U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE TRANSITION PERIOD FROM _________ TO __________
Commission File Number 0-17832
Harbourton Financial Corporation
(Exact name of small business issuer as specified in its charter)
Delaware 54-1208450
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8180 Greensboro Drive, McLean, VA 22102
(Address of principal executive offices) (Zip Code)
(703) 883-9757
(Issuer's telephone number)
Allstate Financial Corporation
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
---- ----
The number of shares outstanding of the issuer's common stock, no par value, as
of May 1, 2001, was 15,184,164
Transitional Small Business Disclosure Format
(check one): No X Yes
---- ----
Harbourton Financial Corporation
Form 10-QSB
Index
Page
Number
Part I
Item 1. Financial Statements
Consolidated Balance Sheets...............................................1
Consolidated Statements of Operations (unaudited).........................2
Consolidated Statements of Comprehensive Income (unaudited)...............2
Consolidated Statements of Shareholders' Equity...........................3
Consolidated Statements of Cash Flows (unaudited).........................4
Notes to Consolidated Financial Statements................................5
Item 2. Management's Discussion and Analysis or Plan of Operation..........6
Part II
Item 1. Legal Proceedings.................................................10
Item 2. Changes in Securities and Use of Proceeds.........................10
Item 3. Defaults Upon Senior Securities...................................10
Item 4. Submission of Matters to a Vote of Security Holders...............10
Item 5. Other.............................................................10
Item 6. Exhibits and Reports on Form 8-K..................................10
Signatures....................................................................10
Harbourton Financial Corporation and Subsidiaries
Consolidated Balance Sheets
------------------------------------------------------------------------ --------------------- ----------------------
March 31, 2001 December 31, 2000
(unaudited)
------------------------------------------------------------------------ --------------------- ----------------------
Assets
------------------------------------------------------------------------
Cash and cash equivalents $ 624,927 $ 447,184
------------------------------------------------------------------------
Loans receivable, net 11,484,812 12,199,912
------------------------------------------------------------------------
Purchased receivables, net 1,519,754 1,575,969
------------------------------------------------------------------------
Securities available for sale 24,000 60,000
------------------------------------------------------------------------
Deferred income taxes, net 3,157,455 3,126,714
------------------------------------------------------------------------
Furniture, fixtures and equipment, net 50,447 55,617
------------------------------------------------------------------------
Other assets 110,315 154,328
------------------------------------------------------------------------
Total assets $16,971,710 $17,619,724
------------------------------------------------------------------------
Liabilities and shareholders' equity
------------------------------------------------------------------------
Liabilities
------------------------------------------------------------------------
Notes payable $ 790,000 $ 1,420,000
------------------------------------------------------------------------
Convertible subordinated notes 266,000 266,000
------------------------------------------------------------------------
Accounts payable and accrued expenses 279,435 793,867
------------------------------------------------------------------------
Income taxes payable 24,189 24,189
------------------------------------------------------------------------
Total liabilities 1,359,624 2,504,056
------------------------------------------------------------------------
Shareholders' equity:
------------------------------------------------------------------------
Preferred stock, no par value, authorized 2,000,000
shares, no shares issued or outstanding - -
------------------------------------------------------------------------
Common stock, $.01 par value, authorized 20,000,000
shares; 151,841 151,841
15,184,164 issued and outstanding
------------------------------------------------------------------------
Additional paid-in-capital 24,612,674 24,612,674
------------------------------------------------------------------------
Accumulated deficit (9,172,429) (9,704,847)
------------------------------------------------------------------------
Accumulated other comprehensive income: unrealized
gains on investment securities 20,000 56,000
------------------------------------------------------------------------
Total shareholders' equity 15,612,086 15,115,668
------------------------------------------------------------------------
Total liabilities and shareholders' equity $16,971,710 $17,619,724
See Notes to Consolidated Financial Statements
1
Harbourton Financial Corporation and Subsidiaries
Consolidated Statements of Operations (unaudited)
Three months ended March 31,
---------------------------------------------------------------------------
2001 2000
--------------------------------------------------------------------------- ------------------ ---------------------
Revenues
---------------------------------------------------------------------------
Interest, discounts, and loan fees $506,225 $131,950
---------------------------------------------------------------------------
