-----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, VJ2CnSNWGhns9IW+b4iSL4IUEwsC3cYWBMY1dXM3VCPjA4yC5nojj4U76EP2J61B TjatITDBJTiPOm7qrg/xBw== 0000852220-97-000004.txt : 19970514 0000852220-97-000004.hdr.sgml : 19970514 ACCESSION NUMBER: 0000852220-97-000004 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970513 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: 97602748 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 1ST QTR 1997 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 MARCH 31, 1997 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 [ ] 2,317,919 Common Shares were outstanding as of March 31, 1997. ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Page Number Part I - Financial Information Item 1 - Financial Statements Consolidated Balance Sheets at March 31, 1997 and December 31, 1996 1-2 Consolidated Statements of Operations Three Months Ended March 31, 1997 and 1996 3 Consolidated Statements of Shareholders' Equity Three Months Ended March 31, 1997 and Year Ended December 31, 1996 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 1997 and 1996 5-6 Notes to Consolidated Financial Statements 7-9 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Conditions 10-17 Part II - Other Information Item 1 - Legal Proceedings 18 Item 4 - Submission of Matters To a Vote of Security Holders 18 Item 5 - Other Information 18 Item 6 - Exhibits and Reports on Form 8-K 18 Signatures 19 PART I - FINANCIAL INFORMATION ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, December 31, 1997 1996 ---------- ------------ ASSETS (Unaudited) CURRENT ASSETS: Cash $2,879,429 $1,624,899 Receivables: Finance, net 24,696,611 30,574,239 Purchased life insurance contracts, net 4,191,738 4,493,088 Other 4,323,608 4,394,975 Prepaid expenses 107,256 154,434 Income Tax Receivable 799,307 1,150,289 Deferred income taxes 893,000 893,000 ----------- ----------- TOTAL CURRENT ASSETS 37,890,949 43,284,924 FURNITURE, FIXTURES AND EQUIPMENT, Net 537,869 538,164 OTHER ASSETS 2,113,699 2,116,343 ------------ ------------ $40,542,517 $45,939,431 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses $ 430,419 $ 446,360 Notes payable 9,176,724 14,851,582 Note payable-related party 103,000 103,000 Credit balances of factoring clients 2,999,795 2,964,873 ----------- ----------- TOTAL CURRENT LIABILITIES 12,709,938 18,365,815 1 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) March 31, December 31, 1997 1996 --------- ------------ (Unaudited) NONCURRENT PORTION OF NOTES PAYABLE: Related parties 63,060 61,969 Convertible Subordinated Notes 4,985,110 4,985,110 ---------- ---------- TOTAL LIABILITIES 17,758,108 23,412,894 ---------- ---------- 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; 3,102,328 issued, 2,317,919 outstanding at March 31, 1997 and December 31, 1996, exclusive of shares held in the Treasury 40,000 40,000 Additional paid-in-capital 18,852,312 18,852,312 Treasury Stock (784,409 shares) (5,034,584) (5,034,584) Retained Earnings 8,926,681 8,668,809 ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 22,784,409 22,526,537 ---------- ---------- $40,542,517 $45,939,431 =========== =========== See Notes to Consolidated Financial Statements 2 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended March 31, 1997 1996 ---------- ----------- (Unaudited) (Unaudited) INCOME: Earned discounts $2,292,585 $2,333,820 Fees and other income 439,521 551,852 ----------- ------- Total Income 2,732,106 2,885,672 ---------- ---------- EXPENSES: Compensation and fringe benefits 731,950 849,055 General and administrative expense 538,736 612,069 Interest expense 403,997 355,360 Provision for credit losses 555,000 623,659 Commission 93,151 89,641 ----------- ----------- TOTAL EXPENSES 2,322,834 2,529,784 ---------- ---------- INCOME BEFORE INCOME TAXES 409,272 355,888 INCOME TAXES 151,400 131,700 ----------- ----------- NET INCOME $ 257,872 $ 224,188 ========== ========== NET INCOME PER SHARE $ .11 $ .09 ============= ============= WEIGHTED AVERAGE NUMBER OF SHARES 2,317,919 2,361,461 ========== ========== 3 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1996 AND THREE MONTHS ENDED MARCH 31, 1997
Common Paid in Treasury Retained Stock Capital Stock Earnings BALANCE - January 1, 1996 .............. $40,000 $18,852,312 $(2,871,901) $9,709,953 Exchange of Convertible Subordinated Notes for 338,275 shares of common stock .... -- -- (2,170,683) -- Conversion of Convertible Subordinated Notes to 1,066 shares of Common Stock ............................. -- -- 8,000 -- Net Loss ............................. -- -- -- (1,041,144) -------- ----------- ----------- ----------- BALANCE - December 31, 1996 ............ 40,000 18,852,312 (5,034,584) 8,668,809 Net Income ........................... -- -- -- 257,872 --------- ----------- ----------- ----------- BALANCE - March 31, 1997 ............... $40,000 $18,852,312 (5,034,584) $8,926,681 ========= =========== =========== ===========
