SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1995 COMMISSION FILE NUMBER 0-17832
Allstate Financial Corporation
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
Virginia 54-1208450
- ------------------------------ --------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
2700 South Quincy Street, Suite 540, Arlington, VA 22206
- --------------------------------------------------------------------------------
(address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 931-2274
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 15 of the Securities and Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
2,655,128 Common Shares were outstanding as of September 30, 1995.
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1995
(Unaudited) and December 31, 1994 1-2
Consolidated Statements of Income Three and Nine Months
Ended September 30, 1995 and 1994 (Unaudited) 3
Consolidated Statements of Shareholders' Equity Nine
Months Ended September 30, 1995 (Unaudited) and Year
Ended December 31, 1994 4
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 1995 and 1994 (Unaudited) 5-6
Notes to Consolidated Financial Statements 7-8
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 9-17
Part II.
Item 1 - Legal Proceedings 18-19
Item 4 - Submission of Matters To a Vote of Security Holders 19
Item 5 - Other Information 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
PART I - FINANCIAL INFORMATION
<PAGE 1>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
September 30, December 31,
1995 1994
------------- ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS:
Cash $ 1,797,020 $ 1,763,930
Receivables:
Finance, net 22,603,649 27,502,806
Purchased life insurance contracts 4,506,532 4,533,952
Other 3,201,672 3,388,638
Prepaid expenses 272,911 198,091
Prepaid income taxes 445,881 628,123
Deferred income taxes 909,000 909,000
----------- -----------
TOTAL CURRENT ASSETS 33,736,665 38,924,540
PROPERTY AND EQUIPMENT, Net 513,619 479,034
OTHER ASSETS 2,488,065 2,447,083
----------- -----------
$36,738,349 $41,850,657
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 389,817 $ 303,838
Notes payable 5,449,019 11,591,718
Note payable-related party 103,000 103,000
Credit balances of factoring clients 1,596,886 1,665,038
----------- -----------
TOTAL CURRENT LIABILITIES 7,538,722 13,663,594
<FN>
See Notes to Consolidated Financial Statements
</FN>
<PAGE 2>
ALLSTATE FINANCIAL CORPORATON AND SUBSIDIARIES
----------------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(CONTINUED)
NONCURRENT PORTION OF NOTES PAYABLE:
Convertible Subordinated Notes 2,838,000 -
Related parties 58,788 58,788
Other 7,110 7,110
----------- -----------
TOTAL LIABILITIES 10,442,620 13,729,492
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 2,000,000
shares with no par value; no shares
issued or outstanding - -
Common stock, authorized 10,000,000 shares
with no par value; 3,102,328 issued;
2,655,128 outstanding at September 30, 1995;
3,102,328 outstanding at December 31, 1994 40,000 40,000
Additional paid-in-capital 18,852,312 18,852,312
Treasury Stock, 447,200 shares (2,839,726) -
Retained Earnings 10,243,143 9,228,853
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 26,295,729 28,121,165
----------- -----------
$36,738,349 $41,850,657
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</FN>
<PAGE 3>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
-----------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- -------------------------
1995 1994 1995 1994
---------- ---------- ---------- -----------
Income:
Earned discounts $2,578,345 $2,412,890 $7,876,644 $6,663,248
Fees and other income 600,245 689,119 1,656,397 1,422,877
---------- ---------- ---------- ----------
3,178,590 3,102,009 9,533,041 8,086,125
---------- ---------- ---------- ----------
Expenses:
Compensation and fringe benefits 785,161 754,546 2,345,710 2,146,661
General and administrative expenses 642,766 650,442 1,981,763 1,718,092
Interest Expense 205,307 141,546 629,833 306,538
Provision for Credit Losses 859,000 613,515 2,770,600 1,485,641
Commission 64,298 31,403 199,645 80,229
---------- ---------- ---------- ----------
Total Expenses 2,557,162 2,191,452 7,927,551 5,737,161
---------- ---------- ---------- ----------
Income Before Income Taxes 621,428 910,557 1,605,490 2,348,964
Income Taxes 228,700 335,400 591,200 865,400
---------- ---------- ---------- ---------
Net Income $ 392,728 $ 575,157 $1,014,290 $1,483,564
========== ========== ========== ==========
Net Income Per Share $ .13 $ .19 $ .33 $ .48
========== ========== ========== ==========
Average Number of Shares Outstanding 3,009,971 3,102,328 3,071,204 3,102,328
========= ========= ========== ==========
<FN>
See Notes to Consolidated Financial Statements
</FN>
<PAGE 4>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1995 (Unaudited)
AND YEAR ENDED DECEMBER 31, 1994
Common Paid In Treasury Retained
Stock Capital Stock Earnings
------- ----------- ------------ ---------
BALANCE - January 1, 1994 $40,000 $18,852,312 $ - $9,081,313
