SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1998 COMMISSION FILE NUMBER 0-17832
Allstate Financial Corporation
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Virginia 54-1208450
- -------------------------------------- -----------------------------------
(State of Incorporation) (I.R.S. Employer Identification No)
2700 South Quincy Street, Suite 540, Arlington, VA 22206
- ---------------------------------------------
(address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 931-2274
Indicate by the check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 of the Securities and Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
2,323,683 Common Shares were outstanding as of June 30, 1998.
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ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at June 30, 1998
and December 31, 1997 1-2
Consolidated Statements of Operations Six and Three Months Ended
June 30, 1998 and 1997 3
Consolidated Statements of Shareholders' Equity Six
Months Ended June 30, 1998 and Year Ended
December 31, 1997 4
Consolidated Statements of Cash Flows Six Months Ended
June 30, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-11
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 12-23
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 24
Item 2 - Changes in Securities 24
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders 24
Item 5 - Other Information 24
Item 6 - Exhibits and Reports on Form 8-K 24
Signatures 25
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PART I - FINANCIAL INFORMATION
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1998 1997
(UNAUDITED)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ...................................... $ 1,911,073 $ 4,200,050
Receivables:
Finance Receivables - Net ............. 39,155,483 33,742,276
Receivables - Other - Net ............. 724,488 2,988,927
Prepaid expenses .......................... 33,539 127,741
Income Tax Receivable ..................... 1,970,087 --
Deferred income taxes ..................... 1,234,511 1,056,686
----------- -----------
TOTAL CURRENT ASSETS ...................... 45,029,181 42,115,680
FURNITURE, FIXTURES AND EQUIPMENT, Net ......... 432,053 494,240
OTHER ASSETS ................................... 2,529,121 4,203,727
----------- -----------
$47,990,355 $46,813,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......... $ 1,282,022 $ 420,356
Notes payable ................................. 16,329,214 14,373,724
Income taxes payable .......................... -- 240,226
Credit balances of factoring clients .......... 5,173,692 3,180,974
---------- -----------
TOTAL CURRENT LIABILITIES .................... 22,784,928 18,215,280
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
June 30, December 31,
1998 1997
(UNAUDITED)
NONCURRENT PORTION OF NOTES PAYABLE:
Convertible Subordinated Notes and Other
Non-Current Notes ............................ 4,961,000 5,034,327
----------- ----------
TOTAL LIABILITIES ............................27,745,928 23,249,607
----------- ----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding ......................... -- --
Common stock, authorized 10,000,000 shares
with no par value; 3,107,560 issued,
2,323,683 outstanding at June 30, 1998
and 2,318,451 at December 31, 1997, exclusive
of shares held in the Treasury ............... 40,000 40,000
Additional paid-in-capital .......................18,874,182 18,852,312
Treasury Stock (782,145 shares at June 30, 1998
and 783,877 shares at December 31, 1997) .....(5,017,604) (5,030,594)
Retained Earnings .................................6,347,849 9,702,322
------------ -----------
TOTAL SHAREHOLDERS' EQUITY ................. 20,244,527 23,564,040
------------ -----------
$ 47,990,355 $ 46,813,647
============ ===========
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See Notes to Consolidated Financial Statements
2
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1998 1997 1998 1997
------------- --------------- ------------ --------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Earned discounts ................................ $ 2,578,581 $ 1,497,010 $ 5,015,246 $ 3,789,595
Fees and other income ........................... 481,618 585,103 1,008,435 1,024,624
------------ ------------ ------------ ------------
Total Revenue ............................... 3,060,199 2,082,113 6,023,681 4,814,219
------------ ------------ ------------ ------------
EXPENSES:
Compensation and fringe benefits ................ 1,128,096 730,246 1,940,330 1,462,196
General and administrative expense .............. 2,027,668 501,210 2,895,784 1,039,947
Interest expense ................................ 448,824 223,330 859,155 627,327
Provision for credit losses ..................... 4,911,000 120,790 5,458,000 675,790
Commissions ..................................... 78,264 72,961 194,972 166,112
------------ ------------ ------------ ------------
Total Expenses ............................. 8,593,852 1,648,537 11,348,241 3,971,372
------------ ------------ ------------ ------------
INCOME/(LOSS) BEFORE INCOME TAXES .................... (5,533,653) 433,576 (5,324,560) 842,847
INCOME TAXES/(BENEFIT) ............................... (2,047,452) 160,452 (1,970,087) 311,852
------------ ------------ ------------ ------------
NET INCOME/(LOSS) .................................... (3,486,201) $ 273,124 $ (3,354,473) $ 530,995
============ ============ ------------ ------------
NET INCOME/(LOSS) PER COMMON SHARE
Diluted ............................ $ (1.50) $ .12 $ (1.44) $ .23
============ ============ ============ ------------
Basic .............................. $ (1.50) $ .12 $ (1.44) $ .23
============ ============ ============ ------------
WEIGHTED AVERAGE NUMBER OF SHARES
Diluted ............................ 2,324,251 2,321,197 2,323,215 2,320,133
============ ============ ============ ============
Basic .............................. 2,320,966 2,317,917 2,319,930 2,316,853
============ ============ ============ ============
</TABLE>
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
AND SIX MONTHS ENDED JUNE 30, 1998
Common Paid in Treasury Retained
STOCK CAPITAL STOCK EARNINGS TOTAL
<S> <C> <C> <C> <C> <C>
BALANCE - January 1, 1997 $40,000 $18,852,312 $(5,034,584) $8,668,809 $22,526,537
Conversion of Convertible
Subordinated Notes to 632
shares of Common Stock - - 3,990 - 3,990
Net Income - - - 1,033,513 1,033,513
----------- ----------------- ----------------- ---------- ----------
BALANCE - December 31, 1997 40,000 18,852,312 (5,030,594) 9,702,322 23,564,040
Conversion of Convertible
Subordinated Notes to 1,732
shares of Common Stock - - 12,990 - 12,990
1,000 Options Exercised at $5.62 - 5,620 - - 5,620
2,500 Options Exercised at $6.50 16,250 - - 16,250
Net (Loss) (Unaudited) - - - (3,354,473) (3,354,473)
------------ ----------------- ----------------- ---------- -----------
BALANCE - June 30, 1998 $40,000 $18,874,182 $(5,017,604) $6,347,849 $20,244,427
======= =========== ============ ========== ===========
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) ........................................... $ (3,354,473) $ 530,995
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net ...................................... 75,000 98,000
Disposition of automobiles .............................. 30,013 --
Provision for credit losses ............................. 5,458,000 675,790
Changes in operating assets and liabilities:
Decrease/(Increase) in other receivables ................ 2,264,439 1,801,525
Decrease in prepaid expenses ............................ 94,202 11,422
(Increase)/Decrease in other assets ..................... 1,674,606 (1,342,966)
(Decrease)/Increase in accounts payable
and accrued expenses ............................... 861,666 (130,292)
Decrease/(Increase) in income taxes
accrued or receivable .............................. (2,388,138) 592,728
------------- -------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ........................................ 4,715,315 2,237,202
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts ................ (131,818,340) (90,514,410)
Collection of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts ................ 120,947,133 105,298,655
Increase (Decrease) in credit balances
of factoring clients .................................... 1,992,718 (1,632,492)
Purchase of furniture, fixtures and equipment ............... (42,826) (60,163)
------------- -------------
NET CASH (USED) PROVIDED BY
INVESTING ACTIVITIES ......................................... (8,921,315) 13,091,600
------------- -------------
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
SIX MONTHS ENDED JUNE 30,
1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and
other borrowings ........................................ 86,122,438 33,827,009
Principal payments on line of credit
and other borrowings .................................... (84,227,275) (48,647,885)
Exercise of Options ......................................... 21,870 --
Treasury Stock Acquisition Costs ............................ (10) --
------------- -------------
NET CASH PROVIDED (USED) BY IN
FINANCING ACTIVITIES: ....................................... 1,917,023 (14,820,876)
------------- -------------
NET INCREASE (DECREASE) IN CASH .................................. (2,288,977) 507,926
CASH, Beginning of period ........................................ 4,200,050 1,624,899
------------- -------------
CASH, End of period .............................................. $ 1,911,073 $ 2,132,825
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid .............................................................. $ 798,104 $ 627,327
============= =============
Income taxes paid .......................................................... $ 418,051 $ 150,000
============= =============
Supplemental Schedule of
Noncash Activities
Transfer of finance and other
receivables to other assets ............................................. $ -- $ 1,305,489
============= =============
Issuance of Convertible Subordinated
Notes in exchange for Common Stock ...................................... $ 12,990 $ --
============= =============
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ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL. The consolidated financial statements of Allstate Financial
Corporation and subsidiaries (the "Company") included herein are unaudited for
all periods ended June 30, 1998 and 1997; however, they reflect all adjustments
which, in the opinion of management, are necessary to present fairly the results
for the periods presented. Certain information and note disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Allstate Financial
Corporation believes that the disclosures are adequate to make the information
presented not misleading. The results of operations for the six months ended
June 30, 1998 are not necessarily indicative of the results of operations to be
expected for the remainder of the year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1997.
