) are chiefly the result of expenses associated with the severance of a key employee and costs associated with replacing that employee, including hiring a former Company executive on an interim basis to help identify and train the severed employee's replacement. The Company does not anticipate incurring any further costs associated with the severance of this employee. General and Administrative Expense. General and administrative expense was $1.6 million (25.1% of total income) as compared to $1.3 million (21.0% of total income) for the first halves of 1996 and 1995, respectively. For the second quarters of 1996 and 1995, general and administrative expense was $941 thousand (28.6% of total income) and $731 thousand (23.8% of total income), respectively. The increase for the first halves and second quarters of 1996 was primarily attributable to an increase in professional fees offset partially by decreases in licenses and taxes and duplicating expense. Professional fees were $754 thousand (12.2% of total income) in the first half of 1996 versus $419 thousand (6.6% of total income) in the first half of 1995 and were $507 thousand (15.4% of total income) in the second quarter of 1996 versus $245 thousand (8.0% of total income) in the first quarter of 1995. The increase in 1996 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. General and administrative expense (other than professional fees) for the six months ended June 30, 1996 and 1995 was $797 thousand (12.9%) and $920 thousand (14.4%), respectively. For the three months ended June 30, 1996 and 1995, 16 general and administrative (other than professional fees) was $434 thousand (13.2%) and $486 thousand (15.8%), respectively. Interest Expense. Interest expense was $782 thousand (12.7% of total income) versus $425 thousand (6.7% of total income) for the first halves of 1996 and 1995, respectively, and $427 thousand (13.0% of total income) versus $166 thousand (5.4% of total income) for the second quarters of 1996 and 1995, respectively. The rise in interest expense is attributable to interest expense related to the Company's Convertible, Subordinated Notes issued in September 1995 and January 1996 and to an increase in the average daily balance outstanding on the Company's revolving lines of credit. Interest expense on the Convertible Subordinated Notes was $229 thousand (3.7%) in the first six months of 1996 and $118 thousand (3.6%) in the second quarter of 1996. The average daily outstanding balance on the Company's revolving lines of credit was $11.0 million and $8.6 million for the first halves of 1996 and 1995, respectively, and $12.4 million and $7.3 million for the three months ended June 30, 1996 and 1995, respectively. The average interest rate paid on the Company's revolving lines of credit decreased to 9.17% during the first half of 1996 from 9.38% during the first half of 1995 and to 9.12% during the second quarter of 1996 as compared to 9.38% during the second quarter of 1995. Provision for Credit Losses. Credit loss experience, the adequacy of underlying collateral, changes in the character and size of the Company's receivables portfolio and management's judgement are factors used in determining the provision for credit losses and the adequacy of the allowance for credit losses. Other factors given consideration in determining the adequacy of the allowance are the level of related credit balances of factoring clients and the current and anticipated impact of economic conditions on the creditworthiness of the Company's clients and account debtors. To mitigate the risk of credit loss, the Company, among other things: (I) thoroughly evaluates the collateral to be made available by each client; (ii) usually collects its factored accounts receivable directly from account debtors, which are frequently (though not always) large, creditworthy companies or governmental entities; (iii) purchases, or takes a first priority security interest in, all accounts receivable of each client; (iv) takes, whenever available, blanket liens on all of its clients' other assets and, when making Collateralized Advances, it employs what management believes to be conservative loan-to-value ratios based on auction or liquidation value appraisals performed by independent appraisers; (v) usually requires personal guaranties (either unlimited guaranties or guaranties limited to the validity and collectability of factored accounts receivable) from its clients' principals, and (vi) actively monitors its portfolio of factored accounts receivable, including the creditworthiness of account debtors and periodically evaluates the value of other collateral securing Collateralized Advances. The provision for credit losses was $4.6 million (73.8% of total income) for the first half of 1996 versus $1.9 million (30.0% of total income) for the first half of 1995 and $3.9 million (119.6% of total income) for the second quarter of 1996 versus $610 thousand (19.9% of total income) for the second quarter of 1995. The Company's provision for credit losses in the first quarter of 1995 included $1.3 million attributable to a settlement reached by the Company with the bankruptcy trustee of Premium Sales Corporation, a former client of a wholly-owned subsidiary of the Company. See Part II, Item 1 - Legal Proceedings. Following certain