Net Income - - - 147,540
------- ----------- -------------- ----------
BALANCE - December 31, 1994 40,000 18,852,312 - 9,228,853
Purchase of 447,200 shares of
Allstate Financial Corporation Stock - - (2,839,726) -
------- ----------- ----------- -----------
Net Income - - - 1,014,290
------- ----------- ------------ -----------
BALANCE - September 30, 1995 $40,000 $18,852,312 $(2,839,726) $10,243,143
======= =========== =========== ===========
<FN>
See Notes to Consolidated Financial Statements
</FN>
<PAGE 5>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30,
--------------------------------
1995 1994
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,014,290 $ 1,483,564
Adjustments to reconcile net income to cash provided
by operating activities:
Depreciation - net 106,104 109,944
Provision for credit losses 2,770,600 1,485,641
Changes in operating assets and liabilities:
Decrease/(Increase) in other receivables 186,966 (2,132)
(Increase) in prepaid expenses (74,820) ( 73,190)
(Increase)/Decrease in other assets (40,982) 103,895
Increase in accounts payable and accrued expenses 85,979 58,358
Decrease in prepaid income taxes 182,242 197,627
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,230,379 3,363,707
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including repurchases and
life insurance contracts (121,242,831) (127,261,690)
Collections of finance receivables, including repurchases
and life insurance contracts 123,398,808 119,926,578
Decrease in credit balances of factoring clients (68,152) (449,520)
Purchase of property and equipment (140,689) (146,892)
------------ ------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES 1,947,136 (7,931,524)
------------- ------------
<FN>
See Notes to Consolidate Financial Statements
</FN>
<PAGE 6>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
Nine Months Ended September 30,
-------------------------------
1995 1994
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and borrowings 51,228,768 46,618,138
Principal payments on line of credit and borrowings (57,371,467) (44,026,428)
Partial Cost of Treasury Stock Acquisition (1,726) -
------------ -------------
NET CASH PROVIDED/(USED) BY FINANCING ACTIVITIES (6,144,425) 2,591,710
------------ -------------
INCREASE/(DECREASE) IN CASH 33,090 (1,976,107)
CASH, Beginning of period 1,763,930 2,785,219
------------ -------------
CASH, End of period $ 1,797,020 $ 809,112
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 615,643 $ 298,925
=========== =============
Taxes paid $ 408,958 $ 666,544
=========== =============
SUPPLEMENTAL SCHEDULE OF NON-CASH ACTIVITIES:
Issuance of Convertible Subordinated Notes
In Exchange for Common Stock $ 2,838,000 -
=========== ============
Transfer of Finance and Other Receivables to
Other Assets $ 125,000 -
=========== ============
<FN>
See Notes to Consolidate Financial Statements
</FN>
<PAGE 7>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation (the "Company") included herein are unaudited for all periods
ended September 30, 1995 and 1994; however, they reflect all adjustments
which, in the opinion of management, are necessary to present fairly the
financial condition and results of operations for the periods presented.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Allstate Financial
Corporation believes that the disclosures are adequate to make the
information presented not misleading. The results of operations for the three
and nine months ended September 30, 1995 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 for the year ended
December 31, 1994.
2. Net income per share. Net income per share of common stock has been
computed by dividing net income by the weighted average number of
common shares outstanding during the periods presented. At December 31,
1994 there were 94,437 stock options outstanding, at exercise prices ranging
from $5.75 to $14.00 per share. During the year ended December 31, 1994,
1,134 options and 3,000 warrants were forfeited. There were no warrants
or options exercised for the three and nine months ended September 30,
1995.
3. Line of credit. As of September 30, 1995 the Company had
approximately $20.6 million available under a $25.0 million secured
revolving line of credit. Borrowings under the credit facility bear interest at
the bank's base rate plus .75%. The current maturity date of this credit
facility is May 13, 1997. The Company is subject to covenants which are
typical in revolving credit facilities of this type.
As of September 30, 1995 Lifetime Options, Inc., a Viatical Settlement
Company, a wholly owned subsidiary of the Company, had approximately
$1.0 million available under a $2.0 million line of credit and an additional
$1.2 million available under a $4.0 million availability from the Company.
Lifetime Options' revolving line of credit: (i) is payable on demand and, if
no demand is made, on December 31, 1995; (ii) bears interest at the prime
rate of interest plus 1%; and (iii) is collateralized by specific purchased life
insurance contracts.
