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 JUNE 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)
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 N
The number of shares outstanding of the issuer's common stock, no par value, as
of August 8, 2000, was 2,499,616.
Transitional Small Business Disclosure Format
(check one): Yes No X
1
<PAGE>
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
PART I Page
Item 1 - Financial Statements Number
Consolidated Condensed Balance Sheets at June 30, 2000 (unaudited)
and December 31, 1999 3
Consolidated Condensed Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999 (unaudited) 4
Consolidated Condensed Statements of Shareholders' Equity for the
Year Ended December 31, 1999 and Six Months Ended
June 30, 2000 (unaudited) 5
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Condensed Financial Statements (unaudited) 7-11
Item 2 - Management's Discussion and Analysis or Plan
of Operations and Financial Condition 10-16
Part II - Other Information
Item 1 - Legal Proceedings 17
Item 3 - Defaults Upon Senior Securities 17
Item 6 - Exhibits and Reports on Form 8-K 17
Signatures 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
June 30, 2000 December 31,1999
(Unaudited)
ASSETS
Cash $1,075,623 $353,962
Purchased receivables 1,985,640 2,110,454
Advances receivable 2,943,520 9,329,366
--------- ---------
4,929,160 11,439,820
Less: Allowance for credit losses (438,263) (4,316,399)
--------- -----------
Total receivables - net 4,490,897 7,123,421
--------- ---------
Securities Held for Sale 380,000 -
Furniture, fixtures and equipment, net 116,291 151,375
Other assets 43,175 43,643
------ ------
TOTAL ASSETS $6,105,986 $7,672,401
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $740,471 $1,009,921
Notes payable - 1,366,051
Convertible subordinated notes 4,954,000 4,954,000
--------- ---------
TOTAL LIABILITIES 5,694,471 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; issued 3,105,828; outstanding 2,324,616
at December 31,1999, 2,499,616 at June 30,2000.
exclusive of shares held in treasury 40,000 40,000
Additional paid-in-capital 18,963,432 18,874,182
Treasury stock, 781,212 shares (4,961,812) (4,967,472)
Accumulated Deficit (14,006,105) (13,604,281)
Accumulated other comprehensive income:
Unrealized gains on investment securities 376,000 -
-------- --------
TOTAL SHAREHOLDERS' EQUITY 411,515 342,429
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,105,986 $7,672,401
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
------------ ------------ ------------ ------------
REVENUE
Earned discounts and interest .. $ 85,038 $ 598,262 $ 216,928 $ 2,212,733
Fees and other revenue ......... 118,783 142,872 190,546 324,446
------------ ------------ ------------ ------------
TOTAL REVENUE .................. 203,821 741,134 407,474 2,537,179
------------ ------------ ------------ ------------
EXPENSES
Compensation and fringe benefits 116,254 653,683 285,242 1,263,696
General and administrative ..... 324,969 1,349,357 542,831 1,754,650
Interest expense ............... 205,369 335,390 346,714 710,964
Provision for credit losses (recovery) (365,489) 8,376,057 8,376,057 (365,489)
------------ ------------ ------------ ------------
TOTAL EXPENSES ................. 281,103 10,714,487 809,298 12,105,367
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAX
EXPENSE ........................ (77,282) (9,973,353) (401,824) (9,568,188)
INCOME TAX EXPENSE ... -- 3,871,938 -- 4,021,849
-------------------------------- ------------ ------------ ------------ ------------
NET LOSS ....................... $ (77,282) $(13,845,291) $ (401,824) $(13,590,037)
============ ============ ============ ============
NET LOSS PER COMMON SHARE
Basic and Diluted .............. $( .03) $ ( 5.96) $( .17) $( 5.85)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
Basic and Diluted .............. 2,359,282 2,324,438 2,354,862 2,324,289
</TABLE>
See Notes to Consolidated Condensed Financial Statements
4
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
-------------------------- ---------- --------------- ------------------ ---------------- ----------------- ---------------------
Common Additional Treasury Accumulated Retained Earnings Total
Stock Paid in Stock Other (Deficit)
Capital Comprehensive
Income
-------------------------- ---------- --------------- ------------------ ---------------- ----------------- ---------------------
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) 5,660 5,660
Unrealized gains on
Investment Securities
(unaudited) 376,000 376,000
Issue of 175,000 Shares
to Non-Employee
Directors (unaudited)
89,250 89,250
Net (Loss) (unaudited)
(401,824) (401,824)
Balance, June 30, 2000
(unaudited)
$40,000 $18,963,432 $(4,961,812) 376,000 $(14,006,105) $411,515
======= =========== ============ ======= ============= ========
</TABLE>
See notes to consolidated condensed financial statements
5
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
<S> <C> <C>
June 30, 2000 June 30, 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(401,824) $(13,590,037)