Certain amounts related to 1997 have been reclassified to conform with the 1998
presentation.
2. NET INCOME PER SHARE. In March 1997, the Financial Accounting Standards
Board (FASB) issued SFAS No. 128, "Earnings Per Share". SFAS No. 128 supersedes
APB No. 15 to conform earnings per share with international standards as well as
to simplify the complexity of the computation under APB No. 15. SFAS No. 128
requires dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. SFAS No. 128 is effective for both interim and annual periods
ending after December 15, 1997. Accordingly, the Company has adopted SFAS No.
128 and the basic and dilutive earnings per share are reflected in the
statements of operations.
3. LINE OF CREDIT. As of June 30, 1998, the Company had approximately $8.0
million available under a $25.0 million secured revolving line of credit. The
revolving line of credit contains various sub facilities which limit its use.
The entire facility is available for the purchase of accounts receivable;
however, the Company may (i) borrow up to $5.0 million for collateralized
advances secured by machinery and equipment, (ii) borrow up to $2.5 million for
collateralized advances secured by inventory, and (iii) issue up to $5.0 million
of letters of credit. Borrowings under the credit facility bear interest at a
spread over the bank's base rate or a spread over LIBOR, at the Company's
election. The Company is subject to covenants which are typical in revolving
credit facilities of this type. The current maturity date of this credit
facility is May 27, 2000.
Because of the net loss caused by the provision for credit losses in the quarter
ended June 30,1998, the Company was in technical default of covenants related to
interest coverage, net worth
7
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requirements, and net cash advanced to any one client. The Company has received
waivers of these defaults or amendments to those covenants from the bank
participants in the line of credit.
4. CONVERTIBLE SUBORDINATED NOTES PAYABLE. As of June 30, 1998 and June 30,
1997, the Company had outstanding approximately $4,961,000 and $4,978,000,
respectively, in aggregate principal amount of Convertible Subordinated Notes
issued in exchange for shares of the Company's common stock (currently held by
the Company as treasury stock). The Convertible Subordinated Notes were issued
in exchange for 782,145 shares of common stock. The Convertible Subordinated
Notes (i) mature on September 30, 2000, (ii) currently bear interest at a rate
of 9.5% per annum, which rate of interest fluctuates with the prime rate, but
may not fall below 8% nor rise above 10% per annum, (iii) are convertible into
common stock of the Company at $7.50 per share, (iv) are subordinated in right
of payment to the Company's obligations under its secured revolving credit
facility and (v) were issued pursuant to an indenture which contains certain
covenants which are less restrictive than those contained in the Company's
secured revolving credit facility. Upon the occurrence of certain "fundamental
changes", the holders of the Convertible Subordinated Notes have the right to
have their Notes redeemed at par. The election of the five persons nominated by
the Independent Shareholders/Directors Committee in connection with the recently
concluded proxy contest was deemed to constitute a "fundamental change" as
defined in the Notes indenture. As a result, on June 17, 1998 the Company mailed
to holders of the Notes a Notice of Fundamental Change, which enables the
holders of the Notes to elect by 5:00 p.m., Eastern time, on August 17, 1998 to
have their Notes redeemed at par. The Company intends to offer existing Note
holders who are accredited investors (including those holders who rescind any
election to have their Notes redeemed) the option of exchanging their current
Notes for new unsecured, subordinated notes having the same principal amount
(the "New Notes"). The New Notes will mature on September 30, 2003 (three years
later than the current Notes), will bear a fixed interest rate of 10% per annum,
will be convertible into common stock at $6.50 per share, and will not be
redeemable by the Company. The Company's largest stockholder has agreed in
principle to exchange its current $1.3 million of Notes for the same amount of
New Notes and also to subscribe to additional New Notes in an amount sufficient
to fund all redemptions of existing Notes, subject to the negotiation and
execution of final documents.
5. NEW ACCOUNTING PRONOUNCEMENTS. In February 1997, The FASB issued SFAS
No. 129, "Disclosure of Information about Capital Structure". SFAS No. 129
consolidates the existing guidance from several other pronouncements relating to
an entity's capital structure. At June 30, 1998, the implementation of this
statement did not materially impact the presentation of any component of the
Company's financial statements and related footnote disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This pronouncement establishes standards for reporting and display of
comprehensive income and its components (revenue, expenses, gains and losses) in
a full set of general purpose financial statements. SFAS No. 130 is effective
for financial statements beginning after December 15, 1997. For the six months
ended June 30, 1998 and 1997, net income equaled comprehensive income.
Additionally, in June of 1997, the FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". SFAS No. 131
establishes standards for the way that public enterprises report information
about operating segments in the annual financial statements and
8
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requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for financial
statements beginning after December 15, 1997. At June 30, 1998, the
implementation of this statement did not materially impact the presentation of
any component of the Company's financial statements and related footnote
disclosures.
