SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1997 COMMISSION FILE NUMBER 0-17832
Allstate Financial Corporation
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(exact name of registrant as specified in its charter)
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Virginia 54-1208450
(State of Incorporation) (I.R.S. Employer Identification No)
2700 South Quincy Street, Suite 540, Arlington, VA 22206
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(address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 931-2274
Indicate by the check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15 of the Securities and Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
2,317,919 Common Shares were outstanding as of March 31, 1997.
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1997
and December 31, 1996 1-2
Consolidated Statements of Operations Three Months Ended
March 31, 1997 and 1996 3
Consolidated Statements of Shareholders' Equity Three
Months Ended March 31, 1997 and Year Ended
December 31, 1996 4
Consolidated Statements of Cash Flows Three Months Ended
March 31, 1997 and 1996 5-6
Notes to Consolidated Financial Statements 7-9
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 10-17
Part II - Other Information
Item 1 - Legal Proceedings 18
Item 4 - Submission of Matters To a Vote of Security Holders 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
PART I - FINANCIAL INFORMATION
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
---------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
Cash $2,879,429 $1,624,899
Receivables:
Finance, net 24,696,611 30,574,239
Purchased life insurance contracts, net 4,191,738 4,493,088
Other 4,323,608 4,394,975
Prepaid expenses 107,256 154,434
Income Tax Receivable 799,307 1,150,289
Deferred income taxes 893,000 893,000
----------- -----------
TOTAL CURRENT ASSETS 37,890,949 43,284,924
FURNITURE, FIXTURES AND EQUIPMENT, Net 537,869 538,164
OTHER ASSETS 2,113,699 2,116,343
------------ ------------
$40,542,517 $45,939,431
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 430,419 $ 446,360
Notes payable 9,176,724 14,851,582
Note payable-related party 103,000 103,000
Credit balances of factoring clients 2,999,795 2,964,873
----------- -----------
TOTAL CURRENT LIABILITIES 12,709,938 18,365,815
1
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 31, December 31,
1997 1996
--------- ------------
(Unaudited)
NONCURRENT PORTION OF NOTES PAYABLE:
Related parties 63,060 61,969
Convertible Subordinated Notes 4,985,110 4,985,110
---------- ----------
TOTAL LIABILITIES 17,758,108 23,412,894
---------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding - -
Common stock, authorized 10,000,000 shares
with no par value; 3,102,328 issued,
2,317,919 outstanding at March 31, 1997
and December 31, 1996, exclusive of shares
held in the Treasury 40,000 40,000
Additional paid-in-capital 18,852,312 18,852,312
Treasury Stock (784,409 shares) (5,034,584) (5,034,584)
Retained Earnings 8,926,681 8,668,809
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 22,784,409 22,526,537
---------- ----------
$40,542,517 $45,939,431
=========== ===========
See Notes to Consolidated Financial Statements
2
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
1997 1996
---------- -----------
(Unaudited) (Unaudited)
INCOME:
Earned discounts $2,292,585 $2,333,820
Fees and other income 439,521 551,852
----------- -------
Total Income 2,732,106 2,885,672
---------- ----------
EXPENSES:
Compensation and fringe benefits 731,950 849,055
General and administrative expense 538,736 612,069
Interest expense 403,997 355,360
Provision for credit losses 555,000 623,659
Commission 93,151 89,641
----------- -----------
TOTAL EXPENSES 2,322,834 2,529,784
---------- ----------
INCOME BEFORE INCOME TAXES 409,272 355,888
INCOME TAXES 151,400 131,700
----------- -----------
NET INCOME $ 257,872 $ 224,188
========== ==========
NET INCOME PER SHARE $ .11 $ .09
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES 2,317,919 2,361,461
========== ==========
3
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<TABLE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
AND THREE MONTHS ENDED MARCH 31, 1997
<CAPTION>
Common Paid in Treasury Retained
Stock Capital Stock Earnings
<S> <C> <C> <C> <C>
BALANCE - January 1, 1996 .............. $40,000 $18,852,312 $(2,871,901) $9,709,953
Exchange of Convertible
Subordinated Notes for
338,275 shares of common stock .... -- -- (2,170,683) --
Conversion of Convertible Subordinated
Notes to 1,066 shares of Common
Stock ............................. -- -- 8,000 --
Net Loss ............................. -- -- -- (1,041,144)
-------- ----------- ----------- -----------
BALANCE - December 31, 1996 ............ 40,000 18,852,312 (5,034,584) 8,668,809
Net Income ........................... -- -- -- 257,872
--------- ----------- ----------- -----------
BALANCE - March 31, 1997 ............... $40,000 $18,852,312 (5,034,584) $8,926,681
========= =========== =========== ===========
</TABLE>
4
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
1997 1996
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 257,872 $ 224,188
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net 49,100 30,900
Provision for credit losses 555,000 623,659
Changes in operating assets and liabilities:
Decrease/(Increase) in other receivable 71,367 (36,320)
Decrease/(Increase) in prepaid expenses 47,178 (37,770)
Decrease/(Increase) in other assets 2,644 (101,486)
(Decrease)/Increase in accounts payable
and accrued expenses (15,941) 148,061
Decrease in income taxes receivable 350,982 102,803
----------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,318,202 954,035
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts (56,897,683) (44,817,066)
Collection of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts 62,521,661 42,248,054
Increase in credit balances of factoring clients 34,922 739,070
