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, 1997 COMMISSION FILE NUMBER 0-17832
- -------------------------------------------------------------------------------
Allstate Financial Corporation
(exact name of registrant as specified in its charter)
-----------------------------------------------------------
Virginia 54-1208450
(State of Incorporation) (I.R.S. Employer Identification No)
-----------------------------------------------------------
2700 South Quincy Street, Suite 540, Arlington, VA 22206
(address of principal executive offices) (zip code)
Registrant's Telephone Number, Including Area Code: (703) 931-2274
Indicate by the check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 and 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 [ ]
2,318,185 Common Shares were outstanding as of November 12, 1997.
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page
Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at September 30, 1997
and December 31, 1996 1-2
Consolidated Statements of Operations Three and Nine Months Ended
September 30, 1997 and 1996 3
Consolidated Statements of Shareholders' Equity Nine
Months Ended September 30, 1997 and Year Ended
December 31, 1996 4
Consolidated Statements of Cash Flows Nine Months Ended
September 30, 1997 and 1996 5-6
Notes to Consolidated Financial Statement 7-10
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 11-19
Part II.
Item 1 - Legal Proceedings 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signature 21
PART I - FINANCIAL INFORMATION
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash .......................................... $ 2,062,321 $ 1,624,899
Receivables:
Finance, net .............................. 22,167,840 30,574,239
Purchased life insurance contracts, net ... 4,125,474 4,493,088
Other ..................................... 3,749,180 4,394,975
Prepaid expenses .............................. 122,480 154,434
Income Tax Receivable ......................... -- 1,150,289
Deferred income taxes ......................... 803,357 893,000
------- -------
TOTAL CURRENT ASSETS .......................... 33,030,652 43,284,924
FURNITURE, FIXTURES AND EQUIPMENT, Net ............. 479,320 538,164
OTHER ASSETS ....................................... 3,748,967 2,116,343
--------- ---------
$37,258,939 $45,939,431
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ..... $ 464,367 $ 446,360
Notes payable ............................. 6,277,719 14,851,582
Note payable-related party ................ 103,000 103,000
Credit balances of factoring clients ...... 2,066,809 2,964,873
--------- ---------
TOTAL CURRENT LIABILITIES ................ 8,911,895 18,365,815
1
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(continued)
September 30, December 31,
1997 1996
----------- ------------
(Unaudited)
NONCURRENT PORTION OF NOTES PAYABLE:
Related parties ......................... 52,015 61,969
Convertible Subordinated Notes .......... 4,983,110 4,985,110
--------- ---------
TOTAL LIABILITIES ................... 13,947,020 23,412,894
---------- ----------
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, 2,318,185
outstanding at September 30, 1997 and
2,317,919 at December 31, 1996,
exclusive of shares held in the Treasury 40,000 40,000
Additional paid-in-capital .................. 18,852,312 18,852,312
Treasury Stock (784,143 shares at 9/30/97 and
784,409 at 12/31/96) .................... (5,032,589) (5,034,584)
Retained Earnings ........................... 9,452,196 8,668,809
--------- ---------
TOTAL SHAREHOLDERS' EQUITY .............. 23,311,919 22,526,537
---------- ----------
$ 37,258,939 $ 45,939,431
============ ============
See Notes to Consolidated Financial Statements
2
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, Nine Months Ended September 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
INCOME:
Earned discounts ............................. $ 1,546,155 $ 2,423,715 $ 5,335,750 $ 7,479,676
Fees and other income ........................ 784,451 499,802 1,809,075 1,615,052
------- ------- --------- ---------
Total Income ............................. 2,330,606 2,923,517 7,144,825 9,094,728
--------- --------- --------- ---------
EXPENSES:
Compensation and fringe benefits ............. 738,837 737,910 2,201,033 2,584,291
General and administrative expense ........... 558,515 632,985 1,598,462 2,184,707
Interest expense ............................. 201,675 360,627 829,002 1,142,970
Provision for credit losses .................. 362,621 527,341 1,038,411 5,079,570
Commission ................................... 68,332 126,248 234,444 352,034
------ ------- ------- -------
TOTAL EXPENSES .......................... 1,929,980 2,385,111 5,901,352 11,343,572
--------- --------- --------- ----------
INCOME/(LOSS) BEFORE INCOME TAXES ................. 400,626 538,406 1,243,473 (2,248,844)
INCOME TAXES/(BENEFIT) ............................ 148,232 198,800 460,086 ( 832,400)
------- ------- ------- -----------
NET INCOME/(LOSS) ................................. $ 252,394 $ 339,606 $ 783,387 $ (1,416,444)
============ ============ ============ ============
NET INCOME/(LOSS) PER SHARE ...................... $ .11 $ 0.15 $ .34 $ ( 0.61)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF SHARES ................ 2,318,139 2,317,237 2,317,993 2,331,797
========= ========= ========= =========
3
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996
AND NINE MONTHS ENDED SEPTEMBER 30, 1997
Common Paid in Treasury Retained
Stock Capital Stock Earnings
--------- ----------- ------------ -----------
BALANCE - January 1, 1996 ................................ $ 40,000 $18,852,312 $(2,871,901) $ 9,709,953
Exchange of Convertible
Subordinated Notes for
338,275 shares of common stock ...................... -- -- (2,170,683) --