6. CERTAIN CONTINGENCIES. The Company is a defendant in WHITE, TRUSTEE V.
ALLSTATE FINANCIAL CORPORATION pending in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. The Company provided receivables financing and
advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject
of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991,
the Lyons' trustee brought an action against the Company claiming, among other
things, fraudulent transfer and breach of contract. In late 1994, the Company
reached a settlement agreement with the Lyons' trustee, subject to approval by
the bankruptcy court, which would have released the Company from all claims upon
the payment of $300,000. A creditor in the bankruptcy proceeding,
Sherwin-Williams Company, objected to the proposed settlement amount and, in
March 1995, the objection was sustained by the bankruptcy court. The $300,000
previously paid by the Company was returned to the Company in April 1996;
however, the Company continues to maintain a liability for this amount. The
matter is currently being litigated in the District Court. It is anticipated
that the court will set a trial date later in 1998 or early 1999. Management
does not believe at this time that the Company has a material exposure
(exclusive of potential accrued interest) significantly in excess of the
previously agreed upon settlement amount.
In connection with the same transaction, the Company was also named in
January 1994 as a defendant in SHERWIN-WILLIAMS COMPANY V. ROBERT CASTELLO ET.
AL. pending in the United States District Court for the Northern District of
Ohio. Sherwin-Williams is suing all parties with any involvement in the
transaction to recover damages allegedly incurred by Sherwin-Williams in
connection with the leveraged buy-out and the bankruptcy litigation arising
therefrom. Sherwin-Williams asserts that it has or will incur pension fund
liabilities and other liabilities as a result of the transaction in the
approximate amount of $11 million and has asserted claims against the Company in
that amount. The complaint asserts, among other things, that the purchasers of
Lyons breached their purchase agreement with Sherwin-Williams by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. In response to the complaint, the Company filed
a motion to dismiss all claims. In March 1997, a Federal magistrate recommended
to the District Court that the Company's motion to dismiss the six claims
contained in the original complaint be granted. However, the magistrate
recommended that the Company's motion to dismiss two new claims, i.e., tortious
interference with contract and civil conspiracy to defraud, contained in an
amended complaint be denied. The District Court sustained the magistrate's
recommendation. The Company believes that it has meritorious defenses and
intends to vigorously defend all claims. However, the litigation is in the
preliminary stage and the probability of a favorable or unfavorable outcome and
the potential amount of loss, if any, cannot be determined or estimated at this
time. The case is currently scheduled for trial in 1999.
The Company is a counterclaim defendant in ALLSTATE FINANCIAL CORPORATION
V. A.G. CONSTRUCTION, INC. (N/K/A A.G. PLUMBING, INC.), AMERICAN GENERAL
CONSTRUCTION CORP., ADAM GUZICZEK AND CHERYL LEE GUZICZEK pending in the United
States Bankruptcy Court for the Southern District of New York. The Company
provided receivable financing to A.G. Construction, Inc.
9
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(n/k/a/ A.G. Plumbing, Inc.) in 1988 and to American General Construction Corp.
(hereinafter, A.G. Construction, Inc. (n/k/a A.G. Plumbing) and American General
Construction shall be collectively referred to as "AG") in 1991. AG's primary
business was renovation of public housing for the City of New York. Adam and
Cheryl Guziczek (hereinafter collectively referred to as "Guziczek") personally
guaranteed the obligation due the Company under the financing arrangement. In
1993, AG defaulted on its obligations under the financing arrangement with the
Company. Thereafter, the Company confessed judgment against AG and Guziczek in
Virginia and commenced actions in New York to enforce the guaranties and to
attempt recovery on the confessed judgments. In one of the actions, an answer
and counterclaim against the Company was filed. The counterclaim asserted claims
for usury, diversion of proceeds of public improvement contracts, and
overpayments to the Company by AG in excess of $2,000,000 (hereinafter the
"Counterclaims"). No specific damage claims amount was set forth in the
Counterclaims.
On August 1, 1994, Guziczek filed a voluntary Chapter 11 petition under the
United States Bankruptcy Code and on June 14, 1995 the case was converted to a
Chapter 7 proceeding. On January 3, 1996, AG filed a separate voluntary Chapter
7 petition. No action was ever taken by the trustee in the Guziczek or AG
bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the trustee
for the AG bankruptcy estate filed a motion to abandon certain claims against
the Company, including all claims that the Company diverted proceeds of public
improvement contracts. On October 7, 1997, New York Surety Company (hereinafter
referred to as the "Surety") filed pleadings objecting to the abandonment of
such claims against the Company. The Surety provided the payment and performance
bond to AG in connection with the construction jobs performed for the City of
New York. In its pleadings, the Surety asserts that it is subrogated to AG's
claims and thereby seeks to intervene and file an intervenor's complaint against
the Company. The proposed complaint adopts the Counterclaims and seeks an
accounting. The Surety asserts damages of approximately $4,000,000. On April 9,
1998, the bankruptcy court remanded the matter to state court. The Company
believes it has meritorious defenses to the Counterclaims and intends to
vigorously defend all claims. However, the litigation is in the preliminary
stage and the probability of a favorable or unfavorable outcome and the
potential amount of loss, if any, cannot be determined or estimated at this
time.
On June 24, 1998, the Surety was formally declared insolvent by the
Superintendent of Insurance of the State of New York (hereinafter referred to as
the "Superintendent") and as such the Superintendent was judicially appointed as
rehabilitator of the surety to conduct its business. At this time, it is
uncertain whether the Superintendent will continue to pursue the litigation
against the Company.
Except as described above, the Company is not party to any litigation other
than routine proceedings incidental to its business, and the Company does not
expect that these proceedings will have a material adverse effect on the
Company. From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without any
factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
10
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[THIS SPACE INTENTIONALLY LEFT BLANK]
11
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING INFORMATION
This Form 10-QSB contains certain "forward-looking statements" relating to
the Company which represent the Company's current expectations or beliefs,
including, but not limited to, statements concerning the Company's operations,
performance, financial condition and growth. For this purpose, any statements
contained in this Form 10-QSB that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may", "will", "expect", "believe", "anticipate",
"intend", "could", "estimate", or "continue", or the negative or other variation
thereof or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, such as credit losses, dependence on management and key
personnel, seasonality, and variability of quarterly results, ability of the
Company to continue its growth strategy, competition, and regulatory
restrictions relating to potential new activities, certain of which are beyond
the Company's control. Should one or more of these risks or uncertainties
materialize or should the underlying assumptions prove incorrect, actual
outcomes and results could differ materially from those indicated in the
forward-looking statements.
GENERAL
The Company is a specialized commercial finance company principally engaged
in providing small- to medium-sized, high risk, growth or turnaround companies,
including debtors-in-possession. The Company purchases accounts receivable at a
discount or makes advances to its clients collateralized by receivables,
inventory, equipment, real estate and other assets (collectively,
"Collateralized Advances"). The Company may advance funds secured by equity in
the client's existing portfolio of Factored Accounts Receivable, equity in other
of the client's principal(s) or accounts receivable including property pledged
by the client's principal(s) or accounts receivable generated through the use of
the proceeds of such secured advances (such advances, collectively,
"Overadvances Secured by General Liens"). On occasion, the Company will also
provide other specialized financing structures which satisfy the unique
requirements of the Company's clients. In addition, the Company provides
financial assistance to clients in the form of guaranties, letters of credit,
credit information, receivables monitoring, collection service and customer
status information.