Purchase of furniture, fixtures and equipment (48,805) (23,773)
----------- ------------
NET CASH PROVIDED BY
(OR USED) BY INVESTING ACTIVITIES 5,610,095 (1,853,715)
--------- -----------
5
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Three Months Ended March 31,
1997 1996
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and
other borrowings 20,527,792 15,824,877
Principal payments on line of credit
and other borrowings (26,201,559) (14,927,618)
Treasury Stock Acquisition Costs - ( 17,816)
------------- -----------
NET CASH PROVIDED BY OR USED
IN FINANCING ACTIVITIES (5,673,767) 879,443
----------- -------
NET INCREASE (DECREASE) IN CASH 1,254,530 (20,237)
CASH, Beginning of period 1,624,899 754,295
--------- -------
CASH, End of period $2,879,429 $734,058
========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $403,779 $355,015
======== ========
Income taxes paid $ - $ 28,897
========= =========
Supplemental Schedule of
Noncash Activities
Transfer of finance and other
receivables to other assets $ - $280,000
========= ========
Issuance of Convertible Subordinated
Notes in exchange for Common Stock $ - $2,148,000
========= ==========
6
<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
March 31, 1997 and 1996; however, they reflect all adjustments which, in the
opinion of management, are necessary to present fairly the results for the
periods presented. Certain information and note disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. Allstate Financial Corporation
believes that the disclosures are adequate to make the information presented not
misleading. The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results of operations to be expected for
the remainder of the year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KB for the
year ended December 31, 1996.
2. NET INCOME PER SHARE. Net income per share of common stock has been computed
by dividing net income by the weighted average number of common shares
outstanding during the periods presented. For the quarters ended March 31, 1997
and 1996, weighted average shares outstanding were 2,317,919 and 2,361,461,
respectively. At March 31, 1997 and December 31, 1996 there were 133,400 stock
options outstanding, at exercise prices ranging from $5.375 to $14.00 per share.
During the year ended December 31, 1996, 24,867 options were forfeited. There
were no options exercised during 1996 or during the three months ended March 31,
1997.
3. LINE OF CREDIT. As of March 31, 1997, the Company had approximately $15.8
million available under a $25 million secured revolving line of credit. The
credit facility contains a $5.0 million sub-facility for the issuance of letters
of credit, a $2 million sub-facility (which under certain circumstances may
increase to $4 million) the proceeds of which may be used by the Company to make
advances to clients secured by machinery and equipment and a $2.5 million
sub-facility the proceeds of which may be used by the Company to make advances
to clients secured by inventory. Borrowings under the credit facility bear
interest at a spread over the bank's base rate. The Company is subject to
covenants which are typical in revolving credit facilities of this type. The
current maturity date of this credit facility is May 13, 1997. The Company
currently anticipates that the credit facility will be renewed for a period of
three years.
7
<PAGE>
During 1996 Lifetime Options, Inc., a Viatical Settlement Company (a
wholly-owned subsidiary of the Company), had a $2 million revolving line of
credit with a local federal savings bank. This line of credit expired on
December 31, 1996 at which time all indebtedness was paid in full.
4. CONVERTIBLE SUBORDINATED NOTES PAYABLE. As of March 31, 1997, the Company had
outstanding $4,978,000 in aggregate principal amount of Convertible Subordinated
Notes issued in exchange for 785,475 shares of common stock of the Company. The
Notes (i) mature on September 30, 2000; (ii) currently bear interest at the rate
of 9.5% per annum which rate may fluctuate in accordance with the prime rate,
but may not fall below 8% nor rise above 10% per annum; (iii) are convertible
into common stock of the Company at the rate of $7.50 per share; (iv) are
subordinated to Senior Indebtedness (as defined) of the Company and (v) were
issued pursuant to an indenture which contains certain covenants which are less
restrictive than those contained in the Company's secured revolving credit
facility. Upon the occurrence of certain change of control events, holders of
the Notes have the right to have their Notes redeemed at par.
5. CERTAIN CONTINGENCIES. The Company is a defendant in White, Trustee v.
Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. The Company provided receivables financing and
advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject
of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991,
the Lyon's trustee brought an action against the Company claiming, among other
things, fraudulent transfer and breach of contract. A partial summary judgement
was granted in favor of the Company which reduced the fraudulent transfer claim
by $1.6 million. As a consequence, the remaining fraudulent transfer claim was
approximately $1,000,000. In late 1994, the Company reached a settlement
agreement with the Lyons trustee, subject to approval by the bankruptcy court,
which would have released the Company from all claims upon the payment of
$300,000. In connection with the settlement, the Company paid and added $300,000
to the provision for credit losses in 1994. A creditor in the bankruptcy
proceeding, Sherwin-Williams Company, objected to the proposed settlement amount
and, in March 1995, the objection, was sustained by the bankruptcy court. The
Company appealed the order sustaining the objection, however, in April 1996 the
appellate court exercised its discretion not to hear the appeal at that time.