Conversion of Convertible Subordinated
Notes to 1,066 shares of Common
Stock ............................................... -- -- 8,000 --
Net Loss ............................................... -- -- -- (1,041,144)
--------- ----------- ------------ -----------
BALANCE - December 31, 1996 .............................. 40,000 18,852,312 $(5,034,584) $ 8,668,809
Conversion of Convertible Subordinated
Notes to 266 shares of Common
Stock ............................................... -- -- 1,995 --
Net Income (unaudited) ................................. -- -- -- 783,387
--------- ----------- ------------ -----------
BALANCE - September 30, 1997 ............................. $ 40,000 $18,852,312 $(5,032,589) $ 9,452,196
=========== =========== =========== ===========
4
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
-------------------------------
1997 1996
----------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income/(Loss) ...................... $ 783,387 $ (1,416,444)
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net ................. 146,900 97,400
Provision for credit losses ........ 1,038,411 5,079,570
Changes in operating assets and liabilities:
Decrease/(Increase) in other receivables 1,804,832 (819,484)
Decrease/(Increase) in prepaid expenses 31,954 (20,202)
(Increase)/Decrease in other assets (1,182,624) 1,226,774
Increase in accounts payable
and accrued expenses .......... 18,007 210,273
Decrease/(Increase) in income taxes receivable 1,239,932 (824,130)
--------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ................... 3,880,799 3,533,757
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts (135,092,067) (142,451,717)
Collection of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts 141,218,632 139,876,073
(Decrease)/Increase in credit balances of
factoring clients .................. (898,064) 508,094
Purchase of furniture, fixtures and equipment (88,056) (51,255)
------- -------
NET CASH PROVIDED/(USED) BY
INVESTING ACTIVITIES .................... 5,140,445 (2,118,805)
--------- ----------
5
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and
other borrowings ............................ 49,965,511 45,155,265
Principal payments on line of credit
and other borrowings ........................ (58,549,333) (45,830,244)
Treasury Stock Acquisition Costs ................ -- 22,683)
============ ==========
NET CASH USED IN FINANCING ACTIVITIES: ............... (8,583,822) (697,662)
---------- --------
NET INCREASE IN CASH ................................. 437,422 717,290
CASH, Beginning of period ............................ 1,624,899 754,295
--------- -------
CASH, End of period .................................. $ 2,062,321 $ 1,471,585
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid ................................... $ 818,033 $ 1,142,970
============ ============
Income taxes paid ............................... $ 300,000 $ --
============ ============
Transfer of finance and other
receivables to other assets .................. $ 1,800,000 $ --
============ ============
Issuance of Convertible Subordinated
Notes in exchange for Common Stock ........... $ -- $ 2,148,000
============ ============
Issuance of Common Stock in exchange
for Subordinated Notes ...................... $ 2,000 $ 5,000
============ ============
6
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation and its wholly owned subsidiaries (the "Company") included herein
are unaudited for all periods ended September 30, 1997 and 1996; however, they
reflect all adjustments which, in the opinion of management, are necessary to
present fairly the results for the periods presented. Certain information and
note disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Allstate Financial Corporation believes that the disclosures are
adequate to make the information presented not misleading. The results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results of operations to be expected for the remainder of the
year.
It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KB for the
year ended December 31, 1996.
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 and
common stock equivalents outstanding during the periods presented. Stock options
are considered common stock equivalents, unless determined to be anti-dilutive.
For the quarters ended September 30, 1997 and 1996, weighted average shares
outstanding were 2,318,139 and 2,317,237, respectively. At September 30, 1997
and December 31, 1996 there were 106,830 and 158,400 stock options outstanding,
at exercise prices ranging from $5.44 to $14.00 per share. During the year ended
December 31, 1996, 24,867 options were terminated without being exercised. There
were no options exercised during 1996 or during the nine months ended September
30, 1997.
In March 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share". SFAS No. 128 supersedes APB No. 15 to conform earnings per
share with internal standards as well as to simplify the complexity of the
computation under APB No. 15. In summary, SFAS No. 128 replaces the previous
primary earnings per share ("EPS") calculation with a basic EPS calculation. The
basic EPS differs from the primary EPS calculation in that the basic EPS does
not include any potentially dilutive securities. Fully dilutive EPS is replaced
with diluted EPS and should be disclosed regardless of its dilutive impact on
EPS. SFAS No. 128 is effective for both interim and annual periods ending after
December 15, 1997. The EPS in the Statements of Operations are presented under
APB No. 15. Proforma EPS under SFAS No. 128 for the nine months ended September
30, 1997 and 1996 would not have resulted in a material difference from EPS as
shown.