4 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1997 1996 ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 257,872 $ 224,188 Adjustments to reconcile net income to cash provided by operating activities: Depreciation - net 49,100 30,900 Provision for credit losses 555,000 623,659 Changes in operating assets and liabilities: Decrease/(Increase) in other receivable 71,367 (36,320) Decrease/(Increase) in prepaid expenses 47,178 (37,770) Decrease/(Increase) in other assets 2,644 (101,486) (Decrease)/Increase in accounts payable and accrued expenses (15,941) 148,061 Decrease in income taxes receivable 350,982 102,803 ----------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,318,202 954,035 --------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts (56,897,683) (44,817,066) Collection of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts 62,521,661 42,248,054 Increase in credit balances of factoring clients 34,922 739,070 Purchase of furniture, fixtures and equipment (48,805) (23,773) ----------- ------------ NET CASH PROVIDED BY (OR USED) BY INVESTING ACTIVITIES 5,610,095 (1,853,715) --------- ----------- 5 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) Three Months Ended March 31, 1997 1996 ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and other borrowings 20,527,792 15,824,877 Principal payments on line of credit and other borrowings (26,201,559) (14,927,618) Treasury Stock Acquisition Costs - ( 17,816) ------------- ----------- NET CASH PROVIDED BY OR USED IN FINANCING ACTIVITIES (5,673,767) 879,443 ----------- ------- NET INCREASE (DECREASE) IN CASH 1,254,530 (20,237) CASH, Beginning of period 1,624,899 754,295 --------- ------- CASH, End of period $2,879,429 $734,058 ========== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $403,779 $355,015 ======== ======== Income taxes paid $ - $ 28,897 ========= ========= Supplemental Schedule of Noncash Activities Transfer of finance and other receivables to other assets $ - $280,000 ========= ======== Issuance of Convertible Subordinated Notes in exchange for Common Stock $ - $2,148,000 ========= ========== 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 March 31, 1997 and 1996; however, they reflect all adjustments which, in the opinion of management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Allstate Financial Corporation believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended March 31, 1997 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-KB for the year ended December 31, 1996. 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. For the quarters ended March 31, 1997 and 1996, weighted average shares outstanding were 2,317,919 and 2,361,461, respectively. At March 31, 1997 and December 31, 1996 there were 133,400 stock options outstanding, at exercise prices ranging from $5.375 to $14.00 per share. During the year ended December 31, 1996, 24,867 options were forfeited. There were no options exercised during 1996 or during the three months ended March 31, 1997. 3. LINE OF CREDIT. As of March 31, 1997, the Company had approximately $15.8 million available under a $25 million secured revolving line of credit. The credit facility contains a $5.0 million sub-facility for the issuance of letters of credit, a $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 $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 a spread over the bank's base rate. The Company is subject to covenants which are typical in revolving credit facilities of this type. The current maturity date of this credit facility is May 13, 1997. The Company currently anticipates that the credit facility will be renewed for a period of three years. 7 During 1996 Lifetime Options, Inc., a Viatical Settlement Company (a wholly-owned subsidiary of the Company), had a $2 million revolving line of credit with a local federal savings bank. This line of credit expired on December 31, 1996 at which time all indebtedness was paid in full. 4. CONVERTIBLE SUBORDINATED NOTES PAYABLE. As of March 31, 1997, the Company had outstanding $4,978,000 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 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. 