The $300,000 previously paid by the Company was returned to the Company in April
1996. The matter is currently being litigated in the District Court. Management
does not believe at this time that the Company has a material exposure
significantly in excess of the previously agreed upon settlement amount.
In connection with the same transaction, the Company was also named in
January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et.
al. pending in the United States District Court for the Northern District of
Ohio. Sherwin-Williams is suing all parties with any involvement in the
transaction to recover damages allegedly incurred by Sherwin-Williams in
connection with the leveraged buy-out and the bankruptcy litigation arising
therefrom. Sherwin-Williams asserts that it has or will incur pension fund
liabilities and other liabilities as a result of the transaction in the
approximate amount of $11 million and has asserted claims against
8
<PAGE>
the Company in that amount. The complaint asserts, among other things, that the
purchasers of Lyons breached their purchase agreement with Sherwin-Williams by
pledging the assets of Lyons to the Company to obtain the down payment. The
Company was not a party to the purchase agreement. The Company filed a motion to
dismiss the claims and a motion to stay discovery pending a ruling on the motion
to dismiss. The motion to stay discovery was granted and, in March 1996, a
federal magistrate recommended to the District Court that the Company's motion
to dismiss be granted. Prior to the District Court ruling on the magistrate's
recommendation, Sherwin-Williams filed an amended complaint. The amended
complaint added two additional claims for "civil conspiracy" and "tortious
interference with contract". The two new claims arise from essentially the same
allegations set forth in the earlier complaint, i.e., that the Company assisted
in the breach of the purchase agreement. In March 1997, the federal magistrate
again recommended to the District Court that the Company's motion to dismiss the
claims contained in the original complaint be granted. However, the magistrate
recommended that the Company's motion to dismiss the two new claims contained in
the amended complaint be denied. Management does not believe the litigation will
have a material effect on the financial position or results of operations of the
Company because, in management's opinion, the claims are without merit.
As disclosed in the Company's Form 10-QSB for the quarter ended June 30,
1995, the Company reached a settlement with the Trustee in the bankruptcy of
Premium Sales Corporation, a former client of one of the Company's wholly-owned
subsidiaries. The settlement is intended to be a full release of any and all
claims between the Company (and its subsidiaries) and the Trustee including,
without limitation, any alleged preference liability of the Company and its
subsidiaries. The settlement was approved by the bankruptcy court in January
1996. The settlement will become fully effective and the settlement monies will
be disbursed at the time a plan of distribution in the Premium Sales Corporation
bankruptcy is approved by the bankruptcy court. The impact of this settlement
has been reflected in the Company's financial statements.
Except as described above, the Company is not party to any litigation other
than routine proceedings incidental to its business, and the Company does not
expect that these proceedings will have a material adverse effect on the
Company. From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without any
factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING INFORMATION
Certain disclosures contained in this Form 10-QSB contain forward looking
information based on current information and expectations of the Company that
involve a number of risks, uncertainties and assumptions, including the overall
state of the economy, competition among financial institutions, the credit
quality of the Company's clients and account debtors, and the Company's ability
to generate growth in earning assets through the generation of new business.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual outcomes could vary materially
from those expected.
GENERAL
The Company's principal business is the discounted purchase of accounts
receivable, usually on a full recourse, full notification basis. In addition,
the Company also makes advances to its clients collateralized by inventory,
equipment, real estate and other assets ("Collateralized Advances"). The Company
has elected to continue to more aggressively pursue the making of Collateralized
Advances as it perceives the need by its targeted customers for such advances
and such funding is not readily available from many of the Company's
competitors. On occasion, the Company will also provide other specialized
financing structures which satisfy the unique requirements of the Company's
clients. The Company also provides its clients with letters of guaranty,
arranges for the issuance of letters of credit for its clients and provides
other related financial services.
The Company's clients are small- to medium-sized businesses with annual
revenues typically ranging between $600,000 and $75,000,000. Historically, the
Company's clients have not qualified for traditional bank or asset-based
financing because they are either too new, too small, undercapitalized (or
over-leveraged), unprofitable or otherwise unable to satisfy the requirements of
a bank or traditional, asset-based lender. Banks and other asset-based lenders
have, however, started to lend to the Company's traditional, high risk type of
client. Given the Company's typical client profile, there is a significant risk
of default and client failure inherent in the Company's business.