Adjustments to reconcile net (loss)
to cash provided (used) by operating activities:
Depreciation - net 32,855 33,039
Provision for credit losses (365,489) 8,376,057
Changes in operating assets and liabilities:
Other receivables 468 595,281
Accounts payable and accrued expenses (269,450) (419,244)
Income taxes receivable and deferred income taxes - 4,783,778
NET CASH (USED) BY OPERATING ACTIVITIES (1,003,440) (221,126)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Receivables and Advances (886,000) (88,329,796)
Collection of purchased receivables
and advances receivable 3,959,994 97,773,630
(Decrease) in credit balances of factoring clients - (3,814,377)
Sale (Purchase) of furniture, fixtures and equipment 11,498 (166,719)
NET CASH PROVIDED BY INVESTING ACTIVITIES 3,085,492 5,462,738
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit - 54,129,626
Principal payments on lines of credit (1,366,051) (61,230,898)
Treasury stock acquisition costs 5,660 8,147
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,360,391) (7,093,125)
NET INCREASE (DECREASE) IN CASH 721,661 (1,851,513)
CASH, Beginning of period 353,962 2,420,644
CASH, End of period $1,075,623 $569,131
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $67,250 $375,285
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 $ -
</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 (the "Company") included herein are unaudited for
the periods ended June 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. 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 and six months ended June 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 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. On April 5, 2000 the Company
repaid the working capital loan in full. The Company 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. 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
("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 (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 ( 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 adopted the Counterclaims and
sought an accounting. The Surety asserted 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 (the "Superintendent") and as such the
Superintendent was judicially appointed as rehabilitator of the Surety to
conduct its business. At that time, it was uncertain whether the Superintendent
would continue to pursue the litigation against the Company.
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.
7
<PAGE>
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 previously occupied approximately 8,000 square feet of space in an
office building in Arlington, Virginia as its principal location. The Company'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
the Company was released from its obligations for the remainder of the lease
term. The Company 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. The Company subleases from,
and shares 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 three months ended June 30, 2000, interest and
fees from two clients each accounted for over 10% of the Company's total earned
revenue, representing 30.6% of the Company's total revenue, as compared to 57.0%
of revenue from the three largest clients, each of which accounted for over 10%
of the total, in the three months ended March 31, 2000.
At June 30, 2000, one client accounted for more than 10% of the Company's total
receivables. The loan, which represented 17.3% of total receivables, is a
participation in a loan which was originated by and is serviced by a separate
financial services firm that is majority owned by Value Partners, the Company's
majority shareholder. At March 31, 2000, one client, not including non-
performing clients whose allocated reserves reduced their net outstandings to
under 10% of receivables, accounted for more than 10% of the Company's total
receivables, with a total of 15.4%.
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 $4,000,
a warrant to purchase four million shares of common stock in the Client's parent
corporation. These shares are held for sale with a market value on June 30, 2000
of $380,000. The common stock is subject to restrictions on sale or transfer
according to Rule 144 of the Securities Act of 1933.
5. Stock Options. The Company 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 Plans as of
February 7, 2000. The 2000 Plan was approved by the board of directors of the
Company on June 13, 2000, and is subject to the approval of the Company's
shareholders. Subsequently, on August 8, 2000, the plan was approved by the
shareholders. 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 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 the Company.
Non-Qualified Plan - The Company 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.
8
<PAGE>
2000 Plan - The Company 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
June 30,2000 the amount of shares reserved was 199,969. 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 June 30, 2000.
