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, 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 and 15d 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 [ ]
2,319,717 Common Shares were outstanding as of May 15, 1998.
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 1-2
Consolidated Statements of Operations Three Months Ended
March 31, 1998 and 1997 3
Consolidated Statements of Shareholders' Equity Three
Months Ended March 31, 1998 and Year Ended
December 31, 1997 4
Consolidated Statements of Cash Flows Three Months Ended
March 31, 1998 and 1997 5-6
Notes to Consolidated Financial Statements 7-10
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 11-17
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 18
Item 6 - Exhibits 18
Signatures 19
<PAGE>
PART I - FINANCIAL INFORMATION
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash ...................................... $ 3,100,630 $ 4,200,050
Receivables:
Finance Receivables, net .............. 38,192,059 33,847,276
Receivables - Other, net .............. 2,591,312 2,988,927
Prepaid expenses .......................... 205,058 127,741
Deferred income taxes ..................... 1,145,486 1,056,686
----------- -----------
TOTAL CURRENT ASSETS ...................... 45,234,545 42,220,680
FURNITURE, FIXTURES AND EQUIPMENT, net ......... 477,309 494,240
OTHER ASSETS, net .............................. 3,476,319 4,203,727
----------- -----------
TOTAL ASSETS ............................. $49,188,173 $46,918,647
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..... $ 552,859 $ 420,356
Notes payable ............................. 16,218,621 14,373,724
Income tax payable ........................ -- 240,226
Credit balances of factoring clients ...... 3,680,410 3,285,974
----------- -----------
TOTAL CURRENT LIABILITIES ................ 20,451,890 18,320,280
----------- -----------
1
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
March 31, December 31,
1998 1997
----------- ------------
(Unaudited)
NONCURRENT PORTION OF NOTES PAYABLE:
Convertible Subordinated Notes and Other
Non Current Notes ....................... 5,032,899 5,034,327
---------- ----------
TOTAL LIABILITIES ....................... 25,484,789 23,354,607
---------- ----------
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; ............. 3,102,328
issued, 2,319,717 outstanding at
March 31, 1998 and 2,318,451 December
31, 1997, exclusive of shares held in
the Treasury .......................... 40,000 40,000
Additional paid-in-capital ................ 18,857,932 18,852,312
Treasury Stock - 783,611 shares
at March 31, 1998 and 783,877 at
December 31, 1997 .................... (5,028,599) (5,030,594)
Retained Earnings ......................... 9,834,051 9,702,322
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ............ 23,703,384 23,564,040
------------ ------------
$ 49,188,173 $ 46,918,647
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31,
----------------------------
1998 1997
----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUE:
Earned discount ........................... $2,436,665 $2,292,585
Fees and other income ..................... 526,817 439,521
---------- ----------
Total Revenue ......................... 2,963,482 2,732,106
---------- ----------
EXPENSES:
Compensation and fringe benefits .......... 812,234 731,950
General and administrative expense ........ 868,116 538,736
Interest expense .......................... 410,331 403,997
Provision for credit losses ............... 547,000 555,000
Commission ................................ 116,708 93,151
---------- ----------
TOTAL EXPENSES ....................... 2,754,389 2,322,834
---------- ----------
INCOME BEFORE INCOME TAXES ..................... 209,093 409,272
INCOME TAXES ................................... 77,364 151,400
---------- ----------
NET INCOME ..................................... $ 131,729 $ 257,872
========== ==========
NET INCOME PER COMMON SHARE
Diluted ............................... $ .06 $ .11
========== ==========
Basic ................................. $ .06 $ .11
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
Diluted ............................... 2,322,160 2,321,199
========== ==========
Basic ................................. 2,318,878 2,317,919
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997
AND THREE MONTHS ENDED MARCH 31, 1998
Common Paid in Treasury Retained
Stock Capital Stock Earnings Total
--------- ----------- ------------ -----------
<S> <C> <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 532
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 266
shares of Common Stock .................. -- -- 1,995 -- 1,995
1,000 options exercised at $5.620 .......... -- 5,620 -- -- 5,620
Net Income ................................. -- -- -- 131,729 131,729
----------- ----------- ----------- ----------- -----------
BALANCE - March 31, 1998 ..................... $ 40,000 $18,857,932 $(5,028,599) $ 9,834,051 $23,703,384
=========== =========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
1998 1997
----------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income ................................. $ 131,729 $ 257,872
Adjustments to reconcile net income
to cash provided by operating
activities:
Depreciation - net ....................... 36,000 49,100
Provision for credit losses .............. 547,000 555,000
Changes in operating assets and
liabilities:
Decrease in other receivables ......... 397,615 71,367
(Increase)/Decrease in prepaid expenses (77,317) 47,178
