U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000 |_|
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File Number 0-17832
Allstate Financial Corporation
(Name of small business issuer in its charter)
Virginia 54-1208450
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8180 Greensboro Drive, McLean, VA 22102
- ---------------------------------------------- ---------------------------------
Address of principal executive offices) (Zip Code)
(703) 883-9757
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
------- --
The number of shares outstanding of the issuer's common stock, no par value, as
of May 10, 2000, was 2,324,616.
Transitional Small Business Disclosure Format
(check one): Yes No X
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I - Financial Information
Item 1 - Financial Statements
Consolidated Condensed Balance Sheets at March 31, 2000
(unaudited)and December 31, 1999 3
Consolidated Condensed Statements of Operations for the Three
Months Ended March 31, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Shareholders' Equity for
the Year Ended December 31, 1999 and Three Months Ended
March 31, 2000 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the Three
Months Ended March 31, 2000 and 1999 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 7-10
Item 2 - Management's Discussion and Analysis or Plan
of Operations and Financial Condition 10-15
Part II - Other Information
Item 1 - Legal Proceedings 16
Item 3 - Defaults Upon Senior Securities 16
Item 6- Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PART I - FINANCIAL INFORMATION
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 2000 December 31,1999
(Unaudited)
ASSETS
Cash $ 210,934 $ 353,962
Purchased receivables 2,088,180 2,110,454
Advances receivable 8,379,465 9,329,366
--------- ---------
10,467,645 11,439,820
Less: Allowance for credit losses (4,323,100) (4,316,399)
----------- -----------
Total receivables - net 6,144,545 7,123,421
--------- ---------
Furniture, fixtures and equipment, net 125,538 151,375
Other assets 32,610 43,643
------ ------
TOTAL ASSETS $6,513,627 $7,672,401
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $918,339 $1,009,921
Notes payable 619,900 1,366,051
Convertible subordinated notes 4,954,000 4,954,000
--------- ---------
TOTAL LIABILITIES 6,492,239 7,329,972
--------- ---------
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; 3,105,828 issued; 2,324,616 outstanding,
exclusive of shares held in treasury 40,000 40,000
Additional paid-in-capital 18,874,182 18,874,182
Treasury stock, 781,212 shares (4,964,642) (4,967,472)
Accumulated Deficit (13,928,152) (13,604,281)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 21,388 342,429
------ -------
$ 6,513,627 $ 7,672,401
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C>
THREE MONTHS ENDED: March 31, 2000 March 31, 1999
- ------------------------------------------------------------------------------ -------------------- ----------------
REVENUE
Earned discounts and interest $131,950 $1,614,471
Fees and other revenue 71,763 181,574
------ -------
TOTAL REVENUE 203,713 1,796,045
------- ---------
EXPENSES
Compensation and fringe benefits 168,897 610,013
General and administrative 217,342 405,293
Interest expense 141,345 375,574
Provision for credit losses - -
------------ -----------
TOTAL EXPENSES 527,584 1,390,880
------- ---------
(LOSS) INCOME BEFORE INCOME TAX EXPENSE (323,871) 405,165
INCOME TAX EXPENSE - 149,911
------------- -------
NET (LOSS) INCOME $ (323,871) $255,254
=========== ========
NET (LOSS) INCOME PER COMMON SHARE
Basic and Diluted $ (0.14) $ 0.11
========= =======
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
Basic and Diluted 2,324,616 2,327,016
</TABLE>
See Notes to Consolidated Financial Statements
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
- ------------------------------------ -------------- ----------------- ------------------ ------------------- -----------------
Additional
Common Paid in Treasury Retained
Stock Capital Stock Earnings Total
- ------------------------------------ -------------- ----------------- ------------------ ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Balance- January 1, 1999 $40,000 $18,874,182 $4,986,520 $3,646,809 $17,574,471
Amortization of Treasury Stock
Costs 15,050 15,050
Conversion of Convertible
Subordinated Notes to 533 shares
of common stock 3,998 3,998
Net (Loss) - - (17,251,090) (17,251,090)
------------ ---------------- ----------------- ------------ ------------
Balance- December 31, 1999 $40,000 $18,874,182 $(4,967,472) $(13,604,281) $ 342,429
======= =========== ============ ============= =========
Amortization of treasury stock
acquisition costs (unaudited)
2,803 2,803
Net Income (unaudited) (323,871) (323,871)
--------- ---------
Balance - March 31, 2000
(unaudited) $40,000 $18,874,182 $(4,964,642) $(13,928,152) $21,388
======= =========== ============ ============= =======
See Notes to Consolidated Financial Statements
[THIS SPACE INTENTIONALLY LEFT BLANK]
</TABLE>
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three Months Ended: March 31, 2000 March 31, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) Income $ (323,871) $ 255,254
Adjustments to reconcile net income
to cash provided (used) by operating activities:
Depreciation - net 19,999 13,000
Changes in operating assets and liabilities:
Other receivables 11,033 442,657
Accounts payable and accrued expenses (91,582) (489,575)
Income taxes receivable and deferred income taxes - 160,941
---------- -------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (384,421) 382,277
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of receivables and advances - (63,915,174)
Collection of receivables, including life insurance
contracts, and advances 978,876 66,480,661
(Decrease) in credit balances of factoring clients - (2,024,903)
Sale (Purchase) of furniture, fixtures and equipment 11,498 (11,957)
------ --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 990,374 528,627
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit - 32,592,132
Principal payments on lines of credit (746,151) (34,595,000)
Treasury stock acquisition costs (2,830) 4,071
------- -----
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (748,981) 1,898,797
--------- ---------
NET (DECREASE) IN CASH (143,028) (987,893)
CASH, Beginning of period 353,962 2,420,644
------- ---------
CASH, End of period $210,934 $1,432,751
======== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 41,345 $388,691
======== ========
Income taxes paid $ - $ 8,592
===== =======
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Conversion of Factoring Clients to ABL Loans $ - $9,309,511
----- ----------
Issuance of common stock in exchange
for convertible subordinated notes $ - $ 998
===== =====
</TABLE>
See Notes to Consolidated Financial Statements
<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
the periods ended March 31, 2000 and 1999; however, they reflect all adjustments
which, in the opinion of management, are necessary to present fairly the results
for the periods presented. The December 31, 1999 balance sheet has been
extracted from audited financial information. 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, 2000 are not necessarily indicative of the results
of operations to be expected for the remainder of the year. It is suggested that
these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in Allstate
Financial Corporation's Annual Report on Form 10-KSB for the year ended December
31, 1999.
2. Lines of Credit. In January 2000, the Company repaid its bank lenders in
full. Previously the Company obtained a $1,000,000 supplemental working capital
loan from Value Partners, a major shareholder. The supplemental working capital
loan bears a 10% rate of interest, which is payable quarterly. The outstanding
balance of the supplemental loan was due March 31, 2000. As of March 31, 2000,
the Company owed $619,900 on the supplemental loan. The Company does not have
any outside source of liquidity to fund new business, and is relying on
collections of existing accounts to fund its current clients.
3. Certain Contingencies. 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
(hereinafter collectively referred to as "AG") pending in the United States
Bankruptcy Court for the Southern District of New York. In a 1993 action the
Company undertook an attempt to recover against AG. An answer and counterclaim
was filed against the Company. 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. No action was
ever taken by the trustee in the AG bankruptcy proceedings to pursue the
Counterclaims. On June 2, 1997, the trustee for the AG bankruptcy estate filed a
motion to abandon these claims against the Company. On October 7, 1997, New York
Surety Company (hereinafter referred to as the "Surety"), which provided the
payment and performance bond to AG in connection with the construction jobs
performed for the City of New York, filed pleadings objecting to the abandonment
of such claims against the Company, asserting that it was subrogated to AG's
claims. 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. 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.
<PAGE>
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 other proceedings will have a material adverse effect on the Company.
The Company's principal offices previously occupied approximately 8,000 square
feet of space in an office building in Arlington, Virginia. The Company's lease
on this property expires in December 2001. The cost of renting this office space
was approximately $178 thousand in 1999 compared to $184 thousand in 1998. The
Company has a right of first refusal to acquire an additional, contiguous 1,500
square feet at its present site when that space becomes available. The Company
had made arrangements to assign its lease on the Arlington location to a third
party, but the Company, the third party, and the landlord, whose approval of the
transaction was required by the terms of the lease, failed to reach agreement on
documentation. The Company remains liable for the lease and has entered into
negotiations with the landlord to be released from its obligations for the
remainder of the lease term. There can be no assurance that such negotiations
will be successful. The Company is occupying approximately 1,500 square feet of
office space in a commercial building located in McLean, VA. The cost of renting
at the new location will be approximately $30 thousand during 2000. The Company
is subleasing from, and will share certain of the expenses of occupancy, with a
separate financial services firm that is majority owned by Value Partners, the
Company's majority shareholder.
