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 MARCH 31, 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 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 [ ]
3,102,328 Common Shares were outstanding as of March 31, 1995.
ALLSTATE FINANCIAL CORPORATION
FORM 10-QSB
INDEX
Page Number
Part I. Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets at March 31, 1995
and December 31, 1994 1-2
Consolidated Statements of Income Three Months Ended
March 31, 1995 and 1994 3
Consolidated Statements of Shareholders' Equity Three
Months Ended March 31, 1995 and Year Ended
December 31, 1994 4
Consolidated Statements of Cash Flows Three Months Ended
March 31, 1995 and 1994 5-6
Notes to Consolidated Financial Statements 7
Item 2 - Management's Discussion and Analysis of Results of
Operations and Financial Conditions 8-12
Part II.
Item 1 - Legal Proceedings 13
Item 4 - Submission of Matters To a Vote of Security Holders 13
Item 5 - Other Information 13
Item 6 - Exhibits and Reports on Form 8-K 13
Signatures 14
PART I - FINANCIAL INFORMATION
1
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1995 1994
---------- -----------
ASSETS
------
CURRENT ASSETS:
Cash $ 1,854,064 $ 1,763,930
Receivables:
Finance, net 21,626,412 27,502,806
Purchased life insurance contracts 5,146,818 4,533,952
Other 3,341,109 3,388,638
Prepaid expenses 249,774 198,091
Prepaid income taxes 921,881 628,123
Deferred income taxes 909,000 909,000
----------- -----------
TOTAL CURRENT ASSETS 34,049,058 38,924,540
PROPERTY AND EQUIPMENT, Net 514,061 479,034
OTHER ASSETS 2,400,045 2,447,083
----------- -----------
$36,963,164 $41,850,657
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 379,693 $ 303,838
Settlement Payable 1,400,000 -
Notes payable 4,892,923 11,591,718
Note payable-related party 103,000 103,000
Credit balances of factoring clients 1,844,609 1,665,038
----------- -----------
TOTAL CURRENT LIABILITIES 8,620,225 13,663,594
NONCURRENT PORTION OF NOTES PAYABLE:
Related parties 58,788 58,788
Other 7,110 7,110
----------- ------------
TOTAL LIABILITIES 8,686,123 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; issued and outstanding
3,102,328 shares at March 31, 1995 and
December 31, 1994 40,000 40,000
Additional paid-in-capital 18,852,312 18,852,312
Retained Earnings 9,384,729 9,228,853
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 28,277,041 28,121,165
----------- -----------
$36,963,164 $41,850,657
=========== ===========
<FN>
See Notes to Consolidated Financial Statements
</FN>
2
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31,
----------------------------
1995 1994
---------- ----------
INCOME:
Earned discounts $2,877,646 $1,972,121
Fees and other income 406,425 324,084
---------- ----------
3,284,071 2,296,205
---------- ----------
EXPENSES:
Compensation and fringe benefits 807,480 678,129
General and administrative expense 608,238 481,269
Interest expense 258,506 73,632
Provision for credit losses 1,301,100 363,355
Commission 61,871 25,241
---------- ----------
TOTAL EXPENSES 3,037,195 1,621,626
---------- ----------
INCOME BEFORE INCOME TAXES 246,876 674,579
INCOME TAXES 91,000 250,000
---------- ----------
NET INCOME $ 155,876 $ 424,579
========== ==========
NET INCOME PER SHARE $ .05 $ .14
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES 3,102,328 3,102,328
========== ==========
<FN>
See Notes to Consolidated Financial Statements
</FN>
3
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
AND THREE MONTHS ENDED MARCH 31, 1995
Common Paid in Retained
Stock Capital 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
Net Income - - 155,876
------- ----------- ----------
BALANCE - March 31, 1995 $40,000 $18,852,312 $9,384,729
======= =========== ==========
<FN>
See Notes to Consolidated Financial Statements
</FN>
4
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31,
----------------------------
1995 1994
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 155,876 $ 424,579
Adjustments to reconcile net income
to cash provided by operating activities:
Depreciation - net 34,784 37,410
Provision for credit losses 1,301,100 363,355
Changes in operating assets and liabilities:
(Increase)/decrease in other receivables 47,529 (8,775)
(Increase) in prepaid expenses
and other current assets (51,683) (46,192)
Decrease in other assets 47,038 84,245
Increase in accounts payable
and accrued expenses 75,855 65,637
Increase in settlement payable 1,400,000 -
(Increase)/decrease in prepaid income taxes (293,758) 233,869
------------ -----------NET
CASH PROVIDED BY OPERATING ACTIVITIES 2,716,741 1,154,128
------------ -----------CASH
FLOWS FROM INVESTING ACTIVITIES:
Purchase of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts (41,357,923) (35,219,315)
Collection of finance receivables, including
accounts receivable, secured advances,
repurchases and life insurance contracts 45,320,351 36,118,353
Increase in credit balances of factoring
clients 179,571 103,315
Purchase of property and equipment (69,811) (11,516)
------------ -----------NET
CASH PROVIDED BY INVESTING ACTIVITIES 4,072,188 990,837
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit and
other borrowings 11,575,275 10,104,995
Principal payments on line of credit
and other borrowings (18,274,070) (13,292,870)
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (6,698,795) (3,187,875)
------------ ------------
INCREASE (DECREASE) IN CASH 90,134 (1,042,910)
------------ ------------
CASH, Beginning of period 1,763,930 2,785,219
------------ ------------
CASH, End of period $ 1,854,064 $ 1,742,309
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid $ 258,506 $ 70,157
============ ============
Income taxes paid $ 375,000 $ 16,131
============ ============
<FN>
See Notes to Consolidated Financial Statements
</FN>
5
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
March 31, 1995 and 1994; 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 three months
ended March 31, 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 months ended March 31, 1995.
