ALLSTATE FINANCIAL CORPORATION
INFORMATION STATEMENT
GENERAL INFORMATION- YOUR VOTE IS NOT REQUIRED
WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND US A PROXY
INTRODUCTION
This Information Statement is being mailed on or about November 9, 2000
by Allstate Financial Corporation ("Allstate"), a Delaware corporation, to all
holders of record at the close of business on November 6, 2000 (the "Record
Date") of Allstate's common stock, $.01 par value per share, to describe the
proposed merger of Harbourton Financial Corporation (Harbourton"), a Delaware
corporation, with and into Allstate. Upon completion of the merger, each
outstanding share of Harbourton common stock will be converted into a
combination of Allstate common stock and cash, with fractional shares paid in
cash. Outstanding shares of Allstate common stock will remain outstanding with
no change, except for those holders who elect to demand their appraisal rights.
After the merger, shares of Allstate common stock will represent the combined
assets and business of Allstate and Harbourton. Allstate plans to complete the
merger on November 30, 2000 or soon thereafter.
After careful consideration, Allstate's Board of Directors approved and
authorized an Agreement and Plan of Merger, dated as of October 24, 2000,
between Allstate and Harbourton and the transactions contemplated therein. A
copy of the merger agreement is attached as Appendix A hereto. Allstate's
directors and certain of their affiliated entities have agreed to provide their
written consent in favor of the merger of Allstate and Harbourton. As of the
Record Date, there were 7,668,004 shares of Allstate common stock outstanding.
The Allstate directors and their affiliates (including Value Partners, Ltd.) own
an aggregate of 5,990,138 shares of Allstate common stock or 78.1% of the
outstanding shares. Such approval and consent by the Allstate directors and
their affiliates are sufficient under Delaware corporate law to effectuate and
complete the merger. Accordingly, the merger agreement will not be submitted to
other shareholders of Allstate for a vote, and this document is being furnished
to shareholders solely to provide them with certain information in accordance
with the requirements of Delaware law and the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), and the regulations promulgated thereunder,
including Regulation 14C. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
Value Partners, Ltd. currently owns 74.0% of the outstanding Allstate
common stock and 95.7% of the outstanding Harbourton common stock. Value
Partners will hold approximately 84.8% of the outstanding Allstate common stock
upon completion of the merger.
You have the right to elect appraisal rights under Delaware law within
20 days from the date of mailing of this document. See "The Merger - Appraisal
Rights" and Appendix B.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE FAIRNESS OR MERITS OF THE TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY
OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS UNLAWFUL.
<PAGE>
i
TABLE OF CONTENTS
Page
Table of Contents....................................................... i
Questions and Answers About the Merger.................................. 1
Summary Term Sheet...................................................... 2
Selected Historical and Pro Forma Financial Data........................ 4
Selected Historical Financial Data of Allstate................. 4
Selected Historical Financial Data of Harbourton............... 5
Unaudited Historical and Pro Forma Per Share Data ............. 6
Recent Developments..................................................... 6
Allstate....................................................... 6
Harbourton..................................................... 7
Disclosure Regarding Forward-looking Information........................ 7
Beneficial Ownership Information........................................ 7
Allstate Common Stock........................................... 7
Harbourton Common Stock......................................... 9
The Merger.............................................................. 9
The Parties.................................................... 9
Overview of the Merger......................................... 9
Merger Consideration .......................................... 9
Background of the Merger....................................... 10
Allstate's Reasons for the Merger.............................. 11
Harbourton's Reasons for the Merger ........................... 12
No Opinion of Independent Financial Advisor.................... 13
Shareholder Action............................................. 13
Tax Treatment.................................................. 14
Accounting Treatment........................................... 15
Corporate Structure after the Merger........................... 15
Regulatory Matters............................................. 15
Obligations of the Post-Merger Corporation..................... 15
What We Must Do to Complete the Merger......................... 15
Interests of Directors and Officers in the Merger that are
Different from Your Interests......... 16
Other Provisions of the Merger Agreement....................... 16
Exchange of Certificates....................................... 17
Resales of Allstate Common Stock by Affiliates of Harbourton... 17
Appraisal Rights............................................... 18
Stock Prices And Dividend Information.......................... 19
Unaudited Pro Forma Condensed Combined Financial Information... 20
Pro Forma Effect of the Notes Conversion 20
Unaudited Pro Forma Condensed Combined Balance Sheet as
of June 30, 2000......................... 21
Unaudited Pro Forma Condensed Combined Income Statement for
the Six Months Ended June 30, 2000................... 22
Unaudited Pro Forma Condensed Combined Income Statement for 1999 23
Unaudited Pro Forma Condensed Combined Income Statement for 1998 23
Business of Allstate........................................... 24
Management's Discussion and Analysis of Financial Condition and
Results of Operations of Allstate.............................. 29
Business of Harbourton.......................................... 34
Management's Discussion and Analysis of Financial Condition
and Results of Operations of Harbourton......................... 38
Future Shareholder Proposals.................................... 41
Where You Can Find More Information............................. 42
<PAGE>
. ii
Index to Consolidated Financial Statements....................................43
Allstate.............................................................43
Harbourton...........................................................44
APPENDICES
A Agreement and Plan of Merger between Allstate and Harbourton A-1
B Section 262 of the Delaware General Corporation Law B-1
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: What will happen to outstanding shares of Harbourton and Allstate
common stock?
