SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1996 COMMISSION FILE NUMBER 0-17832
Allstate Financial Corporation
(exact name of registrant as specified in its charter)
Virginia 54-1208450
(State of Incorporation) (I.R.S. Employer Identification No)
2700 South Quincy Street, Suite 540, Arlington, VA 22206
(address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 931-2274
Indicate by the check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15 of the Securities and Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ]
No [ ]
2,316,853 Common Shares were outstanding as of June 30, 1996.
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at June 30, 1996 (Unaudited)
and December 31, 1995 1-2
Consolidated Statements of Income Three and Six Months Ended
June 30, 1996 and 1995 (Unaudited) 3
Consolidated Statements of Shareholders' Equity Three
Months Ended June 30, 1996 (Unaudited) and Year Ended
December 31, 1995 4
Consolidated Statements of Cash Flows Six Months Ended
June 30, 1996 and 1995 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 10-21
Part II.
Item 1 - Legal Proceedings 22-23
Item 4 - Submission of Matters To a Vote of Security Holders 23
Item 5 - Other Information 23-24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
<PAGE>
PART I - FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 3,019,742 $ 754,295
Receivables:
Finance, net 26,222,598 32,670,706
Purchased life insurance contracts, net 4,231,311 4,292,332
Other 2,848,568 2,756,342
Prepaid expenses 194,048 204,823
Prepaid income taxes 1,782,174 722,081
Deferred income taxes 893,000 893,000
----------- -----------
TOTAL CURRENT ASSETS 39,191,441 42,293,579
PROPERTY AND EQUIPMENT, Net 534,000 537,629
OTHER ASSETS 1,132,549 2,049,323
----------- -----------
$40,857,990 $44,880,531
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 639,440 $ 292,602
Notes payable 11,160,128 13,516,938
Note payable-related party 103,000 103,000
Credit balances of factoring clients 2,098,502 2,333,729
----------- -----------
TOTAL CURRENT LIABILITIES 14,001,070 16,246,269
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
NONCURRENT PORTION OF NOTES PAYABLE:
<S> <C> <C>
Related parties 60,174 58,788
Convertible Subordinated Notes 4,986,000 2,838,000
Other 7,110 7,110
----------- -----------
TOTAL LIABILITIES 19,054,354 19,150,167
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding - -
Common stock, authorized 10,000,000 shares with no par value; issued and
outstanding 2,316,853 shares at June 30, 1996 and
2,655,128 at December 31, 1995 40,000 40,000
Additional paid-in-capital 18,852,312 18,852,312
Treasury Stock (785,475 shares at June 30,
1996 and 447,200 shares at December 31, 1995) (5,042,579) (2,871,901)
Retained Earnings 7,953,903 9,709,953
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 21,803,636 25,730,364
----------- -----------
$40,857,990 $44,880,531
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
INCOME:
<S> <C> <C> <C> <C>
Earned discounts $2,722,140 $2,420,653 $5,055,961 $5,298,299
Fees and other income 563,398 649,726 1,115,250 1,056,151
----------- ---------- ----------- ----------
3,285,538 3,070,379 6,171,211 6,354,450
----------- ---------- ----------- ----------
EXPENSES:
Compensation and fringe benefits 995,894 753,069 1,846,381 1,560,549
General and administrative expense 941,088 730,759 1,551,722 1,338,997
Interest expense 426,983 166,020 782,343 424,526
Provision for credit losses 3,928,570 610,500 4,552,229 1,911,600
Commission 36,145 72,846 225,786 134,717
----------- ---------- ----------- ----------
TOTAL EXPENSES 6,428,680 2,333,194 8,958,461 5,370,389
----------- ---------- ----------- ----------
INCOME/(LOSS) BEFORE INCOME TAX (3,143,142) 737,185 (2,787,250) 984,061
INCOME TAXES/(BENEFIT) (1,162,900) 271,500 (1,031,200) 362,500
----------- ---------- ----------- ----------
NET INCOME/(LOSS) $(1,980,242) $ 465,685 $(1,756,050) $ 621,561
=========== ========== =========== ==========
NET INCOME/(LOSS) PER SHARE $( .85) $ .15 $( .75) $ .20
=========== ========== =========== ==========
WEIGHTED AVERAGE
NUMBER OF SHARES 2,316,853 3,102,328 2,339,157 3,102,328
========= ========= ========= =========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995
AND SIX MONTHS ENDED JUNE 30, 1996 (Unaudited)
Common Paid in Treasury Retained
Stock Capital Stock Earnings
------ ------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE - January 1, 1995 $40,000 $18,852,312 $ - $9,228,853
Exchange of Convertible
Subordinated Notes for
447,200 shares of common stock - - (2,871,901) -
Net Income - - - 481,100
------- ----------- ----------- ----------
BALANCE - December 31, 1995 40,000 18,852,312 (2,871,901) 9,709,953
Exchange of Convertible
Subordinated Notes for
338,275 shares of common stock - - (2,170,678) -
Net Loss - - - (1,756,050)
------- ----------- ----------- ----------
BALANCE - June 30, 1996 $40,000 $18,852,312 $(5,042,579) $7,953,903
======= =========== =========== ==========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended June 30,
--------------------------------
1996 1995
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $(1,756,050) $ 621,561
Adjustments to reconcile net income/(loss)
to cash provided by operating activities:
Depreciation - net 1,800 69,114
Provision for credit losses 4,552,229 1,911,600
Changes in operating assets and liabilities:
(Increase)/decrease in other receivables (92,226) 244,937
(Increase)/decrease in prepaid expenses
and other current assets 10,775 ( 67,659)
Decrease in other assets 916,774 66,030
Increase in accounts payable
and accrued expenses 346,838 18,953
Increase in settlement payable - 1,400,000
Increase in prepaid income taxes (1,060,093) (22,258)
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,980,047 4,242,278
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts (94,407,704) (81,075,404)
Collection of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts 96,364,604 84,025,272
Increase in credit balances of factoring
clients (235,227) (256,851)
Purchase of property and equipment (58,171) (138,239)
----------- -----------
NET CASH PROVIDED BY
INVESTING ACTIVITIES 1,663,502 2,554,778
----------- -----------
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Six Months Ended June 30,
--------------------------------
1996 1995
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Proceeds from line of credit and
other borrowings 29,786,262 30,265,380
Principal payments on line of credit
and other borrowings (32,141,686) (37,617,183)
Treasury Stock Acquisition Costs (22,678) -
----------- -----------
NET CASH (USED) IN
FINANCING ACTIVITIES (2,378,102) (7,351,803)
----------- ----------
INCREASE (DECREASE) IN CASH 2,265,447 ( 554,747)
CASH, Beginning of period 754,295 1,763,930
----------- -----------
CASH, End of period $ 3,019,742 $ 1,209,183
=========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Interest paid $ 781,652 $ 424,526
=========== ===========
Income taxes paid $ 28,897 $ -
=========== ===========
SUPPLEMENTAL SCHEDULE OF
NONCASH ACTIVITIES:
Transfer of finance and
other receivables to
other assets $ 560,655 $ -
=========== ===========
Issuance of Convertible
Subordinated Notes in
exchange for Common Stock $ 2,148,000 $ -
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
6
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation (the "Company") included herein are unaudited for all periods ended
June 30, 1996 and 1995; however, they reflect all adjustments which, in the
opinion of management, are necessary to present fairly the results for the
periods presented. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Allstate Financial Corporation
believes that the disclosures are adequate to make the information presented not
misleading. The results of operations for the three and six months ended June
30, 1996 are not necessarily indicative of the results of operations to be
expected for the remainder of the year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KSB for
the year ended December 31, 1995.
2. Net income/(loss) per share. Net income/(loss) per share of common stock has
been computed by dividing net income/(loss) by the weighted average number of
common shares outstanding during the periods presented. For the quarters ended
June 30, 1996 and 1995, weighted average shares outstanding were 2,316,853 and
3,102,328, respectively. At June 30, 1996 and December 31, 1995 there were
23,400 and 42,167 stock options outstanding, respectively, at exercise prices
ranging from $5.375 to $14.00 per share. During the year ended December 31,
1995, 53,470 options were forfeited. There were no options exercised during 1995
or during the six months ended June 30, 1996.
