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 SEPTEMBER 30, 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)
Delaware 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 November 6, 2000, was 7,668,004
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 September 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Condensed Statements of Operations for the Three and Nine
Months Ended September 30, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Shareholders' Equity for the
Year Ended December 31, 1999 and Nine Months Ended
September 30, 2000 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Condensed Financial Statements (unaudited) 7
Item 2 - Management's Discussion and Analysis or Plan
of Operations and Financial Condition 9
Part II - Other Information
Item 1 - Legal Proceedings 13
Item 2.- Changes In Securities And Use Of Proceeds 13
Item 3 - Defaults Upon Senior Securities 13
Item 4 - Submission of Matters to a Vote of Security Holders 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signatures 14
2
<PAGE>
PART I - FINANCIAL INFORMATION
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
------------------------------------------------------------------------------- ----------------------- --------------------
September 30, 2000 December 31,1999
-------------------------------------------------------------------------------
------------------------------------------------------------------------------- ----------------------- --------------------
<S> <C> <C>
(Unaudited)
-------------------------------------------------------------------------------
ASSETS
-------------------------------------------------------------------------------
Cash $2,319,383 $353,962
-------------------------------------------------------------------------------
Purchased receivables 1,711,426 2,110,454
-------------------------------------------------------------------------------
Advances receivable 2,301,301 9,329,366
--------- ---------
-------------------------------------------------------------------------------
4,012,727 11,439,820
-------------------------------------------------------------------------------
Less: Allowance for credit losses (564,877) (4,316,399)
--------- -----------
-------------------------------------------------------------------------------
Total receivables - net 3,447,850 7,123,421
--------- ---------
-------------------------------------------------------------------------------
Securities available for sale 236,000 -
-------------------------------------------------------------------------------
Furniture, fixtures and equipment, net 99,899 151,375
-------------------------------------------------------------------------------
Other assets 193,791 43,643
------- ------
-------------------------------------------------------------------------------
TOTAL ASSETS $6,296,923 $7,672,401
========== ==========
-------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
Accounts payable and accrued expenses $1,019,113 $1,009,921
-------------------------------------------------------------------------------
Notes payable - 1,366,051
-------------------------------------------------------------------------------
Convertible subordinated notes 4,954,000 4,954,000
--------- ---------
-------------------------------------------------------------------------------
TOTAL LIABILITIES 5,973,113 7,329,972
--------- ---------
-------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
-------------------------------------------------------------------------------
Preferred stock, authorized 2,000,000 shares with
no par value; no shares issued or outstanding - -
-------------------------------------------------------------------------------
Common stock, par value $.01, authorized 20,000,000, issued 3,280,828,
outstanding 2,499,616 at September 30, 2000; no par value, authorized 10,000,000
shares, issued 3,105,828, outstanding 2,324,616
at December 31,1999 (exclusive of shares held in treasury) 32,808 40,000
-------------------------------------------------------------------------------
Additional paid-in-capital 18,970,624 18,874,182
-------------------------------------------------------------------------------
Treasury stock, 781,212 shares (4,954,023) (4,967,472)
-------------------------------------------------------------------------------
Accumulated deficit (13,957,599) (13,604,281)
-------------------------------------------------------------------------------
Accumulated other comprehensive income:
unrealized gains on investment securities 232,000 -
------- -----------
-------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 323,810 342,429
------- -------
-------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,296,923 $7,672,401