A: Upon completion of the merger, each outstanding share of Harbourton
common stock will be converted into a combination of Allstate common
stock and cash, with fractional shares paid in cash. Outstanding shares
of Allstate common stock will remain outstanding with no change, except
for those holders who elect to demand their appraisal rights. After the
merger, shares of Allstate common stock will represent the combined
assets and business of Allstate and Harbourton. Harbourton shareholders
will receive newly issued Allstate shares equal to 49.5% of the
Allstate common stock to be outstanding upon completion of the merger,
plus at least $1,900,000 in cash. See "The Merger - Merger
Consideration"
Q: Is the merger taxable?
A: Allstate and Harbourton each expect the merger to be tax-free.
Allstate's legal counsel will opine that neither Allstate, Harbourton
nor their shareholders should recognize any gain or loss for U.S.
federal income tax purposes in the merger, except that (1) Harbourton
shareholders will recognize gain (but not loss) up to the amount of
cash received, (2) Harbourton shareholders will recognize gain or loss
upon the receipt of cash instead of fractional shares, and (3) Allstate
stockholders who perfect their appraisal rights will recognize gain or
loss on the cash received. In addition, no gain or loss should be
recognized by Allstate shareholders who retain their Allstate common
stock as a result of the merger.
Q: Why isn't a meeting of shareholders being held?
A: Delaware law allows shareholders to act by written consent instead of
holding a meeting of shareholders,unless prohibited by the Certificatef
of Incorporation.Allstate's Certificate of Incorporation does not
prohibit shareholder action by written consent. See "The Merger-
Shareholder Action."
Q: Is my vote required to approve the merger?
A: No. The affirmative vote by the holders of a majority of the
outstanding shares as of the Record Date is required to approve and
adopt the merger agreement. The Allstate directors, together with
certain affiliated approximately 78.1% of the outstanding Allstate
common stock and have agreed to approve the merger by written consent.
APPROVAL AND ADOPTION OF THE MERGER AGREEMENT IS ASSURED WITHOUT
THE VOTE OF ANY OTHER ALLSTATE SHAREHOLDER. See "The Merger -
Shareholder Action."
Q: Am I entitled to appraisal rights?
A: Yes. Both Allstate and Harbourton shareholders are entitled to
appraisal rights in connection with the merger. See "The
Merger - Appraisal Rights" and Appendix B hereto.
Q: When do you expect the merger to be completed?
A: We expect to complete the merger on November 30, 2000 following the
receipt of written consents from Value Partners and the directors of
both companies.
Q: Do I need to exchange my stock certificates?
A: No.
Q: Who do I call if I have questions about the merger?
A: Allstate shareholders may call (703) 883-9757.
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<PAGE>
SUMMARY TERM SHEET
This section highlights selected information in this document and may
not contain all of the information important to you. We urge you to read
carefully the entire document, including the Appendices, to fully understand the
merger.
Allstate and Harbourton are Both Controlled by Value Partners.
Value Partners, Ltd. owns 95.7% of the common stock of Harbourton and
74.0% of the common stock of Allstate. The general partner of Value Partners is
controlled by Timothy G. Ewing, who is a director of both Allstate and
Harbourton. If the merger is completed, Value Partners will own approximately
84.8% of the common stock of Allstate (see pages 7&8).
Harbourton Shareholders Will Receive Allstate Common Stock and Cash
Allstate will issue approximately 7,516,162 new shares of Allstate
common stock to the three shareholders of Harbourton, which equals 49.5% of the
total 15,184,166 shares expected to be outstanding when the merger is completed.
For purposes of the merger agreement, we assigned a value of $0.95 per share to
these new shares, which exceeds recent market prices. Allstate will also pay to
the Harbourton shareholders an amount of cash equal to the difference between
Harbourton's total stockholders' equity as of the month end preceding the
closing of the merger and the assigned value of the Allstate common stock issued
in the merger. We estimate the total cash amount will be at least $1,900,000
(see page 9).
Our Reasons for the Merger.
o Harbourton is profitable, while Allstate has lost money (see pages 22&23).
o Even before subtracting the cash to be paid to Harbourton's
shareholders, Harbourton's total assets and total stockholders' equity
are greater than Allstate's (see page 22).
o The current shareholders of Allstate will hold 50.5% of the common
stock of the combined company, even though Allstate has less assets,
less equity and no income (see page 9).
o Allstate will be able to use its net operating loss carryforwards to offset
Harbourton's post-merger taxable income.
o The merger will strengthen our competitive and capital position and will
enable us to grow in the future (see page 11).
We Did Not Receive Any Independent Fairness Opinion.
The Board of Directors of Allstate negotiated the terms of the merger
agreement with Harbourton and Value Partners. While the Board believes that
these negotiations were conducted at arm's length, you should note that Value
Partners controls both Allstate and Harbourton and has the power to elect all
the directors at both companies. The Board of Directors of Allstate believes
that the terms of the merger and the merger agreement are fair, from a financial
point of view, to Allstate's shareholders, and the Board unanimously approved
the merger agreement. However, because of the costs involved, the Board neither
sought nor obtained a fairness opinion from an independent third party (see page
13).