Continuing competition within the marketplace from banks, asset-based
lenders and newly created finance companies have encroached upon the Company's
potential client base and have negatively affected earned discounts on factored
accounts receivable. Additionally, the Company has attracted larger clients
which often increases the amount of time needed to negotiate and fund new
business. Also, Collateralized Advances require more in-depth and diverse due
diligence which can further delay the funding of new business. Nonetheless, the
Company believes that its ability to respond quickly and to provide specialized,
flexible and comprehensive financing structures to its clients enables it to
compete effectively. In order to remain competitive, the Company is, where
necessary and appropriate, offering lower rates than it has historically. The
Company believes that increased competition will continue for the foreseeable
future and will continue to exert downward pressure on pricing, especially in
the Company's core factoring business. To counter the downward pressure on
pricing, the Company intends to continue to
10
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diversify its sources of income, primarily by continuing to place emphasis on
funding relationships which include (in addition to the factoring of accounts
receivable) the making of Collateralized Advances.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its clients would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however, because
the Company is, where necessary and appropriate, offering lower rates and making
Collateralized Advances, it is possible that the duration of the Company's
funding relationships with its clients may be extended. Even if the Company
succeeds in extending the duration of its funding relationship with its clients,
there will not be a corresponding increase in non-current assets on the
Company's balance sheet. This is because it is anticipated that the Company's
funding relationships with its clients will continue to renew no less frequently
than once a year. Although the Company has historically been successful in
replacing major clients, the loss of one or more major clients and an inability
to replace those clients could have a material adverse effect on the Company.
Lifetime Options, a wholly-owned subsidiary of the Company, provides
financial assistance to individuals facing life-threatening illness by
purchasing their life insurance policies at a discount from face value. The
amount of the discount is determined by Lifetime Options based on the size of
the policy being purchased, the maximum life expectancy of the insured, the
amount of the anticipated premiums payable with respect to the policy being
purchased and the anticipated financing cost associated with purchasing and
carrying the policy. In general, the purchase price for a policy is between 55%
and 85% of the benefits payable under the policy. Because most of the life
insurance policies purchased by Lifetime Options are underwritten by highly
rated insurance companies (and, in many cases, backed by state guaranty funds),
the management of Lifetime Options believes that credit risk is not material to
its business.
Before purchasing each policy, Lifetime Options has each insured's medical
records reviewed by at least one independent physician who provides Lifetime
Options with an opinion of the insured's life expectancy. Historically, Lifetime
Options typically required up to three independent reviews but, based on its
experience, the management of Lifetime Options no longer believes multiple
medical reviews are necessary. To date, the physicians engaged by Lifetime
Options have provided life expectancies which, on average, fairly approximate
actual lifespans. However, there is no assurance that the physician engaged by
Lifetime Options will in the future be able to perform as he has in the past. If
the physician(s) engaged by Lifetime Options were to systematically
underestimate life expectancies or if life extending treatments (or a cure) were
found for AIDS (almost all of the life insurance policies purchased by Lifetime
Options to date have been purchased from individuals with AIDS), there would be
a material adverse effect on the earnings of Lifetime Options. Lifetime Options
relies on its independent physician to assist in monitoring important medical
advances (and potential medical advances). In particular, Lifetime Options'
independent physician is closely monitoring the effects of a relatively new
class of drugs known as protease inhibitors. These drugs, while not a cure for
AIDS, may extend the lives of certain individuals infected with HIV.
11
<PAGE>
During 1996, Lifetime Options started to curtail its operations. This
decision enables management to better focus on the Company's core commercial
finance business at a time when competition has reduced yields, and medical
advances have created a certain degree of uncertainty, in Lifetime Options'
business.
Other than Lifetime Options, none of the Company's subsidiaries is
currently engaged in business which could have a material effect on the Company.
RESULTS OF OPERATIONS
The following table sets forth certain items of income and expense for
the periods indicated and indicates the percentage relationship of each item to
total income.
For the Three Months Ended March 31,
1997 1996
------------------ ------------------
(Unaudited)
INCOME
Earned discounts $2,292,585 83.9% $2,333,820 80.9%
Fees and other income 439,521 16.1 551,852 19.1
----------- ---- ----------- -----
TOTAL INCOME 2,732,106 100.0% 2,885,672 100.0%
---------- ----- ----------- -----
EXPENSES
Compensation and fringe benefits 731,950 26.8 849,055 29.4
General and administrative expense 538,736 19.7 612,069 21.2
Interest expense 403,997 14.8 355,360 12.3
Provision for credit losses 555,000 20.3 623,659 21.6
Commissions 93,151 3.4 89,641 3.1
----------- --- ----------- ---
TOTAL EXPENSES 2,322,834 85.0 2,529,784 87.6
---------- ---- ----------
INCOME BEFORE INCOME TAXES 409,272 15.0 355,888 12.4
INCOME TAXES 151,400 5.5 131,700 4.6
----------- ---- ---------- ---
NET INCOME $ 257,872 9.5% $ 224,188 7.8%
----------- ==== ========== ===
NET INCOME PER SHARE $0.11 $ 0.09
===== ======
WEIGHTED AVERAGE NUMBER OF SHARES 2,317,919 2,361,461
========= =========
TOTAL INCOME. Total income consists of (i) earned discounts and (ii)
fees and other income. "Earned discounts" consist primarily of income from the
purchase of accounts receivable and life insurance policies and income from
Collateralized Advances. "Fees and other income" consist primarily of
application fees, commitment or facility fees, other related financing fees and
supplemental discounts paid by clients who do not sell the minimum volume of
accounts receivable required by their contracts with the Company (including as a
result of "graduating" to a lower cost source of funding).