4. Credit Concentrations. For the quarter ended March 31, 2000, three clients
each accounted for 10% of the Company's total earned interest, for a total of
57.0% of the Company's total earned interest among them, as compared to 66.9% of
earned interest and discount for the three largest clients (each of which
accounted for over 10% of the total) in the quarter ended December 31,1999. At
March 31, 2000, the three clients accounted for 31.3% of the Company's total
receivables, while at December 31, 1999 the three clients accounted for 17.0%.
5. Stock Options. The Company maintains two stock option plans: (1) an Incentive
Stock Option Plan (Qualified), and (2) a Non-Qualified Stock Option Plan
(Non-Qualified). No additional grants can be made under these plans as of
February 7, 2000. The Company continues to account for stock options under APB
25 and provides the additional disclosures as required by SFAS No. 123.
Qualified Plan
The Company had reserved 275,000 shares of common stock for issuance under its
qualified stock option plans. Options to purchase common stock were granted at a
price equal to the fair market value of the stock on the date of grant or 110%
of fair market value of the stock at the date of grant for stockholders owning
10% or more of the combined voting stock of the Company.
Non-Qualified Plan
The Company had reserved 150,000 shares of common stock for issuance under its
non-qualified stock option plan. Options to purchase shares of common stock were
granted at a price equal to the fair value of the stock at the date of grant
except in the case of options granted to directors, in which case the minimum
price was the greater of $7.00 or 110% of fair value at the time of grant.
<PAGE>
The table below summarizes the option activity for both the Qualified and
Non-Qualified Stock Option plans for the three months ended March 31, 2000.
Three Months Ended March 31, 2000
Outstanding January 1 155,500
Granted -
Exercised -
Forfeited or expired (100)
-----
Outstanding 155,400
=======
Exercisable 155,300
=======
6. Income taxes. Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. The Company has reduced all deferred tax assets to zero by
utilizing a valuation allowance because the deferred tax assets more than likely
will not be realized.
7. Uncertainties. The Company continued to incur net losses in the quarter ended
March 31, 2000, although it has made further cuts in expenses and overhead.
Through the repayment of an asset-based loan and the collection of an impaired
asset, the Company repaid the bank lenders and the Value Partners supplemental
working capital loan (see note 8-Subsequent event.) The Company continues to be
in default on its New Notes.
The Company has also continued to develop its strategic turnaround plan (the
"Plan".) The committee of outside directors appointed by the board of directors
has begun negotiations with the holders of the New Notes over the terms of the
exchange of those notes for common stock, which is an important element of the
Plan.
Other major elements of the Plan include:
- - A limitation on transfers of common stock by existing or potential holders
of over 4.9% of outstanding shares, thereby helping to preserve the NOL's
for future use.
- - An increase in the number of authorized shares to facilitate the conversion
and enable the Company to consider possible acquisitions of, or business
combinations with, firms in financial services, involving the issuance of
new shares.
- - The re-incorporation of the Company under Delaware law to take advantage
of provisions favorable to the Plan.
Certain elements of the plan will require shareholder approval and will be
presented to the shareholders for a vote at the Company's annual meeting. The
Company believes that when the Plan is approved by the shareholders and
implemented, the Company will be positioned for future growth. The Company
<PAGE>
believes the conversion of the New Notes to equity will reduce the Company's
interest costs and position it to more effectively obtain new senior funding to
expand its loan portfolio. The satisfactory completion of the Plan is essential,
as the Company continues to have insufficient cash flow to service the interest
payments on the New Notes.
However, there can be no assurance that the Plan will be approved by the
shareholders, that the final terms of the conversion can be agreed upon, that
the Company will be successful in redeploying the amounts it currently has
invested in nonperforming assets into new ABL relationships, or that new
financing will be obtained.
If the plan can be accomplished, management believes that the Company will
continue as a going concern.
8. Subsequent event. On April 5, 2000, the Company and a Client entered into a
settlement agreement, in which the Company agreed to accept $1,200,000 in cash
in settlement of a balance on an impaired loan of $4,735,684. As a result, the
Company charged off $3,535,684 of the balance against a previously established
reserve. Simultaneously the Company also exercised, for a total consideration of
$4000, a warrant to purchase four million shares of common stock in the Client's
parent corporation, with a market value on the date of the agreement of
$1,160,000. The common stock is subject to restrictions on sale or transfer
according to Rule 144 of the Securities Act of 1933. In addition, on April 5,
2000, the Company repaid the working capital loan to Value Partners.