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
----------------------------------------------
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------------------------
2000 1999 2000 1999
<S> <C> <C> <C> <C>
---- ---- ---- ----
----------------------------------------------
REVENUE
----------------------------------------------
Earned discounts and interest $70,807 $592,511 $287,735 $2,805,244
----------------------------------------------
Fees and other revenue 93,686 34,736 284,233 359,182
------ ------ ------- -------
----------------------------------------------
TOTAL REVENUE 164,493 627,247 571,968 3,164,426
------- ------- ------- ---------
----------------------------------------------
EXPENSES
----------------------------------------------
Compensation and fringe 112,805 523,171 398,048 1,786,867
benefits
----------------------------------------------
General and administrative 307,204 563,375 850,035 2,318,024
----------------------------------------------
Interest expense 169,809 319,874 516,523 1,030,839
----------------------------------------------
Provision for credit losses (473,830) 800,000 (839,319) 9,176,057
(recovery)
----------------------------------------------
Restructuring Charge - 259,221 - 259,221
------------ ------- ------------ -------
----------------------------------------------
TOTAL EXPENSES 115,988 2,465,641 925,286 14,571,008
------- --------- ------- ----------
----------------------------------------------
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE 48,505 (1,838,394) (353,318) (11,406,582)
----------------------------------------------
INCOME TAX EXPENSE - 9,500 4,031,349
------------- -------- ------------- ---------
----------------------------------------------
NET INCOME (LOSS) $48,505 $(1,847,894) $(353,318) $(15,437,931)
======= ============ ========== =============
----------------------------------------------
NET INCOME (LOSS) PER COMMON
SHARE
----------------------------------------------
Basic and Diluted $.02 $(0.79) ($.15) $(6.64)
==== ======= ====== =======
----------------------------------------------
WEIGHTED AVERAGE
NUMBER OF SHARES OUTSTANDING
----------------------------------------------
Basic and Diluted 2,499,616 2,324,616 2,403,644 2,324,400
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 AND THE NINE MONTHS ENDED SEPTEMBER 30, 2000
---------------------- ----------- --------------- ---------------- ----------------- --------------------- -----------------
Accumulated
Additional Other Retained Earnings
Common Paid in Treasury Comprehensive (Deficit)
Stock Capital Stock Income Total
---------------------- ----------- --------------- ---------------- ----------------- --------------------- -----------------
<S> <C> <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)
- 13,449 - - 13,449
----------------------
Unrealized gains on
investment
securities
(unaudited)
- - - 232,000 - 232,000
----------------------
Issue of 175,000
shares to
non-employee
directors
(unaudited)
- 89,250 - - - 89,250
----------------------
Conversion of
issued Virginia
shares to $0.01 par
value Delaware
shares (7,192) 7,192 - - - -
----------------------
Net (Loss)
(unaudited) - - - - (353,318) (353,318)
------ -------- --------- ---------- --------- ---------
---------------------
Balance - Sept. 30,
2000
(unaudited) $32,808 $18,970,624 $(4,954,023) $232,000 $(13,957,599) $323,810
======= =========== ============ ======== ============= ========
----------------------
</TABLE>
See Notes to Consolidated Condensed Financial Statements
5
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------------------
2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(353,318) $(15,437,931)
Adjustments to reconcile net (loss)
to cash provided (used) by operating activities:
Depreciation - net 62,697 53,587
Automobiles - 65,440
Provision for credit losses (recoveries) (839,319) 9,176,057
Deferred Income Taxes 3,960,946
Changes in operating assets and liabilities:
Other receivables (150,148) 627,630
Accounts payable and accrued expenses 9,192 (284,901)
Income taxes receivable - 8,824
--------------- -------
NET CASH (USED) BY OPERATING ACTIVITIES (1,270,896) (1,016,340)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of receivables and advances (886,000) (106,526,864)
Collection of purchased receivables
and advances receivable 4,832,158 117,403,655
Recoveries of charged-off assets (net of participant portion) 623,981
(Decrease) in credit balances of factoring clients - (4,146,426)
Sale of Automobiles - 6,800
Sale (Purchase) of furniture, fixtures and equipment (11,221) (181,394)
-------- ---------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 4,558,918 6,519,771
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit - 76,427,897