3. Line of credit. As of June 30, 1996, the Company had approximately $14.7
million available under a $25.0 million secured revolving line of credit.
Borrowings under the credit facility bear interest at the bank's base rate plus
.75%. The current maturity date of this credit facility is May 13, 1997. The
Company is subject to restrictive covenants which are typical in revolving
credit facilities of this type.
As of June 30, 1996, Lifetime Options, Inc., a Viatical Settlement Company
("Lifetime Options"), a wholly owned subsidiary of the Company, had
approximately $1.1 million available under a $2.0 million revolving line of
credit and an additional $1.5 million available under a
$4
million availability from the Company. Lifetime Options' revolving line of
credit: (i) is payable on demand and, if no demand is made, on December 31,
1996; (ii) bears interest at the prime rate of interest plus 1%; and (iii) is
collateralized by specific purchased life insurance
contracts.
7
<PAGE>
4. Convertible Subordinated Notes Payable. As of June 30, 1996, the Company had
outstanding $4,986,000 in aggregate principal amount of Convertible Subordinated
Notes issued in exchange for 785,475 shares of common stock of the Company. The
Notes (i) mature on September 30, 2000; (ii) currently bear interest at the rate
of 9.5% per annum which rate may fluctuate in accordance with the prime rate,
but may not fall below 8% nor rise above 10% per annum; (iii) are convertible
into common stock of the Company at the rate of $7.50 per share; (iv) are
subordinated to Senior Indebtedness (as defined) of the Company and (v) were
issued pursuant to an indenture which contains certain covenants which are less
restrictive than those contained in the Company's secured revolving credit
facility. Upon the occurrence of certain change of control events, holders of
the Notes have the right to have their Notes redeemed at par.
5. Certain Contingencies. The Company is a defendant in White, Trustee v.
Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. The Company provided receivables financing and
advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject
of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991,
the Lyon's trustee brought an action against the Company claiming, among other
things, fraudulent transfer and breach of contract. A summary judgement was
granted in favor of the Company which reduced the fraudulent transfer claim by
$1.6 million. As a consequence, the remaining fraudulent transfer claim was
approximately $1,000,000. The trustee has not actively pursued the breach of
contract claim. In late 1994, the Company reached a settlement agreement with
the Lyons trustee, subject to approval by the bankruptcy court, which would have
released the Company from all claims upon the payment of $300,000. In connection
with the settlement, the Company paid and added $300,000 to the provision for
credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin-Williams
Company, objected to the proposed settlement amount and, in March 1995, the
objection was sustained by the bankruptcy court. The Company appealed the order
sustaining the objection, but in April 1996 the appellate court exercised its
discretion not to hear the appeal at that time. The $300,000 previously paid by
the Company was returned to the Company in April 1996. Management expects this
litigation to resume in the District Court, but does not believe at this time
that the Company has a material exposure on the fraudulent transfer claim in
excess of the previously agreed upon settlement amount.
In connection with the same transaction, the Company was also named in
January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et.
al. pending in the United States District Court for the Northern District of
Ohio. Sherwin-Williams is suing all parties with any involvement in the
transaction to recover damages allegedly incurred by Sherwin-Williams in
connection with the leveraged buy-out and the bankruptcy litigation arising
therefrom. Sherwin-Williams asserts that it has or will incur pension fund
liabilities and other liabilities as a result of the transaction in the
approximate amount of $11 million and has asserted claims against the Company in
that amount. The complaint asserts, among other things, that the purchasers of
Lyons breached their purchase agreement with Sherwin-Williams by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. The complaint seeks relief against the Company
based upon a claim of "acting in concert" and "misrepresentation" in connection
with this purchase agreement without a specific identification of the alleged
misrepresentation made by the Company. The Company filed a motion to dismiss the
claims and a motion to stay discovery pending a ruling on the motion to dismiss.
The motion to stay discovery was granted and, in March 1996, a federal
magistrate recommended to the District Court that the Company's motion to
dismiss be granted. Prior to the District Court ruling on the magistrate's
recommendation, Sherwin-Williams filed an amended complaint. The amended
complaint retains the claims for "acting in concert" and "misrepresentation" and
adds two additional claims for "civil conspiracy" and "tortious interference
with contract". The two new claims arise from essentially the same allegations
set
8
<PAGE>
forth in the earlier claims, i.e., that the Company assisted in the breach of
the purchase agreement. Management does not believe the litigation will have a
material effect on the financial position or results of operations of the
Company because, in management's opinion, the claims are without merit.
The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee v.
Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court in
the District of Massachusetts. The Company factored the accounts receivable of
Clearpoint Research Corporation ("CRC") from late 1992 through early 1993. In
July 1993 CRC filed a petition in bankruptcy, after the Company had collected
all amounts owed to it. The bankruptcy trustee has sued the Company seeking
recovery of alleged preferential transfers made during the course of the
factoring relationship. The bankruptcy trustee alleges that the Company did not
properly perfect its security interest in the accounts receivable. No specific
damage amount is specified in the complaint but it is assumed the bankruptcy
trustee is seeking recovery of the full amount of accounts receivables collected
(approximately $4 million). The Company has filed an answer to the complaint
denying the substantive allegations asserted by the bankruptcy trustee. The
Company has removed the action to federal district court. The motion is
currently pending. The Company believes it has a number of strong defenses to
the complaint and intends to vigorously defend all claims. The litigation is in
a preliminary stage and the probability of an unfavorable outcome and the
potential amount of loss, if any, cannot be determined or estimated at this
time.
As previously disclosed in the Company's Form 10-QSB for the quarter
ended June 30, 1995, the Company has reached a settlement with the Trustee in
the bankruptcy of Premium Sales Corporation, a former client of one of the
Company's wholly-owned subsidiaries. The settlement is intended to be a full
release of any and all claims between the Company (and its subsidiaries) and the
Trustee including, without limitation, any alleged preference liability of the
Company and its subsidiaries. The settlement was approved by the bankruptcy
court in January 1996. The settlement will become fully effective and the
settlement monies will be disbursed at the time a plan of distribution in the
Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The
impact of this settlement has been reflected in the Company's financial
statements.
Except as described above, the Company is not party to any litigation
other than routine proceedings incidental to its business, and the Company does
not expect that these proceedings will have a material adverse effect on the
Company. From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without any
factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
6. Resolution of Subsequent Event. As disclosed in the Company's Form 10-QSB for
the quarter ended March 31, 1996, on May 13, 1996, the Company lost a lawsuit as
plaintiff against Comerica Bank. Due to the adverse result in that lawsuit, the
Company has in the second quarter of 1996 taken a $950,000 charge against the
allowance for credit losses (including approximately $350,000 allocable to the
legal fees and expenses of Comerica Bank and write off of approximately $600,000
in "other receivables" appearing on the Company's balance sheet at March 31,
1996).
9
<PAGE>
Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Company's principal business is the discounted purchase of accounts
receivable, usually on a full recourse, full notification basis. In addition,
the Company also makes advances collateralized by inventory, equipment and real
estate (collectively, "Collateralized Advances"). The Company has elected to
more aggressively pursue the making of Collateralized Advances, as it perceives
the need by its targeted customers for such funding and such funding is not
readily available from many of the Company's competitors. As of June 30, 1996,
Collateralized Advances constituted approximately 41% of the Company's portfolio
of finance receivables. On occasion, the Company will provide other specialized
financing structures which satisfy the unique requirements of the Company's
clients. The Company also provides its clients with letters of guaranty,
arranges for the issuance of letters of credit for its clients and provides
other related financial services.