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, seasonally, 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 commercial finance institution which provides financing to
small businesses, usually those with annual sales of $1 million to $10 million,
through loans secured by accounts receivable, inventory, machinery and
equipment, and real estate. Prior to the sale of its factoring business in
October, 1999, the Company also purchased accounts receivable at a discount with
recourse to the seller. Through its offering of advances secured by accounts
receivable, inventory, machinery and equipment, and real estate ("Asset-Based
Lending" or "ABL"), the Company provides its clients with the ability to expand
their working capital and acquire productive business assets.
<PAGE>
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 lender.
Accordingly, there is a significant risk of default and client failure inherent
in the Company's business.
The Company faces competition from other asset-based lenders, diversified
lenders, and commercial banks that offer secured financing. Due to the size of
facilities that it offers, the Company competes with both regional sources of
financing and large national organizations. Many of these competitors have
significant financial, marketing and operational resources, and may have access
to capital at lower costs than the Company can obtain.
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 qualify for more competitively priced bank or asset-based financing within
that time period, or would be liquidated. Therefore, the Company's major clients
have tended to change significantly over time. 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.
The Company's subsidiary Lifetime Options, Inc. manages a portfolio of life
insurance policies it purchased from individuals facing life-threatening
illnesses. During 1997, Lifetime Options ceased purchasing 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.
Liquidity and Capital Resources
The Company's requirement for capital is a function of the level of its
investment in receivables. The Company funds this investment through internally
generated funds. The Company also has outstanding approximately $5 million in
aggregate principal amount of convertible subordinated notes of which $357
thousand are due in September 2000 and $4.6 million are due in September 2003.
The Company believes the $1.2 million proceeds from the recent settlement of an
impaired loan, together with other internally generated funds will be sufficient
to finance the Company's funding requirements for the near term. However, the
Company's cash position has significantly declined in recent periods, and
expenses continue to exceed revenues. In addition, The Company's current
liabilities exceed its cash on hand.
Impact of Inflation
Management believes that inflation has not had a material effect on the
Company's income, expenses or liquidity during the three month periods ending
March 31, 2000 and 1999. The Company's advances receivable bear interest at a
combination of fixed and floating (base) rates, while the majority of its notes
payable are at fixed rates. Therefore, an environment of falling interest rates
could have adverse affects on the Company's net interest spread.
<PAGE>
Results of Operations
The following table sets forth certain items of revenue and expense for the
periods indicated and indicates the percentage relationships of each item to
total revenue.
<TABLE>
<CAPTION>
Three months ended: March 31,2000 March 31,1999
- ------------------------------------------------------------- ------------------------------- -----------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE
Earned discounts and interest $131,950 64.8% $1,614,471 89.9%
Fees and other revenue 71,764 35.2 181,574 10.1
------ ---- ------- ----
TOTAL REVENUE 203,713 100.0% 1,796,045 100.0%
------- ------ --------- ------
EXPENSES
Compensation and fringe benefits 168,897 82.9 610,013 33.9
General and administrative 217,342 106.7 405,293 22.5
Interest expense 141,345 69.4 375,574 21.0
------- ---- ------- ----
TOTAL EXPENSES 527,584 258.9 1,390,880 77.4
------- ----- --------- ----
INCOME BEFORE INCOME TAX EXPENSE (323,871) (159.0) 405,165 22.6
--------- ------- ------- ----
INCOME TAX EXPENSE - - 149,911 8.3
------------- ----------- ------- ---
NET INCOME (LOSS) $(323,871) (159.0)% $ 255,254 14.3%
========== ======== ========= =====
NET INCOME (LOSS)PER COMMON SHARE
Diluted and Basic $(0.14) $ 0.11
======= ======
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Diluted 2,324,616 2,327,016
Basic 2,324,616 2,324,138
</TABLE>
Total Revenue. Total revenue consists of (i) discounts on purchased invoices
earned in the Company's factoring business from the purchase of accounts
receivable and interest earnings on ABL advances receivable and (ii) fees and
other revenue, which consist primarily of application fees, commitment or
facility fees and other transaction related financing fees, and the premium
which the Company receives over time over time based on the performance of the
Purchased Receivables sold during 1999.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
The following table breaks down total revenue by type of transaction for the
periods indicated and the percentage relationship of each type of transaction to
total revenue.