In May 1997 the Company established Allstate Factors. Allstate Factors is
engaged in traditional "non-recourse" factoring of accounts receivable in which
the factor typically assumes the risk that an account debtor may become
insolvent. However, due to declining volume and the departure of primary staff,
it has been determined to transfer the remaining clients to another factor. The
Company does not anticipate any significant negative impact associated with the
closure of this operation.
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The Company's clients are small- to medium-sized, high risk, growth and
turnaround companies with annual revenues typically between $600,000 and
$25,000,000. The Company's clients do not typically qualify for traditional bank
financing because they are either too new, too small, undercapitalized
(over-leveraged), unprofitable or otherwise unable to satisfy the requirements
of a bank. Accordingly, there is a significant risk of default and client
failure inherent in the Company's business.
The Company often competes against banks, traditional asset-based lenders
and small independent finance companies. The Company anticipates that
competition will remain intense through all of 1998 and may continue to exert
downward pressure on pricing, especially in the Company's core business. In
order to remain competitive, the Company is, where necessary and appropriate,
offering lower rates than it has historically. The Company believes that its
ability to respond quickly and to provide specialized, flexible and
comprehensive financial arrangements to its clients enables it to compete
effectively. Although the Company has historically been successful in replacing
major clients, competition resulting in the loss of one or more major clients
and an inability to replace those clients could have a material adverse effect
on the Company. Additionally, the Company's efforts to reduce the risk profile
of new clients and the total amount advanced to any one client may have an
adverse impact future earnings of the Company.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its clients would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have tended to change significantly over time. Today, however, because
the Company is, where necessary and appropriate, offering lower rates and making
Collateralized Advances, it is possible that the duration of the Company's
funding relationships with its clients may be extended. If the Company succeeds
in extending the duration of its funding relationship with its clients, there
will not be a corresponding increase in non-current assets on the Company's
balance sheet. This is because it is anticipated that the Company's funding
relationships with its clients will continue to renew no less frequently than
once a year. Although the Company has historically been successful in replacing
major clients, the loss of one or more major clients and an inability to replace
those clients could have a material adverse effect on the Company.
Lifetime Options, Inc., a Viatical Settlement Company ("Lifetime Options"),
a wholly-owned subsidiary of the Company, was engaged in the business of buying
life insurance policies at a discount from individuals facing life threatening
illnesses. During 1997, Lifetime Options curtailed any further purchasing of
policies.
None of the Company's subsidiaries is currently engaged in business which
could have a material effect on the Company.
13
<PAGE>
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,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Earned discounts 2,578,581 84.3% $1,497,010 71.9%
Fees and other revenue 481,618 15.7 585,103 28.1
----------- ------ ----------- ------
TOTAL REVENUE 3,060,199 100.0 2,082,113 100.0%
---------- ----- ---------- -----
EXPENSES
Compensation and fringe benefits 1,128,096 36.8 730,246 35.1
General and administrative expense 2,027,668 66.2 501,210 24.1
Interest expense 448,824 14.7 223,330 10.7
Provision for credit losses 4,911,000 160.5 120,790 5.8
Commissions 78,264 2.6 72,961 3.5
------------ ------- ------------ -----
TOTAL EXPENSES 8,593,852 280.8 1,648,537 79.2
---------- ------ ---------- -----
INCOME (LOSS) BEFORE
INCOME TAXES (BNEFIT) (5,533,653) (180.8) 433,576 20.8
INCOME TAXES (BENEFIT) (2,047,452) (66.9) 160,452 7.7
------------ ----- ----------- -----
NET INCOME (LOSS $(3,486,201) (113.9)% 273,124 13.1%
=========== ====== ---------- =====
NET INCOME (LOSS) PER COMMON SHARE
DILUTED $(1.50) $0.12
====== =====
BASIC $(1.50) $0.12
====== =====
WEIGHTED AVERAGE NUMBER OF SHARES
DILUTED 2,324,251 2,321,187
========== ==========
BASIC 2,320,966 2,317,919
========== ==========
</TABLE>
[THIS SPACE INTENTIONALLY LEFT BLANK]
14
<PAGE>
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED JUNE 30,
1998 1997
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Earned discounts $5,015,246 83.3% $3,789,595 78.8%
Fees and other income 1,008,435 16.7 1,024,624 21.2
----------- ----- ----------- -------
TOTAL REVENUE 6,023,681 100.0% 4,814,219 100.0%
---------- ----- ----------- -----
EXPENSES
Compensation and fringe benefits 1,940,330 32.2 1,462,196 30.4
General and administrative expense 2,895,784 48.1 1,039,947 21.6
Interest expense 859,155 14.3 627,327 13.0
Provision for credit losses 5,458,000 90.6 675,790 14.0
Commissions 194,972 3.2 166,112 3.5
----------- ------ ------------ ----
TOTAL EXPENSES 11,348,241 188.4 3,971,372 82.5
---------- ----- ----------- -----
INCOME (LOSS) BEFORE INCOME TAXES (5,324,560) (88.4) 842,847 17.5
INCOME TAXES (BENEFIT) (1,970,087) (32.7) 311,852 6.5
----------- ----- ------------ ------
NET INCOME (LOSS) $(3,354,473) (55.7)% $ 530,995 11.0%
=========== ====== ========== ====
NET INCOME (LOSS) PER COMMON SHARE
DILUTED $(1.44) $0.23
====== =====
BASIC $(1.44) $0.23
====== =====
WEIGHTED AVERAGE NUMBER OF SHARES
DILUTED 2,323,215 2,320,133
========== ==========
BASIC 2,319,930 2,317,919
========== ==========
</TABLE>
TOTAL REVENUE. Total revenue consists of (i) earned discounts and (ii)
fees and other income. "Earned discounts" consist primarily of income from the
purchase of accounts receivable and life insurance policies and income from
Collateralized Advances and Overadvances. "Fees and other income" consist
primarily of application fees, commitment or facility fees, other related
financing fees and supplemental discounts paid by clients who do not sell the
minimum volume of accounts receivable required by their contracts with the
Company (including as a result of "graduating" to a lower cost source of
funding).
The following table breaks down total income by type of transaction for
the periods indicated and the percentage relationship of each type of
transaction to total income.