The Company's clients are small- to medium-sized businesses with annual
revenues typically ranging between $600,000 and $50,000,000. The Company's
clients do not typically qualify for traditional bank or asset-based financing
because they are either too new, too small, undercapitalized (or
over-leveraged), unprofitable or otherwise unable to satisfy the requirements of
a bank or traditional, asset-based lender. Accordingly, there is a significant
risk of default and client failure inherent in the Company's business. The
Company addresses these risks in various ways, including: (i) the Company
thoroughly evaluates the collateral to be made available by each client; (ii)
the Company usually collects its factored accounts receivable directly from
account debtors, which are frequently (though not always) large, creditworthy
companies or governmental entities; (iii) the Company purchases, or takes a
first priority security interest in, all accounts receivable of each client;
(iv) the Company takes, whenever available, blanket liens on all of its clients'
other assets and, when making Collateralized Advances, the Company employs what
management believes to be conservative loan-to-value ratios based on auction or
liquidation value appraisals performed by independent appraisers; (v) the
Company usually requires personal guaranties (either unlimited guaranties or
validity guaranties limited to the validity and collectibility of factored
accounts receivable) from its clients' principals; (vi) the Company actively
monitors its portfolio of purchased accounts receivable, including the
creditworthiness of account debtors and periodically evaluates the value of
other collateral securing Collateralized Advances and (vii) the Company
maintains loss reserves which management believes are adequate and appropriate
for its business. Notwithstanding the foregoing, clients (and account debtors)
may fail and the collateral available to the Company (together with personal
guaranties) may prove insufficient to enable the Company to recover all amounts
due in full.
Lifetime Options, a wholly-owned subsidiary of the Company, provides
financial assistance to individuals facing life-threatening illnesses by
purchasing their life insurance policies at a discount from face value. The
amount of the discount is determined by Lifetime Options based on the size of
the policy being purchased, the maximum life expectancy of the insured, the
amount of the anticipated premiums payable with respect to the policy being
purchased and the anticipated financing cost associated with purchasing and
carrying the policy. In general, the purchase price for a policy is between 55%
and 85% of the benefits payable
10
<PAGE>
under the policy. Because most of the life insurance policies purchased by
Lifetime Options are underwritten by highly rated insurance companies (and, in
many cases, backed by state guaranty funds), management of Lifetime Options
believes that credit risk is not material to its business.
Before purchasing each policy, Lifetime Options has each insured's
medical records reviewed by at least one independent physician who provides
Lifetime Options with an opinion of the insured's life expectancy. Historically,
Lifetime Options typically required up to three independent reviews but, based
on its experience, management of Lifetime Options no longer believes multiple
medical reviews are necessary. To date, the physician engaged by Lifetime
Options has provided life expectancies which, on average, fairly approximate
actual lifespans. However, there is no assurance that the physician engaged by
Lifetime Options will in the future be able to perform as he has in the past. If
the physician engaged by Lifetime Options were to systematically underestimate
life expectancies or if life extending treatments (or a cure) were found for
AIDS (almost all of the life insurance policies purchased by Lifetime Options to
date have been purchased from individuals with AIDS), there would be a material
adverse effect on the earnings of Lifetime Options. Lifetime Options relies on
its independent physician to assist in monitoring medical advances (and
potential medical advances). In particular, Lifetime Options' independent
physician is closely monitoring the effects of a relatively new family of drugs
known as protease inhibitors. These drugs, while not a cure for AIDS, may extend
the lives of certain individuals infected with HIV.
Other than Lifetime Options, none of the Company's subsidiaries is
currently engaged in business which could have a material effect on the Company.
Competition
Continuing competition within the marketplace from banks and
asset-based lenders and newly created finance companies has encroached upon the
Company's potential client base and has negatively affected earned discounts.
Additionally, the Company continues to attract larger clients which often
increases the amount of time needed to negotiate and fund new business. Also,
Collateralized Advances require more in-depth and diverse due diligence which
can further delay the funding of new business. Nonetheless, the Company believes
that its ability to respond quickly and to provide specialized, flexible and
comprehensive financing structures to its clients enables it to compete
effectively. In order to remain competitive, however, the Company is, where
necessary and appropriate, offering lower rates than it has historically. The
Company believes that increased competition may level off or decline somewhat
over time but will for the foreseeable future continue to exert downward
pressure on pricing, especially in the Company's core factoring business. To
counter the downward pressure on pricing, the Company intends to continue to
diversify its sources of income, primarily by continuing its emphasis on funding
relationships which include (in addition to the factoring of accounts
receivable) the making of Collateralized Advances.
Historically, the Company did not expect to maintain a funding
relationship with a client for more than two years; the Company expected that
its clients would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however, because
the Company is, where necessary and appropriate, offering lower rates and making
11
<PAGE>
Collateralized Advances, it is possible that the duration of the Company's
funding relationships with its clients may be extended. Even if the Company
succeeds in extending the duration of its funding relationships with its
clients, there will not be a corresponding increase in non-current assets on the
Company's balance sheet. This is because it is anticipated that the Company's
funding relationships with its clients will continue to renew no less frequently
than once a year. Although the Company has historically been successful in
replacing major clients, the loss of one or more major clients and an inability
to replace those clients could have a material adverse effect on the Company.
Results of Operations
The following table sets forth certain items of income and expense for
the periods indicated and indicates the percentage relationship of each item to
total income.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-----------------------------------------------------
1996 1995
-------------------- --------------------
(Unaudited)
INCOME
<S> <C> <C> <C> <C>
Earned discounts $ 2,722,140 82.9% $2,420,653 78.8%
Fees and other income 563,398 17.1 649,726 21.2
----------- ----- ---------- -----
TOTAL INCOME 3,285,538 100.0 3,070,379 100.0
----------- ----- ---------- -----
EXPENSE
Compensation and fringe benefits 995,894 30.3 753,069 24.5
General and administrative expense 941,088 28.6 730,759 23.8
Interest expense 426,983 13.0 166,020 5.4
Provision for credit losses 3,928,570 119.6 610,500 19.9
Commissions 136,145 4.2 72,846 2.4
----------- ----- ---------- -----
TOTAL EXPENSES 6,428,680 195.7 2,333,194 76.0
----------- ----- ---------- -----
INCOME/(LOSS) BEFORE INCOME TAXES (3,143,142) (95.7) 737,185 24.0
INCOME TAXES/(BENEFIT) (1,162,900) (35.4) 271,500 8.8
----------- ----- ---------- -----
NET INCOME/(LOSS) $(1,980,242) (60.3)% $ 465,685 15.2%
=========== ===== ========== =====
NET INCOME/(LOSS) PER SHARE $ (0.85) $ .15
=========== ==========
WEIGHTED AVERAGE
NUMBER OF SHARES 2,316,853 3,102,328
========= =========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-----------------------------------------------------
1996 1995
-------------------- --------------------
(Unaudited)
INCOME
<S> <C> <C> <C> <C>
Earned discounts $ 5,055,961 81.9% $5,298,299 83.4%
Fees and other income 1,115,250 18.1 1,056,151 16.6
----------- ----- ---------- -----
TOTAL INCOME 6,171,211 100.0 6,354,450 100.0
----------- ----- ---------- -----
EXPENSE
Compensation and fringe benefits 1,846,381 29.9 1,560,549 24.6
General and administrative expense 1,551,722 25.1 1,338,997 21.1
Interest expense 782,343 12.7 424,526 6.7
Provision for credit losses 4,552,229 73.8 1,911,600 30.0
Commissions 225,786 3.7 134,717 2.1
----------- ----- ---------- -----
TOTAL EXPENSES 8,958,461 145.2 5,370,389 84.5
----------- ----- ---------- -----
INCOME (LOSS) BEFORE INCOME TAXES (2,787,250) (45.2) 984,061 15.5
INCOME TAXES/(BENEFIT) (1,031,200) (16.7) 362,500 5.7
----------- ----- ---------- -----
NET INCOME/(LOSS) $(1,756,050) (28.5)% $ 621,561 9.8%
=========== ===== ========== =====
NET INCOME/(LOSS) PER SHARE $ (0.75) $ .20
=========== ==========
WEIGHTED AVERAGE
NUMBER OF SHARES 2,339,157 3,102,328
========= =========
</TABLE>
Total Income. Total income consists of (I) earned discounts and (ii) fees
and other income. "Earned discounts" consist primarily of income from the
purchase of accounts receivable and life insurance policies and income from
Collateralized Advances. "Fees and other income" consist primarily of
application fees, commitment or facility fees, other related financing fees and
supplemental discounts paid by clients who do not sell the minimum volume of
accounts receivable required by their contracts with the Company (including as a
result of "graduating" to a lower cost source of funding).