<PAGE 8>
4. Convertible Subordinated Notes Payable. On September 11, 1995 the
Company issued $2,838,000 in aggregate principal amount of its Convertible
Subordinated Notes in exchange for 447,200 shares of the Company's
Common Stock (currently held by the Company as treasury stock). The
Convertible Subordinated Notes (i) are due September 30, 2000, (ii) currently
bear interest at a rate of 10% per annum, which rate of interest may fluctuate
from time to time but may not exceed 10% nor be less than 8% per annum
(iii) are subordinated in right of payment to the Company's obligations under
its secured revolving credit facility and (iv) were issued pursuant to an
indenture which contains certain covenants which are less restrictive than
those contained in the Company's secured revolving credit facility.
<PAGE 9>
Management's Discussion and Analysis of Financial Condition an Results
of Operations
General
The Company's principal business is the discounted purchase of
accounts receivable, usually on a full recourse, full notification basis. In
addition, the Company also makes advances collateralized by inventory,
equipment, and real estate (collectively, "Collateralized Advances"). The
Company has elected to more aggressively pursue the making of
Collateralized Advances, as it perceives the need by its targeted customers
for such funding and such funding is not readily available from many of the
Company's competitors. As of September 30, 1995, Collateralized Advances
constituted approximately 31% of the Company's portfolio of finance
receivables. The Company also provides its clients with letters of guaranty,
arranges for the issuance of letters of credit for its clients and provides
other related financial services.
The Company's clients are small- to medium-sized businesses with
annual revenues typically ranging between $600 thousand and $50 million.
The Company's clients do not typically qualify for traditional bank or asset-
based financing because they are either too new, too small, undercapitalized
(or over-leveraged), unprofitable or otherwise unable to satisfy the
requirements of a bank or traditional, asset-based lender. Accordingly, there
is a significant risk of default and client failure inherent in the Company's
business. The Company addresses these risks in various ways, including: (i)
the Company thoroughly evaluates the collateral to be made available by each
client; (ii) the Company collects its clients' accounts receivable directly from
its clients' account debtors, which are frequently (though not always) large,
creditworthy companies or governmental entities; (iii) the Company
purchases, or takes a first priority security interest in, all accounts
receivable of each client; (iv) the Company takes, whenever available, blanket
liens on all of its clients' assets and, when making Collateralized Advances,
the Company employs what management believes to be conservative loan-to-
value ratios based on auction or liquidation value appraisals performed by
independent appraisers; (v) the Company requires personal guaranties (either
unlimited guaranties or validity guaranties) from its clients' principals; (vi)
the Company actively monitors its portfolio of purchased accounts receivable,
including the creditworthiness of account debtors and periodically evaluates
the value of other collateral and (vii) the Company maintains loss reserves
which management believes are adequate and appropriate for its business.
Notwithstanding the foregoing, clients (and account debtors) may fail and the
collateral available to the Company (together with personal guaranties) may
prove insufficient to enable the Company to recover all amounts due in full.
<PAGE 10>
Lifetime Options, a wholly-owned subsidiary of the Company,
provides financial assistance to individuals facing life-threatening illness by
purchasing their life insurance policies at a discount from face value. The
amount of the discount is determined by Lifetime Options based on the size
of the policy being purchased, the maximum life expectancy of the insured,
the amount of the anticipated premiums payable with respect to the policy
being purchased and the anticipated financing cost associated with purchasing
and carrying the policy. In general, the purchase price for a policy is
between 55% and 85% of the benefits payable under the policy. Because
most of the life insurance policies purchased by Lifetime Options are
underwritten by highly rated insurance companies (and, in many cases,
backed by state guaranty funds), management of Lifetime Options believes
that credit risk is not material to its business.
Before purchasing each policy, Lifetime Options has each insured's
medical records reviewed by at least one (and typically three) independent
physician(s) who provide(s) Lifetime Options with an opinion(s) of the
insured's life expectancy. To date, the physicians engaged by Lifetime
Options have provided life expectancies which, on average, fairly
approximate actual lifespans. However, there is no assurance that the
physicians engaged by Lifetime Options will in the future be able to perform
as they have in the past. If the physicians engaged by Lifetime Options were
to systematically underestimate life expectancies or if life extending
treatments (or a cure) were found for AIDS (almost all of the life insurance
policies purchased by Lifetime Options to date have been purchased from
individuals with AIDS), there would be a material adverse effect on the
earnings of Lifetime Options.
Other than Lifetime Options, none of the Company's subsidiaries is
currently engaged in business which could have a material effect on the
Company.
