-----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, WPQcmo4Ckcuwf2OxDpWALdrnk9KibqNB+L1GSR5vPgMmHosTWvLvNCqekmsAP3pK eBYasoKEOfHgmQmyUpvs9w== 0000852220-98-000006.txt : 19980817 0000852220-98-000006.hdr.sgml : 19980817 ACCESSION NUMBER: 0000852220-98-000006 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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: SEC FILE NUMBER: 000-17832 FILM NUMBER: 98691001 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 1998 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, 1998 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 or 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 [ ] 2,323,683 Common Shares were outstanding as of June 30, 1998. ALLSTATE FINANCIAL CORPORATION FORM 10-QSB INDEX Page Number PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Consolidated Balance Sheets at June 30, 1998 and December 31, 1997 1-2 Consolidated Statements of Operations Six and Three Months Ended June 30, 1998 and 1997 3 Consolidated Statements of Shareholders' Equity Six Months Ended June 30, 1998 and Year Ended December 31, 1997 4 Consolidated Statements of Cash Flows Six Months Ended June 30, 1998 and 1997 5-6 Notes to Consolidated Financial Statements 7-11 Item 2 - Management's Discussion and Analysis of Results of Operations and Financial Conditions 12-23 PART II - OTHER INFORMATION Item 1 - Legal Proceedings 24 Item 2 - Changes in Securities 24 Item 3 - Defaults Upon Senior Securities Item 4 - Submission of Matters to a Vote of Security Holders 24 Item 5 - Other Information 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, 1998 1997 (UNAUDITED) ASSETS CURRENT ASSETS: Cash ...................................... $ 1,911,073 $ 4,200,050 Receivables: Finance Receivables - Net ............. 39,155,483 33,742,276 Receivables - Other - Net ............. 724,488 2,988,927 Prepaid expenses .......................... 33,539 127,741 Income Tax Receivable ..................... 1,970,087 -- Deferred income taxes ..................... 1,234,511 1,056,686 ----------- ----------- TOTAL CURRENT ASSETS ...................... 45,029,181 42,115,680 FURNITURE, FIXTURES AND EQUIPMENT, Net ......... 432,053 494,240 OTHER ASSETS ................................... 2,529,121 4,203,727 ----------- ----------- $47,990,355 $46,813,647 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable and accrued expenses ......... $ 1,282,022 $ 420,356 Notes payable ................................. 16,329,214 14,373,724 Income taxes payable .......................... -- 240,226 Credit balances of factoring clients .......... 5,173,692 3,180,974 ---------- ----------- TOTAL CURRENT LIABILITIES .................... 22,784,928 18,215,280 1 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) June 30, December 31, 1998 1997 (UNAUDITED) NONCURRENT PORTION OF NOTES PAYABLE: Convertible Subordinated Notes and Other Non-Current Notes ............................ 4,961,000 5,034,327 ----------- ---------- TOTAL LIABILITIES ............................27,745,928 23,249,607 ----------- ---------- 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; 3,107,560 issued, 2,323,683 outstanding at June 30, 1998 and 2,318,451 at December 31, 1997, exclusive of shares held in the Treasury ............... 40,000 40,000 Additional paid-in-capital .......................18,874,182 18,852,312 Treasury Stock (782,145 shares at June 30, 1998 and 783,877 shares at December 31, 1997) .....(5,017,604) (5,030,594) Retained Earnings .................................6,347,849 9,702,322 ------------ ----------- TOTAL SHAREHOLDERS' EQUITY ................. 20,244,527 23,564,040 ------------ ----------- $ 47,990,355 $ 46,813,647 ============ ===========
See Notes to Consolidated Financial Statements 2
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, 1998 1997 1998 1997 ------------- --------------- ------------ -------- (Unaudited) (Unaudited) (Unaudited) REVENUE: Earned discounts ................................ $ 2,578,581 $ 1,497,010 $ 5,015,246 $ 3,789,595 Fees and other income ........................... 481,618 585,103 1,008,435 1,024,624 ------------ ------------ ------------ ------------ Total Revenue ............................... 3,060,199 2,082,113 6,023,681 4,814,219 ------------ ------------ ------------ ------------ EXPENSES: Compensation and fringe benefits ................ 1,128,096 730,246 1,940,330 1,462,196 General and administrative expense .............. 2,027,668 501,210 2,895,784 1,039,947 Interest expense ................................ 448,824 223,330 859,155 627,327 Provision for credit losses ..................... 4,911,000 120,790 5,458,000 675,790 Commissions ..................................... 78,264 72,961 194,972 166,112 ------------ ------------ ------------ ------------ Total Expenses ............................. 8,593,852 1,648,537 11,348,241 3,971,372 ------------ ------------ ------------ ------------ INCOME/(LOSS) BEFORE INCOME TAXES .................... (5,533,653) 433,576 (5,324,560) 842,847 INCOME TAXES/(BENEFIT) ............................... (2,047,452) 160,452 (1,970,087) 311,852 ------------ ------------ ------------ ------------ NET INCOME/(LOSS) .................................... (3,486,201) $ 273,124 $ (3,354,473) $ 530,995 ============ ============ ------------ ------------ NET INCOME/(LOSS) PER COMMON SHARE Diluted ............................ $ (1.50) $ .12 $ (1.44) $ .23 ============ ============ ============ ------------ Basic .............................. $ (1.50) $ .12 $ (1.44) $ .23 ============ ============ ============ ------------ WEIGHTED AVERAGE NUMBER OF SHARES Diluted ............................ 2,324,251 2,321,197 2,323,215 2,320,133 ============ ============ ============ ============ Basic .............................. 2,320,966 2,317,917 2,319,930 2,316,853 ============ ============ ============ ============
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1997 AND SIX MONTHS ENDED JUNE 30, 1998 Common Paid in Treasury Retained STOCK CAPITAL STOCK EARNINGS TOTAL BALANCE - January 1, 1997 $40,000 $18,852,312 $(5,034,584) $8,668,809 $22,526,537 Conversion of Convertible Subordinated Notes to 632 shares of Common Stock - - 3,990 - 3,990 Net Income - - - 1,033,513 1,033,513 ----------- ----------------- ----------------- ---------- ---------- BALANCE - December 31, 1997 40,000 18,852,312 (5,030,594) 9,702,322 23,564,040 Conversion of Convertible Subordinated Notes to 1,732 shares of Common Stock - - 12,990 - 12,990 1,000 Options Exercised at $5.62 - 5,620 - - 5,620 2,500 Options Exercised at $6.50 16,250 - - 16,250 Net (Loss) (Unaudited) - - - (3,354,473) (3,354,473) ------------ ----------------- ----------------- ---------- ----------- BALANCE - June 30, 1998 $40,000 $18,874,182 $(5,017,604) $6,347,849 $20,244,427 ======= =========== ============ ========== ===========
4