Decrease in other assets .............. 727,408 2,644
Increase/(Decrease) in accounts payable
and accrued expenses ................ 132,503 (15,941)
(Increase)/Decrease in income taxes
receivable and deferred income taxes (88,800) 350,982
(Decrease) in income taxes payable .... (240,226) --
------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ....................... 1,565,912 1,318,202
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables,
including repurchases and life
insurance contracts ...................... (70,968,743) (56,897,683)
Collection of finance receivables,
including accounts receivable,
secured advances, repurchases
and life insurance contracts ............. 66,076,960 62,521,661
Increase in credit balances of
factoring clients ........................ 394,436 34,922
Purchase of furniture, fixtures
and equipment ............................ (19,069) (48,805)
------------ ------------
NET CASH (USED FOR OR) PROVIDED BY
INVESTING ACTIVITIES ......................... (4,516,416) 5,610,095
------------ ------------
5
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Three Months Ended March 31,
----------------------------
1998 1997
----------- ------------
(Unaudited) (Unaudited)
ASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and
other borrowings .................... 49,565,581 20,527,792
Principal payments on line of credit
and other borrowings ................ (47,720,112) (26,201,559)
Treasury stock acquisition costs ........ (5) --
Exercise of Option ...................... 5,620 --
------------ ------------
NET CASH PROVIDED BY (OR USED
IN) FINANCING ACTIVITIES ................... 1,851,084 (5,673,767)
------------ ------------
NET (DECREASE)/INCREASE IN CASH .............. (1,099,420) 1,254,530
CASH, Beginning of period .................... 4,200,050 1,624,899
------------ ------------
CASH, End of period .......................... $ 3,100,630 $ 2,879,429
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid ........................... $ 410,331 $ 403,779
============ ============
Income taxes paid ....................... $ 390,226 $ --
============ ============
Issuance of Common Stock in exchange
for Convertible Subordinated Notes ...... $ 2,000 $ --
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
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 March 31, 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 three months ended
March 31, 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 Allstate Financial Corporation's Annual Report on Form 10-KB for the
year ended December 31, 1997.
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 statement
of operations.
3. LINE OF CREDIT. As of March 31, 1998 the Company had approximately $8.4
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 only $5.0 million secured by machinery and
equipment, (ii) borrow only $2.5 million 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.
4. CONVERTIBLE SUBORDINATED NOTES PAYABLE. As of March 31, 1998 and March 31,
1997, the Company had outstanding approximately $4,972,000 and $4,978,000,
respectively, in aggregate principal amount of Convertible Subordinated Notes
issued in exchange for shares of the Company's common stock
7
<PAGE>
(currently held by the Company as treasury stock). The Convertible Subordinated
Notes were issued in exchange for 785,475 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 results of the recently
concluded proxy contest for control of the Company's Board of Directors may
constitute a "fundamental change". The two largest holders of Convertible
Subordinated Notes have indicated, however, that if a fundamental change has
occurred, they have no present intention to request that their Notes be
redeemed.
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 entities'capital structure. At March 31, 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 three months
ended March 31, 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 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 March 31, 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. In connection with the settlement, the Company paid and
added
8
<PAGE>
$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 $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. 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 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 scheduled for trial April 12, 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. (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.
9
<PAGE>
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.
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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
10
<PAGE>
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 and turnaround companies,
including debtors-in-possession, with capital through the discounted purchase of
their accounts receivable. The Company also makes advances to its clients
collateralized by inventory, equipment, real estate and other assets
(collectively, "Collateralized Advances"). 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 a new division, Allstate Factors. The
Allstate Factors division 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. The Company expects that Allstate Factors'
clients typically will have lower risks of default and will generate higher
volumes of accounts receivable than the Company's traditional clients, and,
therefore, will broaden the Company's sources of revenue and diversify
significantly the risk profile of the Company's portfolio.