Principal payments on lines of credit (1,366,050) (83,871,948)
Treasury stock acquisition costs 13,449 12,219
------ ------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,322,601) (7,431,832)
----------- -----------
NET INCREASE (DECREASE) IN CASH 1,965,421 (1,928,401)
--------- -----------
CASH, Beginning of period 353,962 2,420,644
------- ---------
CASH, End of period $2,319,383 $492,243
========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $67,250 $283,111
======= ========
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 $ - $3,998
Issuance of common stock as directors' fees $89,250 $ -
Unrealized gain on securities available for sale received in
settlement of non-performing advance $1,156,000 -
Unrealized gain (loss) on securities available for sale ($924,000) -
</TABLE>
See Notes to Consolidated Condensed Financial Statements
6
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation and subsidiaries ("Allstate") included herein are unaudited for the
periods ended September 30, 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. At the reconvened annual meeting of the shareholders
of Allstate held on August 29, 2000, shareholders approved the reincorporation
of Allstate as a Delaware corporation. The reincorporation into Delaware was
completed on September 1, 2000. The consolidated financial statements for
Allstate at September 30, 2000 reflect adjustments related to the
reincorporation as a Delaware corporation. 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 U.S Securities and Exchange
Commission. Allstate believes that the disclosures are adequate to make the
information presented not misleading. The results of operations for the three
and nine months ended September 30, 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's Annual Report on Form 10-KSB for the year ended December 31, 1999.
2. Lines of Credit. In January 2000, Allstate repaid its bank lenders in full.
Previously Allstate obtained a $1,000,000 supplemental working capital loan from
Value Partners Ltd. ("Value Partners"), Allstate's majority shareholder. On
April 5, 2000 Allstate repaid the working capital loan in full. Allstate does
not have any outside source of liquidity to fund new business, and is relying on
collections of existing accounts and impaired assets to fund its current
clients.
3. Certain Contingencies. At June 30, 2000 Allstate was 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 ("AG"), pending in the United States Bankruptcy Court for the
Southern District of New York. In a 1993 action Allstate undertook an attempt to
recover against AG. An answer and counterclaim was filed against Allstate.
In August 2000 Allstate entered into a settlement of the A.G. litigation. In
exchange for the payment of $105,000, the successors to the party that filed the
counterclaim agreed to drop their objection to the trustees' abandonment of the
claim against Allstate.
Except as described above, Allstate is not party to any litigation other than
routine proceedings incidental to its business, and Allstate does not expect
that these other proceedings will have a material adverse effect on Allstate.
Allstate previously occupied approximately 8,000 square feet of space in an
office building in Arlington, Virginia as its principal location. Allstate's
lease on this property would have expired in December 2001. The cost of renting
this office space was approximately $178,000 in 1999. At the end of May, 2000
Allstate was released from its obligations for the remainder of the lease term.
Allstate sublets approximately 1,500 square feet of office space in a commercial
building located in McLean, Virginia. The cost of renting at the new location
will be approximately $30,000 during 2000. Allstate subleases from, and shares
certain of the expenses of occupancy with, Harbourton Financial Corporation
("Harbourton"), a separate financial services firm that is majority owned by
Value Partners.
4. Credit Concentrations. For the three months ended September 30, 2000,
interest and fees from two clients each accounted for over 10% of Allstate's
total earned revenue, representing 31.19% of Allstate's total revenue, as
compared to 36.8% of revenue from the three largest clients, each of which
accounted for over 10% of the total, in the three months ended September 30,
1999.
At September 30, 2000, one client accounted for more than 10% of Allstate's
total receivables. The loan, which represented 21.2% of total receivables, is a
participation in a loan which was originated by and is serviced by Harbourton.
Subsequent to September 30, 2000, Allstate purchased from Harbourton a
participation interest in a second loan that accounted for more than 10% of
Allstate's total receivables. This loan represented 29.9% of total receivables.