3. Line of credit. As of September 30, 1997, the Company had approximately $18.7
million available under a $25 million secured revolving line of credit. The
credit facility contains a $5.0 million sub-facility for the issuance of letters
of credit, a $5 million sub-facility the proceeds of which may be used by the
Company to make advances to clients secured by machinery and
7
equipment and a $2.5 million sub-facility the proceeds of which may be used by
the Company to make advances to clients secured by inventory. Borrowings under
the credit facility bear interest at a spread over the bank's base rate or a
spread over LIBOR, at the Company's election. The Company is subject to
covenants which are typical in revolving credit facilities of this type. The
maturity date on this credit facility is May 27, 2000.
4. Convertible Subordinated Notes Payable. As of September 30, 1997, included in
Notes Payable the Company had outstanding $4,976,000 in aggregate principal
amount of Convertible Subordinated Notes. The Notes (I) mature on September 30,
2000; (ii) currently bear interest at the rate of 9.5% per annum which rate may
fluctuate in accordance with the prime rate, but may not fall below 8% nor rise
above 10% per annum; (iii) are convertible into common stock of the Company at
the rate of $7.50 per share; (iv) are subordinated to Senior Indebtedness (as
defined) of the Company and (v) were issued pursuant to an indenture which
contains certain covenants which are less restrictive than those contained in
the Company's secured revolving credit facility. Upon the occurrence of certain
change of control events, holders of the Notes have the right to have their
Notes redeemed at par.
5. New Financial Accounting Standards. In September 1996, SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" was issued. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities, based on a financial-components approach that focuses on control.
Under this approach, after a transfer of financial assets, financial and
servicing assets are recognized if controlled or liabilities are recognized if
incurred. Financial and servicing assets are removed from the balance sheet when
control has been surrendered and liabilities are removed when extinguished. SFAS
No. 125 was effective and adopted on January 1, 1997 and will be applied
prospectively. The Company does not anticipate any material effect on its
financial position from this implementation.
6. Certain Contingencies. The Company is a defendant in White, Trustee v.
Allstate Financial Corporation pending in the U.S. Bankruptcy Court for the
Western District of Pennsylvania. The Company provided receivables financing and
advances for Lyons Transportation Lines, Inc. ("Lyons"). Lyons was the subject
of a leveraged buy-out and subsequently filed a bankruptcy petition. In 1991,
the Lyon's trustee brought an action against the Company claiming, among other
things, fraudulent transfer and breach of contract. In late 1994, the Company
reached a settlement agreement with the Lyons trustee, subject to approval by
the bankruptcy court, which would have released the Company from all claims upon
the payment of $300,000. In connection with the settlement, the Company paid and
added $300,000 to the provision for credit losses in 1994. A creditor in the
bankruptcy proceeding, Sherwin-Williams Company, objected to the proposed
settlement amount and, in March 1995, the objection was sustained by the
bankruptcy court. The $300,000 previously paid by the Company was returned to
the Company in April 1996. The matter is currently being litigated in the
District Court. Management does not believe at this time that the Company has a
material exposure significantly in excess of the previously agreed upon
settlement amount.
8
In connection with the same transaction, the Company was also named in
January 1994 as a defendant in Sherwin-Williams Company v. Robert Castello et.
al. pending in the United States District Court for the Northern District of
Ohio. Sherwin-Williams is suing all parties with any involvement in the
transaction to recover damages allegedly incurred by Sherwin-Williams in
connection with the leveraged buy-out and the bankruptcy litigation arising
therefrom. Sherwin-Williams asserts that it has or will incur pension fund
liabilities and other liabilities as a result of the transaction in the
approximate amount of $11 million and has asserted claims against the Company in
that amount. The complaint asserts, among other things, that the purchasers of
Lyons breached their purchase agreement with Sherwin-Williams by pledging the
assets of Lyons to the Company to obtain the down payment. The Company was not a
party to the purchase agreement. In response to the complaint, the Company filed
a motion to dismiss all claims. In March 1997, a federal magistrate recommended
to the District Court that the Company's motion to dismiss the claims contained
in the original complaint held against the Company be granted. However, the
magistrate recommended that the Company's motion to dismiss two new claims
contained in an amended complaint be denied. The District Court has not yet
ruled on the magistrate's recommendation. 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 is a counterclaim defendant in Allstate Financial Corporation
v. A.G. Construction, Inc. (n/k/a A.G. Plumbing, Inc.), American General
Construction Corp., Adam Guziczek and Cheryl Lee Guziczek pending in the United
States Bankruptcy Court for the Southern District of New York. The Company
provided receivable financing to A.G. Construction, Inc. (n/k/a/ A.G. Plumbing,
Inc.) in 1988 and to American General Construction Corp. (hereinafter, A.G.