Three Months Ended
June 30, 2000
Outstanding April 1 155,400
Granted -
Exercised -
Forfeited or expired -
Outstanding 155,400
=======
Exercisable 155,300
=======
6. Restricted Stock Plan. The Company's board of directors approved the
Company'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 the Company's common stock as traded on the Nasdaq OTC Market on June
13 was $.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. The Company 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. The Company continued to incur net
losses in the quarter ended June 30, 2000, although it has made further cuts in
expenses and overhead. Through the collection of impaired assets, the Company
repaid the Value Partners supplemental working capital loan, and believes it now
has sufficient cash to support its operations for the remainder of the fiscal
year. The Company continues to be in default on its Subordinated Notes Due
September 2003 ("New Notes"). As noted below, the Company has reached agreement
with the holders of the New Notes on a conversion to common stock.
9
<PAGE>
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 negotiated the conversion of the New Notes held by Value Partners, Ltd.
(plus accrued and unpaid interest thereon at 12.5% through the date of the
exchange) into common stock of the Company at a price of $.95 per share, which
is an important element of the Plan. The Company has offered the same terms of
exchange to the remaining holders of the New Notes, a majority of whom have also
agreed to the terms of the exchange.
Due to a low percentage of proxies obtained from shareholders, at the Company's
annual meeting on August 8, 2000, the consideration of certain proposals which
are key elements of the plan was adjourned until August 29, 2000. The proposals
included:
- The re-incorporation of the Company under Delaware law to take advantage of
provisions favorable to the Plan.
- A limitation on transfers of common stock by
existing or potential holders of over 4.9% of outstanding shares, thereby
helping to preserve the Company's net operating loss carryforwards ("NOL's") for
future use.
- An increase in the number of authorized shares from 10,000,000 to
20,000,000 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 Company believes sufficient proxies can be gathered before the adjournment
to adopt the proposals and that when the Plan is implemented, the Company will
be positioned for future growth. 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 or to make acquisitions of other
financial services businesses. The satisfactory completion of the Plan is
essential, as the Company continues to have insufficient cash flow from
operations to service the interest payments on the New Notes.
However, there can be no assurance that the provisions important to the plan
will be adopted at the adjournment, that the Company will be successful in
implementing the Plan, identifying and closing possible acquisitions of, or
business combinations with, firms in financial services, re-deploying the
amounts it currently has invested in nonperforming assets into new ABL
relationships, or in securing new financing.
If the Plan can be accomplished, management believes that the Company will
continue as a going concern.
9. Securities held for sale. The Company'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.
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 the Company's comprehensive income:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
<S> <C> <C> <C> <C>
2000 1999 2000 1999
Net (loss) ................... $ (77,282) $(13,845,291) $ (401,824) $(13,590,037)
Other comprehensive income:
unrealized gains
on investment securities 376,000 376,000
---------- ------------ -------- ------------
Comprehensive income ........ $ 278,718 $(13,845,291) $ (25,824) $(13,590,037)
</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 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
10
<PAGE>
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.
The Company'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 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 $4.6
million are due in September 2003. The Company believes funds from the
collection of impaired assets will be sufficient to finance the Company's
funding requirements for the remainder of the fiscal year. The Company's
expenses continue to exceed revenues, although costs have been reduced.
11
<PAGE>
Impact of Inflation. Management believes that inflation has not had a material
effect on the Company's income, expenses or liquidity during the six month
periods ending June 30, 2000 and 1999. The Company's advances receivable bear
interest primarily at fixed rates, and the majority of its notes payable are at
fixed rates. Therefore, an environment of rising or falling interest rates would
have little adverse affect on the Company's net interest spread.
Results of Operations. The following table sets forth certain items of revenue
and expense for the periods indicated and indicates the percentage relationships
of each item to total revenue.