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
1998 1997
(Unaudited) (Unaudited)
------------------------------------ ---------------------------------
Earned % of Total Earned % of Total
TYPE OF TRANSACTION INCOME INCOME INCOME INCOME
------------------------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Discount on Factored
Accounts Receivable $1,085,667 35.5% $ 835,726 40.1%
Earnings on Collateralized
Advances 708,156 23.1 365,501 17.6
Earnings on Overadvances 784,758 25.7 195,783 9.4
Earnings on Purchased Life
Insurance Policies - - 100,000 4.8
----------------- -------- ------------ -------
Total 2,578,581 84.3 1,497,010 71.9
Fees and Other Income 481,618 15.7 585,103 28.1
------------ ------ ------------ ------
Total Revenue $3,060,199 100.0% $2,082,113 100.0%
========== ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
1998 1997
(Unaudited) (Unaudited)
------------------------------------ ---------------------------------
Earned % of Total Earned % of Total
TYPE OF TRANSACTION INCOME INCOME INCOME INCOME
-------------------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Discount on Factored
Accounts Receivable $2,616,119 43.5% $2,320,053 48.2%
Earnings on Collateralized
Advances 1,108,654 18.4 836,744 17.4
Earnings on Overadvances 1,290,473 21.4 432,798 8.9
Earnings on Purchased Life
Insurance Policies - - 200,000 4.2
------------------ ------- ------------ -------
Total 5,015,246 83.3 3,789,595 78.7
Fees and Other Income 1,008,435 16.7 1,024,624 21.3
----------- ----- ----------- ------
Total Revenue $6,023,681 100.0% $4,814,219 100.0%
========== ===== ========== =====
</TABLE>
16
<PAGE>
Total revenue increased 25.1% in the first half of 1998 from the same
period in 1997, from $4.8 million to $6.0 million; total revenue increased 47.1%
for the second quarter of 1998 over the same period 1997, from $2.1 million to
$3.1 million. Earned discounts from finance receivables increased 12.8%, from
$2.3 million to $2.6 million in the first half of 1998 versus the first half of
1997. In the second quarter earned discounts from finance receivables increased
29.9% to $1.1 million from $0.8 million. The increase in earned discounts from
factored accounts receivable in the second quarter of 1998 is largely the result
of additional volume of new clients (10 in 1998, 1 in 1997) during the second
quarter. Earned discounts from factored accounts receivable as a percentage of
total factored accounts receivable purchased were 2.8% and 3.1% in the first
halves of 1998 and 1997, respectively; in the second quarters of 1998 and 1997,
earned discounts were 2.6% and 3.1%, respectively, of factored accounts
receivable. The reduction during the first half of 1998 versus 1997 in the
average earned discount from factored accounts receivable reflects the downward
pressure on pricing from competition in the Company's core business. In the
first halves of 1998 and 1997, earned discounts from factored accounts
receivable accounted for 43.5% and 48.2%, respectively, of total revenue. In the
second quarters of 1998 and 1997, earned discounts from factored accounts
receivable accounted for 35.5% and 40.1%, respectively, of total revenue.
Earned discounts from Collateralized Advances increased approximately
32.5% in the first half of 1998 versus the comparable period in 1997, to
approximately $1.1 million from $0.8 million and increased approximately 93.7%
in the second quarter of 1998 over the same quarter in 1997, to approximately
$708 thousand from $366 thousand. In the first halves of 1998 and 1997, earned
discounts from Collateralized Advances constituted approximately 18.4% and
17.4%, respectively, of total income. In the second quarter of 1998 and 1997,
earnings on Collateralized Advances were 23.1% and 17.6%, respectively, of total
income. The increase in earned discounts from Collateralized Advances in 1998
reflects a move towards Collateralized Advances, as a larger part of the
Company's receivables. In the second quarters of 1998 and 1997, earned discounts
from Collateralized Advances constituted 23.1% and 17.6%, respectively, of total
income. Collateralized Advances currently bear interest at a rate, on average,
of approximately 2% per month calculated generally on the average outstanding
amount of the Collateralized Advance during the month. Earned discounts from
Collateralized Advances are required to be paid in cash monthly in arrears.
See Provision for Credit Losses below.
Earnings on Overadvances increased approximately 198.2% in the first
half of 1998 versus the comparable period in 1997, to approximately $1.3 million
from $433 thousand and increased approximately 300.8% in the second quarter of
1998 over the same quarter in 1997, to approximately $785 thousand from $196
thousand. In the first halves of 1998 and 1997, earnings on Overadvances
constituted approximately 21.4% and 8.9%, respectively, of total income. In the
second quarter of 1998 and 1997 earnings on Overadvances were 25.7% and 9.4%,
respectively, of total income. Earnings on Overadvances are usually greater than
on other types of advances. Overadvances are generally short-term in nature and
are repaid directly by the client. Interest is usually required to be paid in
cash no less frequently than monthly in arrears. The increase in earnings on
Overadvances in the quarter and the half year ended June 30, 1998 results
primarily from activity in the account of one client, MGV International, Inc.
See Provision for Credit Losses below.
As of June 30, 1998 and December 31, 1997, factored accounts receivable
included on the Company's balance sheet were $30.3 million (59.4%) and $30.4
million (70.2%), respectively, of gross finance receivables. As of June 30, 1998
and December 31, 1997, Collateralized Advances included on the Company's balance
sheet were $9.7 million (19.0%) and $7.0 million (16.3%), respectively, of gross
finance receivables. As of June 30, 1998 and December 31, 1997,
17
<PAGE>
Overadvances included on the Company's balance sheet were $3.9 million (7.9%)
and $604 thousand (1.4%), respectively, of gross finance receivables.
Approximately $2.5 million as of June 30, 1998 and none as of December 31, 1997
were due from one client, MGV International, Inc.
Fees and other income remained relatively constant, approximately $1.0
million, in the first half of 1998 as compared to the same amount for the same
period in 1997. In the second quarter of 1998, fees and other income were $482
thousand compared to $585 thousand in 1997. For 1997, included in fee income is
an unusually large supplemental discount in the amount of $165 thousand. This is
partially offset by an increase in various operational fees in 1998.
COMPENSATION AND FRINGE BENEFITS. In the first half of 1998 and 1997,
compensation and fringe benefits were $1.9 million (32.2% of total revenue) and
$1.5 million (30.4% of total revenue), respectively. For the second quarters of
1998 and 1997, compensation and fringe benefits were $1.1 million (36.9% of
total revenue) and $730 thousand (35.1% of total revenue), respectively. Within
compensation and fringe benefits, executive compensation increased in the first
half of 1998 as compared to the same period in 1997, from $431 thousand (9% of
total revenue) to $719 thousand (11.9% of total revenue). Executive compensation
also increased in the second quarter of 1998 as compared to the same period in
1997, from $209 thousand (10.0% of total revenue) to $497 thousand (16.2% of
total revenue). The higher compensation and fringe benefits (including executive
compensation) during 1998 were chiefly the result of expenses associated with
the severance of key employees and the payroll costs associated with Allstate
Factors.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
was $2.9 million (48.1% of total revenue) as compared to $1.0 million (21.6% of
total revenue) for the first half of 1998 and 1997, respectively. For the second
quarters of 1998 and 1997, general and administrative expense was $2.0 million
(66.2% of total revenue) and $501 thousand (24.1% of total revenue),
respectively. During the second quarter of 1998, general and administrative
expenses were significantly increased by the proxy contest concluded during the
quarter. The election of directors was held on May 12, 1998. In addition to the
slate of directors presented by the Company, another slate was presented by the
independent shareholders/directors committee. The independent slate prevailed in
electing five directors, which constituted the entire Board of Directors at the
time (see Part II, Item 4. - Submission of Matters to a Vote of Security
Holders). The fees and expenses of the proxy contest for the first six months of
1998 were $857 thousand (14.6% of total revenue) and for the quarter ended June
30, 1998 the expenses were $679 thousand (22.2% of total revenue), including the
expenses of the independent shareholders/directors committee ($300 thousand),
which were reimbursed by the Company. During the six and three months of 1998
the general and administrative expenses of the Allstate Factors Division were
$291 thousand (4.8% of total revenue) and $152 thousand (5.0% of total revenue),
respectively, without any corresponding expenses for 1997. In addition,
professional fees and expenses in connection with the liquidation of clients'
portfolios and collateral were $629 thousand (10.5% of total revenue) for the
six months ended June 30, 1998 versus $305 thousand (6.3% of total revenue) for
the six months ended June 30, 1997. For the quarter ended June 30, 1998 and
1997, professional fees and expenses were $447 thousand (14.6% of total revenue)
versus $146 thousand (7.0% of total revenue). The increase in professional fees
in 1998 is attributable principally to litigation expenditures associated with
legal procedures instituted in prior years. General and administrative expenses
(exclusive of the proxy contest, Allstate Factors, and professional fees and
expenses) for the six months ended June 30, 1998 and 1997 were $1.1 million
(18.6% of total revenue) versus $769 thousand (25.1% of total revenue). For the
three months ended June 30, 1998 and 1997, adjusted general and administrative
expenses were $462 thousand (15.1% of total revenue) against $355 thousand
(17.1% of total revenue). The
18
<PAGE>
increase in the balance of General and Administrative expenses ($350 thousand)
is principally comprised of increases in professional fees other ($220 thousand)
and recruitment fees ($95 thousand).