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) SIX MONTHS ENDED JUNE 30, 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES: Net Income/(Loss) ........................................... $ (3,354,473) $ 530,995 Adjustments to reconcile net income to cash provided by operating activities: Depreciation - net ...................................... 75,000 98,000 Disposition of automobiles .............................. 30,013 -- Provision for credit losses ............................. 5,458,000 675,790 Changes in operating assets and liabilities: Decrease/(Increase) in other receivables ................ 2,264,439 1,801,525 Decrease in prepaid expenses ............................ 94,202 11,422 (Increase)/Decrease in other assets ..................... 1,674,606 (1,342,966) (Decrease)/Increase in accounts payable and accrued expenses ............................... 861,666 (130,292) Decrease/(Increase) in income taxes accrued or receivable .............................. (2,388,138) 592,728 ------------- ------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ........................................ 4,715,315 2,237,202 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts ................ (131,818,340) (90,514,410) Collection of finance receivables, including accounts receivable, secured advances, repurchases and life insurance contracts ................ 120,947,133 105,298,655 Increase (Decrease) in credit balances of factoring clients .................................... 1,992,718 (1,632,492) Purchase of furniture, fixtures and equipment ............... (42,826) (60,163) ------------- ------------- NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES ......................................... (8,921,315) 13,091,600 ------------- ------------- 5 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) SIX MONTHS ENDED JUNE 30, 1998 1997 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from line of credit and other borrowings ........................................ 86,122,438 33,827,009 Principal payments on line of credit and other borrowings .................................... (84,227,275) (48,647,885) Exercise of Options ......................................... 21,870 -- Treasury Stock Acquisition Costs ............................ (10) -- ------------- ------------- NET CASH PROVIDED (USED) BY IN FINANCING ACTIVITIES: ....................................... 1,917,023 (14,820,876) ------------- ------------- NET INCREASE (DECREASE) IN CASH .................................. (2,288,977) 507,926 CASH, Beginning of period ........................................ 4,200,050 1,624,899 ------------- ------------- CASH, End of period .............................................. $ 1,911,073 $ 2,132,825 ============= ============= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid .............................................................. $ 798,104 $ 627,327 ============= ============= Income taxes paid .......................................................... $ 418,051 $ 150,000 ============= ============= Supplemental Schedule of Noncash Activities Transfer of finance and other receivables to other assets ............................................. $ -- $ 1,305,489 ============= ============= Issuance of Convertible Subordinated Notes in exchange for Common Stock ...................................... $ 12,990 $ -- ============= =============
6 ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. GENERAL. The consolidated financial statements of Allstate Financial Corporation and subsidiaries (the "Company") included herein are unaudited for all periods ended June 30, 1998 and 1997; however, they reflect all adjustments which, in the opinion of management, are necessary to present fairly the results for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Allstate Financial Corporation believes that the disclosures are adequate to make the information presented not misleading. The results of operations for the six months ended June 30, 1998 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 the Company's Annual Report on Form 10-KSB for the year ended December 31, 1997. Certain amounts related to 1997 have been reclassified to conform with the 1998 presentation. 2. NET INCOME PER SHARE. In March 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 supersedes APB No. 15 to conform earnings per share with international standards as well as to simplify the complexity of the computation under APB No. 15. SFAS No. 128 requires dual presentation of basic and diluted earnings per share on the face of the income statement. Basic earnings per share excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS No. 128 is effective for both interim and annual periods ending after December 15, 1997. Accordingly, the Company has adopted SFAS No. 128 and the basic and dilutive earnings per share are reflected in the statements of operations. 3. LINE OF CREDIT. As of June 30, 1998, the Company had approximately $8.0 million available under a $25.0 million secured revolving line of credit. The revolving line of credit contains various sub facilities which limit its use. The entire facility is available for the purchase of accounts receivable; however, the Company may (i) borrow up to $5.0 million for collateralized advances secured by machinery and equipment, (ii) borrow up to $2.5 million for collateralized advances secured by inventory, and (iii) issue up to $5.0 million of letters of credit. Borrowings under the credit facility bear interest at a spread over the bank's base rate or a spread over LIBOR, at the Company's election. 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 27, 2000. Because of the net loss caused by the provision for credit losses in the quarter ended June 30,1998, the Company was in technical default of covenants related to interest coverage, net worth 7 requirements, and net cash advanced to any one client. The Company has received waivers of these defaults or amendments to those covenants from the bank participants in the line of credit. 4. CONVERTIBLE SUBORDINATED NOTES PAYABLE. As of June 30, 1998 and June 30, 1997, the Company had outstanding approximately $4,961,000 and $4,978,000, respectively, in aggregate principal amount of Convertible Subordinated Notes issued in exchange for shares of the Company's common stock (currently held by the Company as treasury stock). The Convertible Subordinated Notes were issued in exchange for 782,145 shares of common stock. The Convertible Subordinated Notes (i) mature on September 30, 2000, (ii) currently bear interest at a rate of 9.5% per annum, which rate of interest fluctuates 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 $7.50 per share, (iv) are subordinated in right of payment to the Company's obligations under its secured revolving credit facility 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 "fundamental changes", the holders of the Convertible Subordinated Notes have the right to have their Notes redeemed at par. The election of the five persons nominated by the Independent Shareholders/Directors Committee in connection with the recently concluded proxy contest was deemed to