events in the second quarter of 1996, management determined that it was necessary and appropriate to write off or write down nine non-performing assets totalling $4.2 million. Prior to the write-offs and write downs, these assets were included in non-earning receivables, other receivables and other 17 assets on the Company's balance sheet. Included in the foregoing is approximately $950,000 (of which approximately $350,000 is for the legal fees and expenses of Comerica Bank) attributable to a lawsuit the Company lost as plaintiff against Comerica Bank (as disclosed in the Company's Form 10-QSB for the quarter ended March 31, 1996). The provision for credit losses in the second quarter of 1996 reflects the amount deemed necessary by management to enable the Company to charge the allowance for credit losses for the foregoing write-offs and to leave a balance in the allowance for credit losses deemed sufficient to cover potential future write-offs. The allowance for credit losses was 7.7% ($2.4 million) and 6.0% ($2.4 million) of gross finance receivables at June 30, 1996 and December 31, 1995, respectively. At June 30, 1996 the accrual of earnings was suspended on $850 thousand of gross finance receivables as compared to $1.6 million of gross finance receivables at December 31, 1995. In addition, "other receivables" and "other assets" appearing on the Company's balance sheet typically do not accrue earnings for financial statement purposes. The following table provides a summary of the Company's gross finance receivables (which includes primarily factored accounts receivable, Collateralized Advances and non-earning receivables), "other receivables" and "other assets" and information regarding the allowance for credit losses as of the dates indicated.
As of June 30, ---------------------- 1996 1995 ------- ------- (Dollars in thousands) Gross Finance Receivables, Other Receivables and Other Assets Data: - ------------------------------------ Gross Finance Receivables $30,989 $27,633 Non-Earning Receivables (also included in Gross Finance Receivables) 850 3,574 Other Receivables 2,849 3,144 Other Assets (excluding miscellaneous) 900 2,085 Allowance for credit losses: - ---------------------------- Balance, January 1 $ 2,351 $ 2,511 Provision for credit losses 4,552 1,912 Receivables charged off (4,523) (1,566) Recoveries 4 42 ------- ------- Balance, June 30 $ 2,384 $ 2,899 ======= =======
18
As of June 30, ---------------------- 1996 1995 ------- ------- (Dollars in thousands) Allowance for Credit Losses as a percent of: - -------------------------------------------- Gross Finance Receivables 7.69% 10.49% Non-Earning Receivables 280.45 81.10 Non-Earning Receivables, Other Receivables and Other Assets 51.84 32.93 As a percent of the sum of Gross Finance Receivables, Other Receivables and Other Assets: - ------------------------------- Non-Earning Receivables 2.45 10.88 Other Receivables 8.20 9.57 Other Assets 2.59 6.35
Although the Company maintains an allowance for credit losses in an amount deemed by management to be adequate to cover potential losses, no assurance can be given that the allowance will in fact be adequate or that an inadequacy, if any, in the allowance could not have a material adverse effect on the Company's earnings in future periods. Furthermore, although management believes that its periodic estimates of the value of "other receivables" and "other assets" are appropriate, no assurance can be given that the amounts which the Company ultimately collects with respect to other receivables and other assets will not differ significantly from management's estimates or that those differences, if any, could not have a material adverse effect on the Company's earnings in future periods. Management recognizes that Collateralized Advances entail different, and possibly greater, risks to the Company than the factoring of accounts receivable. Risks associated with the making of Collateralized Advances (but not the factoring of accounts receivable) include, among others (I) certain types of collateral securing Collateralized Advances may diminish in value (possibly precipitously) over time (sometimes short periods of time), (ii) repossessing, safeguarding and liquidating collateral securing Collateralized Advances may require the Company to incur significant fees and expenses some or all of which may not be recoverable, (iii) clients may dispose of (or conceal) the collateral securing Collateralized Advances and (iv) clients or natural disasters may destroy the collateral securing Collateralized Advances. The Company attempts to manage these risks, respectively, by (I) engaging independent appraisers to review periodically the value of collateral securing Collateralized Advances at intervals established by management based on the characteristics of the underlying collateral, (ii) employing conservative loan-to-value ratios which management believes should generally enable the Company to recover from liquidation proceeds most of the fees and expenses incurred in connection with repossessing, safeguarding and liquidating collateral, (iii) using its internal field examiners to inspect collateral periodically and, when appropriate, engaging independent collateral monitoring firms to implement appropriate collateral control systems including bonding