INTEREST EXPENSE. Interest expense was $859 thousand (14.3% of total
revenue) versus $627 thousand (13.0% of total revenue) for the first half of
1998 and 1997, respectively, and $448 thousand (14.7% of total revenue) versus
$223 thousand (10.7% of total revenue) for the second quarters of 1998 and 1997,
respectively. The increase in interest expense is primarily attributable to the
Allstate Factors Division which commenced operations during the third quarter of
1997. Interest expense on the Convertible Subordinated Notes was comparable in
the first half and second quarter of 1998, to that in the first half and second
quarter of 1997. The average daily outstanding balance on the Company's
revolving lines of credit was $14.2 million and $7.5 million for the first
halves of 1998 and 1997, respectively, and $14.9 million and $3.3 million for
the three months ended June 30, 1998 and 1997, respectively. The average
interest rate paid on the Company's revolving lines of credit decreased to 8.07%
during the first half of 1998 from 9.07% during the first half of 1997 and was
8.04% during the second quarter of 1998 as compared to 9.16% during the second
quarter of 1997. The increase in the outstanding balance in the Company's
revolving credit line reflects the increase in the finance receivables. The
balance of the net receivables at June 30, 1998 was $40 million versus $19.6
million at June 30, 1997.
PROVISION FOR CREDIT LOSSES. Credit loss experience, the adequacy of
underlying collateral, changes in the character and size of the Company's
receivables portfolio and management's judgment are factors used in determining
the provision for credit losses and the adequacy of the allowance for credit
losses. Other factors given consideration in determining the adequacy of the
allowance are the level of related credit balances of factoring clients and the
current and anticipated impact of economic conditions on the creditworthiness of
the Company's clients and account debtors. To mitigate the risk of credit loss,
the Company, among other things: (i) thoroughly evaluates the collateral to be
made available by each client; (ii) usually collects its factored accounts
receivable directly from account debtors, which are frequently (though not
always) large, creditworthy companies or governmental entities; (iii) purchases,
or takes a first priority security interest in, all accounts receivable of each
client; (iv) takes, whenever available, blanket liens on all of its clients'
other assets and, when making Collateralized Advances, employs what management
believes to be conservative loan-to-value ratios based on auction or liquidation
value appraisals performed by independent appraisers; (v) almost always requires
personal guaranties (either unlimited guaranties or guaranties limited to the
validity and collectability of factored accounts receivable) from its clients'
principals, and (vi) actively monitors its portfolio of factored accounts
receivable, including the creditworthiness of account debtors and, (vii)
periodically evaluates the value of other collateral securing Collateralized
Advances.
Management recognizes that Collateralized Advances entail different,
and possibly greater, risks to the Company than the factoring of accounts
receivable. Risks associated with the making of Collateralized Advances (but not
the factoring of accounts receivable) include, among others: (i) certain types
of collateral securing Collateralized Advances may diminish in value (possibly
precipitously) over time (sometimes short periods of time), (ii) repossessing,
safeguarding and liquidating collateral securing Collateralized Advances may
require the Company to incur significant fees and expenses some or all of which
may not be recoverable, (iii) clients may dispose of (or conceal) the collateral
securing Collateralized Advances and (iv) clients or natural disasters may
destroy the collateral securing Collateralized Advances. The Company attempts to
manage these risks, respectively, by (i) engaging independent appraisers to
review periodically the value of
19
<PAGE>
collateral securing Collateralized Advances at intervals established by
management based on the characteristics of the underlying collateral, (ii)
employing conservative loan-to-value ratios which management believes should
generally enable the Company to recover from liquidation proceeds most of the
fees and expenses incurred in connection with repossessing, safeguarding and
liquidating collateral, (iii) using its field examiners to inspect collateral
periodically and, when appropriate, engaging independent collateral monitoring
firms to implement appropriate collateral control systems, including bonding
certain of the client's employees and (iv) requiring clients to maintain
appropriate amounts and types of insurance issued by insurers acceptable to the
Company naming the Company as the party to whom loss is paid. Although
management believes that the Company has (or third parties acting on behalf of
the Company have) the requisite skill to evaluate, monitor and manage the risks
associated with the making of Collateralized Advances, there can be no assurance
that the Company will in fact be successful in doing so.
The making of Overadvances is generally considered by the Company to
entail greater risk than either factoring of accounts receivable or the making
of Collateralized Advances. Overadvances are secured primarily by equity in the
client's assets which is in excess of the formulae used by the Company to
calculate availability of advances for accounts receivable factoring or
Collateralized Advances. In addition, other assets, including those owned by
clients' principals, may be pledged. Accordingly the Company may find it to be
difficult to realize the values of such collateral to repay Overadvances. The
Company makes Overadvances after determining specific uses of each Overadvance
and agreeing with the client on the repayment plan for each such advance, which
is usually a function of a future purchase of an account receivable or a
Collateralized Advance to be made at a future date. Although the Company
carefully monitors each Overadvance, there can be no assurance that Overadvance
activity, particularly if concentrated with a single account debtor, could not
have a material adverse effect on the Company.