13
<PAGE>
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.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
-------------------------------------------------------
1996 1995
------------------------ ------------------------
Earned % of Total Earned % of Total
Income Income Income Income
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount on Factored Accounts
Receivable $1,378,380 42.0% $1,128,465 36.8%
Earnings on Collateralized
Advances 884,727 26.9 769,619 25.1
Earnings on Purchased Life
Insurance Policies 186,467 5.7 283,441 9.2
Other Earnings 272,566 8.3 239,128 7.7
---------- ----- ---------- -----
Total 2,722,140 82.9 2,420,653 78.8
Fees and Other Income 563,398 17.1 649,726 21.2
---------- ----- ---------- -----
Total Income $3,285,538 100.0% $3,070,379 100.0%
========== ===== ========== =====
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
-------------------------------------------------------
1996 1995
------------------------ ------------------------
Earned % of Total Earned % of Total
Income Income Income Income
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Discount on Factored Accounts
Receivable $2,562,245 41.5% $2,747,871 43.2%
Earnings on Collateralized
Advances 1,660,635 26.9 1,555,553 24.5
Earnings on Purchased Life
Insurance Policies 342,072 5.5 510,827 8.1
Other Earnings 491,009 8.0 484,048 7.6
---------- ----- ---------- -----
Total 5,055,961 81.9 5,298,299 83.4
Fees and Other Income 1,115,250 18.1 1,056,151 16.6
---------- ----- ---------- -----
Total Income $6,171,211 100.0% $6,354,450 100.0%
========== ===== ========== =====
</TABLE>
Total income decreased 2.9% in the first half of 1996 from the same
period in 1995, from $6.4 million to $6.2 million; total income increased 7.0%
for the second quarter of 1996 over the same period in 1995, from $3.1 million
to $3.3 million. Earned discounts from factored accounts receivable decreased
6.8%, from $2.7 million to $2.6 million in the first half of 1996 versus the
first half of 1995. In the second quarter earned discounts from factored
accounts increased 22.1% to $1.4 million from $1.1 million. Earned discounts
from factored accounts receivable as a percentage of total factored accounts
receivable purchased were 3.4% and 4.4% in the first halves of 1996 and 1995,
respectively; in the second quarters of 1996 and 1995, earned discounts were
3.5% and 3.7%, respectively, of factored accounts receivable purchased. The
reduction during the first half of 1996 versus 1995 in the average earned
discount from factored accounts receivable reflects the downward pressure on
pricing from competition in the Company's core factoring business. In the first
half of 1996 and 1995, earned discounts from factored accounts receivable
accounted for 41.5% and 43.2%, respectively, of total income. In the second
quarters of 1996 and 1995 earned discounts from factored accounts receivable
accounted for 42.0% and 36.8%, respectively, of total income.
Earned discounts from Collateralized Advances increased approximately
6.8% in the first half of 1996 over the comparable period in 1995, from
approximately $1.6 million to $1.7 million and increased approximately 15.0% in
the second quarter of 1996 over the same quarter in 1995, from approximately
$770 thousand to $885 thousand. In the first halves of 1996 and 1995, earned
discounts from Collateralized Advances constituted approximately 26.9% and
24.5%, respectively, of total income. In the second quarters of 1996 and 1995,
earned discounts from Collateralized Advances constituted 26.9% and 25.1%,
respectively, of total income. Collateralized Advances currently bear interest
at a rate, on average, of approximately 2% per month calculated generally on the
highest outstanding amount of the Collateralized Advance during the month.
Earned discounts from Collateralized Advances are required to be paid in
15
<PAGE>
cash monthly in arrears. See Provision for Credit Losses below.
As of June 30, 1996 and December 31, 1995, factored accounts receivable
included on the Company's balance sheet were $16.6 million (53.5%) and $25.2
million (64.5%), respectively, of gross finance receivables. As of June 30, 1996
and December 31, 1995, Collateralized Advances included on the Company's balance
sheet were $12.7 million (41.0%) and $10.8 million (27.8%), respectively, of
gross finance receivables. The Company intends to pursue its strategy of making
Collateralized Advances in conjunction with its core factoring business.
Fees and other income remained relatively flat, approximately $1.1
million, in the first half of 1996 as compared to the same period in 1995. In
the second quarter of 1996, fees and other income decreased approximately 13.3%
from the second quarter of 1995, from approximately $650 thousand to $563
thousand. The decrease for the second quarter of 1996 from the comparable period
in 1995 is largely attributable to a reduction in application fees partially
offset by an increase in facility fees. In addition, in the second quarter of
1995, the Company collected a one-time brokerage fee of $25,000 which accounts
for approximately 28.0% of the decrease.
Compensation and Fringe Benefits. In the first halves of 1996 and 1995,
compensation and fringe benefits were $1.8 million (29.9% of total income) and
$1.6 million (24.6% of total income), respectively. For the second quarters of
1996 and 1995, compensation and fringe benefits were $996 thousand (30.3% of
total income) and $753 thousand (24.5% of total income), respectively. Within
compensation and fringe benefits, executive compensation increased in the first
half of 1996 as compared to the same period in 1995, from $474 thousand (7.5% of
total income) to $714 thousand (11.6% of total income). Executive compensation
also increased in the second quarter of 1996 as compared to the same period in
1995, from $237 thousand (7.7% of total income) to $419 thousand (12.8% of total
income). All of the increases in 1996 in compensation and fringe benefits
(including executive compensation) are chiefly the result of expenses associated
with the severance of a key employee and costs associated with replacing that
employee, including hiring a former Company executive on an interim basis to
help identify and train the severed employee's replacement. The Company does not
anticipate incurring any further costs associated with the severance of this
employee.
General and Administrative Expense. General and administrative expense
was $1.6 million (25.1% of total income) as compared to $1.3 million (21.0% of
total income) for the first halves of 1996 and 1995, respectively. For the
second quarters of 1996 and 1995, general and administrative expense was $941
thousand (28.6% of total income) and $731 thousand (23.8% of total income),
respectively. The increase for the first halves and second quarters of 1996 was
primarily attributable to an increase in professional fees offset partially by
decreases in licenses and taxes and duplicating expense. Professional fees were
$754 thousand (12.2% of total income) in the first half of 1996 versus $419
thousand (6.6% of total income) in the first half of 1995 and were $507 thousand
(15.4% of total income) in the second quarter of 1996 versus $245 thousand (8.0%
of total income) in the first quarter of 1995. The increase in 1996 in
professional fees was attributable, in part, to on-going litigation and, in
part, to the final resolution of legal proceedings instituted in prior years.
General and administrative expense (other than professional fees) for the six
months ended June 30, 1996 and 1995 was $797 thousand (12.9%) and $920 thousand
(14.4%), respectively. For the three months ended June 30, 1996 and 1995,
16
<PAGE>
general and administrative (other than professional fees) was $434 thousand
(13.2%) and $486 thousand (15.8%), respectively.
Interest Expense. Interest expense was $782 thousand (12.7% of total
income) versus $425 thousand (6.7% of total income) for the first halves of 1996
and 1995, respectively, and $427 thousand (13.0% of total income) versus $166
thousand (5.4% of total income) for the second quarters of 1996 and 1995,
respectively. The rise in interest expense is attributable to interest expense
related to the Company's Convertible, Subordinated Notes issued in September
1995 and January 1996 and to an increase in the average daily balance
outstanding on the Company's revolving lines of credit. Interest expense on the
Convertible Subordinated Notes was $229 thousand (3.7%) in the first six months
of 1996 and $118 thousand (3.6%) in the second quarter of 1996. The average
daily outstanding balance on the Company's revolving lines of credit was $11.0
million and $8.6 million for the first halves of 1996 and 1995, respectively,
and $12.4 million and $7.3 million for the three months ended June 30, 1996 and
1995, respectively. The average interest rate paid on the Company's revolving
lines of credit decreased to 9.17% during the first half of 1996 from 9.38%
during the first half of 1995 and to 9.12% during the second quarter of 1996 as
compared to 9.38% during the second quarter of 1995.