5. Stock Options. Allstate maintains three stock option plans: (1) an Incentive
Stock Option Plan ("Qualified Plan"), (2) a Non-Qualified Stock Option Plan
("Non-Qualified Plan"), and (3) its 2000 Stock Option Plan ("2000 Plan"), which
allows for grants of both qualified and non-qualified options. No additional
grants can be made under the Qualified or Non-Qualified
8
<PAGE>
Plans as of February 7, 2000. The 2000 Plan was approved by the board of
directors of Allstate on June 13, 2000, subject to the approval of Allstate's
shareholders. Subsequently, on August 8, 2000, the plan was approved by the
shareholders. Allstate continues to account for stock options under APB 25 and
provides the additional disclosures as required by SFAS No. 123.
Qualified Plan - Allstate had reserved 275,000 shares of common stock for
issuance under its Qualified Plan. 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 Allstate.
Non-Qualified Plan - Allstate had reserved 150,000 shares of common stock for
issuance under its Non-Qualified 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.
2000 Plan - Allstate reserved the lesser of 450,000 or 8% of the then issued and
outstanding shares of common stock for issuance under its 2000 Plan. As of
November 6, 2000 the amount of shares reserved was 450,000. No options have been
granted under the 2000 Plan.
The table below summarizes the option activity for all three plans for the three
months ended September 30, 2000.
Three Months Ended
September 30, 2000
Outstanding July 1 155,400
Granted -
Exercised -
Forfeited or expired -
Outstanding 155,400
=======
Exercisable 155,300
=======
6. Restricted Stock Plan. Allstate's board of directors approved Allstate's 2000
Restricted Stock Plan for Non-Employee Directors on June 13, 2000. This plan
reserved 175,000 shares of common stock for issuance to non-employee directors
for past services. All of the shares were awarded on June 13, 2000, subject to
the approval of the plan by the shareholders. The closing price of Allstate's
common stock as traded on the Nasdaq OTC Market on June 13 was $0.51.
Subsequently, on August 8, 2000, this plan was approved by the shareholders.
7. 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. Allstate has reduced the deferred tax assets by utilizing a
valuation allowance, because the deferred tax assets more than likely will not
be realized. The remaining tax assets equal the deferred tax liabilities
resulting from the unrealized gain on investment securities.
8. Uncertainties and Subsequent Events. Allstate achieved profitability during
the quarter because of collections of previously charged -off assets. This
permitted a provision for recoveries. Through the collection of impaired assets
Allstate believes it now has sufficient cash to provide the funds required under
the Harbourton merger agreement (see below) and support its operations for the
remainder of the fiscal year.
Allstate continued to be in default on its 10% Convertible Subordinated Notes
due September 2003 ("Allstate Notes") as of September 30, 2000. On October 5,
2000, Allstate filed a plan of arrangement with the Delaware Court of Chancery,
setting forth the proposed conversion of the Allstate Notes together with
accrued but unpaid interest, into common stock of Allstate at a price of $0.95
per share of common stock. (the "Notes Conversion"). The Delaware court approved
the Notes Conversion on October 6, 2000, and minor changes were made to the
approval order on October 11, 2000.
9
<PAGE>
On October 26, 2000, Allstate Notes with an aggregate principal amount of
$4,331,000, together with $578,970 of accrued but unpaid interest at a
negotiated default rate of 12.5% simple, were converted into 5,168,388 shares of
newly issued Allstate common stock. The remaining $266,000 of Allstate Notes
were brought current. Value Partners held Allstate Notes with a principal
balance of $4,197,000 and received 5,008,481 shares of Allstate common stock as
a result of the Notes Conversion. Following the Notes Conversion, Value Partners
held a total of 5,676,849 shares of Allstate common stock, representing 74.0% of
the currently outstanding shares. Value Partners is now deemed to be in control
of Allstate.
On October 2, 2000 all of Allstate's variable rate notes due September 30, 2000
and accrued interest thereon was paid.
Effective September 18, 2000 and September 25, 2000, respectively, Charles G.