The provision for credit losses increased from $676 thousand (14.0% of
total revenue) in the first half of 1997 to $5.5 million (90.6% of total
revenue) in the first six months of 1998. The provision for credit losses during
the second quarter of 1998 was increased by approximately $4.3 million. During
the second quarter, the Company recorded $3.2 million of writedowns or
additional reserves for nine non-performing assets, a substantial majority of
which had been non-performing at December 31, 1997, because of adverse events
related to those assets. Specifically, during the second quarter of 1998, the
Company lost a lawsuit for approximately $900 thousand and was confronted by the
bankruptcy of a major obligor for approximately $900 thousand. The Company also
determined that an appraisal received during the quarter ended March 31, 1998,
did not properly reflect the value of the property because the appraiser did not
use appropriate comparable sales of similar properties in formulating his
opinion of the property's value. As of June 30, 1998 and December 31, 1997 the
allowance for credit losses was 6.6% ($3.4 million) and 4.6% ($2.0 million) of
gross finance receivables, respectively. At June 30, 1998, the accrual of
earnings was suspended on $300 thousand of gross finance receivables as compared
to $829 thousand of gross finance receivables at December 31, 1997. In addition,
"other receivables" and "other assets" appearing on the Company's balance sheet
typically do not accrue earnings for financial statement purposes. The following
table provides a summary of the Company's gross finance receivables (which
includes primarily factored accounts receivable, Collateralized Advances and
non-earning receivables), "other receivables" and "other assets" and information
regarding the allowance for credit losses as of the dates indicated.
20
<PAGE>
<TABLE>
<CAPTION>
As of (or for As of or for the six
the Year Ended) Months Ended June 30,
DECEMBER 31, 1997 1998 1997
----------------- ------ -----
(Dollars in thousands)
<S> <C> <C> <C>
NON-EARNING RECEIVABLES, OTHER Unaudited
RECEIVABLES AND OTHER ASSETS DATA:
Non-Earning Receivables $ 829 $ 373 $ 4,587
Other Receivables 3,748 1,719 2,592
Other Assets (excluding miscellaneous) 3,941 2,602 3,187
------- ------- --------
$8,518 $4,694 $10,366
====== ====== =======
ALLOWANCE FOR CREDIT LOSSES:
Balance, January 1 $2,579 $2,739 $2,579
Provision for credit losses 1,594 5,453 676
Receivables charged off (1,776) (3,428) (360)
Recoveries 342 26 316
Balance at December 31, 1997 and
June 30, 1998 and 1997 (including
$275,000 allocated to Life Insurance
Contracts at December 31, 1997 and
June 30, 1998) $2,739 $4,790 $3,211
ALLOWANCE FOR CREDIT LOSSES AS A PERCENT OF:
Gross Finance Receivables 6.32% 9.40% 16.00%
Non-Earning Receivables 330.40% 1,284.19% 70.00%
Non-Earning Receivables, Other
Receivables and Other Assets: 32.16% 102.05% 30.98%
AS A PERCENT OF THE SUM OF GROSS
FINANCE RECEIVABLES, OTHER
RECEIVABLES AND OTHER ASSETS:
Non-Earning Receivables 1.63% 0.68% 17.79%
Other Receivables 7.35% 3.37% 10.00%
Other Assets 7.73% 4.71% 12.36%
AMOUNT OF ALLOWANCE ALLOCATED TO:
Non-earning Receivables,
Other Receivables and Other Assets $1,055 $1,425 $1,675
Life Insurance Contracts 275 275 -
</TABLE>
In light of the significant charge-off of $3.4 million of receivables
during the first half of 1998 (of which $3.2 million was during the second
quarter), the sum of non-earning receivables, other receivables and other assets
("non-performing assets") declined by $3.8 million or 44.9% from December 31,
1997 to June 30, 1998. As a result, non-performing assets as a percentage of
total assets declined from 18.2% at December 31, 1997 to 9.6% at June 30, 1998.
The $5.5 million provision for credit losses in the first half of 1998
(of which $4.9 million was in the second quarter), reflects Management's
intention to replenish the allowance for credit losses in light of the
significant charge-offs incurred. A portion of the reserve is allocated to
non-earning receivables, other receivables, and other assets (see chart on page
21) and the balance is maintained at a level based on an assessment of the risks
inherent in the finance receivables portfolio. The reserve balance was increased
to reflect the higher level of Overadvances funded during the quarter, including
a higher than usual concentration with one client.
Although the Company currently maintains an allowance for credit losses
in an amount deemed by management to be adequate to cover potential losses, no
assurance can be given that the
21
<PAGE>
allowance will in fact be adequate or that an inadequacy, if any, in the
allowance could not have a material adverse effect on the Company's earnings in
future periods. Furthermore, although management believes that its periodic
estimates of the value of "other receivables" and "other assets" are
appropriate, no assurance can be given that the amounts which the Company
ultimately collects with respect to other receivables and other assets will not
differ significantly from management's estimates or that those differences, if
any, could not have a material adverse effect on the Company's earnings in
future periods.
COMMISSIONS. Commission expense was $195 thousand (3.2% of total
revenue) in the first six months of 1998 as compared to $166 thousand (3.4% of
total revenue) in the first six months of 1997. During the second quarter of
1998, commission expenses were $78 thousand (2.6% of total revenue) as compared
to $73 thousand (3.5% of total revenue) for the second quarter of 1997. The
increase in commission expense reflects the increase in earned discounts.
IMPACT OF INFLATION
Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the past three years.
Changes in interest rate levels do not generally affect the income
earned by the Company in the form of discounts charged. Rising interest rates
would, however, increase the Company's cost of borrowed money based on its
current borrowing arrangements which are prime or base rate adjusted credit
facilities.
CHANGES IN FINANCIAL CONDITION
The Company's total assets increased 2.5% to $48.0 million at June 30,
1998 from $46.8 million at December 31, 1997. The increase is primarily the
result of a $5.4 million, or 16.0%, increase in net finance receivables and a
$1.9 million income tax receivable, partially offset by decreases of $2.3
million in cash and $3.9 million in other receivables and other assets. The
decrease in other receivables is primarily a function of the write-off of $1.8
million of non-earning assets, while the income tax receivable results from the
loss for the three months ended June 30, 1998. The decrease in other assets
comprises the collections of $725 thousand and the write-off of $625 thousand of
non-earning assets.
The increase in assets was primarily funded by increases of $2.0
million in credit balances of factoring clients and $2.0 million in notes
payable under the Company's revolving credit facility. Current liabilities
increased by $4.6 million or 25.1% in the first half of 1998, resulting in a
decline in the Company's working capital ratio as disclosed below. Total debt as
a percentage of total equity increased to 137.1% at June 30, 1998 from 98.7% at
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal funding sources are the collection of factored
accounts receivable, retained cash flow and external borrowings. For additional
detail regarding external borrowings, see Notes 3 and 4 to the unaudited
financial statements contained in this Form 10-QSB.
22
<PAGE>
The Company believes that internally generated funds and borrowings
under its revolving credit facility will be sufficient to finance the Company's
funding requirements for the next 12 months.
At June 30, 1998 and December 31, 1997, the Company had working capital
of $22.2 million and $23.9 million, respectively, and a ratio of current assets
to current liabilities of 1.98 to 1 and 2.31 to 1, respectively.
[THIS SPACE INTENTIONALLY LEFT BLANK]
23
<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 2. - CHANGES IN SECURITIES
None.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 12, 1998.
The shareholders voted as follows:
Nominees elected as directors:
# OF VOTES
C. Scott Bartlett 1,214,320
David W. Campbell 1,214,320
Edward A. McNally 1,214,320
William H. Savage 1,214,320
Lindsay R. Trittipoe 1,214,705
Nominees not elected as directors:
# OF VOTES
Craig Fishman 838,095
Alan L. Freeman 838,095
Wayne M. Lee 838.095
John V. Pollock 838,095
David P. Bindeman 838,095
ITEM 5. - OTHER INFORMATION
None.