3. Line of credit. As of March 31, 1995 the Company had approximately $21
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 March 31, 1995 Lifetime Options, Inc., a Viatical Settlement Company,
a wholly owned subsidiary of the Company, had approximately $900 thousand
available under a $2.0 million line of credit and an additional $800 thousand
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.
4. Settlement Payable. In April 1995 the Company reached a tentative
settlement with the Trustee in the bankruptcy of Premium Sales Corporation. The
terms of the settlement call for the Company to pay $1.4 million in cash. The
settlement is intended to be a full release of any and all claims between the
Company and the Trustee and remains subject to court approval.
6
Management's Discussion and Analysis of Financial Condition and 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 March 31, 1995,
Collateralized Advances constituted approximately 47.7% 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 a 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.
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.
7
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
Heightened competition within the marketplace from banks and asset-based
lenders (previously not in competition with the Company) and newly created
finance companies have infringed on the Company's potential client base and have
negatively affected earned discounts. 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 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 try 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.
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.
8
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.
For the Three Months Ended March 31,
-----------------------------------------
1995 1994
------------------ ------------------
INCOME
Earned discounts $2,877,646 87.6 $1,972,121 85.9
Fees and other income 406,425 12.4 324,084 14.1
---------- ----- ---------- -----
TOTAL INCOME 3,284,071 100.0% 2,296,205 100.0%
---------- ----- ---------- -----
EXPENSE
Compensation and fringe benefits 807,480 24.6 678,129 29.5
General and administrative expense 608,238 18.5 481,269 21.0
Interest expense 258,506 7.9 73,632 3.2
Provision for credit losses 1,301,100 39.6 363,355 15.8
Commissions 61,871 1.9 25,241 1.1
---------- ----- ---------- -----
TOTAL EXPENSES 3,037,195 92.5 1,621,626 70.6
---------- ----- ---------- ------
INCOME BEFORE INCOME TAXES 246,876 7.5 674,579 29.4
INCOME TAXES 91,000 2.8 250,000 10.9
---------- ----- ---------- -----
NET INCOME $ 155,876 4.7% $ 424,579 18.5%
========== ===== ========== =====
NET INCOME PER SHARE $ .05 $ .14
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES 3,102,328 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.
Total income increased 43% in the first quarter of 1995 over the first
quarter of 1994, from $2,296,205 to $3,284,071. Earned discounts from the
purchase of accounts receivable and life insurance policies increased
approximately 19.4% in the first quarter of 1995 versus the first quarter of
1994, from approximately $1.8 million to approximately $2.1 million. In the
first quarters of 1994 and 1995, earned discounts from the purchase of accounts
receivable and life insurance policies constituted 88.8% and 72.7%,
respectively, of total earned discounts and 76.3% and 63.7%, 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.
9
Earned discounts from Collateralized Advances increased 251% in the first
quarter of 1995 over the comparable period in 1994, from $221 thousand to $786
thousand. In the first quarters of 1994 and 1995, earned discounts from
Collateralized Advances constituted 11.2% and 27.3%, respectively, of total
earned discounts and 9.6% and 23.9%, 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 25% in the first quarter of 1995 over the
first quarter of 1994, from $324,084 to $406,425. The increase is attributable
primarily to growth in closing fees and supplemental discounts.
As of March 31, 1994 and 1995 purchased accounts receivable included on the
Company's balance sheet were $25 million (90.8%) and $11.3 million (52.3%),
respectively of net finance receivables. As of March 31, 1994 and 1995,
Collateralized Advances included on the Company's balance sheet were $2.5
million (9.2%) and $10.3 million (47.7%), respectively, of net finance
receivables. The relative increase from the end of the first quarter of 1994
to the end the first quarter of 1995 in the percentage of net 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.
Compensation and Fringe Benefits. Compensation and fringe benefits were
$807 thousand (24.6% of total income) versus $678 thousand (29.5% of total
income) for the first quarters of 1995 and 1994, respectively. This rise is the
result of an increase in sales personnel and administrative staff to support the
growth of the Company. Executive compensation remained relatively flat in the
first quarter of 1995 as compared to the same period in 1994, $237 thousand
(7.2% of total income) and $240 thousand (10.5% of total income), respectively.