constitute a "fundamental change" as defined in the Notes indenture. As a result, on June 17, 1998 the Company mailed to holders of the Notes a Notice of Fundamental Change, which enables the holders of the Notes to elect by 5:00 p.m., Eastern time, on August 17, 1998 to have their Notes redeemed at par. The Company intends to offer existing Note holders who are accredited investors (including those holders who rescind any election to have their Notes redeemed) the option of exchanging their current Notes for new unsecured, subordinated notes having the same principal amount (the "New Notes"). The New Notes will mature on September 30, 2003 (three years later than the current Notes), will bear a fixed interest rate of 10% per annum, will be convertible into common stock at $6.50 per share, and will not be redeemable by the Company. The Company's largest stockholder has agreed in principle to exchange its current $1.3 million of Notes for the same amount of New Notes and also to subscribe to additional New Notes in an amount sufficient to fund all redemptions of existing Notes, subject to the negotiation and execution of final documents. 5. NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, The FASB issued SFAS No. 129, "Disclosure of Information about Capital Structure". SFAS No. 129 consolidates the existing guidance from several other pronouncements relating to an entity's capital structure. At June 30, 1998, the implementation of this statement did not materially impact the presentation of any component of the Company's financial statements and related footnote disclosures. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This pronouncement establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general purpose financial statements. SFAS No. 130 is effective for financial statements beginning after December 15, 1997. For the six months ended June 30, 1998 and 1997, net income equaled comprehensive income. Additionally, in June of 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 establishes standards for the way that public enterprises report information about operating segments in the annual financial statements and 8 requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. SFAS No. 131 is effective for financial statements beginning after December 15, 1997. At June 30, 1998, the implementation of this statement did not materially impact the presentation of any component of the Company's financial statements and related footnote disclosures. 6. 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 Lyons' trustee brought an action against the Company claiming, among other things, fraudulent transfer and breach of contract. 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. 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 $300,000 previously paid by the Company was returned to the Company in April 1996; however, the Company continues to maintain a liability for this amount. The matter is currently being litigated in the District Court. It is anticipated that the court will set a trial date later in 1998 or early 1999. Management does not believe at this time that the Company has a material exposure (exclusive of potential accrued interest) 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 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. In response to the complaint, the Company filed a motion to dismiss all claims. In March 1997, a Federal magistrate recommended to the District Court that the Company's motion to dismiss the six claims contained in the original complaint be granted. However, the magistrate recommended that the Company's motion to dismiss two new claims, i.e., tortious interference with contract and civil conspiracy to defraud, contained in an amended complaint be denied. The District Court sustained the magistrate's recommendation. The Company believes that it has meritorious defenses and intends to vigorously defend all claims. However, the litigation is in the preliminary stage and the probability of a favorable or unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. The case is currently scheduled for trial in 1999. The Company is a counterclaim defendant in ALLSTATE FINANCIAL CORPORATION V. A.G. CONSTRUCTION, INC. (N/K/A A.G. PLUMBING, INC.), AMERICAN GENERAL CONSTRUCTION CORP., ADAM GUZICZEK AND CHERYL LEE GUZICZEK pending in the United States Bankruptcy Court for the Southern District of New York. The Company provided receivable financing to A.G. Construction, Inc. 9 (n/k/a/ A.G. Plumbing, Inc.) in 1988 and to American General Construction Corp. (hereinafter, A.G. Construction, Inc. (n/k/a A.G. Plumbing) and American General Construction shall be collectively referred to as "AG") in 1991. AG's primary business was renovation of public housing for the City of New York. Adam and Cheryl Guziczek (hereinafter collectively referred to as "Guziczek") personally guaranteed the obligation due the Company under the financing arrangement. In 1993, AG defaulted on its obligations under the financing arrangement with the Company. Thereafter, the Company confessed judgment against AG and Guziczek in Virginia and commenced actions in New York to enforce the guaranties and to attempt recovery on the confessed judgments. In one of the actions, an answer and counterclaim against the Company was filed. The counterclaim asserted claims for usury, diversion of proceeds of public improvement contracts, and overpayments to the Company by AG in excess of $2,000,000 (hereinafter the "Counterclaims"). No specific damage claims amount was set forth in the Counterclaims. On August 1, 1994, Guziczek filed a voluntary Chapter 11 petition under the United States Bankruptcy Code and on June 14, 1995 the case was converted to a Chapter 7 proceeding. On January 3, 1996, AG filed a separate voluntary Chapter 7 petition. No action was ever taken by the trustee in the Guziczek or AG bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the trustee for the AG bankruptcy estate filed a motion to abandon certain claims against the Company, including all claims that the Company diverted proceeds of public improvement contracts. On October 7, 1997, New York Surety Company (hereinafter referred to as the "Surety") filed pleadings objecting to the abandonment of such claims against the Company. The Surety provided the payment and performance bond to AG in connection with the construction jobs performed for the City of New York. In its pleadings, the Surety asserts that it is subrogated to AG's claims and thereby seeks to intervene and file an intervenor's complaint against the Company. The proposed complaint adopts the Counterclaims and seeks an accounting. The Surety asserts damages of approximately $4,000,000. On April 9, 1998, the bankruptcy court remanded the matter to state court. The Company believes it has meritorious defenses to the Counterclaims and intends to vigorously defend all claims. However, the litigation is in the preliminary stage and the probability of a favorable or unfavorable outcome and the potential amount of loss, if any, cannot be determined or estimated at this time. On June 24, 1998, the Surety was formally declared insolvent by the Superintendent of Insurance of the State of New York (hereinafter referred to as the "Superintendent") and as such the Superintendent was judicially appointed as rehabilitator of the surety to conduct its business. At this time, it is uncertain whether the Superintendent will continue to pursue the litigation against the Company. 