<TABLE>
<CAPTION>
For the Three Months Ended: March 31, 2000 March 31,1999
<S> <C> <C> <C> <C>
----------------- ------------- --------------- --------------
Type of Revenue Earned Revenue Percent Earned Revenue Percent
- ------------------------------------------------ ----------------- ------------- --------------- --------------
Discount on purchased invoices $ - - $ 380,691 21.2%
Earnings on advances
Receivable 131,950 64.8% 1,233,780 68.7
Fees and other revenue 71,763 35.2 181,574 10.1
-- ------- ---- ------- ----
Total revenue $203,713 100% $1,796,045 100.0%
======== ==== ==== ========== ======
- ------------------------------------------------ ----------------- ------------- --------------- --------------
</TABLE>
Total revenue decreased by 88.6% in the three months ended March 31, 2000 versus
the same period in 1999, to $204 thousand from $1.8 million. Within total
revenue, the Company had no discounts on purchased invoices in 2000 due to the
sale of the factoring business. Earnings on advances receivable decreased by
89.3% in the three months ending March 31, 2000 versus the same period in 1999.
The earnings decrease was attributable to a the decrease in the average
outstanding balance of advances receivable, $8.8 million in the March 31, 2000
quarter versus $23.8 million in the March 31, 1999 quarter, as well as a higher
percentage component of non-performing advances. The Company is not currently
adding new accounts to the portfolio, but may fund additional advances to
existing clients if requested to do so.
Fees and other revenue decreased 60.4% in three months ended March 31, 2000 as
compared to the same period in 1999. Fee income related to the factoring
business and to new facilities or renewals and increases to existing accounts
decreased, while the premium the Company expects to collect over time based on
the performance of the Purchased Receivables sold in 1999 increased.
Compensation and Fringe Benefits. In the three months ended March 31, 2000 and
1999, compensation and fringe benefits were $169 thousand (82.9% of total
revenue) and $610 thousand (34.0% of total revenue), respectively. The lower
compensation and fringe benefits during 2000 were the result of a decrease in
the number of employees.
General and Administrative Expense. Total general and administrative expense
decreased by $188 thousand (46.4%) to $217 thousand from $405 thousand for the
three month period ended March 31, 2000 compared with 1999. The decrease in
expenses is a result in the decrease in staff as well as lower litigation and
professional fees, as the amount of active litigation decreased.
Interest Expense. Interest expense was $141 thousand (69.4% of total revenue)
versus $376 thousand (21.0% of total revenue) for the three months ended March
31, 2000 and 1999, respectively. The decrease in interest expense is primarily
attributable to a decrease in the average amount of debt outstanding, due to the
payoff of the bank revolving credit. Interest expense on the Convertible
Subordinated Notes was comparable in the three months ended March 31 2000 to
that in the 1999 quarter.
Provision for Credit Losses. During the three months ended March 31, 2000, the
Company had no charge-offs, while recovering $7 thousand. During the three
months ended March 31, 1999, the Company had charge-offs of $78 thousand, while
recovering $177 thousand. Net recoveries for the three months ended March 31,
2000 resulted in a marginal increase to the allowance for credit losses. At $4.3
<PAGE>
million, the allowance was 50.4% of total receivables (net of participations and
unearned income), exclusive of life insurance policies, outstanding as of March
31, 2000. At March 31, 2000, $4 million of the allowance was allocated to
non-performing accounts.
The Company determines overall reserve levels based on an analysis which takes
into account a number of factors including a determination of the risk involved
with each individual client. Based on this analysis, the Company believes the
allowance for credit losses is adequate in light of the risks inherent in the
portfolio at March 31, 2000. The Company carefully monitors the portfolio, but a
deterioration in one or more clients could have a material adverse effect on the
Company.
Receivables
<TABLE>
<CAPTION>
Receivables consist of the following, at the dates indicated.
<S> <C> <C>
March 31, 2000 December 31,1999
- -------------------------------------------- ----------------------------------- -----------------------------------
Invoices and insurance claims $212,171 $234,445
Less: unearned discount (13,953) (13,953)
Life insurance policies (net) 1,889,962 1,889,962
--------- ---------
Total purchased receivables $2,088,180 $2,110,454
=========== ==========
Advances receivable $9,124,088 $10,073,989
Less : participation (744,623) (744,623)
--------- ---------
Total advances receivable $8,379,465 $9,329,366
=========== ==========
</TABLE>
Non-performing receivables included within the above totals were $5.3 million at
March 31, 2000 and $5.4 million at December 31, 1999.