General and Administrative Expense. General and administrative expense was
$608 thousand (18.5% of total income) as compared to $481 thousand (21.0% of
total income) for the first quarters of 1995 and 1994, respectively. This
increase is primarily attributable to a rise in licenses and taxes, duplicating
and professional fees. Additional licenses and tax expenses were incurred in
connection with maintaining a portion of the Company's assets acquired in
settlement of finance and other receivables. Professional fees increased from
$135 thousand (5.9% of total income) in the first quarter of 1994 to $174
thousand (5.3% of total income) in the first quarter of 1995. The increase in
professional fees was attributable, in part, to on-going litigation instituted
in prior years and, in part, to the final resolution of legal proceedings
instituted in prior years. Other charges contributing to the rise in general
and administrative expense were insurance, postage, telephone and travel and
entertainment which were offset by decreases in office supplies and credit and
filing costs.
10
Interest Expense. Interest expense was $259 thousand (7.9% of total
income) as compared to $74 thousand (3.2% of total income) for the first
quarters of 1995 and 1994, respectively. The rise in interest expense is
attributable to the 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 the first quarter of 1994 to the first quarter of 1995. The average daily
outstanding balance on the Company's revolving lines of credit was $9.8 million
and $3.0 million for the three months ended March 31, 1995 and 1994,
respectively. The average interest rate paid on the revolving lines of credit
rose to 9.38% from 7.28% for the first quarters of 1995 and 1994, respectively.
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.
The provision for credit losses was $1.3 million (39.6% of total income)
and $363 thousand (15.8% of total income) for the first quarters of 1995 and
1994, respectively. Based on management's assessment of the adequacy of the
allowance for credit losses at March 31, 1995 (see below), the Company's
provision for credit losses in the first quarter of 1995 was attributable to
the tentative settlement reached by the Company early in the second quarter of
1995 with the Trustee in the bankruptcy of Premium Sales Corporation. The
first quarter 1995 provision is in addition to the $1.5 million provision
related to the Premium Sales Corporation matter taken in the fourth quarter of
1994. The settlement is intended to be a full release of any and all claims
between the Company and the Trustee. In addition, certain officers and
directors of the Company have reached a tentative settlement with the
Trustee for a release of any and all claims against them. No indemnification
will be provided by the Company to these officers and directors as a
consequence of their settlement. The settlements remain subject to
Bankruptcy Court approval.
The allowance for credit losses was 9.3% ($2.4 million) and 7.5% ($2.5
million) of gross finance receivables at March 31, 1995 and December 31, 1994,
respectively. The allowance at March 31, 1995 is net of the $1.4 million
settlement payable in connection with the Premium Sales Corporation matter.
11
At March 31, 1995 the accrual of earnings was suspended on $3,580,520 as
compared to $3,608,164 at December 31, 1994 of gross finance receivables.
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 grew to $62 thousand (1.9% of total
income) from $25 thousand (1.1% of total income) in the first quarter of 1995
versus the same period in 1994. The increase stems from 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 charged. 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.
Changes in Financial Condition
The Company's total assets decreased 11.8% to $37.0 million at March 31,
1995 from $41.9 million at December 31, 1994. The decrease for the quarter is
primarily the result of the decrease in net finance receivables and reduction in
notes payable.
Other assets consist primarily of assets acquired in settlement of finance
receivables, including, inventory, land and homes to be foreclosed and a
condominium not used in trade or business and other.
Liquidity and Capital Resources. The Company's principal funding sources
are the collection of purchased receivables, retained cash flow and external
borrowings.
12
As of March 31, 1995 the Company had approximately $21 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 March 31, 1995 Lifetime Options had approximately $900 thousand
available under a $2.0 million line of credit and an additional $800 thousand
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 March 31, 1995 the Company had working capital of $25.4 million and a
ratio of current assets to current liabilities of 3.95 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 balance of 1995. 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. If in 1995 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.
13
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. As a result, the litigation is expected to
resume. 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.
The Company and its wholly-owned subsidiary, Premium Sales Northeast, Inc.
("PSN"), are creditors in the Chapter 11 bankruptcy proceeding of Premium Sales
Corporation. The Company and PSN filed claims against the debtor and its
affiliates in the amounts of $599,557 and $871,865, respectively. The Trustee
provided the Company with a draft complaint which formed the basis for objecting
to these claims. The draft complaint also contained claims against the Company
and PSN seeking recovery of alleged preferences of approximately $15,000,000 and
certain voidable transfers under both the Bankruptcy Code and Florida statutes
of approximately $150,000. The entire matter has been tentatively settled with
the Trustee by the Company's agreement to pay $1,400,000 in cash and
additionally by the Company's and PSN's agreement to withdraw its claims of
$599,557 and $871,865, respectively, in the Premium bankruptcy proceedings.
The agreement is subject to court approval. The Company has reserved and
written off approximately $2.8 million in anticipation of a comprehensive
settlement of the matter. The results of this settlement have been reflected
in the Company's March 31, 1995 and December 31, 1994 financial statements.
14
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. -EXHIBITS AND REPORTS ON FORM 8-K
None.
15
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 May 11, 1995 Lawrence M. Winkler
------------------------------
Lawrence M. Winkler
Secretary/Treasurer
Chief Financial Officer