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The following table breaks down total income by type of transaction for
the periods indicated and the percentage relationship of each type of
transaction to total income.
For the Three Months Ended March 31,
1997 1996
(Unaudited) (Unaudited)
--------------------- ----------------------
Earned % of Total Earned % of Total
Type of Transaction Income Income Income Income
Discount on Factored
Accounts Receivable ....... $1,484,327 54.4% $1,183,864 41.0%
Earnings on Collateralized
Advances .................. 471,243 17.2 775,908 26.9
Earnings on Purchased Life
Insurance Policies ........ 100,000 3.6 155,605 5.4
Other Earnings ............... 237,015 8.7 218,443 7.6
---------- ----- ---------- -----
Total ................... 2,292,585 83.9 2,333,820 80.9
Fees and Other Income ........ 439,521 16.1 551,852 19.1
---------- ----- ---------- -----
Total Income ............ $2,732,106 100.0% $2,885,672 100.0%
========== ===== ========== =====
Total income decreased 5.3%, in the first three months of 1997 as
compared to the same period in 1996. Earned discounts from factored accounts
receivable increased 25.4% in the first quarter of 1997 as compared to the first
quarter of 1996. The absolute dollar increase in earned discounts from factored
accounts receivable in the first quarter of 1997 versus 1996 is attributable to
a higher volume of factored accounts receivable in the first quarter of 1997 as
compared to 1996 - $53,700,000 versus $35,800,000, respectively. Earned
discounts from factored accounts receivable in the first quarter of 1997 as a
percentage of total factored accounts receivable purchased in the first quarter
of 1997 were 2.8%. The comparable percentage in 1996 was 3.3%, a decrease of
15.2% from the first quarter 1996 to the first quarter 1997. The reduction in
average earned discounts from 1996 to 1997 reflects downward pricing pressure
from banks, asset-based lenders and small independent finance companies in the
Company's core factoring business.
Earned discounts from Collateralized Advances decreased 39.3% in the
first quarter of 1997 as compared to the same period in 1996, from $776,000 to
$471,000, respectively. In the first quarters of 1997 and 1996, earned discounts
from Collateralized Advances accounted for 17.2% and 26.9%, respectively, of
total income. Collateralized Advances currently bear interest at a rate, on
average, of approximately 2% per month. Earned discounts from Collateralized
Advances are required to be paid in cash monthly in arrears. See Provision for
Credit Losses below.
As of March 31, 1997 and December 31, 1996, factored accounts
receivable included on the Company's balance sheet were $20.2 million (62.2%)
and $22.4 million (59.5%), respectively, of gross finance receivables. As of
March 31, 1997 and December 31, 1996,
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Collateralized Advances included on the Company's balance sheet were $7.0
million (21.6%) and $8.6 million (22.8%), respectively, of gross finance
receivables. The Company intends to pursue its strategy of making Collateralized
Advances in conjunction with its core factoring business.
Fees and other income decreased 20.4% in the first quarter of 1997
compared to the first quarter of 1996, from $552,000 to $440,000. The decrease
in 1997 is attributable primarily to decreased application and other fees.
COMPENSATION AND FRINGE BENEFITS. Compensation and fringe benefits
decreased 13.9% in the first quarter of 1997 versus the comparable period in
1996, from $849,000 (29.4% of total income) in 1996 to $732,000 (26.8% of total
income) in 1997. Within compensation and fringe benefits, executive compensation
decreased 24.7% in the first quarter of 1997, from $295,000 (10.2% of total
income) in the first quarter of 1996 to $222,000 (8.1% of total income) in the
first quarter of 1997. The decrease in executive compensation in the first
quarter of 1997 is attributable in large part to the cessation of salary
continuation payments associated with the termination of a key employee and
costs associated with replacing that employee.
GENERAL AND ADMINISTRATIVE EXPENSE. In the first quarter of 1997,
general and administrative expense was reduced by 11.9%, from $612,000 (21.2% of
total income) in the first quarter of 1996 to $539,000 (19.7% of total income)
in the first quarter of 1997. The decrease in the first quarter of 1997 was
primarily attributable to a reduction in professional fees offset in part by
increases in depreciation, taxes and credit and filing fees. In the first
quarter of 1997, professional fees were $158,000 (5.8% of total income) as
compared to $247,000 (8.6% of total income) in the first quarter of 1996.
Professional fees decreased, in part, due to the final resolution of legal
proceedings instituted in prior years.