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% of % of % of % of
($ 000) REVENUE ($ 000) REVENUE ($ 000) REVENUE ($ 000) REVENUE
-------- ------ -------- ------- -------- ------ -------- -----
Earned discounts and interest .. $ 85 41.7 $ 598 80.7 $ 217 53.2 $ 2,213 87.2
Fees and other revenue ........... 119 58.3 143 19.3 190 46.8 324 12.8
------ ------ -------- ------- -------- ------ -------- -----
TOTAL REVENUE .................. 204 100.0 741 100.0 407 100.0 2,537 100.0
-------- ------ -------- ------- -------- ------ -------- -----
EXPENSES
Compensation & fringe benefits ..... 116 57.0 654 88.2 285 70.0 1,264 49.8
General and administrative ......... 325 159.4 1,349 182.0 543 133.2 1,755 69.2
Interest expense .................. 205 100.7 335 45.3 347 85.1 711 28.0
Provision for credit losses ...........(366) (179.3) 8,376 1,130.2 (366) (89.7) 8,376 330.1
----- ------ -------- ------- -------- ------ -------- -----
TOTAL EXPENSES ........................ 281 137.9 10,714 1,445.7 809 198.6 12,105 477.1
---- ------ -------- ------- -------- ------ -------- -----
LOSS BEFORE INCOME TAX EXPENSE
(77) (37.9) (9,973) (1,345.7) (402) (98.6) (9,568) (377.1)
----- ------ -------- ------- -------- ------ -------- -----
INCOME TAX EXPENSE .................. -- 0.00 3,872 522.4 -- 0.00 4,021 158.5
------- ------ -------- ------- -------- ------ -------- -----
NET LOSS ..........................$ (77) (137.9) $(13,845) (823.3) $ (402) (98.6) $(13,590) (535.6)
</TABLE>
Total Revenue. Total revenue consists of (i) interest earnings on ABL advances
receivable and, in previous periods, discounts on purchased invoices earned in
the Company's factoring business from the purchase of accounts receivable and
(ii) fees and other revenue, which consists primarily of the premium which the
Company 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.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
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 June 30,
<S> <C> <C> <C> <C>
2000 1999
Type of Revenue Earned Percent Earned Percent
Revenue Revenue
Discount on purchased invoices $312,582 42.2
Earnings on advances receivable $ 85,038 41.7 285,680 38.5
Fees and other revenue ........ 118,783 58.3 142,872 19.3
-------- ----- -------- -----
Total revenue ................. $203,821 100.0 $741,134 100.0
======== ===== ======== =====
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
<S> <C> <C> <C> <C>
2000 1999
Type of Revenue .. Earned Percent Earned Percent
Revenue Revenue
Discount on purchased invoices $ 693,273 27.3
Earnings on advances receivable $ 216,928 53.2 1,519,460 59.9
Fees and other revenue ........ 190,546 46.8 324,446 12.8
---------- ----- ---------- -----
Total revenue ................. $ 407,474 100.0 $2,537,179 100.0
========== ===== ========== =====
</TABLE>
Total revenue decreased by $537 thousand and $2.1 million, or 72.5% and 83.9%,
in the three and six month periods ended June 30, 2000 versus the same periods
in 1999. 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 $200 thousand and $1.3 million, or 70.2% and 85.7% in
the three and six months ending June 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. The Company added two new clients
during the quarter ending June 30, 2000, but the new advances were offset by
pay-downs by existing clients.
Fees and other revenue decreased $24 thousand and $134 thousand, or 16.9% and
41.3%, in the three and six months ended June 30,2000 as compared to the same
periods in 1999. Fee income related to the factoring business and to new
facilities or renewals and increases to existing accounts decreased due to the
lower level of direct business, 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. Comparing the three and six month periods
ending June 30, 2000 and 1999, compensation and fringe benefits fell by $538
thousand and $979 thousand, respectively, or 82.2% and 77.4%. The differences in
each period were due to primarily to a decreased number of employees.
General and Administrative Expense. Total general and administrative expenses
during the three and six month periods ended June 30, 2000 fell by $1 million
and $1.2 million, or 75.9% and 69.1%, compared with the corresponding periods in
1999, respectively. All categories of expense were lower due to the Company's
greatly reduced operation.
Interest Expense. Interest expense fell by $130 thousand, or 38.8%, for the
three months ending June 30, 2000 compared with the corresponding period in
1999. For the six months ending June 30, 2000,` interest was $364 thousand
13
<PAGE>
lower, or 51.2%. 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 six month periods ending June 30, 2000 because the
Company is subject to the penalty rate of 14% per annum on the New Notes.