Construction, Inc. (n/k/a/ A.G. Plumbing) and American General Construction
shall be collectively referred to as "AG") in 1991. AG's primary business was
renovation of public housing for the City of New York. Adam and Cheryl Guziczek
(hereinafter collectively referred to as "Guziczek") personally guaranteed the
obligation due the Company under the financing arrangement. In 1993, AG
defaulted on its obligations under the financing arrangement with the Company.
Thereafter, the Company confessed judgment against AG and Guziczek in Virginia
and commenced actions in New York to enforce the guaranties and to attempt
recovery on the confessed judgments. In one of the actions an answer and
counterclaim against the Company was filed. The counterclaim asserted claims for
usury, diversion of proceeds of public improvement contracts and overpayments to
the Company by AG in excess of $2,000,000.00 (hereinafter the "Counterclaims").
No specific damage claim amount was set forth in the counterclaim. On August 1,
1994, Guziczek filed a voluntary Chapter 11 petition under the United States
Bankruptcy code and on June 14, 1995 the case was converted to a Chapter 7
proceeding. On January 3, 1996, AG filed a separate voluntary Chapter 7
petition. No action was ever taken by the trustee in the Guziczek or AG
bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the Trustee
for the AG bankruptcy estate filed a motion to abandon certain claims against
the Company, including all claims that the Company diverted proceeds of public
improvement contracts. On October 7, 1997, New York Surety Company (hereinafter
referred to as the "Surety") filed pleadings objecting to the abandonment of
such claims against the Company. The Surety provided the payment and performance
bond to AG in connection with the construction jobs performed for the City of
New York. In its pleadings the Surety asserts that it is subrogated to
9
AG's claims and thereby seeks to intervene and file an intervenor's complaint
against the Company. The proposed complaint adopts the Counterclaims and seeks
an accounting. The Surety asserts damages of approximately $4,000,000.00. A
hearing on the motion for intervention has been scheduled for January 14, 1998.
The Company believes it has meritorious defenses to the Counterclaims and
intends to vigorously defend all claims. However, the litigation is in the
preliminary stage and the probability of a favorable or unfavorable outcome and
the potential amount of loss, if any, cannot be determined or estimated at this
time.
Except as described above, the Company is not party to any litigation other
than routine proceedings incidental to its business, and the Company does not
expect that these proceedings will have a material adverse effect on the
Company. From time to time, the Company is required to initiate litigation to
collect amounts owed by former clients, guarantors or obligors. In connection
with such litigation, the Company periodically encounters counterclaims by
defendant(s) for material amounts. Such counterclaims are typically without any
factual basis and, management believes, are usually asserted for defensive
purposes by the litigant.
[THIS SPACE INTENTIONALLY LEFT BLANK]
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Certain disclosures contained in this Form 10-QSB contain forward looking
information based on current information and expectations of the Company that
involve a number of risks, uncertainties and assumptions, including the overall
state of the economy, competition among financial institutions, the credit
quality of the Company's clients and account debtors, and the Company's ability
to generate growth in earning assets through the generation of new business.
Should one or more of these risks or uncertainties materialize, or should the
underlying assumptions prove incorrect, actual outcomes could vary materially
from those expected.
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 to its clients collateralized by inventory,
equipment, real estate and other assets ("Collateralized Advances"). On
occasion, the Company will also provide other specialized financing structures
which satisfy the unique requirements of the Company's clients. 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 $600,000 and $75,000,000. Historically, the
Company's clients have not qualified 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. Banks and other asset-based lenders
have, however, started to lend to the Company's traditional, high risk type of
client. Given the Company's typical client profile, there is a significant risk
of default and client failure inherent in the Company's business.
Continuing competition within the marketplace from banks, asset-based
lenders and newly created finance companies have encroached upon the Company's
potential client base and have negatively affected earned discounts on factored
accounts receivable. Additionally, the Company has attracted larger clients
which often increases the amount of time needed to negotiate and fund new
business. Also, Collateralized Advances require extensive 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 and comprehensive financing structures to its clients
enables it to compete effectively. In order to remain competitive, the Company
is, where necessary and appropriate, offering 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 to place emphasis on funding relationships which
include (in addition to the factoring of full recourse accounts receivable) the
making of
11
Collateralized Advances and by expanding into logically related product lines
such as the traditional non-recourse factoring of accounts receivable through
the Company's Allstate Factors division.