Administration fees and other revenue 394,437 71,763
---------------------------------------------------------------------------
Profit participations 28,422 -
---------------------------------------------------------------------------
Total Revenues 929,084 203,713
---------------------------------------------------------------------------
Expenses
---------------------------------------------------------------------------
Compensation and fringe benefits 292,580 168,897
---------------------------------------------------------------------------
General and administrative 97,544 217,342
---------------------------------------------------------------------------
Interest expense 37,283 141,345
---------------------------------------------------------------------------
Total Expenses 427,407 527,584
---------------------------------------------------------------------------
Income (loss) before income tax benefit 501,677 (323,871)
---------------------------------------------------------------------------
Income tax benefit (30,741) -
---------------------------------------------------------------------------
Net income (loss) $532,418 $(323,871)
---------------------------------------------------------------------------
Net income (loss) per common share
---------------------------------------------------------------------------
Basic and diluted $ 0.04 $ (0.14)
---------------------------------------------------------------------------
Weighted average number of shares outstanding
---------------------------------------------------------------------------
Basic and diluted 15,184,164 2,324,616
Harbourton Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (unaudited)
-------------------------------------------------------------------------- ------------------------------------------
Three months ended March 31,
2001 2000
-------------------------------------------------------------------------- ----------------------- ------------------
Net income (loss) $532,418 $(323,871)
Other comprehensive income:
Unrealized loss on securities available for sale (36,000) -
Comprehensive income (loss) $496,418 $(323,871)
See Notes to Consolidated Financial Statements
2
Harbourton Financial Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Accumulated Other
Additional Earnings Comprehensive
Common Paid-in- Treasury Stock (accumulated Income
Stock Capital Deficit) Total
Balance - December 31, 1999 $ 40,000 $ 18,874,182 $(4,967,472) $(13,604,281) $ - $342,429
Amortization of treasury stock
acquisition costs - - 13,449 - - 13,449
Unrealized gains on investment
securities - - - - 56,000 56,000
Issuance of restricted stock - 89,250 -
- - 89,250
Conversion of no par value Virginia
shares to $.01 par value Delaware
shares (7,192) 7,192 - - - -
Issuance of 5,168,388 shares in
exchange for convertible
subordinated notes 51,684 4,688,415 - - - 4,740,099
Issuance of 7,516,160 shares in
exchange for common stock of
Harbourton Financial Corp. 75,161 7,931,878 - 1,053,753 9,060,792
Return of capital - (2,024,220) - - - (2,024,220)
Retirement of 781,212 shares of
treasury stock (7,812) (4,954,023) 4,954,023 - - (7,812)
Net income 2,845,681 - 2,845,681
Balance-December 31, 2000 $ 151,841 $ 24,612,674 $ - $(9,704,847) $ 56,000 $ 15,115,668
Net income (unaudited) 532,418 - 532,418
Unrealized loss on investment
securities (unaudited) - - - - (36,000) (36,000)
Balance-March 31, 2001 $ 151,841 $ 24,612,674 $ - $(9,172,429) $ 20,000 $ 15,612,086
(unaudited)
See Notes to Consolidated Financial Statements
3
Harbourton Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows (unaudited)
- ---------------------------------------------------------------------------------------------------------------
Three months ended:
March 31, 2001 March 31, 2000
- ---------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $532,418 $(323,871)
Adjustments to reconcile net income (loss)
to cash provided by (used by)operating activities:
Depreciation 10,098 19,999
Amortization of valuation allowance (22,647) -
Changes in operating assets and liabilities:
Other assets 44,013 11,033
Accounts payable and accrued expenses (514,432) (91,582)
Deferred income taxes (30,741) -
Net cash provided by (used by) operating activities 18,710 (384,421)
Cash flows from investing activities:
Collection of receivables, net 793,926 978,876
(Purchase) sale of furniture, fixtures and equipment (4,928) 11,498
Net cash provided by investing activities 789,034 990,374
Cash flows from financing activities:
Principal payments on notes payable, net (630,000) (746,151)
Treasury stock acquisition costs - (2,830)
Net cash used by financing activities (630,000) (748,981)
Net increase (decrease) in cash 177,743 (143,028)
Cash, beginning of period 447,184 353,962
Cash, end of period $624,927 $210,934
Supplemental disclosure of cash flow information:
Cash paid for interest $ 51,046 $41,345
Unrealized loss on securities available for sale $(36,000) $ -
See Notes to Consolidated Financial Statements
4
Harbourton Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. General. The consolidated financial statements of Harbourton Financial
Corporation (f/k/a Allstate Financial Corporation, prior to its name change on
May 1, 2001) and subsidiaries (the "Company") included herein are unaudited for
the periods ended March 31, 2001 and 2000; however, they reflect all adjustments
( consisting of only normal accruals) which, in the opinion of management, are
necessary to present fairly the results for the periods presented. The December
31, 2000 balance sheet has been extracted from audited financial information.