Provision for Credit Losses. Credit loss experience, the adequacy of
underlying collateral, changes in the character and size of the Company's
receivables portfolio and management's judgement are factors used in determining
the provision for credit losses and the adequacy of the allowance for credit
losses. Other factors given consideration in determining the adequacy of the
allowance are the level of related credit balances of factoring clients and the
current and anticipated impact of economic conditions on the creditworthiness of
the Company's clients and account debtors. To mitigate the risk of credit loss,
the Company, among other things: (I) thoroughly evaluates the collateral to be
made available by each client; (ii) usually collects its factored accounts
receivable directly from account debtors, which are frequently (though not
always) large, creditworthy companies or governmental entities; (iii) purchases,
or takes a first priority security interest in, all accounts receivable of each
client; (iv) takes, whenever available, blanket liens on all of its clients'
other assets and, when making Collateralized Advances, it employs what
management believes to be conservative loan-to-value ratios based on auction or
liquidation value appraisals performed by independent appraisers; (v) usually
requires personal guaranties (either unlimited guaranties or guaranties limited
to the validity and collectability of factored accounts receivable) from its
clients' principals, and (vi) actively monitors its portfolio of factored
accounts receivable, including the creditworthiness of account debtors and
periodically evaluates the value of other collateral securing Collateralized
Advances.
The provision for credit losses was $4.6 million (73.8% of total income)
for the first half of 1996 versus $1.9 million (30.0% of total income) for the
first half of 1995 and $3.9 million (119.6% of total income) for the second
quarter of 1996 versus $610 thousand (19.9% of total income) for the second
quarter of 1995. The Company's provision for credit losses in the first quarter
of 1995 included $1.3 million attributable to a settlement reached by the
Company with the bankruptcy trustee of Premium Sales Corporation, a former
client of a wholly-owned subsidiary of the Company. See Part II, Item 1 - Legal
Proceedings. Following certain events in the second quarter of 1996, management
determined that it was necessary and appropriate to write off or write down nine
non-performing assets totalling $4.2 million. Prior to the write-offs and write
downs, these assets were included in non-earning receivables, other receivables
and other
17
<PAGE>
assets on the Company's balance sheet. Included in the foregoing is
approximately $950,000 (of which approximately $350,000 is for the legal fees
and expenses of Comerica Bank) attributable to a lawsuit the Company lost as
plaintiff against Comerica Bank (as disclosed in the Company's Form 10-QSB for
the quarter ended March 31, 1996). The provision for credit losses in the second
quarter of 1996 reflects the amount deemed necessary by management to enable the
Company to charge the allowance for credit losses for the foregoing write-offs
and to leave a balance in the allowance for credit losses deemed sufficient to
cover potential future write-offs. The allowance for credit losses was 7.7%
($2.4 million) and 6.0% ($2.4 million) of gross finance receivables at June 30,
1996 and December 31, 1995, respectively.
At June 30, 1996 the accrual of earnings was suspended on $850 thousand
of gross finance receivables as compared to $1.6 million of gross finance
receivables at December 31, 1995. In addition, "other receivables" and "other
assets" appearing on the Company's balance sheet typically do not accrue
earnings for financial statement purposes. The following table provides a
summary of the Company's gross finance receivables (which includes primarily
factored accounts receivable, Collateralized Advances and non-earning
receivables), "other receivables" and "other assets" and information regarding
the allowance for credit losses as of the dates indicated.
<TABLE>
<CAPTION>
As of June 30,
----------------------
1996 1995
------- -------
(Dollars in thousands)
Gross Finance Receivables, Other
Receivables and Other Assets Data:
- ------------------------------------
<S> <C> <C>
Gross Finance Receivables $30,989 $27,633
Non-Earning Receivables (also included
in Gross Finance Receivables) 850 3,574
Other Receivables 2,849 3,144
Other Assets (excluding miscellaneous) 900 2,085
Allowance for credit losses:
- ----------------------------
Balance, January 1 $ 2,351 $ 2,511
Provision for credit losses 4,552 1,912
Receivables charged off (4,523) (1,566)
Recoveries 4 42
------- -------
Balance, June 30 $ 2,384 $ 2,899
======= =======
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
As of June 30,
----------------------
1996 1995
------- -------
(Dollars in thousands)
Allowance for Credit Losses as a percent of:
- --------------------------------------------
<S> <C> <C>
Gross Finance Receivables 7.69% 10.49%
Non-Earning Receivables 280.45 81.10
Non-Earning Receivables, Other
Receivables and Other Assets 51.84 32.93
As a percent of the sum of Gross
Finance Receivables, Other
Receivables and Other Assets:
- -------------------------------
Non-Earning Receivables 2.45 10.88
Other Receivables 8.20 9.57
Other Assets 2.59 6.35
</TABLE>
Although the Company maintains an allowance for credit losses in an
amount deemed by management to be adequate to cover potential losses, no
assurance can be given that the allowance will in fact be adequate or that an
inadequacy, if any, in the allowance could not have a material adverse effect on
the Company's earnings in future periods. Furthermore, although management
believes that its periodic estimates of the value of "other receivables" and
"other assets" are appropriate, no assurance can be given that the amounts which
the Company ultimately collects with respect to other receivables and other
assets will not differ significantly from management's estimates or that those
differences, if any, could not have a material adverse effect on the Company's
earnings in future periods.
Management recognizes that Collateralized Advances entail different, and
possibly greater, risks to the Company than the factoring of accounts
receivable. Risks associated with the making of Collateralized Advances (but not
the factoring of accounts receivable) include, among others (I) certain types of
collateral securing Collateralized Advances may diminish in value (possibly
precipitously) over time (sometimes short periods of time), (ii) repossessing,
safeguarding and liquidating collateral securing Collateralized Advances may
require the Company to incur significant fees and expenses some or all of which
may not be recoverable, (iii) clients may dispose of (or conceal) the collateral
securing Collateralized Advances and (iv) clients or natural disasters may
destroy the collateral securing Collateralized Advances. The Company attempts to
manage these risks, respectively, by (I) engaging independent appraisers to
review periodically the value of collateral securing Collateralized Advances at
intervals established by management based on the characteristics of the
underlying collateral, (ii) employing conservative loan-to-value ratios which
management believes should generally enable the Company to recover from
liquidation proceeds most of the fees and expenses incurred in connection with
repossessing, safeguarding and liquidating collateral, (iii) using its internal
field examiners to inspect collateral periodically and, when appropriate,
engaging independent collateral monitoring firms to implement appropriate
collateral control systems including bonding certain of the client's employees
and (iv) requiring clients to maintain appropriate amounts and types of
insurance issued by insurers acceptable to the Company naming the Company as the
party to whom loss is paid. Although management believes that the Company has
(or third
19
<PAGE>
parties acting on behalf of the Company have) the requisite skill to evaluate,
monitor and manage the risks associated with the making of Collateralized
Advances, there can be no assurance that the Company will in fact be successful
in doing so.
Commissions. Commission expense rose to $226 thousand (3.7% of total
income) in the first half of 1996 from $135 thousand (2.1% of total income) in
the first half of 1995 and to $136 thousand (4.2% of total income) in the second
quarter of 1996 from $73 thousand (2.4% of total income) in the second quarter
of 1995. The increase was the result of a larger portion of gross finance
receivables acquired in 1996 being generated by commissioned brokers and other
professionals to whom the Company paid referral fees.
Impact of Inflation
Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the past three years.
Changes in interest rate levels do not generally affect the income earned
by the Company in the form of discounts charged. Rising interest rates would,
however, increase the Company's cost of borrowed money based on its current
borrowing arrangements which are prime or base rate adjusted credit facilities.