Competition
Continuing competition within the marketplace from banks and asset-
based lenders and newly created finance companies have encroached upon the
Company's potential client base and have negatively affected earned
discounts. Additionally, the Company continues to attract larger clients
which often increases the amount of time needed to negotiate and fund new
business. Also, Collateralized Advances require more in-depth and diverse
due diligence which can further delay the funding of new business.
Nonetheless, the Company believes that its ability to respond quickly and to
provide specialized, flexible financing structures to its clients enables it to
compete effectively. In order to remain competitive, however, the Company
has, where necessary and appropriate, offered lower rates than it has
historically. The Company believes that increased competition will continue
for the foreseeable future and will continue to exert downward pressure on
pricing, especially in the Company's core factoring business. To counter the
downward pressure on pricing, the Company intends to continue to diversify
its sources of income, primarily by continuing its emphasis on funding
relationships which include (in addition to the factoring of accounts
receivable) the making of Collateralized Advances.
<PAGE 11>
Historically, the Company did not expect to maintain a funding
relationship with a client for more than two years; the Company expected
that its clients would ultimately qualify for more competitively priced bank
or asset based financing. Therefore, the Company's major clients have
tended to change significantly over time. Today, however, because the
Company is, where necessary and appropriate, offering lower rates and
providing Collateralized Advances, it is possible that the duration of the
Company's funding relationships with its clients may be extended. 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.
<PAGE 12>
Results of Operations
The following table sets forth certain items of income and expense
for the periods indicated and the percentage relationship of each item to total
income.
For the Three Months Ended September 30,
----------------------------------------
1995 1994
------------------ -----------------
(Unaudited)
INCOME
Earned discounts $2,578,345 81.1% $2,412,890 77.8%
Fees and other income 600,245 18.9 689,119 22.2
---------- ----- ---------- -----
TOTAL INCOME 3,178,590 100.0 3,102,009 100.0
EXPENSE
Compensation and fringe benefits 785,161 24.7 754,546 24.3
General and administrative expense 642,766 20.2 650,442 21.0
Interest expense 205,307 6.5 141,546 4.5
Provision for credit losses 859,000 27.0 613,515 19.8
Commissions 64,928 2.0 31,403 1.0
---------- ----- ---------- -----
TOTAL EXPENSES 2,557,162 80.4 2,191,452 70.6
---------- ----- ---------- -----
INCOME BEFORE INCOME TAXES 621,428 19.6 910,557 29.3
INCOME TAXES 228,700 7.2 335,400 10.8
---------- ----- ---------- -----
NET INCOME $ 392,728 12.4% $ 575,157 18.5%
========== ===== ========== =====
NET INCOME PER SHARE $ .13 $ .19
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,009,971 3,102,328
========= =========
For the Nine Months Ended September 30,
---------------------------------------
1995 1994
------------------ ----------------
(Unaudited)
INCOME
Earned discounts $7,876,644 82.6% $6,663,248 82.4%
Fees and other income 1,656,397 17.4 1,422,877 17.6
---------- ----- ---------- -----
TOTAL INCOME 9,533,041 100.0 8,086,125 100.0
---------- ----- ---------- -----
EXPENSE
Compensation and fringe benefits 2,345,710 24.6 2,146,661 26.6
General and administrative expense 1,981,763 20.8 1,718,092 21.2
Interest expense 629,833 6.6 306,538 3.8
Provision for credit losses 2,770,600 29.1 1,485,641 18.4
Commissions 199,645 2.1 80,229 1.0
---------- ----- ---------- -----
TOTAL EXPENSES 7,927,551 83.2 5,737,161 71.0
---------- ----- ---------- -----
INCOME BEFORE INCOME TAXES 1,605,490 16.8 2,348,964 29.0
INCOME TAXES 591,200 6.2 865,400 10.7
---------- ----- ---------- -----
NET INCOME $1,014,290 10.6% $1,483,564 18.3%
========== ===== ========== =====
NET INCOME PER SHARE $ .33 $ .48
========== ==========
WEIGHTED AVERAGE SHARES OUTSTANDING 3,071,204 3,102,328
========== ==========
Total Income. Total income consists of (i) earned discounts and
(ii) fees and other income. "Earned discounts" consist primarily of income from
the purchase of accounts receivable and life insurance policies and income
from Collateralized Advances. "Fees and other income" consist primarily of
closing fees, commitment fees, other related financing fees and supplemental
discounts paid by clients who do not sell the minimum volume of accounts
receivable required by their contracts with the Company.
<PAGE 13>
The following table breaks down total income by type of transaction
for the periods indicated and the percentage relationship of each type of
transaction to total income.