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. 10 [THIS SPACE INTENTIONALLY LEFT BLANK] 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION This Form 10-QSB contains certain "forward-looking statements" relating to the Company which represent the Company's current expectations or beliefs, including, but not limited to, statements concerning the Company's operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-QSB that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intend", "could", "estimate", or "continue", or the negative or other variation thereof or comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, seasonality, and variability of quarterly results, ability of the Company to continue its growth strategy, competition, and regulatory restrictions relating to potential new activities, certain of which are beyond the Company's control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements. GENERAL The Company is a specialized commercial finance company principally engaged in providing small- to medium-sized, high risk, growth or turnaround companies, including debtors-in-possession. The Company purchases accounts receivable at a discount or makes advances to its clients collateralized by receivables, inventory, equipment, real estate and other assets (collectively, "Collateralized Advances"). The Company may advance funds secured by equity in the client's existing portfolio of Factored Accounts Receivable, equity in other of the client's principal(s) or accounts receivable including property pledged by the client's principal(s) or accounts receivable generated through the use of the proceeds of such secured advances (such advances, collectively, "Overadvances Secured by General Liens"). On occasion, the Company will also provide other specialized financing structures which satisfy the unique requirements of the Company's clients. In addition, the Company provides financial assistance to clients in the form of guaranties, letters of credit, credit information, receivables monitoring, collection service and customer status information. In May 1997 the Company established Allstate Factors. Allstate Factors is engaged in traditional "non-recourse" factoring of accounts receivable in which the factor typically assumes the risk that an account debtor may become insolvent. However, due to declining volume and the departure of primary staff, it has been determined to transfer the remaining clients to another factor. The Company does not anticipate any significant negative impact associated with the closure of this operation. 12 The Company's clients are small- to medium-sized, high risk, growth and turnaround companies with annual revenues typically between $600,000 and $25,000,000. The Company's clients do not typically qualify for traditional bank financing because they are either too new, too small, undercapitalized (over-leveraged), unprofitable or otherwise unable to satisfy the requirements of a bank. Accordingly, there is a significant risk of default and client failure inherent in the Company's business. The Company often competes against banks, traditional asset-based lenders and small independent finance companies. The Company anticipates that competition will remain intense through all of 1998 and may continue to exert downward pressure on pricing, especially in the Company's core business. In order to remain competitive, the Company is, where necessary and appropriate, offering lower rates than it has historically. The Company believes that its ability to respond quickly and to provide specialized, flexible and comprehensive financial arrangements to its clients enables it to compete effectively. Although the Company has historically been successful in replacing major clients, competition resulting in the loss of one or more major clients and an inability to replace those clients could have a material adverse effect on the Company. Additionally, the Company's efforts to reduce the risk profile of new clients and the total amount advanced to any one client may have an adverse impact future earnings of the Company. 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. 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, Inc., a Viatical Settlement Company ("Lifetime Options"), a wholly-owned subsidiary of the Company, was engaged in the business of buying life insurance policies at a discount from individuals facing life threatening illnesses. During 1997, Lifetime Options curtailed any further purchasing of policies. None of the Company's subsidiaries is currently engaged in business which could have a material effect on the Company. 13 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, 1998 1997 (Unaudited) (Unaudited) REVENUE Earned discounts 2,578,581 84.3% $1,497,010 71.9% Fees and other revenue 481,618 15.7 585,103 28.1 ----------- ------ ----------- ------ TOTAL REVENUE 3,060,199 100.0 2,082,113 100.0% ---------- ----- ---------- ----- EXPENSES Compensation and fringe benefits 1,128,096 36.8 730,246 35.1 General and administrative expense 2,027,668 66.2 501,210 24.1 Interest expense 448,824 14.7 223,330 10.7 Provision for credit losses 4,911,000 160.5 120,790 5.8 Commissions 78,264 2.6 72,961 3.5 ------------ ------- ------------ ----- TOTAL EXPENSES 8,593,852 280.8 1,648,537 79.2 ---------- ------ ---------- ----- INCOME (LOSS) BEFORE INCOME TAXES (BNEFIT) (5,533,653) (180.8) 433,576 20.8 INCOME TAXES (BENEFIT) (2,047,452) (66.9) 160,452 7.7 ------------ ----- ----------- ----- NET INCOME (LOSS $(3,486,201) (113.9)% 273,124 13.1% =========== ====== ---------- ===== NET INCOME (LOSS) PER COMMON SHARE DILUTED $(1.50) $0.12 ====== ===== BASIC $(1.50) $0.12 ====== ===== WEIGHTED AVERAGE NUMBER OF SHARES DILUTED 2,324,251 2,321,187 ========== ========== BASIC 2,320,966 2,317,919 ========== ==========
[THIS SPACE INTENTIONALLY LEFT BLANK] 14
FOR THE SIX MONTHS ENDED JUNE 30, 1998 1997 (Unaudited) (Unaudited) REVENUE Earned discounts $5,015,246 83.3% $3,789,595 78.8% Fees and other income 1,008,435 16.7 1,024,624 21.2 ----------- ----- ----------- ------- TOTAL REVENUE 6,023,681 100.0% 4,814,219 100.0% ---------- ----- ----------- ----- EXPENSES Compensation and fringe benefits 1,940,330 32.2 1,462,196 30.4 General and administrative expense 2,895,784 48.1 1,039,947 21.6 Interest expense 859,155 14.3 627,327 13.0 Provision for credit losses 5,458,000 90.6 675,790 14.0 Commissions 194,972 3.2 166,112 3.5 ----------- ------ ------------ ---- TOTAL EXPENSES 11,348,241 188.4 3,971,372 82.5 ---------- ----- ----------- ----- INCOME (LOSS) BEFORE INCOME TAXES (5,324,560) (88.4) 842,847 17.5 INCOME TAXES (BENEFIT) (1,970,087) (32.7) 311,852 6.5 ----------- ----- ------------ ------ NET INCOME (LOSS) $(3,354,473) (55.7)% $ 530,995 11.0% =========== ====== ========== ==== NET INCOME (LOSS) PER COMMON SHARE DILUTED $(1.44) $0.23 ====== ===== BASIC $(1.44) $0.23 ====== ===== WEIGHTED AVERAGE NUMBER OF SHARES DILUTED 2,323,215 2,320,133 ========== ========== BASIC 2,319,930 2,317,919 ========== ==========