Johnson resigned as a director and as President of Allstate for personal
reasons. David W. Campbell, Allstate's Chairman of the Board, was appointed
interim President. In addition Timothy G. Ewing, who controls the general
partner of Value Partners, was appointed a director of Allstate effective
September 18, 2000.
On October 25, 2000, Allstate entered into an Agreement and Plan of Merger with
Harbourton. Allstate's majority shareholder, Value Partners, currently controls
74.0% of Allstate and controls 95.7% of Harbourton. If the merger is completed,
Value Partners will own approximately 84.8% of the common stock of Allstate.
Under the terms of the proposed transaction Allstate will issue 7,516,162 new
shares of Allstate common stock to the three shareholders of Harbourton, which
equals 49.5% of the total 15,184,166 shares expected to be outstanding when the
merger is completed. For purposes of the merger agreement, Allstate assigned a
value of $0.95 per share to these new shares, which exceeds recent market
prices. Allstate will also pay to the Harbourton shareholders an amount of cash
equal to the difference between Harbourton's total stockholders' equity as of
the month end preceding the closing of the merger and the assigned value of the
Allstate common stock issued in the merger. Allstate expects the total cash
amount will be at least $1,900,000. Because Value Partners holds more than 50%
of the outstanding Allstate common stock and has agreed to approve the merger by
written consent, approval and adoption of the merger agreement is assured. Each
of the directors of Allstate has also agreed to approve the merger by written
consent.
9. Securities Available for Sale. Allstate's investments in marketable equity
securities are classified as available-for-sale. Investments classified as
available-for-sale are measured at market value and net unrealized gains and
losses are recorded as a component of stockholders' equity until realized. These
shares have a market value on September 30, 2000 of $236,000. The shares are
subject to restrictions on sale or transfer according to Rule 144 of the
Securities Act of 1933.
10. Comprehensive Income. SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The following table discloses the
components of Allstate's comprehensive income:
<TABLE>
<CAPTION>
Three months ended September Nine months ended September 30,
30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
---------------------------------- ----------------- ------------------ ----------------- ---------------
Net Income (loss) $48,505 $(1,847,894) $(353,318) $(15,437,931)
Other comprehensive income:
Unrealized gain on securities
available for sale received in
settlement of advance 1,156,000
Unrealized gain (loss) on
securities available for sale (144,000)
- --------- -------------
- (924,000) -
-- --------- -
Comprehensive income ($95,495) $(1,847,894) $(121,318) $(15,437,931)
========= ============ ============= =============
</TABLE>
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 Allstate which represent Allstate's current expectations
or beliefs, including, but not limited to, statements concerning Allstate'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,
10
<PAGE>
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 Allstate to continue its growth
strategy, competition, and regulatory restrictions relating to potential new
activities, certain of which are beyond Allstate'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. Through its offering of advances secured by accounts receivable,
inventory, machinery and equipment ("Asset-Based Lending" or "ABL"), Allstate
provides its clients with the ability to expand their working capital and
acquire productive business assets. Allstate has ceased to offer financing to
new clients and is not increasing its facilities to existing clients. Prior to
the sale of its factoring business in October 1999, Allstate also purchased
accounts receivable ("Purchased Receivables") at a discount with recourse to the
seller.
Allstate's clients do not typically qualify for traditional bank financing
because they are either too new, too small, undercapitalized, 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 Allstate's
business.
Allstate'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 Allstate's subsidiaries is currently
engaged in business which could have a material effect on Allstate.
Liquidity and Capital Resources. Allstate's requirement for capital is a
function of the level of its investment in receivables. Allstate funds this
investment through internally generated funds. Allstate also has outstanding
approximately $266 thousand in aggregate principal amount of convertible
subordinated notes due in September 2003. Allstate believes funds from the
collection of impaired assets will be sufficient to finance Allstate's funding
requirements for the remainder of the fiscal year. Allstate's expenses, net of
provision for recovery, continue to exceed revenues, although costs have been
reduced.