The Company's clients are small- to medium-sized, high risk growth and
turnaround companies with annual revenues typically between $600,000 and
$100,000,000. The Company's clients do not typically qualify for traditional
bank or asset-based financing because they are either too new, too small,
undercapitalized (over-leveraged), unprofitable or otherwise unable to satisfy
the requirements of a bank or traditional asset-based lender. Accordingly, there
is a significant risk of default and client failure inherent in the Company's
business.
11
<PAGE>
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 factoring
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.
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. Lifetime Options may elect to collect policies as they mature or to
sell some or all of its policies.
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.
12
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<TABLE>
<CAPTION>
For The Three Months Ended March 31,
-----------------------------------------------
1998 1997
------------------- --------------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Earned discounts $2,436,665 82.2% $2,292,585 83.9%
Fees and other revenue 526,817 17.8 439,521 16.1
---------- ----- ----------- -----
TOTAL REVENUE 2,963,482 100.0 2,732,106 100.0%
---------- ----- ---------- -----
EXPENSES
Compensation and fringe benefits 812,234 27.4 731,950 26.8
General and administrative expense 868,116 29.3 538,736 19.7
Interest expense 410,331 13.8 403,997 14.8
Provision for credit losses 547,000 18.5 555,000 20.3
Commissions 116,708 3.9 93,151 3.4
---------- ----- ------------ -----
TOTAL EXPENSES 2,754,389 92.9 2,322,834 85.0
--------- ---- ---------- ----
INCOME BEFORE INCOME TAXES 209,093 7.1 409,272 15.0
INCOME TAXES 77,364 2.6 151,400 5.5
---------- ----- ----------- ----
NET INCOME $ 131,729 4.5% $ 257,872 9.5%
========== ==== ----------- ====
NET INCOME PER COMMON SHARE
DILUTED $0.06 $0.11
===== =====
BASIC $0.06 $0.11
===== =====
WEIGHTED AVERAGE NUMBER OF SHARES
DILUTED 2,322,160 2,321,199
========== ==========
BASIC 2,318,878 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 income from Collateralized Advances. "Fees
and other income" consist primarily of closing or application fees, commitment
or facility fees, certain interest, 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
those clients who prematurely terminate their agreements with the Company to
move 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.
13
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
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 $1,530,452 51.6% $1,484,327 54.4%
Earnings on Collateralized
Advances 400,498 13.5 471,243 17.2
Earnings on Purchased Life
Insurance Policies - - 100,000 3.6
Other Earnings 505,715 17.1 237,015 8.7
----------- ------ ------------ ------
Total 2,436,665 82.2 2,292,585 83.9
Fees and Other Income 526,817 17.8 439,521 16.1
------------ ------ ------------ ------
Total Revenue $2,963,482 100.0% $2,732,106 100.0%
========== ===== ========== =====
</TABLE>
Total revenue increased 8.5% in the first three months of 1998 as
compared to the same period in 1997. Earned discounts from factored accounts
receivable increased 3.1% in the first quarter of 1998 as compared to the first
quarter of 1997. Earned discounts from factored accounts receivable in the first
quarter of 1998 as a percentage of total factored accounts receivable purchased
in the first quarter of 1998 was 2.5%. The comparable percentage in the first
quarter of 1997 was 2.8%. In 1998 and 1997 earned discounts from Factored
Accounts Receivable comprised of 51.6% and 54.4% of total revenue, respectively.
Earned discounts from Collateralized Advances decreased 15.3% in the
first quarter of 1998 as compared to the same period in 1997, from $471,000 to
$400,000. This decrease is attributable, in large part, to more stringent
underwriting procedures implemented during 1997. In the first quarters of 1998
and 1997, earned discounts from Collateralized Advances accounted for 13.5% and
17.2%, respectively, of total income. Collateralized Advances currently bear
interest at a rate, on average, of approximately 1.8% per month. Earned
discounts from Collateralized Advances are required to be paid in cash monthly
in arrears.
In May 1997 the Company established a new division, Allstate Factors.