TOTAL REVENUE. Total revenue 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 and Overadvances. "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). 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. 15
For the Three Months Ended June 30, 1998 1997 (Unaudited) (Unaudited) ------------------------------------ --------------------------------- Earned % of Total Earned % of Total TYPE OF TRANSACTION INCOME INCOME INCOME INCOME ------------------------- ---------------- --------- ----------- --------- Discount on Factored Accounts Receivable $1,085,667 35.5% $ 835,726 40.1% Earnings on Collateralized Advances 708,156 23.1 365,501 17.6 Earnings on Overadvances 784,758 25.7 195,783 9.4 Earnings on Purchased Life Insurance Policies - - 100,000 4.8 ----------------- -------- ------------ ------- Total 2,578,581 84.3 1,497,010 71.9 Fees and Other Income 481,618 15.7 585,103 28.1 ------------ ------ ------------ ------ Total Revenue $3,060,199 100.0% $2,082,113 100.0% ========== ===== ========== =====
For the Six Months Ended June 30, 1998 1997 (Unaudited) (Unaudited) ------------------------------------ --------------------------------- Earned % of Total Earned % of Total TYPE OF TRANSACTION INCOME INCOME INCOME INCOME -------------------- ----------- ---------- ------------ ----------- Discount on Factored Accounts Receivable $2,616,119 43.5% $2,320,053 48.2% Earnings on Collateralized Advances 1,108,654 18.4 836,744 17.4 Earnings on Overadvances 1,290,473 21.4 432,798 8.9 Earnings on Purchased Life Insurance Policies - - 200,000 4.2 ------------------ ------- ------------ ------- Total 5,015,246 83.3 3,789,595 78.7 Fees and Other Income 1,008,435 16.7 1,024,624 21.3 ----------- ----- ----------- ------ Total Revenue $6,023,681 100.0% $4,814,219 100.0% ========== ===== ========== =====
16 Total revenue increased 25.1% in the first half of 1998 from the same period in 1997, from $4.8 million to $6.0 million; total revenue increased 47.1% for the second quarter of 1998 over the same period 1997, from $2.1 million to $3.1 million. Earned discounts from finance receivables increased 12.8%, from $2.3 million to $2.6 million in the first half of 1998 versus the first half of 1997. In the second quarter earned discounts from finance receivables increased 29.9% to $1.1 million from $0.8 million. The increase in earned discounts from factored accounts receivable in the second quarter of 1998 is largely the result of additional volume of new clients (10 in 1998, 1 in 1997) during the second quarter. Earned discounts from factored accounts receivable as a percentage of total factored accounts receivable purchased were 2.8% and 3.1% in the first halves of 1998 and 1997, respectively; in the second quarters of 1998 and 1997, earned discounts were 2.6% and 3.1%, respectively, of factored accounts receivable. The reduction during the first half of 1998 versus 1997 in the average earned discount from factored accounts receivable reflects the downward pressure on pricing from competition in the Company's core business. In the first halves of 1998 and 1997, earned discounts from factored accounts receivable accounted for 43.5% and 48.2%, respectively, of total revenue. In the second quarters of 1998 and 1997, earned discounts from factored accounts receivable accounted for 35.5% and 40.1%, respectively, of total revenue. Earned discounts from Collateralized Advances increased approximately 32.5% in the first half of 1998 versus the comparable period in 1997, to approximately $1.1 million from $0.8 million and increased approximately 93.7% in the second quarter of 1998 over the same quarter in 1997, to approximately $708 thousand from $366 thousand. In the first halves of 1998 and 1997, earned discounts from Collateralized Advances constituted approximately 18.4% and 17.4%, respectively, of total income. In the second quarter of 1998 and 1997, earnings on Collateralized Advances were 23.1% and 17.6%, respectively, of total income. The increase in earned discounts from Collateralized Advances in 1998 reflects a move towards Collateralized Advances, as a larger part of the Company's receivables. In the second quarters of 1998 and 1997, earned discounts from Collateralized Advances constituted 23.1% and 17.6%, respectively, of total income. Collateralized Advances currently bear interest at a rate, on average, of approximately 2% per month calculated generally on the average outstanding amount of the Collateralized Advance during the month. Earned discounts from Collateralized Advances are required to be paid in cash monthly in arrears. See Provision for Credit Losses below. Earnings on Overadvances increased approximately 198.2% in the first half of 1998 versus the comparable period in 1997, to approximately $1.3 million from $433 thousand and increased approximately 300.8% in the second quarter of 1998 over the same quarter in 1997, to approximately $785 thousand from $196 thousand. In the first halves of 1998 and 1997, earnings on Overadvances constituted approximately 21.4% and 8.9%, respectively, of total income. In the second quarter of 1998 and 1997 earnings on Overadvances were 25.7% and 9.4%, respectively, of total income. Earnings on Overadvances are usually greater than on other types of advances. Overadvances are generally short-term in nature and are repaid directly by the client. Interest is usually required to be paid in cash no less frequently than monthly in arrears. The increase in earnings on Overadvances in the quarter and the half year ended June 30, 1998 results primarily from activity in the account of one client, MGV International, Inc. See Provision for Credit Losses below. As of June 30, 1998 and December 31, 1997, factored accounts receivable included on the Company's balance sheet were $30.3 million (59.4%) and $30.4 million (70.2%), respectively, of gross finance receivables. As of June 30, 1998 and December 31, 1997, Collateralized Advances included on the Company's balance sheet were $9.7 million (19.0%) and $7.0 million (16.3%), respectively, of gross finance receivables. As of June 30, 1998 and December 31, 1997, 17 Overadvances included on the Company's balance sheet were $3.9 million (7.9%) and $604 thousand (1.4%), respectively, of gross finance receivables. Approximately $2.5 million as of June 30, 1998 and none as of December 31, 1997 were due from one client, MGV International, Inc. Fees and other income remained relatively constant, approximately $1.0 million, in the first half of 1998 as compared to the