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. The matter is currently being litigated in the District Court. Management does not believe at this time that the Company has a material exposure significantly 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 8 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 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 added 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 complaint, i.e., that the Company assisted in the breach of the purchase agreement. In March 1997, the federal magistrate again recommended to the District Court that the Company's motion to dismiss the claims contained in the original complaint be granted. However, the magistrate recommended that the Company's motion to dismiss the two new claims contained in the amended complaint be denied. 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. As disclosed in the Company's Form 10-QSB for the quarter ended June 30, 1995, the Company 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. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION Certain disclosures contained in this Form 10-QSB contain forward looking information based on current information and expectations of the Company that involve a number of risks, uncertainties and assumptions, including the overall state of the economy, competition among financial institutions, the credit quality of the Company's clients and account debtors, and the Company's ability to generate growth in earning assets through the generation of new business. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual outcomes could vary materially from those expected. 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 to its clients collateralized by inventory, equipment, real estate and other assets ("Collateralized Advances"). The Company has elected to continue to more aggressively pursue the making of Collateralized Advances as it perceives the need by its targeted customers for such advances and such funding is not readily available from many of the Company's competitors. On occasion, the Company will also 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 $75,000,000. Historically, the Company's clients have not qualified 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. Banks and other asset-based lenders have, however, started to lend to the Company's traditional, high risk type of client. Given the Company's typical client profile, there is a significant risk of default and client failure inherent in the Company's business. Continuing competition within the marketplace from banks, asset-based lenders and newly created finance companies have encroached upon the Company's potential client base and have negatively affected earned discounts on factored accounts receivable. Additionally, the Company has attracted 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, the Company is, where necessary and appropriate, offering 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 continue to 10 diversify its sources of income, primarily by continuing to place emphasis on funding relationships which include (in addition to the factoring of accounts receivable) the making of Collateralized Advances. Historically, the Company has not expected to maintain a funding relationship with a client for more than two years; the Company expected that its clients would 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 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 relationship 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. 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), the 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, the management of Lifetime Options no longer believes multiple medical reviews are necessary. 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 physician engaged by Lifetime Options will in the future be able to perform as he has in the past. If the physician(s) 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 important medical advances (and potential medical advances). In particular, Lifetime Options' independent physician is closely monitoring the effects of a relatively new class of drugs known as protease inhibitors. These drugs, while not a cure for AIDS, may extend the lives of certain individuals infected with HIV. 11 During 1996, Lifetime Options started to curtail its operations. This decision enables management to better focus on the Company's core commercial finance business at a time when competition has reduced yields, and medical advances have created a certain degree of uncertainty, in Lifetime Options' business. Other than Lifetime Options, none of the Company's subsidiaries is currently engaged in business which could have a material 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 March 31, 1997 1996 ------------------ ------------------ (Unaudited) INCOME Earned discounts $2,292,585 83.9% $2,333,820 80.9% Fees and other income 439,521 16.1 551,852 19.1 ----------- ---- ----------- ----- TOTAL INCOME 2,732,106 100.0% 2,885,672 100.0% ---------- ----- ----------- ----- EXPENSES Compensation and fringe benefits 731,950 26.8 849,055 29.4 General and administrative expense 538,736 19.7 612,069 21.2 Interest expense 403,997 14.8 355,360 12.3 Provision for credit losses 555,000 20.3 623,659 21.6 Commissions 93,151 3.4 89,641 3.1 ----------- --- ----------- --- TOTAL EXPENSES 2,322,834 85.0 2,529,784 87.6 ---------- ---- ---------- INCOME BEFORE INCOME TAXES 409,272 15.0 355,888 12.4 INCOME TAXES 151,400 5.5 131,700 4.6 ----------- ---- ---------- --- NET INCOME $ 257,872 9.5% $ 224,188 7.8% ----------- ==== ========== === NET INCOME PER SHARE $0.11 $ 0.09 ===== ====== WEIGHTED AVERAGE NUMBER OF SHARES 2,317,919 2,361,461 ========= ========= 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). 12 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 March 31, 1997 1996 (Unaudited) (Unaudited) --------------------- ---------------------- Earned % of Total Earned % of Total Type of Transaction Income Income Income Income Discount on Factored Accounts Receivable ....... $1,484,327 54.4% $1,183,864 41.0% Earnings on Collateralized Advances .................. 471,243 17.2 775,908 26.9 Earnings on Purchased Life Insurance Policies ........ 100,000 3.6 155,605 5.4 Other Earnings ............... 237,015 8.7 218,443 7.6 ---------- ----- ---------- ----- Total ................... 2,292,585 83.9 2,333,820 80.9 Fees and Other Income ........ 439,521 16.1 551,852 19.1 ---------- ----- ---------- ----- Total Income ............ $2,732,106 100.0% $2,885,672 100.0% ========== ===== ========== ===== Total income decreased 5.3%, in the first three months of 1997 as compared to the same period in 1996. Earned discounts from factored accounts receivable increased 25.4% in the first quarter of 1997 as compared to the first quarter of 1996. The absolute dollar increase in earned discounts from factored accounts receivable in the first quarter of 1997 versus 1996 is attributable to a higher volume of factored accounts receivable in the first quarter of 1997 as compared to 1996 - $53,700,000 versus $35,800,000, respectively. Earned discounts from factored accounts receivable in the first quarter of 1997 as a percentage of total factored accounts receivable purchased in the first quarter of 1997 were 2.8%. The comparable percentage in 1996 was 3.3%, a decrease of 15.2% from the first quarter 1996 to the first quarter 1997. The reduction in average earned discounts from 1996 to 1997 reflects downward pricing pressure from banks, asset-based lenders and small independent finance companies in the Company's core factoring business. Earned discounts from Collateralized Advances decreased 39.3% in the first quarter of 1997 as compared to the same period in 1996, from $776,000 to $471,000, respectively. In the first quarters of 1997 and 1996, earned discounts from Collateralized Advances accounted for 17.2% and 26.9%, respectively, of total income. Collateralized Advances currently bear interest at a rate, on average, of approximately 2% per month. Earned discounts from Collateralized Advances are required to be paid in cash monthly in arrears. See Provision for Credit Losses below. As of March 31, 1997 and December 31, 1996, factored accounts receivable included on the Company's balance sheet were $20.2 million (62.2%) and $22.4 million (59.5%), respectively, of gross finance receivables. As of March 31, 1997 and December 31, 1996, 13 Collateralized Advances included on the Company's balance sheet were $7.0 million (21.6%) and $8.6 million (22.8%), 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 decreased 20.4% in the first quarter of 1997 compared to the first quarter of 1996, from $552,000 to $440,000. The decrease in 1997 is attributable primarily to decreased application and other fees. COMPENSATION AND FRINGE BENEFITS. Compensation and fringe benefits decreased 13.9% in the first quarter of 1997 versus the comparable period in 1996, from $849,000 (29.4% of total income) in 1996 to $732,000 (26.8% of total income) in 1997. Within compensation and fringe benefits, executive compensation decreased 24.7% in the first quarter of 1997, from $295,000 (10.2% of total income) in the first quarter of 1996 to $222,000 (8.1% of total income) in the first quarter of 1997. The decrease in executive compensation in the first quarter of 1997 is attributable in large part to the cessation of salary continuation payments associated with the termination of a key employee and costs associated with replacing that employee. GENERAL