certain of the client's employees and (iv) requiring clients to maintain appropriate amounts and types of insurance issued by insurers acceptable to the Company naming the Company as the party to whom loss is paid. Although management believes that the Company has (or third 19 parties acting on behalf of the Company have) the requisite skill to evaluate, monitor and manage the risks associated with the making of Collateralized Advances, there can be no assurance that the Company will in fact be successful in doing so. Commissions. Commission expense rose to $226 thousand (3.7% of total income) in the first half of 1996 from $135 thousand (2.1% of total income) in the first half of 1995 and to $136 thousand (4.2% of total income) in the second quarter of 1996 from $73 thousand (2.4% of total income) in the second quarter of 1995. The increase was the result of a larger portion of gross finance receivables acquired in 1996 being generated by commissioned brokers and other professionals to whom the Company paid referral fees. Impact of Inflation Management believes that inflation has not had a material effect on the Company's income, expenses or liquidity during the past three years. Changes in interest rate levels do not generally affect the income earned by the Company in the form of discounts charged. Rising interest rates would, however, increase the Company's cost of borrowed money based on its current borrowing arrangements which are prime or base rate adjusted credit facilities. Changes in Financial Condition The Company's total assets decreased 9.0% to $40.9 million at June 30, 1996 from $44.9 million at December 31, 1995. The decrease for the six months is primarily the result of the decrease in net finance receivables. Liquidity and Capital Resources. The Company's principal funding sources are the collection of factored accounts receivable, retained cash flow and external borrowings. As of June 30, 1996 the Company had approximately $14.7 million available under a $25.0 million secured revolving line of credit. The credit facility contains a $5.0 million sub-facility for the issuance of letters of credit and, as of April 1996, a new $2 million sub-facility (which under certain circumstances may increase to $4 million) the proceeds of which may be used by the Company to make advances to clients secured by machinery and equipment and a new $2.5 million sub-facility the proceeds of which may be used by the Company to make advances to clients secured by inventory. Borrowings under the credit facility bear interest at the bank's base rate plus .75%. The current maturity date of this credit facility is May 13, 1997. The Company is subject to covenants which are typical in revolving credit facilities of this type. As of June 30, 1996 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, 1996; (ii) bears interest at the prime rate of interest plus 1% and (iii) is collateralized by specific purchased life insurance contracts. 20 As of June 30, 1996 and December 31, 1995, the Company had outstanding approximately $4,986,000 and $2,838,000, respectively, in aggregate principal amount of Convertible Subordinated Notes issued in exchange for shares of the Company's common stock. The Convertible Subordinated Notes outstanding at December 31, 1995 were issued in exchange for 447,200 shares of common stock and the Convertible Subordinated Notes outstanding at June 30, 1996 were issued in exchange for 785,475 shares of common stock (including the 447,200 shares of common exchanged prior to December 31, 1995). The Notes (I) mature on September 30, 2000; (ii) currently bear interest at the rate of 9.5% per annum which rate may fluctuate in accordance with the prime rate, but may not fall below 8% nor rise above 10% per annum; (iii) are convertible into common stock of the Company at the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as defined) of the Company and (v) were issued pursuant to an indenture which contains certain covenants which are less restrictive than those contained in the Company's secured revolving credit facility. Upon the occurrence of certain change of control events, holders of the Notes have the right to have their Notes redeemed at par. At June 30, 1996 the Company had working capital of $25.2 million and a ratio of current assets to current liabilities of 2.80 to 1 as compared to December 31, 1995 working capital of $26.0 million and a ratio of current assets to current liabilities of 2.60 to 1. [THIS SPACE INTENTIONALLY LEFT BLANK] 21 PART II -OTHER INFORMATION ITEM 1. -LEGAL PROCEEDINGS The Company is a defendant in White, Trustee v. Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the Western District of Pennsylvania. The Company provided receivables financing and advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991, the Lyon's trustee brought an action against the Company claiming, among other things, fraudulent transfer and breach of contract. A partial summary judgement was granted in favor of the Company which reduced the fraudulent transfer claim by $1.6 million. As a consequence, the remaining fraudulent transfer claim was approximately $1,000,000. The trustee has not actively pursued the breach of contract claim. In late 1994, the Company reached a settlement agreement with the Lyons trustee, subject to approval by the bankruptcy court, which would have released the Company from all claims upon the payment of $300,000. In connection with the settlement, the Company paid and added $300,000 to the provision for credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin-Williams Company, objected to the proposed settlement amount and, in March 1995, the objection, was sustained by the bankruptcy court. The Company appealed the order sustaining the objection, however, in April 1996 the appellate court exercised its discretion not to hear the appeal at that time. The $300,000 previously paid by the Company was returned to the Company in April 1996. Management expects this litigation to resume in the District Court, but does not believe at this time that the Company has a material exposure on the fraudulent transfer claim in excess of the previously agreed upon settlement amount. In connection with the same transaction, the Company was also named in January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et. al. pending in the United States District Court for the Northern District of Ohio. Sherwin-Williams is suing all parties with any involvement in the transaction to recover damages allegedly incurred by Sherwin-Williams in connection with the leveraged buy-out and the bankruptcy litigation arising therefrom. Sherwin-Williams asserts that it has or will incur pension fund liabilities and other liabilities as a result of the transaction in the approximate amount of $11 million and has asserted claims against the Company in that amount. The complaint asserts, among other things, that the purchasers of Lyons breached their purchase agreement with Sherwin-Williams by pledging the assets of Lyons to the Company to obtain the down payment. The Company was not a party to the purchase agreement. The complaint seeks relief against the Company based upon a claim of "acting in concert" and "misrepresentation" in connection with this purchase agreement without a specific identification of the alleged misrepresentation made by the Company. The Company filed a motion to dismiss the claims and a motion to stay discovery pending a ruling on the motion to dismiss. The motion to stay discovery was granted and, in March 1996, a federal magistrate recommended to the District Court that the Company's motion to dismiss be granted. Prior to the District Court ruling on the magistrate's recommendation, Sherwin-Williams filed an amended complaint. The amended complaint retains the claims for "acting in concert" and "misrepresentation" and adds two additional claims for "civil conspiracy" and "tortious interference with contract". The two new claims arise from essentially the same allegations set forth in the earlier claims, i.e., that the Company assisted in the breach of the purchase agreement. 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. 22 The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee v. Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court in the District of Massachusetts. The Company factored the accounts receivable of Clearpoint Research Corporation ("CRC") from late 1992 through early 1993. In July 1993 CRC filed a petition in bankruptcy, after the Company had collected all amounts owed to it. The bankruptcy trustee has sued the Company seeking recovery of alleged preferential transfers made during the course of the factoring relationship. The bankruptcy trustee alleges that the Company did not properly perfect its security interest in the accounts receivable. No specific damage amount is specified in the complaint but it is assumed the bankruptcy trustee is seeking recovery of the full amount of accounts receivables collected (approximately $4 million). The Company has filed an answer to the complaint denying the substantive allegations asserted by the bankruptcy trustee. The Company has removed the action to federal district court. The motion is currently pending. The Company believes it has a number of strong defenses to the complaint and intends to vigorously defend all claims. The litigation is in a preliminary stage and the probability of an unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. As previously disclosed in the Company's Form 10-QSB for the quarter ended June 30, 1995, the Company has reached a settlement with the Trustee in the bankruptcy of Premium Sales Corporation, a former client of one of the Company's wholly-owned subsidiaries. The settlement is intended to be a full release of any and all claims between the Company (and its subsidiaries) and the Trustee including, without limitation, any alleged preference liability of the Company and its subsidiaries. The settlement was approved by the bankruptcy court in January 1996. The settlement will become fully effective and the settlement monies will be disbursed at the time a plan of distribution in the Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The impact of this settlement has been reflected in the Company's financial statements. Except as described above, the Company is not party to any litigation other than routine proceedings incidental to its business, and the Company does not expect that these proceedings will have a material adverse effect on the Company. From time to time, the Company is required to initiate litigation to collect amounts owed by