INTEREST EXPENSE. Interest expense was $404,000 (14.8% of total income)
versus $355,000 (12.3% of total income) in the first quarter of 1997 and 1996,
respectively. The increase in interest expense is attributable to additional
borrowing by the Company to fund increased business volume in the first quarter
of 1997 versus 1996. Gross receivables purchased in the first quarter of 1997
were $56.9 million as compared to $44.8 million in 1996, an increase of 27% in
the first quarter of 1997. The average daily outstanding balance on the
Company's revolving line of credit was $11.6 million and $9.5 million for the
first quarters of 1997 and 1996, respectively, and the average interest rate
paid on the Company's revolving line of credit was 9.0% in the first quarter of
1997 compared to 9.2% in the first quarter of 1996.
PROVISION FOR CREDIT LOSSES. Credit loss experience, the adequacy of
underlying collateral, changes in the character and size of the Company's
receivables portfolio and management's judgement are factors used in determining
the provision for credit losses and the adequacy of the allowance for credit
losses. Other factors given consideration in determining the adequacy of the
allowance are the level of related credit balances of factoring clients and the
current and anticipated impact of economic conditions on the creditworthiness of
the Company's clients and account debtors. To mitigate the risk of credit loss,
the Company, among other things: (I) thoroughly evaluates the collateral to be
made available by each client; (ii) usually collects its factored accounts
receivable directly from account debtors, which are frequently (though not
always) large, creditworthy companies or governmental entities; (iii) purchases,
or takes a first
14
<PAGE>
priority security interest in, all accounts receivable of each client; (iv)
takes, whenever available, blanket liens on all of its clients' other assets
and, when making Collateralized Advances, it employs what management believes to
be conservative loan-to-value ratios based on auction or liquidation value
appraisals performed by independent appraisers; (v) almost always requires
personal guaranties (either unlimited guaranties or guaranties limited to the
validity and collectability of factored accounts receivable) from its clients'
principals, and (vi) actively monitors its portfolio of factored accounts
receivable, including the creditworthiness of account debtors and periodically
evaluates the value of other collateral securing Collateralized Advances.
Management recognizes that Collateralized Advances entail different,
and possibly greater, risks to the Company than the factoring of accounts
receivable. Risks associated with the making of Collateralized Advances (but not
the factoring of accounts receivable) include, among others (I) certain types of
collateral securing Collateralized Advances may diminish in value (possibly
precipitously) over time (sometimes short periods of time), (ii) repossessing,
safeguarding and liquidating collateral securing Collateralized Advances may
require the Company to incur significant fees and expenses some or all of which
may not be recoverable, (iii) clients may dispose of (or conceal) the collateral
securing Collateralized Advances and (iv) clients or natural disasters may
destroy the collateral securing Collateralized Advances. The Company attempts to
manage these risks, respectively, by (I) engaging independent appraisers to
review periodically the value of collateral securing Collateralized Advances at
intervals established by management based on the characteristics of the
underlying collateral, (ii) employing conservative loan-to-value ratios which
management believes should generally enable the Company to recover from
liquidation proceeds most of the fees and expenses incurred in connection with
repossessing, safeguarding and liquidating collateral, (iii) using its internal
field examiners to inspect collateral periodically and, when appropriate,
engaging independent collateral monitoring firms to implement appropriate
collateral control systems, including bonding certain of the client's employees
and (iv) requiring clients to maintain appropriate amounts and types of
insurance issued by insurers acceptable to the Company naming the Company as the
party to whom loss is paid. Although management believes that the Company has
(or third parties acting on behalf of the Company have) the requisite skill to
evaluate, monitor and manage the risks associated with the making of
Collateralized Advances, there can be no assurance that the Company will in fact
be successful in doing so.
The provision for credit losses decreased from $624,000 (21.6% of total
income) in the first quarter of 1996 to $555,000 (20.3% of total income) in the
first quarter of 1997. As of March 31, 1997 and December 31, 1996 the allowance
for credit losses was 8.9% ($2.9 million) and 6.9% ($2.6 million) of gross
finance receivables, respectively. At March 31, 1997 the accrual of earnings was
suspended on $3.7 million of gross finance receivables as compared to $4.5
million of gross finance receivables at December 31, 1996. In addition, "other
receivables" and "other assets" appearing on the Company's balance sheet
typically do not accrue earnings for financial statement purposes. The following
table provides a summary of the Company's gross finance receivables (which
includes primarily factored accounts receivable, Collateralized Advances and
non-earning receivables), "other receivables" and "other assets" and information
regarding the allowance for credit losses as of the dates indicated.