same amount for the same period in 1997. In the second quarter of 1998, fees and other income were $482 thousand compared to $585 thousand in 1997. For 1997, included in fee income is an unusually large supplemental discount in the amount of $165 thousand. This is partially offset by an increase in various operational fees in 1998. COMPENSATION AND FRINGE BENEFITS. In the first half of 1998 and 1997, compensation and fringe benefits were $1.9 million (32.2% of total revenue) and $1.5 million (30.4% of total revenue), respectively. For the second quarters of 1998 and 1997, compensation and fringe benefits were $1.1 million (36.9% of total revenue) and $730 thousand (35.1% of total revenue), respectively. Within compensation and fringe benefits, executive compensation increased in the first half of 1998 as compared to the same period in 1997, from $431 thousand (9% of total revenue) to $719 thousand (11.9% of total revenue). Executive compensation also increased in the second quarter of 1998 as compared to the same period in 1997, from $209 thousand (10.0% of total revenue) to $497 thousand (16.2% of total revenue). The higher compensation and fringe benefits (including executive compensation) during 1998 were chiefly the result of expenses associated with the severance of key employees and the payroll costs associated with Allstate Factors. GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense was $2.9 million (48.1% of total revenue) as compared to $1.0 million (21.6% of total revenue) for the first half of 1998 and 1997, respectively. For the second quarters of 1998 and 1997, general and administrative expense was $2.0 million (66.2% of total revenue) and $501 thousand (24.1% of total revenue), respectively. During the second quarter of 1998, general and administrative expenses were significantly increased by the proxy contest concluded during the quarter. The election of directors was held on May 12, 1998. In addition to the slate of directors presented by the Company, another slate was presented by the independent shareholders/directors committee. The independent slate prevailed in electing five directors, which constituted the entire Board of Directors at the time (see Part II, Item 4. - Submission of Matters to a Vote of Security Holders). The fees and expenses of the proxy contest for the first six months of 1998 were $857 thousand (14.6% of total revenue) and for the quarter ended June 30, 1998 the expenses were $679 thousand (22.2% of total revenue), including the expenses of the independent shareholders/directors committee ($300 thousand), which were reimbursed by the Company. During the six and three months of 1998 the general and administrative expenses of the Allstate Factors Division were $291 thousand (4.8% of total revenue) and $152 thousand (5.0% of total revenue), respectively, without any corresponding expenses for 1997. In addition, professional fees and expenses in connection with the liquidation of clients' portfolios and collateral were $629 thousand (10.5% of total revenue) for the six months ended June 30, 1998 versus $305 thousand (6.3% of total revenue) for the six months ended June 30, 1997. For the quarter ended June 30, 1998 and 1997, professional fees and expenses were $447 thousand (14.6% of total revenue) versus $146 thousand (7.0% of total revenue). The increase in professional fees in 1998 is attributable principally to litigation expenditures associated with legal procedures instituted in prior years. General and administrative expenses (exclusive of the proxy contest, Allstate Factors, and professional fees and expenses) for the six months ended June 30, 1998 and 1997 were $1.1 million (18.6% of total revenue) versus $769 thousand (25.1% of total revenue). For the three months ended June 30, 1998 and 1997, adjusted general and administrative expenses were $462 thousand (15.1% of total revenue) against $355 thousand (17.1% of total revenue). The 18 increase in the balance of General and Administrative expenses ($350 thousand) is principally comprised of increases in professional fees other ($220 thousand) and recruitment fees ($95 thousand). INTEREST EXPENSE. Interest expense was $859 thousand (14.3% of total revenue) versus $627 thousand (13.0% of total revenue) for the first half of 1998 and 1997, respectively, and $448 thousand (14.7% of total revenue) versus $223 thousand (10.7% of total revenue) for the second quarters of 1998 and 1997, respectively. The increase in interest expense is primarily attributable to the Allstate Factors Division which commenced operations during the third quarter of 1997. Interest expense on the Convertible Subordinated Notes was comparable in the first half and second quarter of 1998, to that in the first half and second quarter of 1997. The average daily outstanding balance on the Company's revolving lines of credit was $14.2 million and $7.5 million for the first halves of 1998 and 1997, respectively, and $14.9 million and $3.3 million for the three months ended June 30, 1998 and 1997, respectively. The average interest rate paid on the Company's revolving lines of credit decreased to 8.07% during the first half of 1998 from 9.07% during the first half of 1997 and was 8.04% during the second quarter of 1998 as compared to 9.16% during the second quarter of 1997. The increase in the outstanding balance in the Company's revolving credit line reflects the increase in the finance receivables. The balance of the net receivables at June 30, 1998 was $40 million versus $19.6 million at June 30, 1997. 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 judgment 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, 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, (vii) 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 19 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 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 making of Overadvances is generally considered by the Company to entail greater risk than either factoring of accounts receivable or the making of Collateralized Advances. Overadvances are secured primarily by equity in the client's assets which is in excess of the formulae used by the Company to calculate availability of advances for accounts receivable factoring or Collateralized Advances. In addition, other assets, including those owned by clients' principals, may be pledged. Accordingly the Company may find it to be difficult to realize the values of such collateral to repay Overadvances. The Company makes Overadvances after determining specific uses of each Overadvance and agreeing with the client on the repayment plan for each such advance, which is usually a function of a future purchase of an account receivable or a Collateralized Advance to be made at a future date. Although the Company carefully monitors each Overadvance, there can be no assurance that Overadvance activity, particularly if concentrated with a single account debtor, could not have a material adverse effect on the Company. The provision for credit