For the Three Months Ended September 30,
------------------------------------------------------
1995 1994
(Unaudited) (Unaudited)
----------------------- ----------------------
Earned % of Total Earned % of Total
Type of Transaction Discounts Income Discounts Income
------------------- ---------- ---------- ---------- ----------
Purchase of Accounts
Receivable $1,707,513 53.7% $1,768,182 57.0%
Purchase of Life
Insurance Policies 191,581 6.0 182,597 5.9
Collateralized Advances 517,578 16.3 295,491 9.5
Other 161,673 5.1 166,620 5.4
---------- ----- ---------- -----
Total Earned Discount 2,578,345 81.1 2,412,890 77.8
Fees and Other Income 600,245 18.9 689,119 22.2
---------- ----- ---------- -----
Total Income $3,178,590 100.0% $3,102,009 100.0%
========== ===== ========== =====
For the Nine Months Ended September 30,
------------------------------------------------------
1995 1994
(Unaudited) (Unaudited)
-------------------------- ------------------------
Earned % of Total Earned % of Total
Type of Transaction Discounts Income Discounts Income
------------------- ---------- ---------- ----------- ----------
Purchase of Accounts
Receivable $4,455,384 46.7 $5,015,254 62.0
Purchase of Life
Insurance Policies 702,408 7.4 441,690 5.5
Collateralized Advances 2,111,793 22.1 742,856 9.2
Other 607,059 6.4 463,448 5.7
---------- ----- ---------- -----
Total Earned Discount 7,876,644 82.6 6,663,248 82.4
Fees and Other Income 1,656,397 17.4 1,422,877 17.6
---------- ----- ---------- -----
Total Income $9,533,041 100.0 $8,086,125 100.0
========== ===== ========== =====
Total income increased 17.9% in the first nine months of 1995 over
the same period in 1994, from $8.1 million to $9.5 million, and increased
2.5% in the third quarter of 1995 over the same quarter in 1994. Earned
discounts from the purchase of accounts receivable and life insurance policies
decreased 5.5% in the first nine months of 1995 as compared to the same
period in 1994, from $5.5 million to $5.2 million. Earned discounts from the
purchase of accounts receivable and life insurance policies remained relatively
flat, $1.9 million, in the third quarters of 1995 and 1994. In the first nine
months of 1995 and 1994, earned discounts from the purchase of accounts
receivable and life insurance policies comprised 54.1% and 67.5%,
respectively, of total income. In the third quarters of 1995 and 1994, earned
discounts from the purchase of accounts receivable and life insurance policies
comprised 59.7% and 62.9%, respectively, of total income. These percentages
reflect management's decision to pursue the making of Collateralized
Advances, in addition to the Company's core factoring business.
<PAGE 14>
Earned discounts from Collateralized Advances increased 184.3% in
the first nine months of 1995 from the same period in 1994, from $743
thousand to $2.1 million. In the third quarter of 1995, earned discounts from
Collateralized Advances increased 75.2% over the same quarter in 1994, from
$295 thousand to $518 thousand. In the first nine months of 1995 and 1994,
earned discounts from Collateralized Advances comprised 22.1% and 9.2%,
respectively, of total income. In the third quarters of 1995 and 1994, earned
discounts from Collateralized Advances comprised 16.3% and 9.5%,
respectively, of total income. These changes again reflect management's
decision to pursue the making of Collateralized Advances, in addition to the
Company's core factoring business. Collateralized Advances currently bear
interest at a rate, on average, of approximately 2% per month calculated on
the amount of the Collateralized Advance. Earned discounts from
Collateralized Advances are required to be paid in cash monthly in arrears.
Fees and other income increased 16.4% in the first nine months of
1995 over the comparable period in 1994, from $1.4 million to $1.7 million.
In the third quarter of 1995, fees and other income decreased 12.9% from the
comparable quarter of 1994, from $689 thousand to $600 thousand. The
increase for the first nine months of 1995 is largely attributable to growth in
closing fees and supplemental discounts partially offset by reductions in
related financing fees. The decrease in fees and other income in the third
quarter of 1995 from the third quarter of 1994 is primarily attributable to a
decrease in related financing fees and the absence of a one-time finders ($50
thousand) fee partially offset by increased supplemental discounts.