15
<PAGE>
As of (or for
the Year Ended) As of March 31,
December 31, 1996 1997 1996
------------------ ---------- ----------
(Dollars in thousands)
Gross Finance Receivables, Other
Receivables and Other Assets Data:
Gross Finance Receivables ............ $ 37,600 $ 32,452 $ 41,198
Non-Earning Receivables (also included
in Gross Finance Receivables) ...... 4,548 3,726 1,760
Other Receivables .................... 4,390 4,321 2,793
Other Assets (excluding
miscellaneous) ....................... 1,884 1,881 1,912
Allowance for credit
losses:
Balance, January 1 ................... 2,351 2,579 2,351
Provision for credit
losses ............................. 5,878 555 624
Receivables charged off .............. (5,711) (233) (284)
Recoveries .......................... 6 3
Ending Balance ....................... $ 2,579 $ 2,904 $ 2,691
Allowance for Credit Losses as a percent of:
Gross Finance Receivables ............ 6.85% 8.94% 6.53%
Non-Earning Receivables .............. 56.7% 77.90% 152.90%
Non-Earning Receivables, Other
Receivables and Other Assets ....... 28.3% 29.25% 41.62%
As a percent of the sum of Gross
Finance Receivables, Other
Receivables and Other Assets:
Non-Earning
Receivables ........................ 10.4% 9.63% 3.83%
Other Receivables .................... 10.0% 11.17% 6.08%
Other Assets ......................... 4.29% 4.86% 4.17%
The absolute increase in non-earning receivables, other receivables and
other assets (and the relative decrease in the size of the allowance for credit
losses) from the end of the first quarter of 1996 to the end of the first
quarter of 1997 is attributable, in large part, to two large clients put on
non-accrual status in late November 1996.
Although the Company maintains an allowance for credit losses in an
amount deemed by management to be adequate to cover potential losses, no
assurance can be given that the allowance will in fact be adequate or that an
inadequacy, if any, in the allowance could not have a material adverse effect on
the Company's earnings in future periods. Furthermore, although management
believes that its periodic estimates of the value of "other receivables" and
"other assets" are appropriate, no assurance can be given that the amounts which
the Company ultimately collects with respect to other receivables and other
assets will not differ significantly from management's
16
<PAGE>
estimates or that those differences, if any, could not have a material adverse
effect on the Company's earnings in future periods.
COMMISSIONS. Commission expense was $93,000 (3.4% of total income) in
the first quarter of 1997 as compared to $90,000 (3.1% of total income) in the
first quarter of 1996.
IMPACT OF INFLATION
Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the past three years.
Changes in interest rate levels do not generally affect the income
earned by the Company in the form of discounts charged. Rising interest rates
would, however, increase the Company's cost of borrowed money based on its
current borrowing arrangements which are prime or base rate adjusted credit
facilities.
CHANGES IN FINANCIAL CONDITION
The Company's total assets decreased 11.7% to $40.5 million at March
31, 1997 from $45.9 million at December 31, 1996. The decrease is primarily the
result of a decrease in net finance receivables.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal funding sources are the collection of factored
accounts receivable, retained cash flow and external borrowings.
For additional detail regarding external borrowings, see Notes 3 and 4
to the unaudited financial statements contained in this Form 10-QSB.
At March 31, 1997 and December 31, 1996, the Company had working
capital of $25.2 million and $24.9 million, respectively, and a ratio of current
assets to current liabilities of 2.98 to 1 and 2.36 to 1, respectively.
[THIS SPACE INTENTIONALLY LEFT BLANK]
17
<PAGE>
PART II -OTHER INFORMATION
ITEM 1. -LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 5 to the unaudited
financial statements contained in this Form 10-QSB.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. - OTHER INFORMATION
None.
ITEM 6(a). - EXHIBITS
Amendment to Exhibit 10.7 - Revolving Credit and Security Agreement
dated as of May 13, 1994, among the Company, the Lenders party thereto
and IBJ Schroder Bank & Trust Company (as Lender and as Agent), as
amended to March 21, 1997.
Eleventh Amendment dated as of March 21, 1997.
ITEM 6(b). - REPORTS ON FORM 8-K
None.
18
<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
Date: May 13, 1997 /s/ Lawrence M. Winkler
-----------------------
Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2879429
<SECURITIES> 0
<RECEIVABLES> 31792527
<ALLOWANCES> 2904178
<INVENTORY> 0
<CURRENT-ASSETS> 37890949
<PP&E> 1423160
<DEPRECIATION> 652716
<TOTAL-ASSETS> 40542517
<CURRENT-LIABILITIES> 12709938
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 22744409
<TOTAL-LIABILITY-AND-EQUITY> 40542517
<SALES> 0
<TOTAL-REVENUES> 2732106
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1363837
<LOSS-PROVISION> 555000
<INTEREST-EXPENSE> 403997
<INCOME-PRETAX> 409272
<INCOME-TAX> 151400
<INCOME-CONTINUING> 257872
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257872
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
ELEVENTH AMENDMENT
TO
REVOLVING CREDIT AND SECURITY AGREEMENT
ELEVENTH AMENDMENT ("Eleventh Amendment") dated as of March
21, 1997 to Revolving Credit and Security Agreement dated as of May 13, 1994 (as
amended and waived to the dated hereof and as may be further amended,
supplemented, modified or waived from time to time, the "Loan Agreement") by and
among ALLSTATE FINANCIAL CORPORATION, a corporation organized under the laws of
the Commonwealth of Virginia ("Borrower"), IBJ SCHRODER BANK & TRUST COMPANY
("IBJS"), the other lenders party to the Loan Agreement (IBJS, and each of the
other lenders which may now or in the future be a party to the Loan Agreement,
the "Lenders") and IBJS, as agent for the Lenders (IBJS, in such capacity, the
"Agent").