Historically, the Company has not expected to maintain a funding
relationship with a client for more than two years; the Company expected that
its clients would ultimately qualify for more competitively priced bank or
asset-based financing within that time period. Therefore, the Company's major
clients have historically tended to change significantly over time. More
recently, however, because the Company is, where necessary and appropriate,
offering lower rates and making Collateralized Advances, it is possible that the
duration of the Company's funding relationships with its clients may be
extended. In addition, the Company's Allstate Factors division is expected to
provide a more stable client base than the Company's traditional client base.
Even if the Company succeeds in extending the duration of its funding
relationship with its clients, there will not be a corresponding increase in
non-current assets on the Company's balance sheet. This is because it is
anticipated that the Company's funding relationships with its clients will
continue to renew no less frequently than once a year. Although the Company has
historically been successful in replacing major clients, the loss of one or more
major clients and an inability to replace those clients could have a material
adverse effect on the Company.
Lifetime Options, a wholly-owned subsidiary of the Company, provided
financial assistance to individuals facing life-threatening illness by
purchasing their life insurance policies at a discount from face value. 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), the management of Lifetime Options believes that credit
risk is not material to its business. Lifetime Options has curtailed its
operations. This decision enables management to better focus on the Company's
core commercial finance business at a time when competition has reduced yields,
and medical advances have created a certain degree of uncertainty, in Lifetime
Options' business. Lifetime Options is currently exploring the sale of some or
all of the life insurance policies in its portfolio.
RESULTS OF OPERATIONS
The following table sets forth certain items of income and expense for
the periods indicated and indicates the percentage relationship of each item to
total income.
[THIS SPACE INTENTIONALLY LEFT BLANK]
12
For the Three Months Ended September 30,
----------------------------------------
1997 1996
------------------ ------------------
(Unaudited) (Unaudited)
INCOME
Earned discounts ................. $1,546,155 66.3% $2,423,715 82.9%
Fees and other income ............ 784,451 33.7 499,802 19.1
------- ---- ------- ----
TOTAL INCOME ................ 2,330,606 100.0% 2,923,517 100.0%
--------- ----- --------- -----
EXPENSES
Compensation and fringe benefits . 753,637 32.3% 737,910 25.3
General and administrative expense 543,715 23.3 632,985 21.7
Interest expense ................. 201,675 8.7 360,627 12.3
Provision for credit losses ...... 362,621 15.6 527,341 18.0
Commissions ...................... 68,332 2.9 126,248 4.3
------ --- ------- ---
TOTAL EXPENSES ............. 1,929,980 82.8 2,385,111 81.6
--------- ---- --------- ----
INCOME BEFORE INCOME TAXES .......... 400,626 17.2 538,406 18.4
INCOME TAXES ........................ 148,232 6.4 198,800 6.8
------- --- ------- ---
NET INCOME .......................... $ 252,394 10.8% $ 339,606 11.6%
========== ==== =========== ====
NET INCOME PER SHARE ................ $ 0.11 $ 0.15
====== ========
WEIGHTED AVERAGE NUMBER OF SHARES ... 2,318,139 2,317,237
========= =========
For the Nine Months Ended September 30,
---------------------------------------
1997 1996
------------------- -------------------
(Unaudited) (Unaudited)
INCOME
Earned discounts .................. $ 5,335,750 74.7% $ 7,479,676 82.2%
Fees and other income ............. 1,809,075 25.3 1,615,052 17.8
--------- ---- --------- ----
TOTAL INCOME ................... 7,144,825 100.0% 9,094,728 100.0%
--------- ----- --------- -----
EXPENSES
Compensation and fringe benefits .. 2,215,833 31.0 2,584,291 28.4
General and administrative expense 1,583,662 22.2 2,184,707 24.0
Interest expense .................. 829,002 11.6 1,142,970 12.6
Provision for credit losses ....... 1,038,411 14.5 5,079,570 55.8
Commissions .................... 234,444 3.3 352,034 3.9
------- --- ------- ---
TOTAL EXPENSES ................. 5,901,352 82.6 11,343,572 124.7
--------- ---- ---------- -----
INCOME (LOSS) BEFORE INCOME TAXES .... 1,243,473 17.4 (2,248,844)(24.7)
INCOME TAXES (BENEFIT) ............... 460,086 6.4 (832,400) 9.2
------- --- -------- ---
NET INCOME (LOSS) .................... $ 783,387 11.0% $(1,416,444)(15.5)
============ ==== =========== =====
NET INCOME (LOSS) PER SHARE $0.34 $(0.61)
===== ======
WEIGHTED AVERAGE NUMBER OF SHARES 2,317,993 2,331,797
========= =========
13
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 income from Collateralized Advances. "Fees
and other income" consist primarily of application fees, commitment or facility
fees, other related financing fees, revenue recognized on the collection of
certain non-performing assets and supplemental discounts paid by clients who do
not sell the minimum volume of accounts receivable required by their contracts
with the Company (including as a result of "graduating" to a lower cost source
of funding).
The following table breaks down total income by type of transaction for
the periods indicated and the percentage relationship of each type of
transaction to total income.