From time to time, a single client or single industry may account for a
significant portion of the Company's receivables. As detailed in Note 4 to the
Consolidated Financial Statements, three clients accounted for more than 10% of
total earned discounts and interest for the three-month periods ended March 31,
2000. Three different clients accounted for 10% each of total earned discounts
and interest for the three-month period ended December 31, 1999. The Company has
adopted a policy to generally restrict the size of any one new client to a
maximum of $500 thousand. and to take steps to reduce the size of the two
existing clients who are currently over that limit. Although the Company
carefully monitors client and industry concentration, there can be no assurance
that the risks associated with client or industry concentration could not have a
material adverse effect on the Company.
Subsequent Events. On April 5, 2000, the Company and a Client entered into a
settlement agreement, in which the Company agreed to accept $1.2 million in cash
in settlement of a balance on an impaired loan of $4.8 million. As a result, the
Company charged off $3.6 million of the balance against a previously established
reserve. Simultaneously the Company also exercised, for a total consideration of
$4000, a warrant to purchase four million shares of common stock in the Client's
parent corporation, with a market value on the date of the agreement of
$1.1million. The common stock is subject to restrictions on sale or transfer
according to Rule 144 of the Securities Act of 1933. In addition, on April 5,
2000, the Company repaid the working capital loan to Value Partners.
Uncertainties. The Company continued to incur net losses in the quarter
ended March 31, 2000, although it has made further cuts in expenses and
overhead. Through the repayment of an asset-based loan and the collection of an
<PAGE>
impaired asset, the Company repaid the bank lenders and the Value Partners
supplemental working capital loan (see Subsequent event.) The Company
continues to be in default on its New Notes.
The Company has also continued to develop its strategic turnaround plan (the
"Plan".) The committee of outside directors appointed by the board of directors
has begun negotiations with the holders of the New Notes over the terms of the
exchange of those notes for common stock, which is an important element of the
Plan.
Other major elements of the Plan include:
- - A limitation on transfers of common stock by existing or potential holders
of over 4.9% of outstanding shares, thereby helping to preserve the NOL's
for future use.
- - An increase in the number of authorized shares to facilitate the conversion
and enable the Company to consider possible acquisitions of, or business
combinations with, firms in financial services, involving the issuance of
new shares.
- - The re-incorporation of the Company under Delaware law to take advantage
of provisions favorable to the Plan.
Certain elements of the plan will require shareholder approval and will be
presented to the shareholders for a vote at the Company's annual meeting. The
Company believes that when the Plan is approved by the shareholders and
implemented, the Company will be positioned for future growth. The Company
believes the conversion of the New Notes to equity will reduce the Company's
interest costs and position it to more effectively obtain new senior funding to
expand its loan portfolio. The satisfactory completion of the Plan is essential,
as the Company continues to have insufficient cash flow to service the interest
payments on the New Notes.
However, there can be no assurance that the Plan will be approved by the
shareholders, that the final terms of the conversion can be agreed upon, that
the Company will be successful in redeploying the amounts it currently has
invested in nonperforming assets into new ABL relationships, or that new
financing will be obtained.
If the plan can be accomplished, management believes that the Company will
continue as a going concern.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 3 to the unaudited financial
statements contained in this Form 10-QSB.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES As discussed in Note 2 to the
unaudited financial statements, at March 31,2000 the Company was in default
of its obligation to Value Partners, Ltd. for the balance of the working
capital loan. On April 5, 2000, the loan waspaid in full.
ITEM 6(a). - EXHIBITS
Exhibit 27. Financial Data Schedule
ITEM 6(b). - REPORTS ON FORM 8-K
Form 8-K as filed with the Securities and Exchange Commission on March 14,2000
is incorporated by reference.
[THIS SPACE INTENTIONALLY LEFT BLANK]
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
Date: May 15, 1999 _____/s/ ______
Charles G. Johnson
Chief Executive Officer
Date: May 15, 1999 _____/s/_______
C. Fred Jackson
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 210934
<SECURITIES> 0
<RECEIVABLES> 10476645
<ALLOWANCES> 4323100
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 251838
<DEPRECIATION> 126300
<TOTAL-ASSETS> 6513627
<CURRENT-LIABILITIES> 918339
<BONDS> 5573900
0
0
<COMMON> 21388
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6513627
<SALES> 0
<TOTAL-REVENUES> 203713
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 386239
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 141345
<INCOME-PRETAX> (323871)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (323871)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