As of September 30, 1995 and 1994, purchased accounts receivable
included on the Company's balance sheet were $15.1 million (55.1%) and
$22.4 million (71.9%), respectively, of gross finance receivables. As of
September 30, 1995 and 1994, Collateralized Advances included on the
Company's balance sheet were $8.6 million (31.3%) and $4.5 million
(15.9%), respectively, of gross finance receivables. The relative increase from
the end of the first nine months of 1994 to the end of the first nine months
of 1995 in the percentage of gross finance receivables comprised of
Collateralized Advance reflects management's decision to pursue the making
of Collateralized Advances, in addition to the Company's core factoring
business. The relative decrease at the same points in time in the percentage
of gross finance receivables comprised of purchased accounts receivable is a
further reflection of management's decision to pursue the making of
Collateralized Advances, in addition to the Company's core factoring business.
Compensation and Fringe Benefits. Compensation and fringe benefits
were $2.3 million (24.6% of total income) and $2.1 million (26.6% of total
income) in the first nine months of 1995 and 1994, respectively. In the third
quarters of 1995 and 1994, compensation and fringe benefits were $785
thousand (24.7% of total income) and $755 thousand (24.3% of total income),
respectively. The absolute dollar increase is chiefly the result of increases
in sales personnel and compensation. Executive compensation in the first nine
months of 1995 was $749 thousand (7.9% of total income) versus $759
thousand (9.4% of total income) in the first nine months of 1994. In the third
quarter of 1995 executive compensation increased slightly as compared to the
same period in 1994, from $264 thousand (8.5% of total income) to $275
thousand (8.6% of total income).
<PAGE 15>
General and Administrative Expense. In the first nine months of 1995
and 1994 general and administrative expense was $2.0 million (20.8% of total
income) as compared to $1.7 million (21.2% of total income), respectively.
General and administrative expense for the third quarters of 1995 and 1994,
was $643 thousand (20.2% of total income) and $650 thousand (21.0% of
total income), respectively. The increase for the nine months ended
September 30, 1995 was primarily attributable to a rise in professional fees,
licenses and taxes and duplicating expense. In the first nine months of 1995
professional fees rose to $653 thousand (6.9% of total income) as compared
to $396 thousand (4.9% of total income) for the comparable period in 1994
and increased to $234 thousand (7.4% of total income) in the third quarter of
1995 versus $131 thousand (4.2% of total income) in the third quarter of
1994. Professional fees have increased, in part, due to on-going litigation
and, in part, to the final resolution of legal proceedings instituted in prior
years. Also contributing to the increase in general and administrative expense
were additional rent expense incurred in connection with the opening of two
off-site marketing offices as well as additional license and tax expenditures
incurred in connection with maintaining certain assets acquired in settlement
of finance and other receivables. Other charges increasing general and
administrative expense were insurance, postage, telephone, stockholder related
expenses and travel and entertainment which were offset, in part, by decreases
in loan amortization, office supplies and credit and filing costs.
Interest Expense. Interest expense was $630 thousand (6.6% of total
income) versus $307 thousand (3.8% of total income) in the first nine months
of 1995 and 1994, respectively, and $205 thousand (6.5% of total income)
versus $142 thousand (4.5% of total income) for the third quarters of 1995
and 1994, respectively. The rise in interest expense is attributable to an
increase in the average daily balance outstanding on the Company's revolving
lines of credit and the rise in the prime rate of interest from 1994 to 1995.
The average daily outstanding balance on the Company's revolving lines of
credit was $7.9 million and $4.0 million for the first nine months of 1995 and
1994, respectively, and $6.6 million and $6.1 million for the three months
ended September 30, 1995 and 1994, respectively. The average interest rate
paid on the Company's revolving lines of credit rose to 9.48% during the first
nine months of 1995 as compared to 7.8% during the first nine months of
1994 and to 9.28% during the third quarter of 1995 as compared to 8.3%
during the third quarter of 1994.
Provision for Credit Losses. Credit loss experience, the adequacy of
underlying collateral, changes in the character and size of the Company's
receivables portfolio and management's judgement are factors used in
determining the provision for credit losses and the adequacy of the allowance
for credit losses. Other factors given consideration in determining the
adequacy of the allowance are the level of related credit balances of factoring
clients and the current and anticipated impact of economic conditions on the
creditworthiness of the Company's clients and account debtors. To mitigate
the risk of credit loss, the Company, among other things: (i) thoroughly
evaluates the collateral to be made available by each client; (ii) collects its
factored accounts receivable directly from account debtors, which are
frequently (though not always) large, creditworthy companies or governmental
entities; (iii) purchases, or takes a first priority security interest in, all
accounts receivable of each client; (iv) takes, whenever available, blanket
liens on all of its clients' assets and, when making Collateralized Advances, it
employs what management believes to be conservative loan-to-value ratios
based on auction or liquidation value appraisals performed by independent
appraisers; (v) requires personal guaranties (either unlimited guaranties or
validity guaranties) from its clients' principals, and (vi) actively monitors
its portfolio of factored accounts receivable, including the creditworthiness of
account debtors and periodically evaluates the value of other collateral.