Provision for Credit Losses. During the three and six months ended June 30,
2000, the Company had charge-offs of $3.6 and $3.6 million, while recovering $7
thousand and $23 thousand. During the three and six months ending June 30, 1999,
the Company had charge-offs of $8 thousand and $78 thousand, while recovering
$178 thousand and $355 thousand. During the three months ending June 30, 2000,
the Company also collected $272 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
June 30, 2000, the Company took a negative provision of ($365) thousand for the
three months and six months ended June 30, 2000. At $438 thousand, the allowance
was 14.0% of total receivables (net of participations and unearned income),
exclusive of life insurance policies, outstanding as of June 30, 2000. At June
30, 2000, $172 thousand of the allowance was allocated to non-performing
accounts. At March 31,2000 the comparable figures were $4.3 million, or 50.4%,
with $4 million allocated to non-performing.
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 June 30, 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. Receivables consist of the following, at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31,1999
<S> <C> <C>
Invoices and insurance claims $209,631 $234,445
Less: unearned discount (13,953) (13,953)
Life insurance policies (net) 1,789,962 1,889,962
--------- ---------
Total purchased receivables $1,985,640 $2,110,454
========== ==========
Advances receivable $3,688,143 $10,073,989
Less: participation (744,623) (744,623)
--------- ---------
Total advances receivable $2,943,520 $9,329,366
</TABLE>
Non-performing receivables included within the above totals were $983 thousand
at June 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 the Company's receivables. See Note 4 to the unaudited
financial statements. The Company 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. The Company has entered
into a participation in the amount of $850 thousand which is managed by a
14
<PAGE>
company majority owned by Value Partners, the Company's largest shareholder.
This facility is expected to be outstanding for a very limited term. 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.
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 $4
thousand, a warrant to purchase four million shares of common stock in the
Client's parent corporation, with a market value on June 30, 2000 of $380
thousand. The common stock is subject to restrictions on sale or transfer
according to Rule 144 of the Securities Act of 1933.
Uncertainties and Subsequent Events. The Company continued to incur net losses
in the quarter ended June 30, 2000, although it has made further cuts in
expenses and overhead. Through the collection of impaired assets, the Company
repaid the Value Partners supplemental working capital loan, and believes it now
has sufficient cash to support its operations for the remainder of the fiscal
year. The Company continues to be in default on its New Notes. As noted below,
the Company has reached agreement with a majority of the holders of the New
Notes on a conversion to common stock.
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 negotiated the conversion of the New Notes (plus accrued and unpaid interest
thereon at 12.5% through the date of the exchange) into common stock of the
Company at a price of $.95 per share, which is an important element of the Plan.
Due to a low number of proxies obtained from shareholders at the
Company's annual meeting on August 8, 2000, the consideration of certain
proposals which are key elements of the plan was adjourned until August 29,
2000. The proposals included:
- The re-incorporation of the Company under Delaware law to take advantage of
provisions favorable to the Plan.
- A limitation on transfers of common stock by
existing or potential holders of over 4.9% of outstanding shares, thereby
helping to preserve the Company's net operating loss carryforwards ("NOL's") for
future use.
- An increase in the number of authorized shares from 10,000,000 to 20,000,000
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 Company believes sufficient proxies can be gathered before the adjournment
to adopt the proposals and that when the Plan is implemented, the Company will
be positioned for future growth. 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 or to make acquisitions of other
financial services businesses. The satisfactory completion of the Plan is
essential, as the Company continues to have insufficient cash flow from
operations to service the interest payments on the New Notes.
However, there can be no assurance that the provisions important to the plan
will be adopted at the adjournment, that the Company will be successful in
implementing the Plan, identifying and closing possible acquisitions of, or
business combinations with, firms in financial services, re-deploying the
amounts it currently has invested in nonperforming assets into new ABL
relationships, or in securing new financing.
15
<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 2.- CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 13, 2000 the Company issued 175,000 shares of its common stock, no par
value, to its outside directors in return for past service. The amount of
consideration charged to expense for directors' fees was $89,250.
ITEM 3. - DEFAULTS UPON SENIOR SECURITIES
The Company has defaulted in the payment of interest on its convertible
subordinated notes due September 30, 2003. The total interest which is in
arrears as of the date of filing of this report is $421,398.68.
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,
the Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
<
Date: August 11, 2000
/s/ Charles G. Johnson
Charles G. Johnson
Chief Executive Officer
Date: August 11, 2000
/s/ C. Fred Jackson
C. Fred Jackson
Chief Financial Officer
16
<PAGE>