AND ADMINISTRATIVE EXPENSE. In the first quarter of 1997, general and administrative expense was reduced by 11.9%, from $612,000 (21.2% of total income) in the first quarter of 1996 to $539,000 (19.7% of total income) in the first quarter of 1997. The decrease in the first quarter of 1997 was primarily attributable to a reduction in professional fees offset in part by increases in depreciation, taxes and credit and filing fees. In the first quarter of 1997, professional fees were $158,000 (5.8% of total income) as compared to $247,000 (8.6% of total income) in the first quarter of 1996. Professional fees decreased, in part, due to the final resolution of legal proceedings instituted in prior years. INTEREST EXPENSE. Interest expense was $404,000 (14.8% of total income) versus $355,000 (12.3% of total income) in the first quarter of 1997 and 1996, respectively. The increase in interest expense is attributable to additional borrowing by the Company to fund increased business volume in the first quarter of 1997 versus 1996. Gross receivables purchased in the first quarter of 1997 were $56.9 million as compared to $44.8 million in 1996, an increase of 27% in the first quarter of 1997. The average daily outstanding balance on the Company's revolving line of credit was $11.6 million and $9.5 million for the first quarters of 1997 and 1996, respectively, and the average interest rate paid on the Company's revolving line of credit was 9.0% in the first quarter of 1997 compared to 9.2% in the first quarter of 1996. 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 14 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) almost always 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. 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 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. The provision for credit losses decreased from $624,000 (21.6% of total income) in the first quarter of 1996 to $555,000 (20.3% of total income) in the first quarter of 1997. As of March 31, 1997 and December 31, 1996 the allowance for credit losses was 8.9% ($2.9 million) and 6.9% ($2.6 million) of gross finance receivables, respectively. At March 31, 1997 the accrual of earnings was suspended on $3.7 million of gross finance receivables as compared to $4.5 million of gross finance receivables at December 31, 1996. 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. 15 As of (or for the Year Ended) As of March 31, December 31, 1996 1997 1996 ------------------ ---------- ---------- (Dollars in thousands) Gross Finance Receivables, Other Receivables and Other Assets Data: Gross Finance Receivables ............ $ 37,600 $ 32,452 $ 41,198 Non-Earning Receivables (also included in Gross Finance Receivables) ...... 4,548 3,726 1,760 Other Receivables .................... 4,390 4,321 2,793 Other Assets (excluding miscellaneous) ....................... 1,884 1,881 1,912 Allowance for credit losses: Balance, January 1 ................... 2,351 2,579 2,351 Provision for credit losses ............................. 5,878 555 624 Receivables charged off .............. (5,711) (233) (284) Recoveries .......................... 6 3 Ending Balance ....................... $ 2,579 $ 2,904 $ 2,691 Allowance for Credit Losses as a percent of: Gross Finance Receivables ............ 6.85% 8.94% 6.53% Non-Earning Receivables .............. 56.7% 77.90% 152.90% Non-Earning Receivables, Other Receivables and Other Assets ....... 28.3% 29.25% 41.62% As a percent of the sum of Gross Finance Receivables, Other Receivables and Other Assets: Non-Earning Receivables ........................ 10.4% 9.63% 3.83% Other Receivables .................... 10.0% 11.17% 6.08% Other Assets ......................... 4.29% 4.86% 4.17% The absolute increase in non-earning receivables, other receivables and other assets (and the relative decrease in the size of the allowance for credit losses) from the end of the first quarter of 1996 to the end of the first quarter of 1997 is attributable, in large part, to two large clients put on non-accrual status in late November 1996. 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 16 estimates or that those differences, if any, could not have a material adverse effect on the Company's earnings in future periods. COMMISSIONS. Commission expense was $93,000 (3.4% of total income) in the first quarter of 1997 as compared to $90,000 (3.1% of total income) in the first quarter of 1996. 