Certain information and note disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The Company believes that the disclosures
are adequate to make the information presented not misleading. The results of
operations for the three months ended March 31, 2001 are not necessarily
indicative of the results of operations to be expected for the remainder of the
year. It is suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and notes thereto
included in Allstate Financial Corporation's Annual Report on Form 10-KSB for
the year ended December 31, 2000.
2. Receivables. At March 31, 2001 and December 31, 2000, loans receivable, net,
comprises the following:
March 31, 2001 December 31, 2000
Loans receivable, gross $56,984,755 $55,651,303
Portion sold to participants (43,830,535) (41,833,057)
Deferred interest and fees (1,067,792) (979,971)
Amount allocated from purchase
of minority interest (75,409) (98,137)
Allowance for credit losses (526,126) (540,226)
Loans receivable, net $11,484,812 $12,199,912
At March 31, 2001 and December 31, 2000, purchased receivables, net, is as
follows:
March 31,2001 December 31, 2000
Life insurance policies $2,814,868 $2,914,868
Valuation allowance (1,336,560) (1,386,045)
Life insurance policies, net 1,478,308 1,528,823
Litigation claims, net of unearned discount 54,173 59,872
Allowance for credit losses (12,726) (12,726)
Litigation claims, net 41,446 47,146
Total purchased receivables, net $1,519,754 $1,575,969
3. Credit Concentrations. For the quarter ended March 31, 2001, the total
revenue from the two largest borrowers, each of which accounted for 10% or more
of the Company's total revenues, was 40.6% of the Company's total revenues, as
compared to a combined 56.6% of revenues for the three largest borrowers (each
5
of which accounted for over 10% or more of the total) in the quarter ended March
31, 2000. At March 31, 2001, the four largest borrowers (counting as a single
borrower those related by common ownership) measured by the Company's
outstanding loan balances net of deferred income and participations sold,
accounted for 57.4% of the Company's total receivables, while at December 31,
2000 four such borrowers accounted for 61.5%.
4. Lines of Credit. On March 15, 2001, the Company's bank approved an increase
in the secured line of credit from $2.5 million to $3 million, and an extension
of the maturity to December 31, 2002.
5. Stock Options. There was no activity in either the Qualified or 2000 Stock
Option plans during the three months ended March 31, 2001. The Company continues
to account for stock options under APB 25 and provides the additional
disclosures as required by SFAS No. 123.
6. Income taxes. The Company determined that a portion of the valuation
allowance for the deferred tax asset was not required because of projected
future profitability and recorded a $222,834 reduction to the allowance in March
2001.
Activity in the net deferred income taxes account for the three months ending
March 31, 2001 was as follows:
Beginning balance $3,126,714
Income taxes (192,092)
Reduction in valuation allowance 222,834
Ending Balance $3,157,455
7. Subsequent event. On May 1, 2001, the shareholders of the Company approved an
amendment to the Company's Certificate of Incorporation to change the Company's
name from Allstate Financial Corporation to Harbourton Financial Corporation.
The name change was effective May 1, 2001.
Item 2. Management's Discussion and Analysis or Plan of Operation
This Form 10-QSB may contain certain "forward-looking statements" relating to
the Company (defined in the notes to the financial statements above, and also
referred to herein as "we," "our," or "us") that represent our current
expectations or beliefs, including, but not limited to, statements concerning
our operations, performance, financial condition and growth. For this purpose,
any statements contained in this Form 10-QSB that are not statements of
historical fact may be deemed forward-looking statements. Without limiting the
generality of the foregoing, words such as "may", "will", "expect", "believe",
"anticipate", "intend", "could", "estimate", or "continue", or the negatives or
other variations thereof, or comparable terminology are intended to identify
forward-looking statements. These statements by their nature involve substantial
risks and uncertainties, such as credit losses, dependence on management and key
personnel, seasonality and variability of quarterly results, our ability to
continue our growth strategy, competition, and regulatory restrictions relating
to potential new activities, certain of which are beyond our control. Should one
or more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual outcomes and results could differ materially
from those indicated in the forward-looking statements.