Changes in Financial Condition
The Company's total assets decreased 9.0% to $40.9 million at June
30, 1996 from $44.9 million at December 31, 1995. The decrease for the six
months is primarily the result of the decrease in net finance receivables.
Liquidity and Capital Resources. The Company's principal funding sources
are the collection of factored accounts receivable, retained cash flow and
external borrowings.
As of June 30, 1996 the Company had approximately $14.7 million
available under a $25.0 million secured revolving line of credit. The credit
facility contains a $5.0 million sub-facility for the issuance of letters of
credit and, as of April 1996, a new $2 million sub-facility (which under certain
circumstances may increase to $4 million) the proceeds of which may be used by
the Company to make advances to clients secured by machinery and equipment and a
new $2.5 million sub-facility the proceeds of which may be used by the Company
to make advances to clients secured by inventory. Borrowings under the credit
facility bear interest at the bank's base rate plus .75%. The current maturity
date of this credit facility is May 13, 1997. The Company is subject to
covenants which are typical in revolving credit facilities of this type.
As of June 30, 1996 Lifetime Options had approximately $1.1 million
available under a $2.0 million line of credit and an additional $1.5 million
available under a $4 million availability from the Company. Lifetime Options'
revolving line of credit: (I) is payable on demand and, if no demand is made, on
December 31, 1996; (ii) bears interest at the prime rate of interest plus 1% and
(iii) is collateralized by specific purchased life insurance contracts.
20
<PAGE>
As of June 30, 1996 and December 31, 1995, the Company had outstanding
approximately $4,986,000 and $2,838,000, respectively, in aggregate principal
amount of Convertible Subordinated Notes issued in exchange for shares of the
Company's common stock. The Convertible Subordinated Notes outstanding at
December 31, 1995 were issued in exchange for 447,200 shares of common stock and
the Convertible Subordinated Notes outstanding at June 30, 1996 were issued in
exchange for 785,475 shares of common stock (including the 447,200 shares of
common exchanged prior to December 31, 1995). The Notes (I) mature on September
30, 2000; (ii) currently bear interest at the rate of 9.5% per annum which rate
may fluctuate in accordance with the prime rate, but may not fall below 8% nor
rise above 10% per annum; (iii) are convertible into common stock of the Company
at the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as
defined) of the Company and (v) were issued pursuant to an indenture which
contains certain covenants which are less restrictive than those contained in
the Company's secured revolving credit facility. Upon the occurrence of certain
change of control events, holders of the Notes have the right to have their
Notes redeemed at par.
At June 30, 1996 the Company had working capital of $25.2 million and a
ratio of current assets to current liabilities of 2.80 to 1 as compared to
December 31, 1995 working capital of $26.0 million and a ratio of current assets
to current liabilities of 2.60 to 1.
[THIS SPACE INTENTIONALLY LEFT BLANK]
21
<PAGE>
PART II -OTHER INFORMATION
ITEM 1. -LEGAL PROCEEDINGS
The Company is a defendant in White, Trustee v. Allstate Financial
Corporation pending in the U.S. Bankruptcy Court for the Western District of
Pennsylvania. The Company provided receivables financing and advances for Lyons
Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a leveraged
buy-out and subsequently filed a bankruptcy petition. In 1991, the Lyon's
trustee brought an action against the Company claiming, among other things,
fraudulent transfer and breach of contract. A partial summary judgement was
granted in favor of the Company which reduced the fraudulent transfer claim by
$1.6 million. As a consequence, the remaining fraudulent transfer claim was
approximately $1,000,000. The trustee has not actively pursued the breach of
contract claim. In late 1994, the Company reached a settlement agreement with
the Lyons trustee, subject to approval by the bankruptcy court, which would have
released the Company from all claims upon the payment of $300,000. In connection
with the settlement, the Company paid and added $300,000 to the provision for
credit losses in 1994. A creditor in the bankruptcy proceeding, Sherwin-Williams
Company, objected to the proposed settlement amount and, in March 1995, the
objection, was sustained by the bankruptcy court. The Company appealed the order
sustaining the objection, however, in April 1996 the appellate court exercised
its discretion not to hear the appeal at that time. The $300,000 previously paid
by the Company was returned to the Company in April 1996. Management expects
this litigation to resume in the District Court, but does not believe at this
time that the Company has a material exposure on the fraudulent transfer claim
in excess of the previously agreed upon settlement amount.
In connection with the same transaction, the Company was also named in
January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et.
al. pending in the United States District Court for the Northern District of
Ohio. Sherwin-Williams is suing all parties with any involvement in the
transaction to recover damages allegedly incurred by Sherwin-Williams in
connection with the leveraged buy-out and the bankruptcy litigation arising
therefrom. Sherwin-Williams asserts that it has or will incur pension fund
liabilities and other liabilities as a result of the transaction in the
approximate amount of $11 million and has asserted claims against the Company in
that amount. The complaint asserts, among other things, that the purchasers of
Lyons breached their purchase agreement with Sherwin-Williams by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. The complaint seeks relief against the Company
based upon a claim of "acting in concert" and "misrepresentation" in connection
with this purchase agreement without a specific identification of the alleged
misrepresentation made by the Company. The Company filed a motion to dismiss the
claims and a motion to stay discovery pending a ruling on the motion to dismiss.
The motion to stay discovery was granted and, in March 1996, a federal
magistrate recommended to the District Court that the Company's motion to
dismiss be granted. Prior to the District Court ruling on the magistrate's
recommendation, Sherwin-Williams filed an amended complaint. The amended
complaint retains the claims for "acting in concert" and "misrepresentation" and
adds two additional claims for "civil conspiracy" and "tortious interference
with contract". The two new claims arise from essentially the same allegations
set forth in the earlier claims, i.e., that the Company assisted in the breach
of the purchase agreement. Management does not believe the litigation will have
a material effect on the financial position or results of operations of the
Company because, in management's opinion, the claims are without merit.
22
<PAGE>
The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee v.
Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court in
the District of Massachusetts. The Company factored the accounts receivable of
Clearpoint Research Corporation ("CRC") from late 1992 through early 1993. In
July 1993 CRC filed a petition in bankruptcy, after the Company had collected
all amounts owed to it. The bankruptcy trustee has sued the Company seeking
recovery of alleged preferential transfers made during the course of the
factoring relationship. The bankruptcy trustee alleges that the Company did not
properly perfect its security interest in the accounts receivable. No specific
damage amount is specified in the complaint but it is assumed the bankruptcy
trustee is seeking recovery of the full amount of accounts receivables collected
(approximately $4 million). The Company has filed an answer to the complaint
denying the substantive allegations asserted by the bankruptcy trustee. The
Company has removed the action to federal district court. The motion is
currently pending. The Company believes it has a number of strong defenses to
the complaint and intends to vigorously defend all claims. The litigation is in
a preliminary stage and the probability of an unfavorable outcome and the
potential amount of loss, if any, cannot be determined or estimated at this
time.
As previously disclosed in the Company's Form 10-QSB for the quarter
ended June 30, 1995, the Company has reached a settlement with the Trustee in
the bankruptcy of Premium Sales Corporation, a former client of one of the
Company's wholly-owned subsidiaries. The settlement is intended to be a full
release of any and all claims between the Company (and its subsidiaries) and the
Trustee including, without limitation, any alleged preference liability of the
Company and its subsidiaries. The settlement was approved by the bankruptcy
court in January 1996. The settlement will become fully effective and the
settlement monies will be disbursed at the time a plan of distribution in the
Premium Sales Corporation bankruptcy is approved by the bankruptcy court. The
impact of this settlement has been reflected in the Company's financial
statements.