former clients, guarantors or obligors. In connection with such litigation, the Company periodically encounters counterclaims by defendant(s) for material amounts. Such counterclaims are typically without any factual basis and, management believes, are usually asserted for defensive purposes by the litigant. ITEM 4. -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. -OTHER INFORMATION Effective July 1, 1996, the Company's Board of Directors was increased from seven (7) to nine (9) members and the seven Board members filled the vacancies created thereby with independent directors, Lawrence Vecker and Edward A. McNally. Mr. Vecker has over 45 years experience in the commercial finance industry, including over 20 years with Congress Financial Corporation (a subsidiary of Corestates Financial Corp.) where his last position was Executive Vice President. Mr. Vecker is currently a managing director with a New York based merchant 23 bank. Mr. McNally has over 25 years of commercial banking experience, including 17 years with National Westminster Bank USA where his last position was Senior Vice President. Since 1991, Mr. McNally has run his own management consulting firm providing services to the financial services industry. The Company's other independent directors are David W. Campbell, Alan L. Freeman, William H. Savage and James C. Spector. Mr. Campbell has over 23 years of banking experience, including 5 years as President and Chief Executive Officer of Ameribanc Savings Bank and 3 years as a Trustee of the Ameribanc Investors Group, a publicly held bank holding company; he is currently President of Southern Financial Bank in Warrenton, Virginia. Mr. Freeman has 30 years of experience in public accounting; he is currently a named partner in his own accounting firm and a former partner in Deloitte & Touche. Mr. Savage has over 30 years experience in real estate development and banking, including serving as the President and Chief Executive Officer of a publicly held real estate investment trust which later became Ameribanc Investors Group. Mr. Spector has over 35 years experience in the commercial finance industry, including over 30 years with Heller Financial, Inc. and its affiliates where his last position was executive vice president. Also effective July 1, 1996, Lawrence Winkler resigned from the Board of Directors and Leon Fishman was elected to fill the vacancy created thereby. The Company's Board of Directors is, for the first time since the Company's inception, comprised of a majority of Directors who are independent of the Company's management. In addition to the foregoing Board changes, Leon Fishman resigned as the Company's President and Chief Executive Officer effective July 1, 1996. The Board of Directors elected Craig Fishman as President and Chief Executive Officer effective July 1, 1996. The Board of Directors also elected Peter D. Matthy as Executive Vice President and Chief Operating Officer. Mr. Matthy has over 27 years of commercial banking experience, including 15 years with IBJ Schroder Bank & Trust Company where his last position (in 1994) was Executive Vice President and member of the Management Committee. Since 1994 and prior to joining the Company, Mr. Matthy ran his own management and consulting firm providing services to the financial services industry. ITEM 6(a). -EXHIBITS Amendments and Waivers to Exhibit 10.7 - Revolving Credit and Security Agreement dated as of May 13, 1994, among the Company, the Lenders party thereto and IBJ Schroder Bank & Trust Company (as Lender and as Agent), as amended to April 26, 1996: Waiver dated as of May 13, 1996 Tenth Amendment and Waiver dated as of June 30, 1996 ITEM 6(b). -REPORTS ON FORM 8-K None. 24 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 August 14, 1996 Lawrence M. Winkler Secretary/Treasurer Chief Financial Officer 25 EX-99 2 EXHIBIT 10.7 WAIVER WAIVER TO REVOLVING CREDIT AND SECURITY AGREEMENT WAIVER (the "Waiver") dated as of May 13, 1996 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the date hereof and as may be further amended, supplemented, modified or waived from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the "Agent") BACKGROUND Borrower has requested that Agent and Lenders waive certain provisions of the Loan Agreement and the Agent and the Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrower by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Waiver of Section 7.19 (a)(i) and (a)(ii) for the Four Quarters Ended March 31, 1996. Subject to satisfaction of the conditions precedent set forth in Section 4 below, the Agent and the Lenders hereby waive compliance by the Borrower with Section 7.19(a)(i) and (a)(ii) of the Loan Agreement for the four Fiscal Quarters ended on March 31, 1996. 3. Waiver of Specified Defaults and Events of Default. Subject to satisfaction of the conditions set forth in Section 4 below, the Agent and the Lenders hereby waive any and all Defaults or Events of Default which would exist (and any and all rights and remedies which may exist as a consequence thereof) absent this Waiver. 4. Conditions of Effectiveness. This Waiver shall become effective as of the date first above written (the "Waiver Effective Date") upon receipt by the Agent of this Waiver duly executed by Borrower and the Required Lenders and consented to by each of the Guarantors. 