<PAGE 16>
The provision for credit losses was $2.8 million (29.1% of total
income) for the first nine months of 1995 as compared to $1.5 million (18.4%
of total income) for the same period in 1994 and $859 thousand (27.0% of
total income) for the third quarter of 1995 as compared to $614 thousand
(19.8% of total income) for the third quarter of 1994. The increase in the
Company's provision for credit losses in the first nine months of 1995 as
compared to the first nine months of 1994 was principally attributable to the
settlement reached by the Company early in the second quarter of 1995 with
the Trustee in the bankruptcy of Premium Sales Corporation. The settlement
remains subject to Bankruptcy Court approval.
At September 30, 1995 the allowance for credit losses was 8.0% ($2.2
million) and 7.5% ($2.5 million) of gross finance receivables and December
31, 1994, respectively.
At September 30, 1995 the accrual of earnings was suspended on
$2,725,929 of gross finance receivables as compared to $3,608,164 of gross
finance receivables at December 31, 1994.
Although the Company maintains an allowance for credit losses in an
amount deemed by management to be adequate to cover potential losses, no
assurance can be given that the allowance will in fact be adequate or that an
inadequacy, if any, in the allowance could not have a material adverse effect
on the Company's earnings in future periods. In addition, management
recognizes that Collateralized Advances may entail greater risk to the
Company than the factoring of accounts receivable. Although management
believes that the Company has (or third parties acting on behalf of the
Company have) the requisite skill to evaluate, monitor and manage such risks,
there can be no assurance that the Company will in fact be successful in doing
so.
Commissions. Commission expense was $200 thousand (2.1% of total
income) in the first nine months of 1995 as compared to $80 thousand (1.0%
of total income) in the first nine of 1994. In the third quarter of 1995
commission expense increased to $65 thousand (2.0% of total income) from
$31 thousand (1.0% of total income) in the third quarter of 1994. The
increase was the result of a larger portion of gross receivables purchased in
1995 being generated by commissioned brokers and other professionals to
whom the Company paid referral fees.
Impact of Inflation
Management believes that inflation has not had a material effect on
the Company's income, expenses or liquidity during the past three years.
Changes in interest rate levels do not generally affect the income
earned by the Company in the form of discounts. Rising interest rates would,
however, increase the Company's cost of borrowed money based on its
current borrowing arrangements which are prime or base rate adjusted credit
facilities.
<PAGE 17>
Changes in Financial Condition
The Company's total assets decreased 12.2% to $36.7 million at
September 30, 1995 from $41.9 million at December 31, 1994. The decrease
is primarily the result of a decrease in net finance receivables.
Liquidity and Capital Resources. The Company's principal funding
sources are the collection of purchased receivables, retained cash flow and
external borrowings.
As of September 30, 1995 the Company had approximately $20.6
million available under a $25.0 million secured revolving line of credit.
Borrowings under the credit facility bear interest at the bank's base rate plus
.75%. The current maturity date of this credit facility is May 13, 1997. The
Company is subject to covenants which are typical in revolving credit
facilities of this type.
As of September 30, 1995 Lifetime Options had approximately $1.0
million available under a $2.0 million line of credit and an additional $1.2
million available under a $4 million availability from the Company. Lifetime
Options' revolving line of credit: (i) is payable on demand and, if no demand
is made, on December 31, 1995; (ii) bears interest at the prime rate of interest
plus 1% and (iii) is collateralized by specific purchased life insurance
contracts.
At September 30, 1995 the Company had working capital of $26.2
million and a ratio of current assets to current liabilities of 4.48 to 1 as
compared to December 31, 1994 working capital of $25.3 million and a ratio
of current assets to current liabilities of 2.85 to 1.
The Company believes that internally generated funds and borrowings
under its current or a replacement credit facility will be sufficient to finance
the Company's future funding requirements for the near term. Under certain
circumstances, however, this may not be the case. Borrowings under the
Company's existing revolving credit facility are predicated on a borrowing
base comprised primarily of accounts receivable acquired by the Company
from its clients and, to a lesser extent, equipment securing Collateralized
Advances. If in the near term an unexpectedly high portion of the Company's
potential new business includes Collateralized Advances, internally generated
funds and borrowings under the Company's existing credit facility may not
be sufficient to fund such new business. Under such circumstances the
Company would attempt to negotiate the borrowing base in its existing credit
facility to allow the Company to borrow greater amounts from its primary
lender(s) and thereby support the growth in Collateralized Advances. If those
negotiations were unsuccessful there is no assurance that the Company could
attract sufficient capital to enable the Company to pursue its strategy of
making additional Collateralized Advances.