Except as described above, the Company is not party to any litigation
other than routine proceedings incidental to its business, and the Company does
not expect that these proceedings will have a material adverse effect on the
Company. From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without any
factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
ITEM 4. -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. -OTHER INFORMATION
Effective July 1, 1996, the Company's Board of Directors was increased
from seven (7) to nine (9) members and the seven Board members filled the
vacancies created thereby with independent directors, Lawrence Vecker and Edward
A. McNally. Mr. Vecker has over 45 years experience in the commercial finance
industry, including over 20 years with Congress Financial Corporation (a
subsidiary of Corestates Financial Corp.) where his last position was Executive
Vice President. Mr. Vecker is currently a managing director with a New York
based merchant
23
<PAGE>
bank. Mr. McNally has over 25 years of commercial banking experience, including
17 years with National Westminster Bank USA where his last position was Senior
Vice President. Since 1991, Mr. McNally has run his own management consulting
firm providing services to the financial services industry. The Company's other
independent directors are David W. Campbell, Alan L. Freeman, William H. Savage
and James C. Spector. Mr. Campbell has over 23 years of banking experience,
including 5 years as President and Chief Executive Officer of Ameribanc Savings
Bank and 3 years as a Trustee of the Ameribanc Investors Group, a publicly held
bank holding company; he is currently President of Southern Financial Bank in
Warrenton, Virginia. Mr. Freeman has 30 years of experience in public
accounting; he is currently a named partner in his own accounting firm and a
former partner in Deloitte & Touche. Mr. Savage has over 30 years experience in
real estate development and banking, including serving as the President and
Chief Executive Officer of a publicly held real estate investment trust which
later became Ameribanc Investors Group. Mr. Spector has over 35 years experience
in the commercial finance industry, including over 30 years with Heller
Financial, Inc. and its affiliates where his last position was executive vice
president. Also effective July 1, 1996, Lawrence Winkler resigned from the Board
of Directors and Leon Fishman was elected to fill the vacancy created thereby.
The Company's Board of Directors is, for the first time since the Company's
inception, comprised of a majority of Directors who are independent of the
Company's management.
In addition to the foregoing Board changes, Leon Fishman resigned as the
Company's President and Chief Executive Officer effective July 1, 1996. The
Board of Directors elected Craig Fishman as President and Chief Executive
Officer effective July 1, 1996. The Board of Directors also elected Peter D.
Matthy as Executive Vice President and Chief Operating Officer. Mr. Matthy has
over 27 years of commercial banking experience, including 15 years with IBJ
Schroder Bank & Trust Company where his last position (in 1994) was Executive
Vice President and member of the Management Committee. Since 1994 and prior to
joining the Company, Mr. Matthy ran his own management and consulting firm
providing services to the financial services industry.
ITEM 6(a). -EXHIBITS
Amendments and Waivers to Exhibit 10.7 - Revolving Credit and
Security Agreement dated as of May 13, 1994, among the Company, the
Lenders party thereto and IBJ Schroder Bank & Trust Company (as
Lender and as Agent), as amended to April 26, 1996:
Waiver dated as of May 13, 1996
Tenth Amendment and Waiver dated as of June 30, 1996
ITEM 6(b). -REPORTS ON FORM 8-K
None.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities and Exchange Act of 1934, The Company has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
ALLSTATE FINANCIAL CORPORATION
August 14, 1996 Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer
25
WAIVER
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
WAIVER (the "Waiver") dated as of May 13, 1996 to Revolving Credit and
Security Agreement dated as of May 13, 1994 (as amended and waived to the date
hereof and as may be further amended, supplemented, modified or waived from time
to time, the "Loan Agreement") by and among ALLSTATE FINANCIAL CORPORATION, a
corporation organized under the laws of the Commonwealth of Virginia
("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY ("IBJS"), the other lenders
party to the Loan Agreement (IBJS, and each of the other lenders which may now
or in the future be a party to the Loan Agreement, the "Lenders") and IBJS, as
agent for the Lenders (IBJS, in such capacity, the "Agent")
BACKGROUND
Borrower has requested that Agent and Lenders waive certain provisions of
the Loan Agreement and the Agent and the Lenders are willing to do so on the
terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by
Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings given to them in the Loan Agreement.
2. Waiver of Section 7.19 (a)(i) and (a)(ii) for the Four Quarters Ended
March 31, 1996. Subject to satisfaction of the conditions precedent set forth in
Section 4 below, the Agent and the Lenders hereby waive compliance by the
Borrower with Section 7.19(a)(i) and (a)(ii) of the Loan Agreement for the four
Fiscal Quarters ended on March 31, 1996.
3. Waiver of Specified Defaults and Events of Default. Subject to
satisfaction of the conditions set forth in Section 4 below, the Agent and the
Lenders hereby waive any and all Defaults or Events of Default which would exist
(and any and all rights and remedies which may exist as a consequence thereof)
absent this Waiver.
4. Conditions of Effectiveness. This Waiver shall become effective as of
the date first above written (the "Waiver Effective Date") upon receipt by the
Agent of this Waiver duly executed by Borrower and the Required Lenders and
consented to by each of the Guarantors.
5. Representations and Warranties. Borrower hereby represents and
warrants as of the Waiver Effective Date as follows:
(a) This Waiver and the Loan Agreement, as waived hereby constitute
the legal, valid and binding obligations of Borrower and are enforceable
against Borrower in accordance with their respective terms.
(b) After giving effect to this Waiver, Borrower hereby reaffirms
all covenants, representations and warranties made in the Loan Agreement
and agrees that all such covenants, representations and warranties shall
be deemed to have been remade as of the Waiver Effective Date (after
giving effect to this Waiver).
(c) No Event of Default or Default has occurred and is continuing
or would exist, in either case, after giving effect to this Waiver.
-1-
<PAGE>
(d) Borrower has no defense, counterclaim or offset to the
Obligations.
6. Effect on the Loan Agreement and the Security Agreement.
(a) Upon the effectiveness of Sections 2 and 3 hereof, each reference in
the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words
of like import shall mean and be a reference to the Loan Agreement as waived
hereby.
(b) Except as specifically waived herein, the Loan Agreement and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) Except as expressly set forth herein, the execution, delivery and
effectiveness of this Waiver shall not operate as a waiver of any right, power
or remedy of Agent and Lenders, nor constitute a waiver of any provision of the
Loan Agreement or any other documents, instruments or agreements executed and/or
delivered under or in connection therewith.
7. Governing Law. This Waiver shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns and
shall be governed by and construed in accordance with the laws of the State of
New York.
8. Headings. Section headings in this Waiver are included herein for
convenience of reference only and shall not constitute a part of this Waiver for
any other purpose.
9. Counterparts; Telecopy Signatures. This Waiver may be executed by
the parties hereto in one or more counterparts, each of which taken together
shall be deemed to constitute one and the same instrument. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
officers, have executed this Waiver as of the day and year first above written.
IBJ SCHRODER BANK & TRUST COMPANY
as Agent and Lender
By:_______________________
Name:
Title:
NATIONAL CANADA FINANCE CORP., a Lender
By:_______________________
Name:
Title:
By:_______________________
Name:
Title:
-2-
<PAGE>
ALLSTATE FINANCIAL CORPORATION
By: ___________________________
Name: Craig Fishman
TitleSenior Vice President
[SIGNATURES CONTINUED ON NEXT PAGE]
-3-
<PAGE>
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By: ___________________________
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION
By: ___________________________ By:___________________________
Name: Craig Fishman Name: Craig Fishman
Title: Senior Vice President Title:Senior Vice President
RECEIVABLE FINANCING CORPORATION
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF AMERICA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
SETTLEMENT SOLUTIONS, INC.
By:______________________________
Name: Craig Fishman
Title: Senior Vice President
-4-
TENTH AMENDMENT AND WAIVER
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
TENTH AMENDMENT AND WAIVER (the "Amendment") dated as of June 30, 1996 to
Revolving Credit and Security Agreement dated as of May 13, 1994 (as amended and
waived to the date hereof and as may be further amended, supplemented, modified
or waived from time to time, the "Loan Agreement") by and among ALLSTATE
FINANCIAL CORPORATION, a corporation organized under the laws of the
Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY
("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the
other lenders which may now or in the future be a party to the Loan Agreement,
the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the
"Agent")
BACKGROUND
Borrower has requested that Agent and Lenders waive certain provisions of
the Loan Agreement and the Agent and the Lenders are willing to do so on the
terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or grant of
credit heretofore or hereafter made to or for the account of Borrower by
Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. Definitions. All capitalized terms not otherwise defined herein
shall have the meanings given to them in the Loan Agreement.