ITEM 6(a). - EXHIBITS
EXHIBIT 10.9. EMPLOYMENT CONTRACTS
Severance Agreement with Craig Fishman dated July 2, 1998.
EXHIBIT 27. FINANCIAL DATA SCHEDULE
ITEM 6(b). - REPORTS ON FORM 8-K
None.
24
<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
/S/ LAWRENCE M. WINKLER
-----------------------
Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer
Date: August 14, 1998
25
<PAGE>
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<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1911073
<SECURITIES> 0
<RECEIVABLES> 44670422
<ALLOWANCES> 4790451
<INVENTORY> 0
<CURRENT-ASSETS> 45029181
<PP&E> 1269599
<DEPRECIATION> 837546
<TOTAL-ASSETS> 47990355
<CURRENT-LIABILITIES> 22784928
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 20204527
<TOTAL-LIABILITY-AND-EQUITY> 47990355
<SALES> 0
<TOTAL-REVENUES> 6023681
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5031086
<LOSS-PROVISION> 5458000
<INTEREST-EXPENSE> 859155
<INCOME-PRETAX> (5324560)
<INCOME-TAX> (1970087)
<INCOME-CONTINUING> (3354473)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3354473)
<EPS-PRIMARY> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
The Board of Directors
Allstate Financial Corporation
July 2, 1998 - Page 1
Craig Fishman
2687 Hillsman Street
Falls Church, VA 22043
July 2, 1998
The Board of Directors
Allstate Financial Corporation
2700 South Quincy Street, Suite 540
Arlington, VA 22206
Gentlemen:
Consistent with our discussions, the following are my suggestions as to
how to proceed in the best interests of Allstate Financial Corporation (the
"Company"):
I. Consulting Arrangements
(following termination of
Employment)
Nature of Consulting Engagement:
I will assist David Campbell (in hiscapacity as active Chairman of the
Board) and/or the to-be-identified replacement President/CEO address critical
transition issues and I will assist him (or them) with such other tasks as he
(or they) may reasonably request.
I will use my best efforts when performing consulting services. If either Mr.
Campbell or the replacement President/CEO is not satisfied with my consulting
efforts or services, I expect him or them to so notify me immediately.
Consulting Period:
I will be available to consult as an independent consultant (see "II.
Termination of Employment" below) for up to 5 hours/week from August 1, 1998
through September 30, 1998 (the "Initial
Consulting Period").
If requested by the Company, I will make reasonable efforts to be available to
consult for more than 5 hours/week from time to time during the Initial
Consulting Period.
Compensation During the Initial
Consulting Period and Thereafter:
The first 5 hours/week of consultation in any calendar week during the Initial
Consulting Period will be at no cost to the Company.
<PAGE>
The Board of Directors
Allstate Financial Corporation
July 2, 1998 - Page 2
Consultation in excess of 5 hours/week in any calendar week during the
Initial Consulting Period or consultation beyond the Initial Consulting Period
will be billed and paid at $250/hour.
II. Termination of Employment
Termination/Termination Date:
For purposes of severance benefits under my employment agreement, my
employment will be terminated by the Company without cause effective July 31,
1998. Until July 31, 1998, I will continue to be a full time employee of the
Company compensated at an annual rate of $220,000 paid at the same time as all
other employees.
For all other purposes including, without limitation, press releases and
employment references, my departure from the Company is by mutual agreement.
Severance Payments and Other
Lump Sum Benefits:
Contractual Benefits: On July 31, 1998, the Company will pay me 5.5 months
severance (i.e., $100,833.50) in a lump sum plus accrued salary and accrued
vacation (approximately 180 hours).
On September 30, 1998, the Company will pay me the remaining 5.5 months
severance due under my employment contract (i.e., an additional $100,833.50) in
a lump sum.
The Company will provide such other benefits as are set forth in my
employment contract including, without limitation, health insurance for eleven
(11) months for me and my spouse (at no cost to me or my spouse). Thereafter, I
will have available for me and my spouse eighteen (18) months of continuation
health insurance coverage (at my expense) under federal COBRA law.
Non-Contractual Benefits: On July 31, 1998, the Company will transfer to me
the Company car driven by me (at no cost to me).
<PAGE>
The Board of Directors
Allstate Financial Corporation
July 2, 1998 - Page 3
The Company will pay me on July 31, 1998, $5,000 to defray the expenses of
identifying, preparing for and obtaining subsequent employment.
Mutual Release:
Effective July 31, 1998, the Company releases me and I release the Company,
from any and all claims, damages, actions, liabilities, etc. of any kind,
provided that the foregoing release does not apply to claims, damages, actions,
liabilities, etc. arising from a breach by either party of obligations created
under this letter agreement or from a breach by either party of any
post-termination obligations under my employment contract.
Non-Disparagement:
Through July 31, 1999, neither I nor the Company (including its officers
and directors) will make statements which may reasonably be considered to be
adverse to the interests of the other, provided that the foregoing shall not be
construed as waiver by me or the Company of any cause of action that may arise
as a consequence of disparaging or other statements made on or after August 1,
1999.
Press Release:
Through July 31, 1999, any press release which mentions my name or
otherwise refers to me (whether directly or indirectly) must, with respect to
such mention or reference, be in form and substance reasonably satisfactory to
me.
Coordination with Employment
Agreement:
This letter agreement and my employment agreement are intended to be read
together to give full effect to both agreements. In the case of a direct
conflict, I and the Company will cooperate to resolve the conflict.
Without limiting the generality of the foregoing, except in the case of a
direct conflict, nothing in this letter agreement is intended to change the
non-compete, confidentiality or other provisions of my employment agreement.
<PAGE>
The Board of Directors
Allstate Financial Corporation
July 2, 1998 - Page 4
III. Board Approval, Etc.
The terms and provisions of this letter agreement should be ratified
and approved by the Board of Directors on or before July 14, 1998. If approved,
the terms and provisions hereof should be incorporated into a formal agreement
between me and the Company. If, however, the Board of Directors approves the
terms and provisions hereof and no formal agreement is executed, it is
understood and agreed that this letter agreement (once duly executed by a member
of the Board) is enforceable in accordance with its terms. The signature of any
member of the Board of Directors in the space provided below shall be conclusive
evidence that the Board of Directors has duly ratified and approved all of the
terms and provisions hereof (without qualification or reservation).
I believe the arrangements contemplated in this letter agreement are in
the best interests of the Company and provide the Company (and its Board of
Directors) the best opportunity to manage and work through what I perceive to be
a crisis period for the Company.
Sincerely,
/s/ Craig Fishman
---------------------
Craig Fishman
President and CEO
CF/gbb
Ratified and Approved by the Board of Directors (without qualification or
reservation) on this 14th day of July, 1998:
ALLSTATE FINANCIAL CORPORATION
By /s/ David W. Campbell
-----------------------
Name: David W. Campbell
Title: Director and Chairman of the Board
<PAGE>