Allstate Shareholders Will Retain Their Current Shares.
Since Harbourton is merging into Allstate, the shareholders of Allstate
will continue to hold the same number of shares of Allstate common stock, except
for those Allstate shareholders who demand appraisal rights. You do not need to
exchange your Allstate stock certificate for a new certificate. Current Allstate
shareholders will hold a total of 50.5% of the common stock in the combined
company.
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<PAGE>
We Are Not Asking Allstate Shareholders to Vote.
Because Value Partners holds more than 50% of the outstanding Allstate
common stock and has agreed to approve the merger by written consent, approval
and adoption of the merger agreement is assured. Each of the directors of
Allstate have also agreed to approve the merger by written consent (see page
13).
The Merger Will Not Be Taxable to Allstate's Shareholders.
Allstate shareholders who do not demand appraisal rights will retain
their current shares and will not recognize any gain or loss for tax purposes.
Allstate shareholders who demand and perfect their appraisal rights will receive
cash equal to the fair value of their shares and will recognize gain or loss on
the cash they receive (see page 14).
You Have Appraisal Rights.
Under Delaware law, you have dissenters' appraisal rights with respect
to your Allstate shares. If you do not wish to retain your shares, you can
dissent from the merger and instead choose to have the fair value of your shares
paid to you in cash. In order to exercise your rights, you must follow specific
procedures. You should carefully read Section 262 of the Delaware General
Corporation Law which is included as Appendix B. See also page 18.
Interests of Directors and Officers in the Merger.
o Harbourton can designate up to three directors of the combined company,
and Allstate will designate a number of directors equal to the number
designated by Harbourton plus one additional director (see page16).
o The President and the Senior Vice President of Harbourton will have the
same positions in Allstate. Allstate will honor their existing
employment agreements with Harbourton. (see page16).
o The directors, officers and employees of both companies will be
indemnified to the fullest extent permitted under Delaware law (see
page15).
We Intend to Complete the Merger on November 30, 2000.
The following events need to occur before the merger can be completed
on November 30, 2000:
o the receipt of written consents from Value Partners, which has already
agreed to consent to the merger as a majority shareholder of both
Allstate and Harbourton (see page 13);
o the written consents of Harbourton's senior lender and certain third
party participants in Harbourton's loans:
o the receipt of tax opinions relating to the merger and Allstate's
net operating loss carryforwards (see page 15); and
o the exchange of customary certificates and other documents at closing
(see page 15).
Market Value Information
The following table sets forth the average of the closing high bid and
low asked prices per share of Allstate common stock and the equivalent per share
price for Harbourton common stock giving effect to the merger on (1) October 24,
2000, the last trading day before public announcement of the signing of the
merger agreement; and (2) November 6, 2000, the latest available date prior to
the mailing of this document. The equivalent price per Harbourton share at each
specified date in the following table represents the average of the closing high
bid and low asked prices of a share of Allstate common stock on that date
multiplied by an exchange ratio of 9.54 Allstate shares for each Harbourton
share, which assumes that no holders of Allstate common stock demand appraisal
rights.
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<PAGE>
Allstate Harbourton Equivalent Price per
Common Stock Common Stock Harbourton Share
-------------------- ---------------------- ---------------------
October 24, 2000 $0.41 (1) $3.91
November 6, 2000 $0.53 (1) $5.06
(1) There is no market for the Harbourton common stock. As of June 30,
2000, Harbourton had stockholders' equity of $11.30
per share compared to $0.16 per share for Allstate.
As of the November 6, 2000 record dates for written consents by
Allstate's shareholders and for voting at the Harbourton special meeting,
7,668,004 outstanding shares of Allstate common stock were held by approximately
41 record owners and 787,612 outstanding shares of Harbourton common stock
were held by three record owners.
The market price of Allstate common stock may fluctuate between the
date of this document and completion of the merger. We cannot give you any
assurance about the market price of Allstate common stock before or after the
merger. Changes in the market price of the Allstate common stock will not affect
the number of shares to be issued to the shareholders of Harbourton in the
merger.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Selected Historical Financial Data of Allstate
The following tables set forth selected historical financial and other
data of Allstate as of the dates and for the periods shown. The historical
consolidated financial data at June 30, 2000 and for the six months ended June
30, 2000 and 1999 is unaudited. However, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation at such date and for such periods have been made. Operating results
for the six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for any interim period or the entire year ended
December 31, 2000. The financial information of Allstate at December 31, 1999
and 1998 and for the two years ended December 31, 1999 is based on, and
qualified in its entirety by, the audited consolidated financial statements of
Allstate, including the notes thereto, which are included elsewhere in this
information statement, and should be read in conjunction therewith.
<TABLE>
<CAPTION>
At June 30, At December 31,
2000 1999 1998
<S> <C> <C> <C>
(In thousands)
------------------------------------------------------ ------------------ ---------------- -----------------
Selected Financial Condition Data:
------------------------------------------------------ ------------------ ---------------- -----------------
Total assets.................................... $6,106 $7,672 $43,188
------------------------------------------------------ ------------------ ---------------- -----------------
Cash............................................ 1,076 354 2,421
------------------------------------------------------ ------------------ ---------------- -----------------
Total receivables, net.......................... 4,491 7,123 35,155
------------------------------------------------------ ------------------ ---------------- -----------------
Securities held for sale........................ 380 -- --
------------------------------------------------------ ------------------ ---------------- -----------------
Convertible subordinated notes.................. 4,954 4,954 4,958
------------------------------------------------------ ------------------ ---------------- -----------------
Notes payable................................... -- 1,366 15,015
------------------------------------------------------ ------------------ ---------------- -----------------
Total stockholders' equity...................... 412 342 17,574
------------------------------------------------------ ------------------ ---------------- -----------------
</TABLE>
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<PAGE>
For the Six Months For the Year Ended
Ended June 30, December, 31,
2000 1999 1999 1998(1)
-------- -------- ------ -------
............................ (In thousands, except per share data)
Selected Operating Data:
Total revenue ............. $ 407 $ 2,537 $ 3,621 $ 10,301
Total expense ............. 809 12,105 16,870 19,913
-------- -------- ------ -------
Loss before income tax expense (402) (9,568) (13,248) (9,612)
Income tax expense (benefit) -- 4,021 4,003 (3,556)
-------- -------- ------ -------
Net loss .................. $ (402) $(13,590) $(17,251) $ (6,056)
======== ======== ====== =======
Per Share Data:
Basic and diluted loss per share $(0.17) $(5.85) $(7.42) $ (2.61)
Cash dividends per share .. -- -- -- --
Stockholders' equity per share 0.16 1.72 0.15 7.56
Selected Historical Financial Data of Harbourton
The following tables set forth selected historical financial and other
data of Harbourton as of the dates and for the periods shown. The historical
consolidated financial data at June 30, 2000 and for the six months ended June
30, 2000 and 1999 is unaudited. However, in the opinion of management, all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation at such date and for such periods have been made. Operating results
for the six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for any interim period or the entire year ended
December 31, 2000. The financial information of Harbourton at December 31, 1999
and 1998 and for the two years ended December 31, 1999 is based on, and
qualified in its entirety by, the consolidated financial statements of
Harbourton, including the notes thereto, which are included elsewhere in this
information statement, and should be read in conjunction therewith.
<TABLE>
<CAPTION>
For the Six Months For the Year Ended
Ended June 30, December 31,
2000 1999 1999 1998(1)
(In thousands, except per share data)
<S> <C> <C> <C> <C>
------------------------------------ ----- ----- ----- -----
Selected Operating Data:
------------------------------------ ------ ---- ------ ----
Loan income $1,093 $588 $1,332 $464
------------------------------------ ------ ---- ------ ----
Other income 26 30 85 12
------------------------------------ ------ ---- ------ ----
Total expenses 703 304 764 246
------------------------------------ ------ ---- ------ ----
Income before provision for income taxes
416 314 654 230
------------------------------------ ------ ---- ------ ----
Provision for income taxes 159 119 252 78
------------------------------------ ------ ---- ------ ----
Net income 257 195 402 152
------------------------------------ ------ ---- ------ ----
Per Share Data:
------------------------------------ ------ ---- ------ ----
Basic and diluted earnings per share $ 0.33 $.043 $ 0.76 $0.55
------------------------------------ ------ ---- ------ ----
Cash dividends per share -- -- -- --
------------------------------------ ------ ---- ------ ----
Stockholders' equity per share 11.38 11.86 11.05 10.23
------------------------------------ ------ ---- ------ ----
</TABLE>
(1) For the period since inception on August 28, 1998 to December 31, 1998.
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<PAGE>
Unaudited Historical and Pro Forma Per Share Data
Set forth below are the book value and the basic and diluted earnings
per common share data for each of Allstate and Harbourton on an historical
basis, for Allstate on a pro forma combined basis and on a pro forma combined
basis per Harbourton equivalent share. The pro forma per Harbourton equivalent
share shows the effect of the merger from the perspective of an owner of
Harbourton common stock. The information was computed by multiplying the
combined pro forma amounts for the merger by an exchange ratio of 9.54 Allstate
shares for each Harbourton share, after taking into effect the shares issued in
the Notes Conversion (as defined below), and assuming that none of the holders
of the Allstate common stock demands appraisal rights. Neither Allstate nor
Harbourton have paid dividends on their common stock in the last two years.
<TABLE>
<CAPTION>
Combined Pro Forma Pro Forma Per Harbourton
Allstate Harbourton Amounts for the Merger Equivalent Share
as Reported as Reported
-------------- ---------------- ------------------------ ---------------------------
<S> <C> <C> <C> <C>
Book value per share at June 30, 2000
$0.16 $11.38 $0.81 $7.72
Basic and diluted earnings (loss) per
share for the six months ended June 30, $(0.17) $0.33 $0.03 $0.29
2000
Basic and diluted earnings (loss) per
share for 1999 $(7.42) $0.76 $(2.22) ($21.17)
</TABLE>
RECENT DEVELOPMENTS
Allstate
Subsequent to June 30, 2000, Allstate realized collections of $1.2
million on two non-accrual accounts and collected life insurance proceeds on two
Lifetime Options insureds for a total of $266,000. In combination with cash on
hand at June 30, 2000, Allstate believes it has the financial resources to
complete the merger.
In August 2000, Allstate entered into a settlement of the A.G.
litigation matter (see notes to financial statements on pages F23 and F-30). In
exchange for a payment of $105,000, the successors to the party that filed the
counterclaim agreed to drop their objection to the trustee's abandonment of the
claim against Allstate.
At the reconvened annual meeting of the shareholders of Allstate held
on August 29, 2000, the Allstate shareholders approved the reincorporation of
Allstate as a Delaware corporation, including several provisions in Allstate's
Delaware certificate of incorporation and bylaws. The reincorporation into
Delaware was completed on September 1, 2000.
On October 5, 2000, Allstate filed a plan of arrangement with the
Delaware Court of Chancery, setting forth the proposed conversion of Allstate's
10% Convertible Subordinated Notes due September 30, 2003 ("Allstate Notes"),
together with accrued but unpaid interest, into common stock of Allstate at a
price of $0.95 per share of common stock (the "Notes Conversion"). The Delaware
court approved the Notes Conversion on October 6, 2000, and minor changes were
made to the approval order on October 11, 2000.
On October 26, 2000, Allstate Notes with an aggregate principal amount
of $4,331,000 , together with $578,970 of accrued but unpaid interest at a
negotiated default rate of 12.5% simple interest, were converted into 5,168,388
shares of newly issued Allstate common stock. The remaining $ $ 266,000 of
Allstate Notes were brought current. Value Partners held Allstate Notes with a
principal balance of $4,197,000 and received 5,008,481 shares of Allstate common
stock as a result of the Notes Conversion. Following the Notes Conversion, Value
Partners held a total of 5,676,849 shares of Allstate common stock, representing
74.0% of the currently outstanding shares. Value Partners is now deemed to be in
control of Allstate.
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<PAGE>
Effective September 18, 2000 and September 25, 2000, respectively,
Charles G. Johnson resigned as a director and as President of Allstate for
personal reasons. David W. Campbell, Allstate's Chairman of the Board, was
appointed interim President. In addition Timothy G. Ewing, who controls the
general partner of Value Partners, was appointed a director of Allstate
effective September 18, 2000.
On October 2, 2000 Allstate paid the Convertible Subordinated Notes Due
September 30, 2000 in full.
On October 25, 2000 Allstate and Harbourton entered into the merger
agreement.
Although the results for the September 30, 2000 quarter have not yet been
reported, Allstate operated at a profit for the three months ended September 30,
2000 due primarily to recoveries of amounts previously charged-off.
Harbourton
Harbourton had approximately $10.6 million of total assets and $9.1
million of total stockholders' equity at August 31, 2000. Harbourton is expected
to continue to be profitable until completion of the merger.
DISCLOSURE REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements about Allstate,
Harbourton and the combined company which we believe are within the meaning of
the Private Securities Litigation Reform Act of 1995. These forward-looking
statements include information in this document regarding the financial
condition, results of operations and business of Allstate following the
consummation of the merger. They also include statements relating to the
benefits expected to be realized from the merger and the expected impact of the
merger on Allstate's financial performance and earnings estimates for the
combined company. Forward-looking statements are also identified by words such
as "believe," "anticipate," "estimate," "expect," "intend," "plan" or similar
expressions. Forward-looking statements involve certain risks and uncertainties.
You should understand that the following important factors, in addition to those
discussed elsewhere in this document and in the documents which are incorporated
into this document by reference, could affect the future results of Allstate and
Harbourton, and of Allstate after the merger and could cause those results to
differ materially from those expressed in our forward-looking statements:
o revenues following the merger may be lower than expected, or operating
costs, customer loss and business disruption following the merger may be
greater than expected;
o costs or difficulties related to the integration of the businesses of
Allstate and Harbourton may be greater than expected;
o changes in the interest rate environment may reduce margins more than
expected;
o general economic conditions, either nationally or regionally, may be less
favorable than expected, resulting in, among other things, a deterioration
in the credit quality of our loans; and
o competitive pressure in the financial services industry, and in particular
our regional market, may increase.
BENEFICIAL OWNERSHIP INFORMATION
Allstate Common Stock
The following table sets forth, as of November 6, 2000, the amount of
Allstate common stock beneficially owned by: (1) each person known to Allstate
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<PAGE>
to be the beneficial owner of more than 5% of the outstanding Allstate common
stock, (2) each director and executive officer of Allstate, and (3)all directors
and executive officers of Allstate as a group. The table also shows the pro
forma beneficial ownership of the above persons and entities upon completion of
the merger.
<TABLE>
<CAPTION>
Shares Beneficially Shares Expected to
Owned at be Held Upon
November 6, 2000(1)(2) Percent Completion of the Percent of
Name of Class Merger(3) Class(3)
<S> <C> <C> <C> <C>
Timothy G. Ewing (4) 5,676,849 74.0% 12,868,264 84.8%
Ewing & Partners
Value Partners, Ltd.
4514 Cole Avenue, Suite 808
Dallas, Texas 75201
Other directors:
David W. Campbell 59,000 .8% 59,000 .4%
------------------------------------- ------------------------- ----------- -------------------- ---------------
Steven W. Lefkowitz 38,000 .5% 38,000 .2%
------------------------------------- ------------------------- ----------- -------------------- ----------------
Edward A. McNally 39,000 .5% 39,000 .3%
------------------------------------- ------------------------- ----------- -------------------- ---------------
William H. Savage (5) 74,385 1.0% 74,385 .5%
------------------------------------- ------------------------- ----------- -------------------- ---------------
Lindsay B. Trittipoe 160,289 2.1% 160,289 1.1%
------------------------------------- ------------------------- ----------- -------------------- ---------------
Executive officer who is not
a director:
------------------------------------- ------------------------- ----------- -------------------- ---------------
C. Fred Jackson 40,000 .5% 40,000 .3%
------------------------------------- ------------------------- ----------- -------------------- ---------------
All directors and
executive officers as a 5,990,138 78.1% 13,265,785 87.4%
group (7 persons)
-------------------------
</TABLE>
(1) The amounts in the table are based on filings or other information
furnished by the respective individuals or entities. Under applicable
regulations, shares are deemed to be beneficially owned by a person if he
directly or indirectly has or shares the power to vote or dispose of the
shares, whether or not he has any economic interest in the shares. Unless
otherwise indicated, the named beneficial owner has sole voting and
dispositive power with respect to the shares. Under applicable regulations,
a person is deemed to have beneficial ownership of any shares of common
stock which may be acquired within 60 days of November 6, 2000 pursuant to
the exercise of outstanding stock options or convertible notes. Shares of
common stock owned by such person or group are deemed to be outstanding for
the purpose of computing the percentage of outstanding common stock owned
by such person or group, but are not deemed outstanding for the purpose of
computing the percentage of common stock owned by any other person or
group.
(2) The amounts set forth in the table above include shares which may be
received upon the exercise of stock options within 60 days of November 6,
2000 as follows: Mr. Lefkowitz, 13,000 shares; Mr. McNally, 13,000 shares;
Mr. Savage, 13,000 shares; Mr. Trittipoe, 13,000 shares; Mr. Jackson,
30,000 shares; and all directors and executive officers as a group, 82,000
shares.
(3) Assumes that 7,516,162 shares of Allstate common stock are issued in the
merger.
(4) Mr. Ewing is a director of Allstate and is the general partner and the
Managing Partner of Ewing & Partners, a Texas general partnership which is
the general partner of Value Partners. Value Partners is a Texas limited
partnership. In addition, Ewing Asset Management, L.L.P., a Texas limited
liability company ("AM"), holds a 1% general partnership interest in Ewing
& Partners. Mr. Ewing is the Manager and 100% owner of AM. The principal
place of business for Ewing & Partners, AM and Mr. Ewing is the same as for
Value Partners.
(5) Mr. Savage owns $100,000 of Allstate's Notes, which are currently
convertible into 15,385 shares of Allstate common stock. These shares are
included in the table.
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Harbourton Common Stock
Value Partners, Ltd. owns 95.7% of the outstanding Harbourton common stock,
and J. Kenneth McLendon and James Cluett, the executive officers of Harbourton,
own the remaining 4.3%.
THE MERGER
This summary of the terms of the merger may not contain all the
information that is important to you. You should read the full text of the
merger agreement which is attached as Appendix A. This summary is qualified in
its entirety by reference to the merger agreement.
The Parties
The parties to the merger agreement are Allstate and Harbourton. Both
companies share office space and are located at 8180 Greensboro Drive, Suite
525, McLean, Virginia 22102. The phone number for Allstate is (703) 883-9759,
and the phone number for Harbourton is (703) 821-1601. Both companies are
currently controlled by Value Partners.
Allstate is a commercial finance institution which provides financing
to small businesses through loans secured by accounts receivable, inventory,
machinery and equipment, and real estate. Allstate does not have any outside
sources of liquidity to fund new business, and it is relying on collections of
existing accounts and impaired assets to fund its current clients. No new
clients are being accepted. At June 30, 2000, Allstate had $6.1 million of total
assets and $412,000 of total stockholders' equity. Allstate has incurred losses
since 1998 and, as of December 31, 1999, had $18.8 million of net operating loss
carryforwards which begin to expire in 2018.
Harbourton provides loans to builders and developers for residential
land development and for the construction of single-family homes, attached
residences, townhouses and condominiums and for the conversion of residential
rental properties to units for sale. In many cases , Harbourton sells a
participation interest in the loans. The participation interest is typically 20%
to 85% of the loan. At June 30, 2000, Harbourton had $10.4 million of total
assets and $8.9 million of total stockholders' equity. Harbourton has been
profitable since its inception on August 28, 1998.
Overview of the Merger
Harbourton will be merged into Allstate. Allstate will be the surviving
entity of the merger. Each outstanding share of Harbourton common stock will be
converted into the right to receive 9.54 shares of Allstate common stock plus an
amount of cash based on Harbourton's book value as of the end of the month
immediately preceding completion of the merger. After the merger, current
Allstate shareholders will own approximately 50.5% of the combined company and
current Harbourton shareholders will own the remainder. After the merger, Value
Partners will hold approximately 12,868,264 shares or 84.8% of the pro forma
outstanding common stock of Allstate.
Merger Consideration
Each outstanding share of Harbourton common stock will be converted
into the right to receive a combination of Allstate common stock and cash. The
merger agreement provides that the aggregate number of shares of Allstate common
stock to be issued in the merger will equal 49.5% of the Allstate common stock
to be issued and outstanding immediately following completion of the merger. As
of the Record Date, Allstate has 7,668,004 shares of common stock outstanding.
Based on this amount, the three Harbourton shareholders would receive an
aggregate of 7,516,162 shares of Allstate common stock, which represents 49.5%
of the total 15,184,166 shares of Allstate common stock to be outstanding
following completion of the merger.
The merger agreement assigns a value of $0.95 per share to the Allstate
common stock to be issued to the Harbourton shareholders. This value was
determined by arm's-length negotiations and exceeds recent market prices of the
Allstate common stock. See "Summary Term Sheet - Market Value Information" and
"Stock Prices and Dividend Information". Assuming 7,516,162 shares of Allstate
common stock are issued in the merger, these shares will have an aggregate value
of $7,140,354 for purposes of the merger agreement. The aggregate value of the
stock consideration will then be subtracted from Harbourton's total
stockholders' equity as of the last day of the calendar month prior to
completion of the merger to determine the aggregate amount of cash to be paid
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to Harbourton's shareholders. Based on Harbourton's total stockholders' equity
of $9,091,592 at August 31, 2000, the aggregate cash consideration would equal
$1,951,236.
The number of shares of Allstate common stock to be issued to
Harbourton's shareholders will only change proportionately if the number of
outstanding shares of Allstate common stock changes prior to completion of the
merger. The $0.95 per share value assigned to the Allstate common stock to be
issued in the merger will not change based on changes in the market price of the
Allstate common stock. The aggregate cash consideration to be paid to
Harbourton's shareholders will change as Harbourton's total stockholders' equity
changes from one month end to the next. The parties currently anticipate that
Harbourton's total stockholders' equity will increase each month.
The number of shares of Allstate common stock to be issued in the
merger will be reduced by the number of currently outstanding shares of Allstate
common stock as to which holders demand appraisal rights by November 30, 2000
and do not withdraw or otherwise lose those rights prior to completion of the
merger. The purpose of this reduction is to ensure that the Allstate shares
issued to the Harbourton shareholders do not exceed 49.5% of the total Allstate
shares to be outstanding upon completion of the merger in order to preserve
Allstate's net operating loss carryforwards. If the number of shares of Allstate
common stock issued in the merger is reduced because of dissenting shares, then
an additional cash payment will be paid to the Harbourton shareholders equal to
(a) the number of shares by which the aggregate stock consideration is reduced,
multiplied by (b) $0.95. Unless otherwise specified, references in this document
to the number of shares of Allstate common stock to be issued and the amount of
cash to be paid in the merger, either in the aggregate or per share of
Harbourton stock, assume that there are no dissenting shares of Allstate common
stock.
No fractional shares of Allstate common stock will be issued in the
merger. Instead of a fractional share, Harbourton shareholders will receive the
cash value (without interest) of the fractional share based on the average of
the high bid and low asked prices of Allstate common stock on the last trading
day before the merger.
In the event that Allstate's participation interest in the Lakelands
project loan originated by Harbourton is not repaid in full prior to the
effective time, then Allstate may elect to reduce the cash consideration to be
paid to Value Partners in the merger by the dollar amount of the participation
interest and instead assign all of its rights in such participation interest to
Value Partners. If the participation interest is assigned to Value Partners,
Harbourton is required to pay to Allstate at the effective time of the metrger
any accrued but unpaid interest on the participation interest held by Allstate.
On November 6, 2000, Allstate common stock closed at $0.53 per share. Based
on that price, the value of 7,516,162 shares of Allstate common stock would have
been approximately $3,983,566 and the aggregate market value of the stock
consideration would have been approximately $5,883,566 million. While these
values may increase or decrease as a result of fluctuations in the market price
of Allstate common stock, changes in the market price will not affect the number
of shares of Allstate common stock to be issued in the merger.
Background of the Merger
During 1998 and 1999, Allstate was impacted by the negative performance
of its factoring and asset based lending portfolio. At December 31, 1999,
Allstate had few earning assets and limited financial and human resources.
However, Allstate had a significant net operating loss carryforward ("NOL") of
$18.8 million. In early 2000, the Board of Directors established three major
goals for Allstate: (1) preserve Allstate as a public entity, (2) preserve the
NOL, and (3) define strategies to develop a business plan to generate
profitability, including the acquisition of other businesses to maximize the use
of the NOL.
The Board appointed a committee consisting of Messrs. Campbell,
Lefkowitz and McNally to negotiate with Value Partners, the majority owner of
the Allstate Notes and the largest holder of the Allstate common stock,
regarding the feasibility of converting the Allstate Notes. The Board committee
successfully negotiated in May 2000 an exchange of Value Partners' Allstate
Notes into common stock at a price of $0.95 per share. The Board committee
determined that it would be necessary to have the Notes Conversion approved by a
court in order to preserve the NOL, which resulted in the proposed
reincorporation into Delaware. The Board committee also determined that it was
desirable to adopt a restriction on the transfer of Allstate common stock in
order to preserve the NOL.