For the Three Months Ended September 30,
1997 1996
(Unaudited) (Unaudited)
-------------------- --------------------
Earned % of Total Earned % of Total
Type of Transaction Income Income Income Income
------------------- ---------- ------- ----------- ------
Discount on Factored
Accounts Receivable ....... $1,100,130 47.2% $1,470,677 50.4%
Earnings on Collateralized
Advances .................. 238,308 10.2 685,778 23.4
Earnings on Purchased Life
Insurance Policies ........ -- -- 149,172 5.1
Other Earnings ................. 207,717 8.9 118,088 4.0
------- --- ------- ---
Total ..................... 1,546,155 66.3 2,423,715 82.9
Fees and Other Income .......... 784,451 33.7 499,802 17.1
------- ---- ------- ----
Total Income .............. $2,330,606 100.0% $2,923,517 100.0%
========== ===== ========== =====
For the Nine Months Ended September 30,
1997 1996
(Unaudited) (Unaudited)
------------------- -------------------
Earned % of Total Earned % of Total
Type of Transaction Income Income Income Income
------------------- --------- -------- ---------- -------
Discount on Factored
Accounts Receivable ......... $3,582,944 50.1% $4,033,922 44.3%
Earnings on Collateralized
Advances .................... 697,856 9.8 2,345,413 25.8
Earnings on Purchased Life
Insurance Policies .......... 200,000 2.8 491,244 5.4
Other Earnings ................... 854,950 12.0 609,097 6.7
------- ---- ------- ---
14
1997 1996
(Unaudited) (Unaudited)
-------------------- -------------------
Total ....................... 5,335,750 74.7 7,479,676 82.2
Fees and Other Income ............ 1,809,075 25.3 1,615,052 17.8
--------- ---- --------- ----
Total Income ................ $7,144,825 100.0% $9,094,728 100.0%
========== ===== ========== =====
Total income decreased 21.4% in the first nine months of 1997 from the
same period in 1996, from $9.1 million to $7.1 million; total income decreased
21.9% for the third quarter of 1997 over the same period in 1996, from $2.9
million to $2.3 million. Earned discounts from factored accounts receivable
decreased, from $4.0 million to $3.6 million in the first nine months of 1997
versus the first nine months of 1996. In the third quarter of 1997 earned
discounts from factored accounts receivable decreased $1.1 million from $1.5
million. The decline in earned discounts from factored accounts receivable in
the nine months ended September 30, 1997 is, in part, attributable to the loss
of volume from several large clients that paid their obligations in full at the
beginning of the year. During the third quarter of 1997, however, the Company
funded seven new clients. Revenue from these accounts should enhance performance
in the fourth quarter of 1997. In addition, competition in the marketplace has
continued to exert downward pressure on earned discounts. Earned discounts from
factored accounts receivable as a percentage of total factored accounts
receivable purchased were 3.0% and 3.4%, respectively, in the first nine months
of 1997 and 1996. In the third quarters of 1997 and 1996, earned discounts were
3.0% and 3.4%, respectively, of factored accounts receivable. In the first nine
months of 1997 and 1996, earned discounts from factored accounts receivable
accounted for 50.1% and 44.3%, respectively, of total income. In the third
quarters of 1997 and 1996 earned discounts from factored accounts receivable
accounted for 47.2% and 50.4%, respectively, of total income.
Earned discounts from Collateralized Advances decreased approximately
70.2% in the first nine months of 1997 versus the comparable period in 1996, to
approximately $1.0 million from $2.4 million and decreased approximately 65.2%
in the third quarter of 1997 over the same quarter in 1996, to approximately
$238 thousand from $686 thousand. In the first nine months of 1997 and 1996,
earned discounts from Collateralized Advances constituted approximately 9.8% and
25.8%, respectively, of total income. The decline in earned discounts from
Collateralized Advances in 1997 does not reflect a strategic move away from
Collateralized Advances. Rather, it reflects a reduction in the average amount
of Collateralized Advances outstanding during the relevant periods. In the third
quarters of 1997 and 1996, earned discounts from Collateralized Advances
constituted 10.2% and 23.4%, respectively, of total income. Collateralized
Advances currently bear interest at a rate, on average, of approximately 2% per
month calculated generally on the average outstanding amount of the
Collateralized Advance during the month. Earned discounts from Collateralized
Advances are required to be paid in cash monthly in arrears. (See Provision for
Credit Losses below.)
As of September 30, 1997 and December 31, 1996, factored accounts
receivable included on the Company's balance sheet were $20.1 million (65.8%)
and $22.4 million (59.6%), respectively, of gross finance receivables. As of
September 30, 1997 and December 31, 1996, Collateralized Advances included on
the Company's balance sheet were $4.4 million (15.4%) and $8.8 million (23.4%),
respectively, of gross finance receivables.