Impact of Inflation. Management believes that inflation has not had a material
effect on Allstate's income, expenses or liquidity during the three or nine
month periods ending September 30, 2000 and 1999. Allstate's advances receivable
bear interest primarily at fixed rates, and its notes payable are at fixed
rates. Therefore, an environment of rising or falling interest rates would have
little adverse affect on Allstate's net interest spread.
THIS SPACE INTENTIONALLY LEFT BLANK
11
<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 September 30, Nine Months ended September 30,
2000 1999 2000 1999
----------------------------------------------------------------------------------------------------------------------
% of % of % of % of
($000) Revenue ($000) Revenue ($000) Revenue ($000) Revenue
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earned discounts and interest 71 43.0% 593 94.6% 288 50.3% 2,805 88.7%
Fees and other revenue 93 57.0% 35 5.6% 284 49.7% 359 11.3%
TOTAL REVENUE 164 100.0% 628 100.0% 572 100.0% 3,164 100.0%
EXPENSES
Compensation and fringe
benefits 113 68.5% 523 83.4% 398 69.6% 1,787 56.5%
General and administrative 307 186.1% 563 89.8% 850 148.6% 2,318 73.3%
Interest expense 170 103.0% 320 51.0% 517 90.4% 1,031 32.6%
Provision for credit losses
(recovery) (474) (287.3%) 800 127.6% (839) (146.7%) 9,176 290.0%
Restructuring Charge 0 259 41.3% 0 259 8.2%
TOTAL EXPENSES 116 70.3% 2,465 393.1% 926 161.7% 14,571 460.5%
INCOME (LOSS) BEFORE INCOME
TAX EXPENSE 48 29.7% (1,837) (293.1%) (354) -61.7% (11,407) (360.5%)
INCOME TAX EXPENSE 0 0.0% 10 1.6% 0 0.0% 4,031 127.4%
NET INCOME (LOSS) 48 29.7% (1,847) (294.7%) (354) (61.7%) (15,438) 487.9%)
</TABLE>
Total Revenue. Total revenue consists of (i) interest earnings on ABL advances
receivable and, in previous periods, discounts on purchased invoices earned in
Allstate's factoring business from the purchase of accounts receivable and (ii)
fees and other revenue, which consists primarily of the premium which Allstate
receives over time based on the performance of the Purchased Receivables sold
during 1999, along with application fees, commitment or facility fees and other
transaction related financing fees.
The following tables break 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
September 30,2000 September 30,1999
----------------- -----------------
Type of Revenue Earned Revenue Percent Earned Revenue Percent
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Discount on purchased invoices - - $288,910 46.1
Earnings on advances receivable $70,807 43.0 303,601 48.4
Fees and other revenue 93,686 57.0 34,736 5.5
-------- ---- ------ ---
Total revenue $164,493 100.0 $627,247 100.0
========== ===== ======== =====
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended,
September 30, 2000 September 30, 1999
------------------ ------------------
Earned
Type of Revenue Revenue Percent Earned Revenue Percent
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Discount on purchased invoices - - $982,183 31.0
Earnings on advances receivable $287,735 50.3 1,823,061 57.6
Fees and other revenue 284,233 49.7 359,182 11.4
------- ---- ------- ----
Total revenue $571,968 100.0 $3,164,426 100.0
======== ===== ========== =====
</TABLE>
Total revenue decreased by $463 thousand and $2.6 million, or 73.8% and 81.9%,
in the three and nine-month periods ended September 30, 2000 versus the same
periods in 1999. Within total revenue, Allstate had no discounts on purchased
invoices in 2000 due to the sale of the factoring business. Earnings on advances
receivable decreased by $233 thousand and $1.5 million, or 76.7% and 84.2% in
the three and nine months ending September 30, 2000 versus the same periods in
1999. The decrease in earnings on advances was attributable to the decrease in
the outstanding balances of advances receivable.