5. Representations and Warranties. Borrower hereby represents and warrants as of the Waiver Effective Date as follows: (a) This Waiver and the Loan Agreement, as waived hereby constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) After giving effect to this Waiver, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Waiver Effective Date (after giving effect to this Waiver). (c) No Event of Default or Default has occurred and is continuing or would exist, in either case, after giving effect to this Waiver. -1- (d) Borrower has no defense, counterclaim or offset to the Obligations. 6. Effect on the Loan Agreement and the Security Agreement. (a) Upon the effectiveness of Sections 2 and 3 hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as waived hereby. (b) Except as specifically waived herein, the Loan Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Waiver shall not operate as a waiver of any right, power or remedy of Agent and Lenders, nor constitute a waiver of any provision of the Loan Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 7. Governing Law. This Waiver shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and shall be governed by and construed in accordance with the laws of the State of New York. 8. Headings. Section headings in this Waiver are included herein for convenience of reference only and shall not constitute a part of this Waiver for any other purpose. 9. Counterparts; Telecopy Signatures. This Waiver may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Waiver as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY as Agent and Lender By:_______________________ Name: Title: NATIONAL CANADA FINANCE CORP., a Lender By:_______________________ Name: Title: By:_______________________ Name: Title: -2- ALLSTATE FINANCIAL CORPORATION By: ___________________________ Name: Craig Fishman TitleSenior Vice President [SIGNATURES CONTINUED ON NEXT PAGE] -3- CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By: ___________________________ Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION By: ___________________________ By:___________________________ Name: Craig Fishman Name: Craig Fishman Title: Senior Vice President Title:Senior Vice President RECEIVABLE FINANCING CORPORATION By: ___________________________ Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF FLORIDA, INC. By: ___________________________ Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF AMERICA, INC. By: ___________________________ Name: Craig Fishman Title: Senior Vice President SETTLEMENT SOLUTIONS, INC. By:______________________________ Name: Craig Fishman Title: Senior Vice President -4- EX-99 3 EXHIBIT 10.7 10TH AMEND + WAIVER TENTH AMENDMENT AND WAIVER TO REVOLVING CREDIT AND SECURITY AGREEMENT TENTH AMENDMENT AND WAIVER (the "Amendment") dated as of June 30, 1996 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the date hereof and as may be further amended, supplemented, modified or waived from time to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the other lenders which may now or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the "Agent") BACKGROUND Borrower has requested that Agent and Lenders waive certain provisions of the Loan Agreement and the Agent and the Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrower by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendments to the Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 5 below, the Loan Agreement is hereby amended as follows: (i) Subsection (a) of Section 7.19 of the Loan Agreement is hereby deleted in its entirety and the following new subsection "(a)" is inserted to read as follows: "(a)(i) On the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended June 30, 1994 and ending with the Fiscal Quarter ended June 30, 1996, the ratio of (A) EBIT to (B) interest expense (other than interest expense in respect of the Convertible, Senior Subordinated Notes) for the four Fiscal Quarters then ended (taken as one accounting period) shall not be less than 3:1; (ii) On the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended September 30, 1996, the ratio of (A) EBIT to (B) interest expense (other interest expense in respect of the Convertible, Senior Subordinated Notes) for (w) the Fiscal Quarter ended September 30, 1996, (x) the two Fiscal Quarters ended December 31, 1996 (taken as one accounting period), (y) the three Fiscal Quarters ended march 31, 1997 (taken as one accounting period) and (z) the Four Fiscal Quarters (taken as one accounting period) ended on the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended June 30, 1997, shall not be less than 3:1; (iii) On the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended September 30, 1995 and ending with the Fiscal Quarter ended June 30, 1996, the ratio of (A) EBIT to (B) total interest expense for the four Fiscal Quarters then ended (taken as one accounting period) shall not be less than 2:1; and (iv) On the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended September 30, 1996, the ratio of (A) EBIT to (B) total interest expense for (w) the Fiscal Quarter -1- ended September 30, 1996, (x) the two Fiscal Quarters ended December 31, 1996 (taken as one accounting period), (y) the three Fiscal Quarters ended March 31, 1997 (taken as one accounting