<PAGE 18>
PART II - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
The Company is a defendant in White, Trustee v. Allstate Financial
Corporation pending in the U.S. Bankruptcy Court for the Western District
of Pennsylvania. The Company provided receivables financing and advances
for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject of a
leveraged buy-out and has since filed a bankruptcy petition. The Company
had agreed to a settlement with the Lyons trustee, subject to approval by the
bankruptcy court, which would have released the Company from all claims
upon the payment of $300,000. In connection with the settlement, the
Company added $300,000 to the provision for credit losses in 1994 and then
charged off the full settlement amount. A creditor in the bankruptcy
proceeding, Sherwin-Williams Company, objected to the proposed settlement
and, in March 1995, the objection was sustained by the bankruptcy court.
The Company has appealed the order sustaining the objection. The appeal is
currently pending. Management does not believe the Company has a material
exposure in excess of the previously agreed upon settlement amount.
In connection with the same transaction, the Company has also been
named as a defendant in Sherwin-Williams Company v. Robert Castello et. al.
pending in the United States District Court for the Northern District of Ohio.
Sherwin-Williams is suing all parties with any involvement in the transaction
to recover damages allegedly incurred by Sherwin-Williams in connection
with the leveraged buy-out and the bankruptcy litigation arising therefrom.
Sherwin-Williams asserts that it has or will incur pension fund liabilities and
other liabilities as a result of the transaction in the approximate amount of
$11 million and has asserted claims against the Company in that amount.
Management does not believe the litigation will have a material effect on the
financial position or results of operations of the Company because, in
management's opinion, the claims are without merit. The Company has filed
a motion to dismiss the claims and a motion to stay discovery pending a
ruling on the motion to dismiss. The motion to stay discovery has been
granted and the motion to dismiss is currently pending. A hearing date on the
motion to dismiss has not yet been set.
The Company is a defendant in Harold B. Murphy, Chapter 7 Trustee
v. Allstate Financial Corporation, et al. pending in the U.S. Bankruptcy Court
in the District of Massachusetts. The Company factored the accounts
receivable of Clearpoint Research Corporation ("CRC") from late 1992
through early 1993. In July 1993 CRC filed a petition in bankruptcy, after
the Company had collected all amounts owed to it. The bankruptcy trustee
has sued the Company seeking recovery of alleged preferential transfers made
during the course of the factoring relationship. The bankruptcy trustee alleges
that the Company did not properly perfect its security interest in the accounts
receivable. No specific damage amount is specified in the complaint but it
is assumed the bankruptcy trustee is seeking recovery of the full amount of
accounts receivables collected (approximately $4 million). The Company has
filed an answer denying the substantive allegations asserted by the bankruptcy
trustee. The Company believes it has a number of strong defenses to the
complaint and intends to vigorously defend all claims.
<PAGE 19>
As previously disclosed in the Company's Form 10-QSB for the
quarter ended March 31, 1995, the Company has reached a settlement with
the Trustee in the bankruptcy of Premium Sales Corporation, a former client
of one of the Company's wholly-owned subsidiaries. On July 21, 1995, the
Company placed the full cash settlement amount of $1.4 million in escrow in
accordance with the terms of the settlement. The settlement is intended to be
a full release of any and all claims between the Company and the Trustee.
The settlement remains subject to court approval. The impact of this
settlement has been reflected in the Company's financial statements.
From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without
any factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
Except as described above, the Company is not party to any litigation
other than routine proceedings incidental to its business, and the Company
does not expect that these proceedings will have a material effect on the
Company.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. - OTHER INFORMATION
None.
ITEM 6(a). - Exhibit 4. INSTRUMENTS DEFINING THE RIGHTS OF SHAREHOLDERS
Exhibit 4.2 - Stock Purchase Agreement dated September 11, 1995
between Allstate Financial Corporation and Scoggin Capital
Management, LP and Selig Partners, LP.
Exhibit 4.3 - Indenture of Trust dated September 11, 1995
between Allstate Financial Corporation and Shawmut Bank
Connecticut, National Association as Trustee.
Exhibit 4.4 - Letter of Agreement dated September 11, 1995
between Allstate Financial Corporation and Leon Fishman and
Eugene Haskin.
ITEM 6(b). - EXHIBITS AND REPORTS ON FORM 8-K
None.
<PAGE 20 >
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
and Exchange Act of 1934, The Company has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
ALLSTATE FINANCIAL CORPORATION
Date Nov 14, 1995 Lawrence M. Winkler
Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer