10QSB 1 secondq2001qsb.txt FORM 10QSB FOR QUARTER ENDED 6/30/01 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-QSB |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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) 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, $.01 par value, as of June 29, 2001, was 15,184,164 Transitional Small Business Disclosure Format (check one): Yes No X ---- ---- 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........8 Part II.......................................................................13 Item 1. Legal Proceedings...............................................13 Item 2. Changes in Securities and Use of Proceeds.......................13 Item 3. Defaults Upon Senior Securities.................................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 Harbourton Financial Corporation and Subsidiaries Consolidated Balance Sheets
------------------------------------------------------------------------ --------------------- ---------------------- June 30, 2001 December 31, 2000 ------------- ----------------- ------------------------------------------------------------------------ ------------------------------------------------------------------------ Unaudited ------------------------------------------------------------------------ --------------------- ---------------------- Assets ------------------------------------------------------------------------ ------------------------------------------------------------------------ Cash and cash equivalents $759,202 $ 447,184 ------------------------------------------------------------------------ Loans receivable, net 11,799,477 12,199,912 ------------------------------------------------------------------------ Purchased receivables, net 1,518,454 1,575,969 ------------------------------------------------------------------------ Securities available for sale 867 60,000 ------------------------------------------------------------------------ Deferred income taxes, net 3,190,198 3,126,714 ------------------------------------------------------------------------ Furniture, fixtures and equipment, net 40,463 55,617 ------------------------------------------------------------------------ Other assets 232,719 154,328 ------- ------- ------------------------------------------------------------------------ Total assets $17,541,380 $17,619,724 =========== =========== ------------------------------------------------------------------------ ------------------------------------------------------------------------ Liabilities and shareholders' equity ------------------------------------------------------------------------ ------------------------------------------------------------------------ Liabilities ------------------------------------------------------------------------ ------------------------------------------------------------------------ Notes payable $415,000 $ 1,420,000 ------------------------------------------------------------------------ Convertible subordinated notes 266,000 266,000 ------------------------------------------------------------------------ Deferred Income 38,704 ------------------------------------------------------------------------ Accounts payable and accrued expenses 572,163 793,867 ------------------------------------------------------------------------ Income taxes payable 24,189 24,189 ------ ------ ------------------------------------------------------------------------ Total liabilities 1,316,056 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 (8,536,058) (9,704,847) ------------------------------------------------------------------------ Accumulated other comprehensive income: unrealized (loss) gain on investment securities (3,133) 56,000 ------- ------- ------------------------------------------------------------------------ Total shareholders' equity 16,225,324 15,115,668 ---------- ---------- ------------------------------------------------------------------------ Total liabilities and shareholders' equity $17,541,380 $17,619,724 =========== =========== ------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 1 Harbourton Financial Corporation and Subsidiaries Consolidated Statements of Operations (unaudited)
Three Months Ending June 30, Six Months Ending June 30, --------------------------------------------- 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------------------- Revenues -------------------------------------------- Interest, discounts, and loan fees $566,615 $85,038 $1,072,840 $216,928 -------------------------------------------- Administration fees and other revenue 507,551 118,783 901,988 190,546 -------------------------------------------- Profit participations 68,756 - 97,178 - ------ ----- ------ ----- -------------------------------------------- Total Revenues 1,142,922 203,821 2,072,006 407,474 --------- ------- --------- ------- -------------------------------------------- Expenses -------------------------------------------- Compensation and fringe benefits 313,547 116,254 606,128 285,242 -------------------------------------------- General and administrative 210,357 324,969 307,900 542,831 -------------------------------------------- Interest expense 15,390 205,369 52,673 346,714 -------------------------------------------- Provision for (recovery of) credit losses - (365,489) - (365,489) ------ --------- ---- --------- -------------------------------------------- Total Expenses 539,294 281,103 966,701 809,298 -------- -------- -------- -------- -------------------------------------------- Income (loss) before income tax benefit 603,628 (77,282) 1,105,305 (401,824) -------------------------------------------- Income tax benefit (32,743) (63,484) - -------- ------- -------- ---- -------------------------------------------- Net income (loss) $636,371 $(77,282) $1,168,789 $(401,824) ========= ========= =========== ========== -------------------------------------------- Net income (loss) per common share -------------------------------------------- Basic and diluted $ 0.04 $ (0.03) $ 0.08 $ (0.17) ======== ========= ========= ========= -------------------------------------------- Weighted average number of shares outstanding -------------------------------------------- Basic and diluted 15,184,164 2,385,445 15,184,164 2,354,862 --------------------------------------------
Harbourton Corporation and Subsidiaries Consolidated Statements of Comprehensive Income (unaudited)
----------------------------------------- ------------------------------------ -------------------------------------- Three Months Ending June 30, Six Months Ending June 30, 2001 2000 2001 2000 ---------------------------------------------- -------------- ----------------- ------------------- ----------------- Net income (loss) $636,371 $(77,282) $1,168,789 $(401,824) Other comprehensive income: Unrealized (loss) gain on securities available for sale (23,133) 376,000 (59,133) 376,000 -------- ------- -------- ------- Comprehensive income (loss) $613,238 $298,719 $1,109,656 $ (25,824) ======== ======== ========== ==========
See Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- 2 Harbourton Financial Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity
----------------------------------------------------------------------------------------------------------------------------------- Retained Accumulated Additional Earnings Other Common Paid-in- Treasury (Accumulated Comprehensive Stock Capital Stock Deficit) Income 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) - - - 1,168,789 - 1,168,790 Unrealized loss on investment securities (unaudited) - - - - $ (59,133) $(59,133) -------------------------------------------------------------- ---------- --------- Balance-June 30, 2001 (unaudited) $151,841 $24,612,674 $ - $(8,536,058) $ (3,133) $16,225,324 ========= ============ ======== ============ ========= ===========
See Notes to Consolidated Financial Statements 3 Harbourton Financial Corporation and Subsidiaries Consolidated Statements of Cash Flows (unaudited)
------------------------------------------------------------------------------------------------------------- Six months ended June 30, 2001 June 30, 2000 ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $1,168,789 $(401,824) Adjustments to reconcile net income (loss) to cash provided by (used by) operating activities: Depreciation 20,040 32,855 Amortization of valuation allowance (45,294) - Provision for (recovery of) credit losses - (365,489) Changes in operating assets and liabilities: Other receivables (78,391) 468 Accounts payable and accrued expenses (221,704) (269,450) Deferred income 38,704 - Deferred income taxes (63,484) - -------- ---------- Net cash provided by (used by) operating activities 818,660 (1,003,440) ------- ----------- Cash flows from investing activities: Collection of receivables, net 503,244 3,073,994 (Purchase) sale of furniture, fixtures and equipment (4,886) 11,498 ------- ------ Net cash provided by investing activities 498,358 3,085,492 ------- --------- Cash flows from financing activities: Principal payments on notes payable, net (1,005,000) (1,366,051) Treasury stock acquisition costs - 5,660 ----------- --------- Net cash used by financing activities (1,005,000) (1,360,391) ----------- ----------- Net increase in cash 312,018 721,661 Cash, beginning of period 447,184 353,962 ------- ------- Cash, end of period $759,202 $1,075,623 ======== ========== Supplemental disclosure of cash flow information: Cash paid for interest $71,186 $67,250 -------- ------- Unrealized (loss) gain on securities available for sale $(59,133) $376,000 --------- -------- Issuance of common stock as directors' fees $ - $89,250 ------ -------
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 June 30, 2001 and 2000; however, they reflect all adjustments (consisting only of normal recurring 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 and six months ended June 30, 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 are 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 June 30, 2001 and December 31, 2000, loans receivable, net, comprises the following:
-------------------------------------------------- ---------------------------- --------------------------- June 30, 2001 December 31, 2000 ------------- ----------------- -------------------------------------------------- ---------------------------- --------------------------- Loans receivable, gross $56,124,401 $55,651,303 Portion sold to participants (42,439,984) (41,833,057) Deferred interest and fees (1,213,572) (979,971) Amount allocated from purchase of minority interest (52,843) (98,137) Allowance for credit losses (618,526) (540,226) --------- --------- Loans receivable, net $11,799,477 $12,199,912 =========== ===========
At June 30, 2001 and December 31, 2000, purchased receivables, net, is as follows:
-------------------------------------------------- ---------------------------- --------------------------- June 30, 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 40,146 59,872 -------------------------------------------------- Allowance for credit losses - (12,726) -------------------------------------------------- Litigation claims, net 40,146 47,146 ------ ------ -------------------------------------------------- Total purchased receivables, net $1,518,454 $1,575,969 ========== =========== --------------------------------------------------
5 Activity in the allowance for losses accounts for the three and six months ending June 30, 2001 was as follows:
------------------------------------------------------------------------------------------------------------ Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 ------------------------------------------------------------------------------------------------------------ Beginning Balance $526,126 $552,954 Additions charged to operations - - Direct write- downs charged against the allowance - 16,901 Recoveries of amounts previously charged-off (92,401) (95,200) -------- -------- Ending Balance $618,526 $618,526 ======== ========
Impaired loans are measured based on the present value of expected future cash flows discounted at a rate determined by management, or, as a practical expedient, the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Changes in the present value of impaired loans are recognized as bad debt expense in the same manner in which impairment was initially recognized or as a reduction in the amount of bad-debt expense that otherwise would be reported. Information regarding impaired loans at June 30, 2001 and December 31, 2000 is as follows:
------------------------------------------------------------ ----------------------- -------------------------- June 30, 2001 December 31, 2000 ------------- ----------------- ------------------------------------------------------------ ----------------------- -------------------------- Number of impaired loans 2 1 ------------------------------------------------------------ Total recorded investment in impaired loans, net of deferred income $1,702,291 $463,746 ------------------------------------------------------------ Recorded investment in impaired loans for which there is a related allowance 1,702,291 $463,746 ------------------------------------------------------------ Related allowance for impaired loans $ 586,130 $232,000 ------------------------------------------------------------
3. Credit Concentrations. For the three months ended June 30, 2001, the total revenue from the two largest borrowers, each of which accounted for 10% or more of the Company's total revenues (net of non-recurring item), was 35.8% of the Company's total revenues, compared to revenues from two clients, each accounting for over 10% of the Company's total revenue, representing 30.6% of the total in the same period in 2000. At June 30, 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 48.8% of the Company's total receivables, while at December 31, 2000 four such borrowers accounted for 61.5%. 4. Stock Options. The Company maintains two stock option plans: (1) the Incentive Stock Option Plan ("Qualified"), and (2) the 2000 Stock Option Plan ("2000 Plan"), under which either qualified or non-qualified options may be issued. The Company continues to account for stock options under APB 25 and provides the additional disclosures as required by SFAS No. 123. There was no activity in the Qualified plan during the three and six months ended June 30, 2001. 6 The Company reserved the lesser of 450,000 shares or 8% of the then issued and outstanding shares of common stock for issuance under its 2000 Plan. As of June 30, 2000, the amount of shares reserved was 450,000. On May 2, 2001 400,000 options were granted under the 2000 Plan. The exercise price of the options was $1.00 per share and is indexed to the rate on US Treasury securities of the same maturity as the options, 5.0 %. The terms of the awards will require that the Company use variable plan accounting to measure compensation expense in subsequent periods. The options vest by December 31, 2003 and expire on December 31, 2008. Because the exercise price of the options exceeded the market value of the underlying stock on every day during the period, no compensation cost has been recognized under the provisions of APB 25 for the 2000 Plan for the three and six months ended June 30, 2001. The fair value at date of grant for options granted during the three and six months ended June 30, 2001 was $0.34. The fair value of options at date of grant was estimated using the Black-Scholes model with an expected option life of 5.7 years, and the following assumptions: dividend yield - none; interest rate - 0% (the "risk-free" rate minus the index rate referred to above); volatility 68.00% (average daily volatility for the period November 30, 2000-June 30, 2001). In accordance with the additional disclosures as required by SFAS No. 123, had we determined compensation cost for the 2000 Plan based on the fair value at date of grant for options granted during the three and six months ended June 30, 2001, our net profit for the three and six months ended June 30, 2001 would have been reduced to the proforma amounts indicated below:
------------------------- ----------------------- -------------------------- ------------------------- Three Months Ended Six Months Ended June 30, 2001 June 30, 2001 ------------------------- ----------------------- -------------------------- ------------------------- Net income As reported $636,371 $1,168,789 Pro forma $573,082 $1,105,500 Basic and diluted As reported $.04 $.08 earnings per share Pro forma $.04 $.07
The table below summarizes the option activity for both plans for the six months ended June 30, 2001: Outstanding at January 1, 2001 30,600 ------------------------------------------------- Granted 400,000 ------------------------------------------------- Forfeited or expired 0 ------------------------------------------------- Outstanding at June 30, 2001 430,600 ------------------------------------------------- Exercisable at June 30, 2001 130,600 ======= -------------------------------------------------
5. 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 reductions to the allowance in three and six month periods ending June 30, 2001. 7 Activity in the net deferred income taxes account for the three and six months ending June 30, 2001 was as follows:
-------------------------------------------------------- ------------------------- ----------------------- Three months ending Six months ending June 30, 2001 June 30, 2001 ------------- ------------- -------------------------------------------------------- ------------------------- ----------------------- Beginning balance $3,157,455 $3,126,714 Income taxes (231,129) (423,222) Reduction in valuation allowance 263,872 455,965 ------- ------- Ending Balance $3,190,198 $3,190,198 ========== ==========
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 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. 8 During the six months ended June 30, 2001 we sold an additional participation interest in a retained interest in one of our acquisition, development, and construction ("AD&C") loans. On March 15, 2001, our bank approved an increase in our secured line of credit from $2.5 million to $3.0 million, and an extension of the maturity to December 31, 2002. On June 30, 2001, there was $2.6 million available to the Company under the line. Financial condition at June 30, 2001 and December 31, 2000. Total assets were $17.5 million at June 30, 2001 compared to $17.6 million at December 31, 2000. Our total loans receivable before the sale of participations ("Managed Loan Portfolio") was $55.6 million at June 30, 2001 and $55.3 million at December 31, 2000. Participations sold as of those same dates were $42.4 million and $41.8 million. Purchased receivables declined by $58 thousand with the collection of two life insurance policies. We increased the balance of our deferred tax asset by $63 thousand as a result of a reduction in the valuation allowance applied to the asset. The value of our securities held for resale (consisting of stock accepted in partial settlement of a loan) fell to less than $1 thousand from $60 thousand. Other assets increased to $232 thousand from $154 thousand, most of which is due to an account receivable representing a settlement of a lawsuit related to an account that had previously been written off. The cash flows from our operations during the six months ended June 30, 2001 were used to reduce the balance of our line of credit by $1 million. 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. 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 June 30, 2001 and December 31, 2000 (dollars in thousands and as a percentage of the total portfolio).
--------------------------------------------------------------------------------------------------------- Composition of Receivable Portfolio June 30, 2001 December 31, 2000 ------------- ----------------- % % - - Amount of total Amount of total ------ -------- ------ -------- --------------------------------------------------------------------------------------------------------- Loans receivable $12,471 88.8% $12,838 89.0% Purchased receivables 1,576 11.2% 1,589 11.0% ----- ----- ----- ----- Total portfolio $14,047 100.0% $14,427 100.0% ======= ====== ======= ======
This space intentionally left blank. 9 The following table indicates the composition of our retained loan portfolio, net of deferred income, by loan product, as of June 30, 2001 and December 31, 2000 (dollars in thousands and as a percentage of the total portfolio).
--------------------------------------------------------------------------------------------------------- Loans Receivable, Net of Deferred Income, by Loan Product June 30, 2001 December 31, 2000 % % Amount of total Amount of total ------ -------- ------ -------- --------------------------------------------------------------------------------------------------------- Acquisition, development and construction $6,189 49.6% $6,516 50.8% Mezzanine 5,366 43.0% 5,059 39.4% Asset-based 113 0.9% 1,146 8.9% Other 803 6.4% 117 0.9% ------ ---- ---- ------ All products $12,471 100.0% $12,838 100.0% ======== ====== ======== ======
Within the asset-based portfolio, we have one non-performing account at December 31, 2000 and June 30, 2001. The balance of that loan was reduced to $420 thousand at June 30, 2001 from $464 thousand at December 31, 2000, through collections. At June 30, 2001 there is one non-performing loan in the mezzanine loan portfolio, with a balance (net of deferred income) of $1.3 million. Except for the asset-based loan referenced above, there were no other non-performing loans at December 31, 2000. Three and six months ended June 30, 2001 vs. three and six months ended June 30, 2000. The following tables show the components of revenue for the three and six-month periods ended June 30, 2001 vs. June 30, 2000 (dollars in thousands, and as a percentage of total revenues).
-------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2001 2000 ---- ---- % % Increase Increase - - -------- -------- Amount of total Amount of total amount % ------ -------- ------ -------- ------ - -------------------------------------------------------------------------------------------------------------------- Interest,discounts,and loan fees $ 566.6 49.6% $ 85.0 41.7% $481.6 566.3% Administration fees and other revenue 507.5 44.4% 118.8 58.3% 388.8 327.3% Profit participations 68.8 6.0% 0.0 0.0% 68.8 - ---- ---- ---- ---- ---- ------ Total revenues $1,142.9 100.0% $203.8 100.0% $939.1 460.7% ======== ====== ====== ====== ======= ======
------------------------------- ------------------------------------------------------------------------------------ Six Months Ended June 30, 2001 2000 ---- ---- % % Increase Increase - - -------- -------- Amount of total Amount of total amount % ------ -------- ------ -------- ------ - ------------------------------- ------------- ------------- ------------- ------------- -------------- ------------- Interest, discounts, and loan fees $1,072.8 51.8% $216.9 53.2% $ 855.9 394.6% Administration fees and other revenue 902.0 43.5% 190.5 46.8% 711.4 373.4% Profit participations 97.2 4.7% 0.0 0.0% 97.2 - ----- ---- ---- ---- ---- ----- Total revenues $2,072.0 100.0% $407.5 100.0% $1,664.5 408.5% ======== ====== ====== ====== ========= ======
10 During the three and six months ended June 30, 2001, the results predominantly reflect our current core business of lending to builders/developers of residential real estate. During the three months ended June 30, 2001, we had other, non-recurring, revenue of $250 thousand from the sale of intellectual property. 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 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 tables show our expenses for the three and six-month periods ended June 30, 2001 vs. June 30, 2000(dollars in thousands and as a percentage of total revenues).
-------------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, 2001 2000 ---- ---- % % Increase/ Increase/ - - --------- --------- of of (decrease) (decrease) -- -- ---------- ---------- Amount revenue Amount revenue amount % ------ ------- ------ ------- ------ - -------------------------------------------------------------------------------------------------------------------- Compensation and fringe benefits $313.5 27.4% $116.3 57.0% $ 197.3 169.7% General and administrative 210.4 18.4% 325.0 159.4% (114.6) (35.3)% Interest expense 15.4 1.3% 205.4 100.8% (190.0) (92.5)% Provision for (recovery of) credit losses 0.0 0.0% (365.5) (179.3)% 365.5 (100.0)% ---- --- ---- ---- ----- -------- Total expenses 539.3 47.2% 281.1 137.9% 257.5 91.8% Income (loss) before income tax benefit 603.6 52.8% (77.3) (37.9)% 680.9 - Income tax benefit (32.7) (2.9)% 0.0 0.0% (32.7) - ------ ------ ------ ---- ----- --- - Net income (loss) $636.4 55.7% $(77.3) (37.9)% $ 713.7 - ====== ===== ======= ======= ======== =====
----------------------------------- --------------------------------------------------------------------------------- Six Months Ended June 30, 2001 2000 ---- ---- % % Increase/ Increase/ - - --------- --------- of of (decrease) (decrease) -- -- ---------- ---------- Amount revenue Amount revenue amount % ------ ------- ------ ------- ------ - ----------------------------------- ------------ ------------ ------------- ----------- --------------- -------------- Compensation and fringe benefits $ 606.1 29.3% $ 285.2 70.0% $ 320.9 112.5% General and administrative 307.9 14.9% 542.8 133.2% (234.9) (43.3)% Interest expense 52.7 2.5% 346.7 85.1% (294.0) (84.8)% Provision for (recovery of) credit losses 0.0 0.0% (365.5) (89.7)% 365.5 (100.0)% ---------- ---- ------- ------- ------ -------- Total expenses 966.7 46.7% 809.3 198.6% 157.4 19.4% Income (loss) before income tax benefit $1,105.3 53.3% $(401.8) (98.6)% $1,507.1 - ======== ===== ======== ======= ========= ==== Income tax benefit (63.5) (3.1)% 0.0 0.0% (63.5) - ------ ------ --- ---- ------ ---- - Net income (loss) $1,168.8 56.4% $(401.8) (98.6)% $1,570.6 - ======== ===== ======== ======= ======= ===== -
11 During the three and six months ended June 30, 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 and six months ended June 30, 2001 was $7 thousand and $13 thousand, respectively, vs. $124 and $248 thousand, respectively, in the same period in 2000. Based on our projected profitability we determined that a portion of the valuation allowance for the deferred tax asset was not required and recorded a $264 thousand reduction to the allowance in June 2001. Combined with income taxes at our statutory rate of $231 thousand, this led to a net tax benefit of $33 thousand for the three months ended June 30, 2001. For the six months ended June 30, 2001 the corresponding amounts were $456 thousand, $423 thousand, and $33 thousand respectively. In 2000, we did not record any tax expense or benefit. We did not record a provision for losses or recoveries in the three and six months ended June 30, 2001. In the three and six month periods ended June 30, 2000, we recorded a provision for recoveries of $365 thousand. During the three and six months ended June 30, 2001, we charged off no loans and $17 thousand in loans, respectively. In those same periods, we recovered $92 thousand and $95 thousand of loans charged-off in prior periods. During the three and six months ended June 30, 2000, the Company had charge-offs of $3.6 million, while recovering $7 thousand and $23 thousand. At June 30, 2001, our allowance for losses on loans receivable was $619 thousand.Of the total allowance, $586 thousand was allocated to two impaired accounts. At December 31, 2000, $232 thousand of the $553 thousand allowance was allocated to one impaired account. This space intentionally left blank. 12 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 At an annual meeting of shareholders on May 1, 2001, the following directors nominated by management listed in the proxy statement dated April 9,2001 for one year terms were elected. There was no opposition to management's nominations.
Name For Against Withhold ---- --- ------- -------- David W. Campbell 14,933,843 0 20,610 Timothy G. Ewing 14,933,843 0 20,610 J. Kenneth McLendon 14,933,843 0 20,610 William H. Savage 14,933,843 0 20,610
The following are the results of voting on the other proposals considered at the meeting, by the respective number of votes for, against or withheld for directors; and for, against or abstain, for other proposals. Each of the proposals was considered a "discretionary" item and there were no "broker non-votes."
For Against Abstain Proposal 2.- Amendment of the Company's Certificate of Incorporation to change the name to Harbourton Financial Corporation 14,922,642 11,311 20,500 Proposal 3.- Ratify the appointment of Arthur Andersen, LLP as independent auditors 14,946,943 6,010 1,500
Item 5. Other Information. None Item 6. Exhibits and Reports on Form 8-K. (10) Material Contract-Second Modification Agreement dated June 21, 2001 to Credit and Security Agreement between Harbourton Financial Corp. and Greater Atlantic Bank No Reports were filed on Form 8-K during the period. 13 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: August 8, 2001 /s/ J. Kenneth McLendon J. Kenneth McLendon President and Chief Executive Officer Date: August 8, 2001 /s/ C. Fred Jackson C. Fred Jackson Senior Vice President and Chief Financial Officer 14