period) and (z) the four Fiscal Quarters (taken as one accounting period) ended on the last day of each Fiscal Quarter commencing with the Fiscal Quarter ended June 30, 1997, shall not be less than 2:1, provided that, in the case of preceding clauses (i), (ii), (iii) and (iv), as applicable, in the event the Base Rate exceeds 8 1/2% per annum for any period of determination hereunder then the applicable ratio shall be reduced by a percentage equal to the percentage by which the Base Rate exceeds 8 1/2% per annum; provided further, that in no event shall the applicable ratio be reduced below 1.75:1." (b) Subsection (c) of Section 7.19 of the Loan Agreement is hereby amended by inserting the following proviso immediately before the period appearing at the end thereof: "provided further that, notwithstanding the foregoing, commencing on June 30, 1996, and on the last day of each Fiscal Quarter thereafter, the sum of (i) Tangible Net Worth and (ii) the aggregate principal amount of Convertible, Senior Subordinated Notes then outstanding shall equal or exceed $26,700,000". 3. Waiver of Section 7.19 (a)(i) and (a)(iii) for the Four Quarters Ended June 30, 1996. Subject to satisfaction of the conditions precedent set forth in Section 5 below, the Agent and the Lenders hereby waive compliance by the Borrower with Section 7.19(a)(i) and (a)(iii) of the Loan Agreement (after giving effect to Section 2 of this Amendment) for the four Fiscal Quarters ended on June 30, 1996. 4. Waiver of Specified Defaults and Events of Default. Subject to satisfaction of the conditions set forth in Section 5 below, the Agent and the Lenders hereby waive any and all Defaults or Events of Default which would exist (and any and all rights and remedies which may exist as a consequence thereof) absent this Amendment. 5. Conditions of Effectiveness. This Amendment shall become effective as of the date first above written (the "Amendment Effective Date") upon receipt by the Agent of this Amendment duly executed by Borrower and the Required Lenders and consented to by each of the Guarantors. 6. Representations and Warranties. Borrower hereby represents and warrants as of the Amendment Effective Date as follows: (a) This Amendment and the Loan Agreement, as amended and waived hereby constitute the legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) After giving effect to this Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Amendment Effective Date (after giving effect to this Amendment). (c) No Event of Default or Default has occurred and is continuing or would exist, in either case, after giving effect to this Amendment. (d) Borrower has no defense, counterclaim or offset to the Obligations. 7. Effect on the Loan Agreement and the Security Agreement. -2- (a) Upon the effectiveness of Sections 2, 3 and 4 hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as waived hereby. (b) Except as specifically amended and waived herein, the Loan Agreement and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly set forth herein, the execution, delivery and effectiveness of this Amendment shall not operate as an amendment or waiver of any right, power or remedy of Agent and Lenders, nor constitute an amendment or waiver of any provision of the Loan Agreement or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 8. Governing Law. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and shall be governed by and construed in accordance with the laws of the State of New York. 9. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 10. Counterparts; Telecopy Signatures. This Amendment may be executed by the parties hereto in one or more counterparts, each of which taken together shall be deemed to constitute one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. IN WITNESS WHEREOF, the parties hereto, by their duly authorized officers, have executed this Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY as Agent and Lender By:_______________________ Name: Title: NATIONAL CANADA FINANCE CORP., a Lender By:_______________________ Name: Title: By:_______________________ Name: Title: ALLSTATE FINANCIAL CORPORATION By: ___________________________ -3- Name: Craig Fishman Title President [SIGNATURES CONTINUED ON NEXT PAGE] -4- CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By: ___________________________ Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION By: ___________________________ By:__________________________ Name: Craig Fishman Name: Craig Fishman Title: Senior Vice President Title:Senior Vice President RECEIVABLE FINANCING CORPORATION By: ___________________________ Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF FLORIDA, INC. By: ___________________________ Name: Craig Fishman Title: Senior Vice President BUSINESS FUNDING OF AMERICA, INC. By: ___________________________ Name: Craig Fishman Title: Senior Vice President SETTLEMENT SOLUTIONS, INC. By:______________________________ Name: Craig Fishman Title: Senior Vice President -5- EX-27 4 FDS JUN 96
5 0000852220 ALLSTATE FINANCIAL CORP 6-MOS DEC-31-1996 JUN-30-1996 3019742 0 33302477 2383863 0 39191441 1582343 815768 40857990 14001070 0 0 0 40000 21763636 40857990 0 6171211 0 0 3623889 4552229 782343 (2787250) (1031200) (1756050) 0 0 0 (1756050) (.75) (.75)
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