losses increased from $676 thousand (14.0% of total revenue) in the first half of 1997 to $5.5 million (90.6% of total revenue) in the first six months of 1998. The provision for credit losses during the second quarter of 1998 was increased by approximately $4.3 million. During the second quarter, the Company recorded $3.2 million of writedowns or additional reserves for nine non-performing assets, a substantial majority of which had been non-performing at December 31, 1997, because of adverse events related to those assets. Specifically, during the second quarter of 1998, the Company lost a lawsuit for approximately $900 thousand and was confronted by the bankruptcy of a major obligor for approximately $900 thousand. The Company also determined that an appraisal received during the quarter ended March 31, 1998, did not properly reflect the value of the property because the appraiser did not use appropriate comparable sales of similar properties in formulating his opinion of the property's value. As of June 30, 1998 and December 31, 1997 the allowance for credit losses was 6.6% ($3.4 million) and 4.6% ($2.0 million) of gross finance receivables, respectively. At June 30, 1998, the accrual of earnings was suspended on $300 thousand of gross finance receivables as compared to $829 thousand of gross finance receivables at December 31, 1997. 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. 20
As of (or for As of or for the six the Year Ended) Months Ended June 30, DECEMBER 31, 1997 1998 1997 ----------------- ------ ----- (Dollars in thousands) NON-EARNING RECEIVABLES, OTHER Unaudited RECEIVABLES AND OTHER ASSETS DATA: Non-Earning Receivables $ 829 $ 373 $ 4,587 Other Receivables 3,748 1,719 2,592 Other Assets (excluding miscellaneous) 3,941 2,602 3,187 ------- ------- -------- $8,518 $4,694 $10,366 ====== ====== ======= ALLOWANCE FOR CREDIT LOSSES: Balance, January 1 $2,579 $2,739 $2,579 Provision for credit losses 1,594 5,453 676 Receivables charged off (1,776) (3,428) (360) Recoveries 342 26 316 Balance at December 31, 1997 and June 30, 1998 and 1997 (including $275,000 allocated to Life Insurance Contracts at December 31, 1997 and June 30, 1998) $2,739 $4,790 $3,211 ALLOWANCE FOR CREDIT LOSSES AS A PERCENT OF: Gross Finance Receivables 6.32% 9.40% 16.00% Non-Earning Receivables 330.40% 1,284.19% 70.00% Non-Earning Receivables, Other Receivables and Other Assets: 32.16% 102.05% 30.98% AS A PERCENT OF THE SUM OF GROSS FINANCE RECEIVABLES, OTHER RECEIVABLES AND OTHER ASSETS: Non-Earning Receivables 1.63% 0.68% 17.79% Other Receivables 7.35% 3.37% 10.00% Other Assets 7.73% 4.71% 12.36% AMOUNT OF ALLOWANCE ALLOCATED TO: Non-earning Receivables, Other Receivables and Other Assets $1,055 $1,425 $1,675 Life Insurance Contracts 275 275 -
In light of the significant charge-off of $3.4 million of receivables during the first half of 1998 (of which $3.2 million was during the second quarter), the sum of non-earning receivables, other receivables and other assets ("non-performing assets") declined by $3.8 million or 44.9% from December 31, 1997 to June 30, 1998. As a result, non-performing assets as a percentage of total assets declined from 18.2% at December 31, 1997 to 9.6% at June 30, 1998. The $5.5 million provision for credit losses in the first half of 1998 (of which $4.9 million was in the second quarter), reflects Management's intention to replenish the allowance for credit losses in light of the significant charge-offs incurred. A portion of the reserve is allocated to non-earning receivables, other receivables, and other assets (see chart on page 21) and the balance is maintained at a level based on an assessment of the risks inherent in the finance receivables portfolio. The reserve balance was increased to reflect the higher level of Overadvances funded during the quarter, including a higher than usual concentration with one client. Although the Company currently 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 21 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. COMMISSIONS. Commission expense was $195 thousand (3.2% of total revenue) in the first six months of 1998 as compared to $166 thousand (3.4% of total revenue) in the first six months of 1997. During the second quarter of 1998, commission expenses were $78 thousand (2.6% of total revenue) as compared to $73 thousand (3.5% of total revenue) for the second quarter of 1997. The increase in commission expense reflects the increase in earned discounts. 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 increased 2.5% to $48.0 million at June 30, 1998 from $46.8 million at December 31, 1997. The increase is primarily the result of a $5.4 million, or 16.0%, increase in net finance receivables and a $1.9 million income tax receivable, partially offset by decreases of $2.3 million in cash and $3.9 million in other receivables and other assets. The decrease in other receivables is primarily a function of the write-off of $1.8 million of non-earning assets, while the income tax receivable results from the loss for the three months ended June 30, 1998. The decrease in other assets comprises the collections of $725 thousand and the write-off of $625 thousand of non-earning assets. The increase in assets was primarily funded by increases of $2.0 million in credit balances of factoring clients and $2.0 million in notes payable under the Company's revolving credit facility. Current liabilities increased by $4.6 million or 25.1% in the first half of 1998, resulting in a decline in the Company's working capital ratio as disclosed below. Total debt as a percentage of total equity increased to 137.1% at June 30, 1998 from 98.7% at December 31, 1997. 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. 22 The Company believes that internally generated funds and borrowings under its revolving credit facility will be sufficient to finance the Company's funding requirements for the next 12 months. At June 30, 1998 and December 31, 1997, the Company had working capital of $22.2 million and $23.9 million, respectively, and a ratio of current assets to current liabilities of 1.98 to 1 and 2.31 to 1, respectively. [THIS SPACE INTENTIONALLY LEFT BLANK] 23 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 2. - CHANGES IN SECURITIES None. ITEM 3. - DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's annual meeting of shareholders was held on May 12, 1998. The shareholders voted as follows: Nominees elected as directors: # OF VOTES C. Scott Bartlett 1,214,320 David W. Campbell 1,214,320 Edward A. McNally 1,214,320 William H. Savage 1,214,320 Lindsay R. Trittipoe 1,214,705 Nominees not elected as directors: # OF VOTES Craig Fishman 838,095 Alan L. Freeman 838,095 Wayne M. Lee 838.095 John V. Pollock 838,095 David P. Bindeman 838,095 ITEM 5. - OTHER INFORMATION None. ITEM 6(a). - EXHIBITS EXHIBIT 10.9. EMPLOYMENT CONTRACTS Severance Agreement with Craig Fishman dated July 2, 1998. EXHIBIT 27. FINANCIAL DATA SCHEDULE 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 /S/ LAWRENCE M. WINKLER ----------------------- Lawrence M. Winkler Secretary/Treasurer Chief Financial Officer Date: August 14, 1998 25 EX-27 2 FDS JUN 98