Fees and other revenue increased $60 thousand or 169.7% in the three months
ended September 30, 2000 compared to the similar period in 1999 and decreased
$75 thousand or 20.9%, for the nine months as compared to the like period in
1999. Fee income related to the factoring business and to new facilities or
renewals decreased due to the lower level of direct business, while the fee
Allstate expects to collect over time based on the performance of the Purchased
Receivables sold in 1999 increased.
Compensation and Fringe Benefits. Comparing the three and nine month periods
ending September 30, 2000 and 1999, compensation and fringe benefits fell by
$410 thousand and $1.4 million, respectively, or 78.4% and 77.7%. The
differences in each period were due primarily to a decreased number of
employees.
General and Administrative Expense. Total general and administrative expenses
during the three and nine month periods ended September 30, 2000 fell by $256
thousand and $1.5 million, or 45.5% and 63.3%, compared with the corresponding
periods in 1999, respectively. All categories of expense were lower due to
Allstate's significantly reduced operations.
Interest Expense. Interest expense fell by $150 thousand, or 46.9%, for the
three months ending September 30, 2000 compared with the corresponding period in
1999. For the nine months ending September 30, 2000, interest was $514 thousand
lower, or 49.9%. 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 and the supplemental working capital loan. The savings on
interest due to the decrease in the amount of debt outstanding was partially
offset in the three and nine month periods ending September 30, 2000 because
Allstate is subject to the penalty rate of 14% per annum on the Allstate Notes.
Provision for Credit Losses (Recovery). During the three and nine months ended
September 30, 2000, Allstate had charge-offs of $0 and $3.5 million, while
recovering $600 thousand and $624 thousand (both net of participant portion of
$119 thousand), respectively. During the three and nine months ending September
30, 1999, Allstate had charge-offs of $11 thousand and $96 thousand, while
recovering $39 thousand and $217 thousand. During the three months ending
September 30, 2000, Allstate also collected $179 thousand in excess of the
allocated reserve on an impaired asset. To account for that collection, and to
adjust the amount of unallocated reserves in light of the decrease in the amount
of receivables at September 30, 2000, Allstate recorded a provision for recovery
(negative loss provision) of $474 thousand for the three months ended September
30, 2000. At $565 thousand, the allowance was 14.1% of total receivables (net of
participations and unearned income), exclusive of life insurance policies,
outstanding as of September 30, 2000. At September 30, 2000, $376 thousand of
the allowance was allocated to non-performing accounts. At June 30,2000 the
comparable figures were $438 thousand, or 14.0%, with $172 thousand allocated to
non-performing.
Allstate 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, Allstate believes the allowance
for credit losses is adequate in light of the risks inherent in the portfolio at
September 30, 2000. Allstate carefully monitors the portfolio, but deterioration
in one or more clients could have a material adverse effect on Allstate.
13
<PAGE>
Receivables. Receivables consist of the following, at the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000 December 31,1999
--------------------------------------- ------------------------------ -----------------------------
<S> <C> <C>
Invoices and insurance claims $196,556 $234,445
---------------------------------------
Less: unearned discount (13,953) (13,953)
---------------------------------------
Life insurance policies (net) 1,528,823 1,889,962
--------- ---------
---------------------------------------
Total purchased receivables $1,711,426 $2,110,454
========== ==========
---------------------------------------
Advances receivable $2,301,301 $10,073,989
---------------------------------------
Less: participation - (744,623)
----------- -----------
Total advances receivable $2,301,301 $9,329,366
========== ==========
</TABLE>
Non-performing receivables included within the above totals were $804 thousand
at September 30, 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 Allstate's receivables. See Note 4 to the unaudited
financial statements. Allstate has adopted a policy to generally restrict the
size of any one new client to a maximum of $500 thousand, and has reduced the
size of the existing clients who were over that limit. Allstate has entered into
a loan participation in the amount of $850 thousand which is managed by
Harbourton. Additionally, subsequent to September 30 Allstate entered into an
additional loan participation of $1.2 million with Harbourton. Although Allstate
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 Allstate.