15
Fees and other income increased 12.5% to approximately $1.8 million in
the first nine months of 1997 as compared to $1.7 million in the same period in
1996. In the third quarter of 1997, fees and other income were $784 thousand
compared to $500 thousand, an increase of 56.8% in the third quarter of 1997.
The increase in fees and other income in 1997 is primarily attributable to
revenue recognized on the collection of certain non-performing assets offset, in
part, by a reduction in facility fees and one-time fees received in 1996.
Compensation and Fringe Benefits. In the first nine months of 1997 and
1996, compensation and fringe benefits were $2.2 million (31.0% of total income)
and $2.6 million (28.4% of total income), respectively. For the third quarters
of 1997 and 1996, compensation and fringe benefits were $754 thousand (32.3% of
total income) and $738 thousand (25.2% of total income), respectively. Within
compensation and fringe benefits, executive compensation decreased in the first
nine months of 1997 as compared to the same period in 1996, from $904 thousand
(9.9% of total income) to $652 thousand (9.1% of total income). Executive
compensation increased in the third quarter of 1997 as compared to the same
period in 1996, from $190 thousand (6.5% of total income) to $220 thousand (9.5%
of total income). The higher compensation and fringe benefits (including
executive compensation) during the first nine months of 1996 were chiefly the
result of expenses associated with the severance of a key employee and costs
associated with replacing that employee.
General and Administrative Expense. General and administrative expense
was $1.6 million (22.4% of total income) as compared to $2.2 million (24.0% of
total income) for the first nine months of 1997 and 1996, respectively. For the
third quarters of 1997 and 1996, general and administrative expense was $559
thousand (24.0% of total income) and $633 thousand (21.7% of total income),
respectively. The decrease for the first nine months and the third quarter of
1997 was primarily attributable to a decrease in professional fees, offset in
part by increases in depreciation. Professional fees were $432 thousand (6.0% of
total income) in the first nine months of 1997 versus $980 thousand (10.8% of
total income) in the first nine months of 1996 and were $14.2 thousand (6.1% of
total income) in the third quarter of 1997 versus $226 thousand (7.7% of total
income) in the third quarter of 1996. The decrease in professional fees in 1997
is attributable, in part, to the final resolution of legal proceedings in prior
years. General and administrative expense (other than professional fees) for the
nine months ended September 30, 1997 and 1996 was $1.2 million (16.3%) and $1.2
million (13.2%), respectively. For the three months ended September 30, 1997 and
1996, general and administrative expense (other than professional fees) was $417
thousand (17.9%) and $407 thousand (13.9%), respectively.
Interest Expense. Interest expense was $829 thousand (11.6% of total
income) versus $1.1 million (12.6% of total income) for the first nine months of
1997 and 1996, respectively, and $202 thousand (8.7% of total income) versus
$360 thousand (12.3% of total income) for the third quarters of 1997 and 1996,
respectively. The decrease in interest expense is attributable to a decrease in
the average daily balance outstanding on the Company's revolving lines of credit
and to more favorable borrowing rates negotiated by the Company in May 1997. The
average daily outstanding balance on the Company's revolving lines of credit was
$4.9 million and $10.4 million for the first nine months of 1997 and 1996,
respectively, and $3.7 million and $9.5 million for the three months ended
September 30, 1997 and 1996, respectively. The average interest rate paid on the
Company's revolving lines of credit decreased to 8.89% during the first nine
months of 1997 from 9.12% during the first nine months of 1996 and was 8.45%
during the third quarter of 1997 as compared to 9.28% during the third quarter
of 1996.
16
Interest expense on the Company's Convertible Subordinated Notes was
approximately $118,000 in the third quarters of 1997 and 1996 and $355,000 for
the first nine months of 1997 and 1996.
Provision for Credit Losses. The provision for credit losses decreased
from $5.1 million (55.9% of total income) in the first nine months of 1996 to
$1.0 million (14.5% of total income) in the first nine months of 1997. The
provision for credit losses during the first nine months of 1996 included a
provision of $3.9 million in the second quarter of 1996 associated with
management's decision to write-off or write-down nine non-performing assets
totaling $4.2 million. As of September 30, 1997 and December 31, 1996 the
allowance for credit losses was 10.0% ($2.8 million) and 6.9% ($2.6 million) of
gross finance receivables, respectively. At September 30, 1997 the accrual of
earnings was suspended on $1.9 million of gross finance receivables as compared
to $4.5 million of gross finance receivables at December 31, 1996. In addition,
"other receivables" and "other assets" appearing on the Company's balance sheet
typically do not accrue earnings for financial statement purposes. The following
table provides a summary of the Company's gross finance receivables (which
includes primarily factored accounts receivable, Collateralized Advances and
non-earning receivables), "other receivables" and "other assets" and information
regarding the allowance for credit losses as of the dates indicated.