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 11.7% to $40.5 million at March 31, 1997 from $45.9 million at December 31, 1996. The decrease is primarily the result of a 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. For additional detail regarding external borrowings, see Notes 3 and 4 to the unaudited financial statements contained in this Form 10-QSB. At March 31, 1997 and December 31, 1996, the Company had working capital of $25.2 million and $24.9 million, respectively, and a ratio of current assets to current liabilities of 2.98 to 1 and 2.36 to 1, respectively. [THIS SPACE INTENTIONALLY LEFT BLANK] 17 PART II -OTHER INFORMATION ITEM 1. -LEGAL PROCEEDINGS For details regarding legal proceedings, see Note 5 to the unaudited financial statements contained in this Form 10-QSB. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. - OTHER INFORMATION None. ITEM 6(a). - EXHIBITS Amendment 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 March 21, 1997. Eleventh Amendment dated as of March 21, 1997. ITEM 6(b). - 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: May 13, 1997 /s/ Lawrence M. Winkler ----------------------- Lawrence M. Winkler Secretary/Treasurer Chief Financial Officer 19 EX-27 2 FDS MAR 97
5 0000852220 ALLSTATE FINANCIAL CORP 3-MOS DEC-31-1997 MAR-31-1997 2879429 0 31792527 2904178 0 37890949 1423160 652716 40542517 12709938 0 0 0 40000 22744409 40542517 0 2732106 0 0 1363837 555000 403997 409272 151400 257872 0 0 0 257872 .11 .11
EX-10 3 ELEVENTH AMENDMENT TO REVOLVING CREDIT AND SECURITY AGREEMENT ELEVENTH AMENDMENT ("Eleventh Amendment") dated as of March 21, 1997 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and waived to the dated 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 amend certain provisions of the Loan Agreement and Agent and 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 LOAN AGREEMENT. Subject to satisfaction of the conditions set forth in Section 3 below, the Loan Agreement is hereby amended as follows: (a) The definition of "MAXIMUM ADDITIONAL EQUIPMENT VALUE ADVANCE AMOUNT" appearing in Section 1.2 of the Loan Agreement is hereby amended by deleting the date "April 1, 1996" appearing therein and inserting in lieu thereof the date "May 13, 1997". (b) Section 2.2(A) of the Loan Agreement is hereby amended by deleting the date "March 31, 1997" appearing therein and inserting in lieu thereof the date "May 13, 1997". 3. CONDITIONS OF EFFECTIVENESS. This Eleventh Amendment shall become effective as of the date first above written (the "Eleventh Amendment Effective Date") upon receipt by Agent of a copy of this Eleventh Amendment duly executed by Borrower and each Lender and consented to by each of the Guarantors. 4. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants as of the Eleventh Amendment Effective Date as follows: (a) This Eleventh 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 Eleventh Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement and the Security Agreement and agrees that all such covenants, representations and warranties shall be deemed to have been remade as of the Eleventh Amendment Effective Date. (c) No Event of Default or Default has occurred and is continuing or would exist, in each case, after giving effect to this Eleventh Amendment. (d) Borrower has no defense, counterclaim or offset to the Obligations. 5. EFFECT ON THE LOAN AGREEMENT. (a) Upon the effectiveness of SECTION 2 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 amended hereby. (b) Except as specifically amended hereby, 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 Eleventh Amendment 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. 6. GOVERNING LAW. This Eleventh 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. 7. HEADINGS. Section headings in this Eleventh Amendment are included herein for convenience of reference only and shall not constitute a part of this Eleventh Amendment for any other purpose. 8. COUNTERPARTS; TELECOPY SIGNATURES. This Eleventh 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 Eleventh Amendment as of the day and year first above written. IBJ SCHRODER BANK & TRUST COMPANY, as Agent and Lender By Name: Title: NATIONAL BANK OF CANADA, a Lender By Name: Title: By Name: Title: ALLSTATE FINANCIAL CORPORATION By Name: Craig Fishman Title: President CONSENTED AND AGREED TO: LIFETIME OPTIONS, INC., A VIATICAL SETTLEMENT COMPANY By Name: Craig Fishman Title: President PREMIUM SALES NORTHEAST, INC. By Name: Craig Fishman Title: President SETTLEMENT SOLUTIONS, INC. By Name: Craig Fishman Title: President RECEIVABLE FINANCING CORPORATION By Name: Craig Fishman Title: President BUSINESS FUNDING OF FLORIDA, INC. By Name: Craig Fishman Title: President BUSINESS FUNDING OF AMERICA, INC. By Name: Craig Fishman Title: President AFC HOLDING CORPORATION By Name: Craig Fishman Title: President -----END PRIVACY-ENHANCED MESSAGE-----