BACKGROUND
Borrower has requested that Agent and Lenders amend certain
provisions of the Loan Agreement and Agent and Lenders are willing to do so on
the terms and conditions hereafter set forth.
NOW, THEREFORE, in consideration of any loan or advance or
grant of credit heretofore or hereafter made to or for the account of Borrower
by Lenders, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
1. DEFINITIONS. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the Loan
Agreement.
2. AMENDMENTS TO LOAN AGREEMENT. Subject to
satisfaction of the conditions set forth in Section 3 below, the
Loan Agreement is hereby amended as follows:
(a) The definition of "MAXIMUM ADDITIONAL EQUIPMENT VALUE
ADVANCE AMOUNT" appearing in Section 1.2 of the Loan Agreement is
hereby amended by deleting the date "April 1, 1996" appearing therein
and inserting in lieu thereof the date "May 13, 1997".
(b) Section 2.2(A) of the Loan Agreement is hereby amended by
deleting the date "March 31, 1997" appearing therein and inserting in
lieu thereof the date "May 13, 1997".
3. CONDITIONS OF EFFECTIVENESS. This Eleventh
Amendment shall become effective as of the date first above written
(the "Eleventh Amendment Effective Date") upon receipt by Agent of
<PAGE>
a copy of this Eleventh Amendment duly executed by Borrower and each Lender and
consented to by each of the Guarantors.
4. REPRESENTATIONS AND WARRANTIES. Borrower hereby
represents and warrants as of the Eleventh Amendment Effective Date
as follows:
(a) This Eleventh Amendment and the Loan Agreement, as amended
and waived hereby, constitute the legal, valid and binding obligations
of Borrower and are enforceable against Borrower in accordance with
their respective terms.
(b) After giving effect to this Eleventh Amendment, Borrower
hereby reaffirms all covenants, representations and warranties made in
the Loan Agreement and the Security Agreement and agrees that all such
covenants, representations and warranties shall be deemed to have been
remade as of the Eleventh Amendment Effective Date.
(c) No Event of Default or Default has occurred and is
continuing or would exist, in each case, after giving effect to this
Eleventh Amendment.
(d) Borrower has no defense, counterclaim or offset to
the Obligations.
5. EFFECT ON THE LOAN AGREEMENT.
(a) Upon the effectiveness of SECTION 2 hereof, each reference
in the Loan Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import shall mean and be a reference to the
Loan Agreement as amended hereby.
(b) Except as specifically amended hereby, the Loan Agreement
and all other documents, instruments and agreements executed and/or
delivered in connection therewith, shall remain in full force and
effect, and are hereby ratified and confirmed.
(c) Except as expressly set forth herein, the execution,
delivery and effectiveness of this Eleventh Amendment shall not operate
as a waiver of any right, power or remedy of Agent and Lenders, nor
constitute a waiver of any provision of the Loan Agreement or any other
documents, instruments or agreements executed and/or delivered under or
in connection therewith.
6. GOVERNING LAW. This Eleventh Amendment shall be
binding upon and inure to the benefit of the parties hereto and
their respective successors and assigns and shall be governed by
and construed in accordance with the laws of the State of New York.
<PAGE>
7. HEADINGS. Section headings in this Eleventh
Amendment are included herein for convenience of reference only and
shall not constitute a part of this Eleventh Amendment for any
other purpose.
8. COUNTERPARTS; TELECOPY SIGNATURES. This Eleventh
Amendment may be executed by the parties hereto in one or more
counterparts, each of which taken together shall be deemed to constitute one and
the same instrument. Any signature delivered by a party by facsimile
transmission shall be deemed to be an original signature hereto.
IN WITNESS WHEREOF, the parties hereto, by their duly
authorized officers, have executed this Eleventh Amendment as of the day and
year first above written.
IBJ SCHRODER BANK & TRUST
COMPANY, as Agent and Lender
By
Name:
Title:
NATIONAL BANK OF CANADA, a
Lender
By
Name:
Title:
By
Name:
Title:
ALLSTATE FINANCIAL CORPORATION
By
Name: Craig Fishman
Title: President
<PAGE>
CONSENTED AND AGREED TO:
LIFETIME OPTIONS, INC., A
VIATICAL SETTLEMENT COMPANY
By
Name: Craig Fishman
Title: President
PREMIUM SALES NORTHEAST, INC.
By
Name: Craig Fishman
Title: President
SETTLEMENT SOLUTIONS, INC.
By
Name: Craig Fishman
Title: President
RECEIVABLE FINANCING CORPORATION
By
Name: Craig Fishman
Title: President
BUSINESS FUNDING OF FLORIDA, INC.
By
Name: Craig Fishman
Title: President
BUSINESS FUNDING OF AMERICA, INC.
By
Name: Craig Fishman
Title: President
AFC HOLDING CORPORATION
By
Name: Craig Fishman
Title: President