Uncertainties and Subsequent Events. See Note 8 to the unaudited
financial statements.
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 2. - CHANGES IN SECURITIES AND USE OF PROCEEDS
Effective with the Notes Conversion on October 26, 2000 the following sections
of the Indenture dated as of September 14, 1998, for the Allstate Notes were
deleted in their entirety:
Section 3.8 Limitation on Dividends
Section 3.9 Limitations on Liens
Section 3.10 Limitation on Line of Business
Section 3.12 Limitations on Sale-Leaseback transactions
Section 3.13 Limitation on Dividends
Section 3.14 Authorized Indebtedness to Consolidated Tangible Net Worth
Section 3.15 Net Non-Earning Assets Over Average Assets
Section 3.16 Earnings to Debt Coverage
Section 3.17 Limitation on Transactions with Related Persons
Section 3.18 Fundamental Modification
Section 3.19 Maintenance of Properties, Etc.
Section 3.20 Comply With Material Agreements
Section 3.21 ERISA
Section 10.2 Directors
In addition, Article 13 of the Indenture, Subordination, was modified to
call for the Allstate Notes to be generally subordinated to all other senior
debt.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
The Company has defaulted in the payment of interest on its convertible
subordinated notes due September 30, 2003. On October 26, 2000, notes with an
aggregate principal amount of $4,331,000, together with $578,970 of accrued but
unpaid interest at a negotiated default rate of 12.5% simple, were converted
into 5,168,388 shares of newly issued Allstate common stock. The remaining
$266,000 of notes were brought current.
14
<PAGE>
ITEM 4. -SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At a meeting of shareholders on August 8, 2000, all of the directors listed in
the proxy statement dated July 11,2000 nominated by management for one year
terms were elected. There was no opposition to management's nominations.
The following are the results of voting on proposals considered at the meeting,
by the respective number of votes for, against or withheld for directors; and
for, against or abstain, along with broker non votes, for other proposals.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For Against Withhold
Proposal 1.- Voting for all directors nominated: 2,154,617 77,800 92,199
Broker
For Against Abstain Non-Vote
Proposal 3.- Approve the 2000 Stock plan 1,421,527 95,272 2,718 712,900
Proposal 4.- Approve the 2000 Restricted Stock
Plan for Non-Employee Directors 1,418,687 97,612 3,218 712,900
Proposal 5.- Ratify the appointment of McGladrey
& Pullen, LLP as independent auditors
2,215,399 13,000 4,018 712,900
</TABLE>
<TABLE>
<CAPTION>
Proposals 2a, 2b,2c,and 2d were adjourned to August 28. At the adjournment
meeting the results of voting on the proposals considered at the meeting were:
<S> <C> <C> <C> <C>
Broker
For Against Abstain Non-Vote
Proposal 2a.- Approve reincorporation in Delaware
1,642,033 71,600 2,498 516,533
Proposal 2b.- Approve a provision in the Delaware
charter restricting the transfer of securities.
1,641,733 71,400 2,998 516,533
Proposal 2c.- Approve an increase in the number
of authorized shares of common stock from 10
million to 20 million 1,620,273 93,960 2,398 516,033
Proposal 2d.-Approve provisions in the Delaware
bylaws restricting shareholder proposals and
nominations 1,628,473 85,260 2,398 516,533
</TABLE>
ITEM 6(a). - EXHIBITS
Exhibit 27. Financial Data Schedule
ITEM 6(b). - REPORTS ON FORM 8-K None.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
Allstate caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
Date:
/s/ David W. Campbell
David W. Campbell
Chief Executive Officer
Date: November 14, 2000
/s/ C. Fred Jackson
C. Fred Jackson
Chief Financial Officer