2. Amendments to the Loan Agreement. Subject to satisfaction of the
conditions precedent set forth in Section 5 below, the Loan Agreement is hereby
amended as follows:
(i) Subsection (a) of Section 7.19 of the Loan Agreement is hereby
deleted in its entirety and the following new subsection "(a)" is
inserted to read as follows:
"(a)(i) On the last day of each Fiscal Quarter commencing with the
Fiscal Quarter ended June 30, 1994 and ending with the Fiscal Quarter
ended June 30, 1996, the ratio of (A) EBIT to (B) interest expense (other
than interest expense in respect of the Convertible, Senior Subordinated
Notes) for the four Fiscal Quarters then ended (taken as one accounting
period) shall not be less than 3:1;
(ii) On the last day of each Fiscal Quarter commencing with the
Fiscal Quarter ended September 30, 1996, the ratio of (A) EBIT to (B)
interest expense (other interest expense in respect of the Convertible,
Senior Subordinated Notes) for (w) the Fiscal Quarter ended September 30,
1996, (x) the two Fiscal Quarters ended December 31, 1996 (taken as one
accounting period), (y) the three Fiscal Quarters ended march 31, 1997
(taken as one accounting period) and (z) the Four Fiscal Quarters (taken
as one accounting period) ended on the last day of each Fiscal Quarter
commencing with the Fiscal Quarter ended June 30, 1997, shall not be less
than 3:1;
(iii) On the last day of each Fiscal Quarter commencing with the
Fiscal Quarter ended September 30, 1995 and ending with the Fiscal
Quarter ended June 30, 1996, the ratio of (A) EBIT to (B) total interest
expense for the four Fiscal Quarters then ended (taken as one accounting
period) shall not be less than 2:1; and
(iv) On the last day of each Fiscal Quarter commencing with the
Fiscal Quarter ended September 30, 1996, the ratio of (A) EBIT to (B)
total interest expense for (w) the Fiscal Quarter
-1-
<PAGE>
ended September 30, 1996, (x) the two Fiscal Quarters ended December 31,
1996 (taken as one accounting period), (y) the three Fiscal Quarters
ended March 31, 1997 (taken as one accounting period) and (z) the four
Fiscal Quarters (taken as one accounting period) ended on the last day of
each Fiscal Quarter commencing with the Fiscal Quarter ended June 30,
1997, shall not be less than 2:1,
provided that, in the case of preceding clauses (i), (ii), (iii) and
(iv), as applicable, in the event the Base Rate exceeds 8 1/2% per annum
for any period of determination hereunder then the applicable ratio shall
be reduced by a percentage equal to the percentage by which the Base Rate
exceeds 8 1/2% per annum; provided further, that in no event shall the
applicable ratio be reduced below 1.75:1."
(b) Subsection (c) of Section 7.19 of the Loan Agreement is hereby
amended by inserting the following proviso immediately before the period
appearing at the end thereof:
"provided further that, notwithstanding the foregoing, commencing
on June 30, 1996, and on the last day of each Fiscal Quarter
thereafter, the sum of (i) Tangible Net Worth and (ii) the
aggregate principal amount of Convertible, Senior Subordinated
Notes then outstanding shall equal or exceed $26,700,000".
3. Waiver of Section 7.19 (a)(i) and (a)(iii) for the Four Quarters Ended
June 30, 1996. Subject to satisfaction of the conditions precedent set forth in
Section 5 below, the Agent and the Lenders hereby waive compliance by the
Borrower with Section 7.19(a)(i) and (a)(iii) of the Loan Agreement (after
giving effect to Section 2 of this Amendment) for the four Fiscal Quarters ended
on June 30, 1996.
4. Waiver of Specified Defaults and Events of Default. Subject to
satisfaction of the conditions set forth in Section 5 below, the Agent and the
Lenders hereby waive any and all Defaults or Events of Default which would exist
(and any and all rights and remedies which may exist as a consequence thereof)
absent this Amendment.
5. Conditions of Effectiveness. This Amendment shall become effective as
of the date first above written (the "Amendment Effective Date") upon receipt by
the Agent of this Amendment duly executed by Borrower and the Required Lenders
and consented to by each of the Guarantors.
6. Representations and Warranties. Borrower hereby represents and
warrants as of the Amendment Effective Date as follows:
(a) This Amendment and the Loan Agreement, as amended and waived
hereby constitute the legal, valid and binding obligations of Borrower
and are enforceable against Borrower in accordance with their respective
terms.
(b) After giving effect to this Amendment, Borrower hereby
reaffirms all covenants, representations and warranties made in the Loan
Agreement and agrees that all such covenants, representations and
warranties shall be deemed to have been remade as of the Amendment
Effective Date (after giving effect to this Amendment).
(c) No Event of Default or Default has occurred and is continuing
or would exist, in either case, after giving effect to this Amendment.
(d) Borrower has no defense, counterclaim or offset to the
Obligations.
7. Effect on the Loan Agreement and the Security Agreement.
-2-
<PAGE>
(a) Upon the effectiveness of Sections 2, 3 and 4 hereof, each reference
in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or
words of like import shall mean and be a reference to the Loan Agreement as
waived hereby.
(b) Except as specifically amended and waived herein, the Loan Agreement
and all other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) Except as expressly set forth herein, the execution, delivery and
effectiveness of this Amendment shall not operate as an amendment or waiver of
any right, power or remedy of Agent and Lenders, nor constitute an amendment or
waiver of any provision of the Loan Agreement or any other documents,
instruments or agreements executed and/or delivered under or in connection
therewith.
8. Governing Law. This Amendment shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
and shall be governed by and construed in accordance with the laws of the State
of New York.
9. Headings. Section headings in this Amendment are included herein
for convenience of reference only and shall not constitute a part of this
Amendment for any other purpose.
10. Counterparts; Telecopy Signatures. This Amendment may be executed
by the parties hereto in one or more counterparts, each of which taken together
shall be deemed to constitute one and the same instrument. Any signature
delivered by a party by facsimile transmission shall be deemed to be an original
signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
officers, have executed this Amendment as of the day and year first above
written.
IBJ SCHRODER BANK & TRUST COMPANY
as Agent and Lender
By:_______________________
Name:
Title:
NATIONAL CANADA FINANCE CORP., a Lender
By:_______________________
Name:
Title:
By:_______________________
Name:
Title:
ALLSTATE FINANCIAL CORPORATION
By: ___________________________
-3-
<PAGE>
Name: Craig Fishman
Title President
[SIGNATURES CONTINUED ON NEXT PAGE]
-4-
<PAGE>
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By: ___________________________
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC. AFC HOLDING CORPORATION
By: ___________________________ By:__________________________
Name: Craig Fishman Name: Craig Fishman
Title: Senior Vice President Title:Senior Vice President
RECEIVABLE FINANCING CORPORATION
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF FLORIDA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
BUSINESS FUNDING OF AMERICA, INC.
By: ___________________________
Name: Craig Fishman
Title: Senior Vice President
SETTLEMENT SOLUTIONS, INC.
By:______________________________
Name: Craig Fishman
Title: Senior Vice President
-5-
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 3019742
<SECURITIES> 0
<RECEIVABLES> 33302477
<ALLOWANCES> 2383863
<INVENTORY> 0
<CURRENT-ASSETS> 39191441
<PP&E> 1582343
<DEPRECIATION> 815768
<TOTAL-ASSETS> 40857990
<CURRENT-LIABILITIES> 14001070
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 21763636
<TOTAL-LIABILITY-AND-EQUITY> 40857990
<SALES> 0
<TOTAL-REVENUES> 6171211
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3623889
<LOSS-PROVISION> 4552229
<INTEREST-EXPENSE> 782343
<INCOME-PRETAX> (2787250)
<INCOME-TAX> (1031200)
<INCOME-CONTINUING> (1756050)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1756050)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