The Allstate Factors division 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. The Company expects that Allstate Factors'
clients typically will have lower risks of default and will generate higher
volumes of accounts receivable than the Company's traditional clients, and,
therefore, will broaden the Company's sources of revenue and diversify
significantly the risk profile of the Company's portfolio. As of March 31, 1998
Allstate Factors' accounts receivable included on the Company's balance sheet
were $7.3 million (or 15.4%) of gross finance receivables. For the first quarter
of 1998, Allstate Factors' revenues of $220,000 represent 7.4% of total revenue.
14
<PAGE>
Fees and other income increased 19.9% in the first quarter of 1998
compared to the first quarter of 1997, from $440,000 to $527,000. The increase
in 1998 is attributable primarily to increase in servicing fees and supplemental
discounts offset by a decrease in facility fees and interest income.
COMPENSATION AND FRINGE BENEFITS. Compensation and fringe benefits
increased 11.0% in the first quarter of 1998 versus the comparable period in
1997, from $732,000 (26.8% of total revenue) in 1997 to $812,000 (27.4% of total
revenue) in 1998. For the first quarter of 1998, compensation and fringe
benefits include $89,000 attributable to the Company's new division, Allstate
Factors. There was no comparable expense in the first quarter of 1997 because
Allstate Factors was first established in May 1997.
GENERAL AND ADMINISTRATIVE EXPENSE. In the first quarter of 1998,
general and administrative expense increased by 61.1%, from $539,000 (19.7% of
total revenue) in the first quarter of 1997 to $868,000 (29.3% of total revenue)
in the first quarter of 1998. Of the $359,000 increase in general administrative
expenses during the first quarter of 1998, $159,000 is attributable to the
operations of Allstate Factors and $178,000 is attributable to expenses incurred
in connection with the Company's recently concluded proxy contest and certain
related litigation. Excluding these two items, general and administrative
expenses would have been $531,000 (17.9% of total revenue) for the first quarter
of 1998 compared to $539,000 (19.7% of total revenue) for the same period last
year. The Company will recognize additional proxy contest related expenses
during the second quarter of 1998.
INTEREST EXPENSE. Interest expense was $410,000 (13.8% of total
revenue) versus $404,000 (14.8% of total revenue) in the first quarter of 1998
and 1997, respectively. The net increase in interest expense is attributable to
additional borrowing by the Company to fund increased business volume (including
that of Allstate Factors) in the first quarter of 1998 versus 1997 partially
offset by a lower cost of funds and the collection of certain non-performing
assets in the latter part of 1997. Gross receivables purchased in the first
quarter of 1998 were $71.0 million (including $9.1 million for Allstate Factors)
compared to $56.9 million in 1997, an increase of 24.7% in the first quarter of
1998. The average daily outstanding balance on the Company's revolving line of
credit was $13.4 million and $11.6 million for the first quarters of 1998 and
1997, respectively, and the average interest rate paid on the Company's
revolving line of credit was 8.1% in the first quarter of 1998 compared to 9.0%
in the first quarter of 1997.
PROVISION FOR CREDIT LOSSES. The provision for credit losses decreased
from $555,000 (20.3% of total revenue) in the first quarter of 1997 to $547,000
(18.6% of total revenue) in the first quarter of 1998. As of March 31, 1998 and
December 31, 1997 the allowance for credit losses was 6.4% ($3.0 million) and
6.3% ($2.7 million) of gross finance receivables, respectively. At March 31,
1998 the accrual of earnings was suspended on $1.1 million of gross finance
receivables as compared to $0.8 million 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.