5 0000852220 ALLSTATE FINANCIAL CORP 6-MOS DEC-31-1998 JUN-30-1998 1911073 0 44670422 4790451 0 45029181 1269599 837546 47990355 22784928 0 0 0 40000 20204527 47990355 0 6023681 0 0 5031086 5458000 859155 (5324560) (1970087) (3354473) 0 0 0 (3354473) (1.44) (1.44)
EX-10 3 The Board of Directors Allstate Financial Corporation July 2, 1998 - Page 1 Craig Fishman 2687 Hillsman Street Falls Church, VA 22043 July 2, 1998 The Board of Directors Allstate Financial Corporation 2700 South Quincy Street, Suite 540 Arlington, VA 22206 Gentlemen: Consistent with our discussions, the following are my suggestions as to how to proceed in the best interests of Allstate Financial Corporation (the "Company"): I. Consulting Arrangements (following termination of Employment) Nature of Consulting Engagement: I will assist David Campbell (in hiscapacity as active Chairman of the Board) and/or the to-be-identified replacement President/CEO address critical transition issues and I will assist him (or them) with such other tasks as he (or they) may reasonably request. I will use my best efforts when performing consulting services. If either Mr. Campbell or the replacement President/CEO is not satisfied with my consulting efforts or services, I expect him or them to so notify me immediately. Consulting Period: I will be available to consult as an independent consultant (see "II. Termination of Employment" below) for up to 5 hours/week from August 1, 1998 through September 30, 1998 (the "Initial Consulting Period"). If requested by the Company, I will make reasonable efforts to be available to consult for more than 5 hours/week from time to time during the Initial Consulting Period. Compensation During the Initial Consulting Period and Thereafter: The first 5 hours/week of consultation in any calendar week during the Initial Consulting Period will be at no cost to the Company. The Board of Directors Allstate Financial Corporation July 2, 1998 - Page 2 Consultation in excess of 5 hours/week in any calendar week during the Initial Consulting Period or consultation beyond the Initial Consulting Period will be billed and paid at $250/hour. II. Termination of Employment Termination/Termination Date: For purposes of severance benefits under my employment agreement, my employment will be terminated by the Company without cause effective July 31, 1998. Until July 31, 1998, I will continue to be a full time employee of the Company compensated at an annual rate of $220,000 paid at the same time as all other employees. For all other purposes including, without limitation, press releases and employment references, my departure from the Company is by mutual agreement. Severance Payments and Other Lump Sum Benefits: Contractual Benefits: On July 31, 1998, the Company will pay me 5.5 months severance (i.e., $100,833.50) in a lump sum plus accrued salary and accrued vacation (approximately 180 hours). On September 30, 1998, the Company will pay me the remaining 5.5 months severance due under my employment contract (i.e., an additional $100,833.50) in a lump sum. The Company will provide such other benefits as are set forth in my employment contract including, without limitation, health insurance for eleven (11) months for me and my spouse (at no cost to me or my spouse). Thereafter, I will have available for me and my spouse eighteen (18) months of continuation health insurance coverage (at my expense) under federal COBRA law. Non-Contractual Benefits: On July 31, 1998, the Company will transfer to me the Company car driven by me (at no cost to me). The Board of Directors Allstate Financial Corporation July 2, 1998 - Page 3 The Company will pay me on July 31, 1998, $5,000 to defray the expenses of identifying, preparing for and obtaining subsequent employment. Mutual Release: Effective July 31, 1998, the Company releases me and I release the Company, from any and all claims, damages, actions, liabilities, etc. of any kind, provided that the foregoing release does not apply to claims, damages, actions, liabilities, etc. arising from a breach by either party of obligations created under this letter agreement or from a breach by either party of any post-termination obligations under my employment contract. Non-Disparagement: Through July 31, 1999, neither I nor the Company (including its officers and directors) will make statements which may reasonably be considered to be adverse to the interests of the other, provided that the foregoing shall not be construed as waiver by me or the Company of any cause of action that may arise as a consequence of disparaging or other statements made on or after August 1, 1999. Press Release: Through July 31, 1999, any press release which mentions my name or otherwise refers to me (whether directly or indirectly) must, with respect to such mention or reference, be in form and substance reasonably satisfactory to me. Coordination with Employment Agreement: This letter agreement and my employment agreement are intended to be read together to give full effect to both agreements. In the case of a direct conflict, I and the Company will cooperate to resolve the conflict. Without limiting the generality of the foregoing, except in the case of a direct conflict, nothing in this letter agreement is intended to change the non-compete, confidentiality or other provisions of my employment agreement. The Board of Directors Allstate Financial Corporation July 2, 1998 - Page 4 III. Board Approval, Etc. The terms and provisions of this letter agreement should be ratified and approved by the Board of Directors on or before July 14, 1998. If approved, the terms and provisions hereof should be incorporated into a formal agreement between me and the Company. If, however, the Board of Directors approves the terms and provisions hereof and no formal agreement is executed, it is understood and agreed that this letter agreement (once duly executed by a member of the Board) is enforceable in accordance with its terms. The signature of any member of the Board of Directors in the space provided below shall be conclusive evidence that the Board of Directors has duly ratified and approved all of the terms and provisions hereof (without qualification or reservation). I believe the arrangements contemplated in this letter agreement are in the best interests of the Company and provide the Company (and its Board of Directors) the best opportunity to manage and work through what I perceive to be a crisis period for the Company. Sincerely, /s/ Craig Fishman --------------------- Craig Fishman President and CEO CF/gbb Ratified and Approved by the Board of Directors (without qualification or reservation) on this 14th day of July, 1998: ALLSTATE FINANCIAL CORPORATION By /s/ David W. Campbell ----------------------- Name: David W. Campbell Title: Director and Chairman of the Board -----END PRIVACY-ENHANCED MESSAGE-----