General Description. Harbourton Financial Corporation, f/k/a Allstate Financial
Corporation, was formed in 1982 as a Virginia corporation. On August 28 2000, we
changed our state of incorporation to Delaware and, on November 30, 2000,
acquired Harbourton Financial Corp. ("Old Harbourton") by merger. Old Harbourton
6
was a Delaware corporation formed in August 1998 to acquire the assets of
Harbourton Residential Capital Co., L.P. On May 1, 2001 we changed our name to
Harbourton Financial Corporation, to better reflect our business plan, which is
to provide financing to the residential building and development community,
through products that were previously offered by Old Harbourton. Although we are
no longer active in these business lines, we have a liquidating portfolio of
commercial finance loans to small and middle-market businesses secured by
inventory and machinery and equipment collateral ("Asset-Based" loans, or
"ABL"). In October 1999, we sold our factoring business, the portion of the
business that purchased discounted invoices with recourse. We will continue to
receive revenue from this sale for the near future, under an agreement with the
purchaser to pay us part of their net revenue earned from new factoring
activities with the borrowers acquired from us. Our subsidiary Lifetime Options,
Inc. manages a portfolio of life insurance policies it purchased from
individuals facing life-threatening illnesses. During 1997, Lifetime Options
ceased purchasing policies.
Liquidity and Capital Resources. Our requirement for capital is a function of
the level of our generation of and investment in receivables. We fund this
investment in receivables through participations, shareholders' equity, bank
lines of credit, convertible subordinated notes, and internally generated funds.
We believe our internal and external sources of liquidity are adequate.
During the three months ended March 31, 2001 we sold an additional participation
interest (the "New Participation") in a retained interest (the "Retained
Portion") in one of our acquisition, development, and construction ("AD&C")
loans. Our net portfolio of loans receivable decreased as a result of the sale
transaction.
On March 15, 2001, our bank approved an increase in our secured line of credit
from $2.5 million to $3 million, and an extension of the maturity to December
31, 2002.
Financial condition at March 31, 2001 and December 31, 2000.
Total assets fell to $17.0 million at March 31, 2001 from $17.6 million at
December 31, 2000, because of a reduction in our net receivable portfolio.
Although our total loans receivable before the sale of participations ("Managed
Loan Portfolio") increased by $1.3 million, we sold additional participations of
$2 million. Purchased receivables declined by $56 thousand with the collection
of two life insurance policies. We increased the balance of our deferred tax
asset by $30 thousand as a result of a reduction in the valuation allowance
applied to the asset. The value of our securities held for resale fell to $20
thousand from $36 thousand. Other assets decreased to $110 thousand from $154
thousand, because of fee collections.
The net difference of $715 thousand in loans receivable was used to reduce the
balance of our line of credit. We also reduced accounts payable and accrued
expenses, primarily through the payments of merger-related expenses and bonus
compensation for the year ended December 31, 2000.
THIS SPACE INTENTIONALLY LEFT BLANK
7
The following table indicates the composition of our portfolio, net of deferred
income and participations sold(gross of the allowance for losses), by loans
receivable, and purchased receivables, as of March 31, 2001 and December 31,
2000 (dollars in thousands).
Composition of Receivable Portfolio
March 31, 2001 December 31, 2000
% %
Amount of total Amount of total
Loans receivable $12,086 88.8% $12,838 89.0%
Purchased receivables 1,532 11.2% 1,589 11.0%
Total portfolio $13,618 100.0% $14,427 100.0%
The following table indicates the composition of our retained loan portfolio,
net of deferred income, by loan product, as of March 31, 2001 and December 31,
2000 (dollars in thousands).
Loans Receivable, Net of Deferred Income, by Loan Product
Loan Product March 31, 2001 December 31, 2000
Amount % Amount %
Acquisition, development and construction $5,742 47.5% $6,516 50.8%
Mezzanine 5,386 44.5% 5,059 39.4%
Asset-based 793 6.6% 1,146 8.9%
Other 165 1.4% 117 0.9%
All products $12,086 100.0% $12,838 100.0%
Within the asset-based portfolio, we have one non-performing account. The
balance of that loan was reduced to $447 thousand at March 31, 2001 from $464
thousand at December 31, 2000, through collections.
Three months ended March 31, 2001 vs. three months ended March 31, 2000.