15
<PAGE>
<TABLE>
As of (or for As of or for the three
the Year Ended) Months Ended March 31,
December 31, 1997 1998 1997
----------------- ------ -----
(Dollars in thousands)
Unaudited
<S> <C> <C> <C>
Non-Earning Receivables, Other
Receivables and Other Assets data:
Non-Earning Receivables $ 829 $1,112 $3,726
Other Receivables 3,748 3,698 4,321
Other Assets (excluding miscellaneous) 3,941 3,244 1,881
------- ----- -----
$8,518 $8,054 $9,928
====== ====== ======
ALLOWANCE FOR CREDIT LOSSES:
Balance, January 1 $2,579 $2,739 $2,579
Provision for credit losses 1,594 547 555
Receivables charged off (1,776) (274) (233)
Recoveries 342 13 3
Balance at December 31, 1997 and
March 31, 1998 and 1997 (including
$275,000 allocated to Life Insurance
Contracts at December 31, 1997 and
March 31, 1998) $2,739 $3,025 $2,904
Allowance for Credit Losses AS A PERCENT OF:
Gross Finance Receivables 6.32% 6.40% 8.94%
Non-Earning Receivables 330.40% 272.03% 77.90%
Non-Earning Receivables, Other
Receivables and Other Assets 32.16% 37.56% 29.25%
As a percent of the sum of Gross
Finance Receivables, Other
Receivables and Other Assets:
Non-Earning
Receivables 1.63% 2.05% 9.63%
Other Receivables 7.35% 6.82% 11.17%
Other Assets 7.73% 5.99% 4.86%
Amount of Allowance Allocated to
Non-earning Receivables, Other Receivables
Other Assets $1,055 $1,484 $925
Life Insurance Contracts 275 275 -
</TABLE>
Although the Company maintains an allowance for credit losses in an amount
deemed by management to be adequate to cover potential losses, no assurance can
be given that the allowance will in fact be adequate or that an inadequacy, if
any, in the allowance could not have a material adverse effect on the Company's
earnings in future periods. Furthermore, although management believes that its
periodic estimates of the value of "other receivables" and "other assets" are
appropriate, no assurance can be given that the amounts which the Company
ultimately collects with respect to other receivables and other assets will not
differ significantly from management's estimates or that those differences, if
any, could not have a material adverse effect on the Company's earnings in
future periods.
16
<PAGE>
COMMISSIONS. Commission expense was $117,000 (3.9% of total revenue) in the
first quarter of 1998 as compared to $93,000 (3.1% of total revenue) in the
first quarter of 1997. The increase in 1998 is due to more referrals from
outside brokers and commissions paid for Allstate Factors.
IMPACT OF INFLATION
Management believes that inflation has not had a material effect on the
Company's revenue, expenses or liquidity during the past three years.
Changes in interest rate levels do not generally affect the revenue earned
by the Company in the form of discounts charged. Rising interest rates would,
however, increase the Company's cost of funds 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 4.8% to $49.2 million at March 31,
1998 from $46.9 million at December 31, 1997. The increase is primarily the
result of a increase 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. Additionally,
the reduction of other assets ($727,409) primarily reflects the sale of property
held by the Company. This porperty was held as additional collateral for a
non-performing account.
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, 1998 and December 31, 1997, the Company had working capital of
$28.7 million and $23.9 million, respectively, and a ratio of current assets to
current liabilities of 2.21 to 1 and 2.30 to 1, respectively. Cash flow from
operations together with availability under its credit facilities are adequate
to support the Company's current operations.
[THIS SPACE INTENTIONALLY LEFT BLANK]
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. -LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 6 to the unaudited
financial statements contained in this Form 10-QSB.
ITEM 6. - EXHIBITS
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on form 8-K
- None
18
<PAGE>
SIGNATURES
Pursuant to the requirements 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 15, 1997 By: /S/ LAWRENCE M. WINKLER
-----------------------
Lawrence M. Winkler
Principal Financial Officer, Duly Authorized
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000852220
<NAME> ALLSTATE FINANCIAL CORP
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3100630
<SECURITIES> 0
<RECEIVABLES> 41216650
<ALLOWANCES> 3024591
<INVENTORY> 0
<CURRENT-ASSETS> 45234545
<PP&E> 1321664
<DEPRECIATION> 844355
<TOTAL-ASSETS> 49188173
<CURRENT-LIABILITIES> 20451890
<BONDS> 0
0
0
<COMMON> 40000
<OTHER-SE> 23663384
<TOTAL-LIABILITY-AND-EQUITY> 49188173
<SALES> 0
<TOTAL-REVENUES> 2963482
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1797058
<LOSS-PROVISION> 547000
<INTEREST-EXPENSE> 410331
<INCOME-PRETAX> 209093
<INCOME-TAX> 77364
<INCOME-CONTINUING> 131729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 131729
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