As of (or for As of (or for the Nine
the Year Ended) Months Ended) September 30,
December 31, 1996 1997 1996
----------------- -------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
Gross Finance Receivables, Other
Receivables and Other Assets Data:
Gross Finance Receivables ............................. $ 37,600 $ 28,314 $ 35,416
Non-Earning Receivables (also included
in Gross Finance Receivables) ....................... 4,548 1,895 313
Other Receivables ..................................... 4,390 3,748 3,565
Other Assets (excluding
miscellaneous) ........................................ 1,884 3,481 590
Allowance for credit
losses:
Balance, January 1 .................................... 2,351 2,579 2,351
Provision for credit
losses .............................................. 5,878 1,038 5,080
Receivables charged off ............................... (5,711) (1,120) (5,708)
Recoveries ............................................ 61 330 15
-- --- --
Ending Balance ........................................ $ 2,579 $ 2,827 $ 1,738
======== ======== ========
Allowance for Credit Losses
as a percent of:
Gross Finance Receivables ............................. 6.9% 10.0% 4.9%
Non-Earning Receivables ............................... 56.7% 149.2% 555.3%
Non-Earning Receivables, Other
Receivables and Other Assets ........................ 28.3% 31.0% 39.0%
17
As of (or for As of (or for the Nine
the Year Ended) Months Ended) September 30,
December 31, 1996 1997 1996
----------------- -------- ---------
(Unaudited) (Unaudited)
(Dollars in thousands)
As a percent of the sum of Gross
Finance Receivables, Other
Receivables and Other Assets:
Non-Earning
Receivables .................................... 10.4% 5.3% 0.1%
Other Receivables ................................ 10.0% 10.5% 9.0%
Other Assets ..................................... 4.3% 9.8% 0.9%
Although the Company maintains an allowance for credit losses in an
amount deemed by management to be adequate to cover potential losses, no
assurance can be given that the allowance will in fact be adequate or that an
inadequacy, if any, in the allowance could not have a material adverse effect on
the Company's earnings in future periods. Furthermore, although management
believes that its periodic estimates of the value of "other receivables" and
"other assets" are appropriate, no assurance can be given that the amounts which
the Company ultimately collects with respect to other receivables and other
assets will not differ significantly from management's estimates or that those
differences, if any, could not have a material adverse effect on the Company's
earnings in future periods.
COMMISSIONS. Commission expense was $234 thousand (3.3% of total
income) in the first nine months of 1997 as compared to $352 thousand (3.9% of
total income) in the first nine months of 1996. For the quarter ended September
30, 1997, commission expense was $68 thousand (2.9% of total income) versus $126
thousand (4.3% of total income) for the same quarter in 1996. The reduction in
commission expense is related, in part, to the decrease in earned discounts and,
in part, to certain new business acquired from non-commissioned referral
sources.
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 charged. Rising interest rates
would, however, increase the Company's cost of borrowed funds based on its
current borrowing arrangements which are prime or LIBOR adjusted credit
facilities.
CHANGES IN FINANCIAL CONDITION
The Company's total assets decreased 18.9% to $37.3 million at
September 30, 1997 from $45.9 million at December 31, 1996. The decrease is
primarily the result of a decrease in net finance receivables. The Company's
assets have increased 24.7% from June 30, 1997 to September 30, 1997. The
increase is primarily due to the increase in net finance receivables.
18
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal funding sources are the collection of factored
accounts receivable, retained cash flow and external borrowings. For additional
detail regarding external borrowings, see Notes 3 and 4 to the unaudited
financial statements contained in this Form 10- QSB.
The Company believes that internally generated funds and borrowings
under its revolving credit facility will be sufficient to finance the Company's
funding requirements for the next 12 months.
At September 30, 1997 and December 31, 1996, the Company had working
capital of $24.1 million and $24.9 million, respectively, and a ratio of current
assets to current liabilities of 3.7 to 1 and 2.36 to 1, respectively.
[THIS SPACE INTENTIONALLY LEFT BLANK]
19
PART II - OTHER INFORMATION
ITEM 1. -LEGAL PROCEEDINGS
For details regarding legal proceedings, see Note 6, Certain
Contingencies, to the unaudited financial statements contained in this Form
10-QSB.
ITEM 6(a). - EXHIBITS
EXHIBIT 10.1 MATERIAL CONTRACTS
Factoring Agreement with Republic Business Credit
EXHIBIT 10.9. EMPLOYMENT CONTRACTS
Hotsenpiller, Employment Agreement
EXHIBIT 27. FINANCIAL DATA SCHEDULE
ITEM 6(b). - REPORTS ON FORM 8-K
None.
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
By: /s/ Lawrence M. Winkler
-----------------------
Lawrence M. Winkler
Date: November 14, 1997 /s/ Lawrence M. Winkler
-----------------------
Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer
21