The following table shows the components of revenue for the three-month periods
ended March 31, 2001 vs. March 31, 2000 (dollars in thousands).
March 31, 2001 March 31, 2000 Increase
Revenues Amount % Amount % Amount %
Interest, discounts, and loan fees $506.2 54.5% $132.0 64.8% $374.3 283.6%
Administration fees and other revenue 394.4 42.4% 71.8 35.2% 322.7 449.6%
Profit participations 28.4 3.1% - - 28.4 -
-
Total Revenues $929.1 100.0% $203.7 100.0% $725.4 356.2%
During the three months ended March 31, 2001, the results predominantly reflect
our current core business of lending to builders/developers of residential real
estate. Because we may provide higher amounts of funding based on loan to costs
than traditional bank lenders, our loan structures provide for fees and other
8
revenue, including profit participations in the properties being developed by
borrowers, to enhance our yield and provide returns that may approach those
traditionally earned by equity investments. In addition, we have subordinated
our retained interests to our participants, which allows us to reduce the rates
paid on participations sold. This has the effect of increasing our yield on our
retained loan portfolio.
For the same period in 2000, the revenues were derived from the liquidating
portfolio of commercial finance loans to small and middle-market businesses
secured by inventory and machinery and equipment, as well as the fees from the
buyer of the factoring business.
The following table shows our expenses for the three-month periods ended March
31, 2001 vs. March 31, 2000(dollars in thousands).
March 31, 2001 March 31, 2000 Increase/ (Decrease)
Expenses Amount % Amount % Amount %
Compensation and fringe benefits $292.6 31.5% $ 168.9 82.9% $ 123.7 73.2%
General and administrative 97.5 10.5% 217.3 106.7% (119.8) (55.1%)
Interest expense 37.3 4.0% 141.3 69.4% (104.1) (73.6%)
Total Expenses 427.4 46.0% 527.6 259.0% (100.2) (19.0%)
Income (loss) before income tax benefit 501.7 54.0% (323.9) (159.0%) 825.5 254.9%
Income tax benefit (30.7) (3.3%) - - (30.7) -
Net income (loss) $532.4 57.3% $(323.9) (159.0%) $856.3 264.4%
During the three months ended March 31, 2001, the expenses reflect the
operations of the merger of the Company with Old Harbourton (the "Merged
Operation"). Compensation expenses were higher for the Merged Operation in part
because it employs a greater number of people to effect the new business model
as compared to our liquidating operation in the same period last year. General
and administrative expenses were lower primarily due to lower legal and
professional costs, rent and occupancy expenses and depreciation expense. Most
of these savings relate to our downsizing during 2000. Interest expense is lower
because the majority of our financing now comes from participations instead of
lines of credit, and because we converted the majority of our convertible
subordinated notes to equity in October 2000. Interest on the convertible
subordinated notes in the three months ended March 31, 2001 was $7 thousand, vs.
$123 thousand in the same period in 2000.
Based on our continued profitability we determined that a portion of the
valuation allowance for the deferred tax asset was not required and recorded a
$223 thousand reduction to the allowance in March 2001. Combined with income
taxes at our statutory rate of $192 thousand, this led to a net tax benefit of
$31 thousand. In 2000, we did not record any tax expense or benefit.
We did not record a provision for losses or recoveries in the three months ended
March 31, 2001 or 2000. During the three months ended March 31, 2000, we charged
off $17 thousand on asset-based loans, and recovered $3 thousand of loans
charged-off in prior periods. During the three months ended March 31, 2000, we
had no charge-offs, while recovering $7 thousand. At March 31, 2001, our
allowance for losses on loans receivable was $526 thousand, of which $232
thousand was allocated to a non-performing account. The balance, $294 thousand,
was 4.55% of our performing loans receivable, net, portfolio. We believe our
allowance for loan losses is adequate.
9
Part II
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
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.
No Exhibits are required to be filed.
No Reports were filed on Form 8-K during the period.
Signatures
In accordance with the requirements of the Securities and Exchange Act of 1934,
Harbourton Financial Corporation caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Harbourton Financial Corporation
Date: May 11, 2001
/s/ J. Kenneth McLendon
J. Kenneth McLendon
President and Chief Executive Officer
Date: May 11, 2001
/s/ C. Fred Jackson
C. Fred Jackson
Senior Vice President and Chief Financial Officer
10