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In early June 2000, Allstate negotiated an agreement with Value
Partners providing for the Notes Conversion. The agreement was approved and
executed on June 13, 2000 and provided for the following:
o the conversion of Value Partners' Allstate Notes into common stock at a
price of $0.95 per share in order to recapitalize Allstate and reduce its
interest expense;
o the reincorporation of Allstate into Delaware in order to utilize a
provision in Delaware law providing for court approval of the Notes
Conversion that would enable the NOL to be preserved;
o an increase in the number of authorized shares of Allstate common stock so
that sufficient shares would be available for the Notes Conversion and any
future acquisitions; and
o a restriction on the transfer of Allstate common stock in order to preserve
the NOL.
On July 11, 2000, Allstate mailed proxy materials to its shareholders
seeking shareholder approval of the above proposals. The ability to convert the
Allstate Notes at the rate of $0.95 per share was also subsequently made
available to each of the other noteholders. The proposals were approved by
shareholders at the re-convened meeting held on August 29, 2000.
During the discussion of the Notes Conversion, Allstate management
approached Value Partners about the possibility of acquiring Harbourton. Value
Partners was receptive to further discussions, and mutual confidentiality
agreements were executed on July 18, 2000. Allstate and Harbourton exchanged
confidential information, and Allstate's Board reviewed a presentation of
Harbourton's financial position and its business plan. Allstate's management was
then authorized to proceed with a full due diligence of Harbourton.
In August 2000, Allstate utilized its external accountants to assist in
the review of Harbourton's financial records, a law firm specializing in real
estate to review documentation of the loan files, and an independent real estate
consultant to review the valuation of Harbourton's loan portfolio. Allstate's
Board reviewed the due diligence reports and a term sheet proposed by Value
Partners at its September 12, 2000 meeting, and authorized management to submit
a revised term sheet to Value Partners.
On September 19, 2000, Harbourton and Allstate agreed to a revised term
sheet, which was subject to the completion of the Notes Conversion and the
execution of a definitive merger agreement. From late September to mid October
2000, Allstate and Harbourton negotiated the terms of the merger agreement.
During this period, Allstate filed its recapitalization plan with the Delaware
Court of Chancery and received approval by the court. The boards of both
companies met on October 19, 2000 to approve the merger agreement. Harbourton's
board approved the merger agreement and authorized the agreement to be executed.
Allstate's board determined that further changes were appropriate and
re-scheduled its meeting to October 24 in order to allow for sufficient time to
review a revised draft. A revised draft was sent to the directors of Allstate on
October 20, 2000.
On October 24, 2000, the board of Allstate met to review the financial
and legal arrangements of the definitive agreement. After careful consultation,
Allstate's board authorized the execution of the merger agreement. Following the
conclusion of the board meetings, Allstate and Harbourton executed and delivered
the merger agreement. Each director of both companies also executed a voting
agreement obligating them to vote their shares for the adoption of the merger
agreement. Allstate publicly announced the execution of the merger agreement
prior to the opening of the market on October 25, 2000.
Allstate's Reasons for the Merger
Allstate believes that the merger will:
o return Allstate to profitability;
o enable Allstate's net operating loss carryforwards to offset Harbourton's
post-merger taxable income, which will significantly enhance the combined
company's future earnings per share growth rate;
o strengthen its competitive and capital position in the financial services
industry, which is rapidly changing and growing more competitive; and
o provide an additional platform for further growth.
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The Allstate board has unanimously determined that the terms of the
merger and the merger agreement and the payment of the merger consideration are
advisable and fair to, and in the best interests of, Allstate and its
shareholders. In reaching its determination, the Allstate board considered a
number of factors, including that the merger should produce a well capitalized,
profitable institution. The Allstate board did not assign any specific or
relative weights to the factors considered, and individual directors may have
given different weights to different factors. The material factors considered
were as follows:
o Information concerning the businesses, earnings, operations, financial
condition, prospects, capital levels and asset quality of Harbourton,
individually and as combined with Allstate.
o The shares of Allstate common stock to be issued in the merger were
assigned a value of $0.95 per share, which exceeds recent market prices.
See "Stock Prices and Dividend Information."
o The total stock and cash consideration to be paid by Allstate does not exceed
Harbourton's total stockholders' equity.
o Current Allstate shareholders will own 50.5% of the combined company, even
though Harbourton's total assets and total stockholders' equity (even after
subtracting the cash to be paid to Harbourton's shareholders) are greater
than Allstate's.
o The ability to use Allstate's net operating loss carryforwards to offset
Harbourton's post-merger taxable income.
o The terms of the merger agreement and the other documents executed in
connection with the merger, including the employment agreements with
Harbourton's President and Senior Vice President.
o The current and prospective economic and competitive environment facing
each company and financial services companies generally.
o The results of the due diligence investigation conducted by the management
of Allstate, including assessment of credit policies, asset quality,
interest rate risk, litigation and adequacy of loan loss reserves.
o The expectation that the merger would be tax-free to Allstate and its
shareholders for federal income tax purposes. See " - Federal Income Tax
Consequences of the Merger."
Harbourton's Reasons for the Merger
The Harbourton board of directors believes that the merger presents a
unique opportunity to combine these two companies to create a strong franchise
with a commitment and the resources to significantly enhance shareholder value.
In deciding to approve the merger agreement and the transactions
contemplated by such agreements, the Harbourton board considered the following
material factors:
o The Harbourton board's familiarity with and review of Harbourton's
business, operations, earnings, prospects, financial condition, asset
quality, and capital levels.
o The Harbourton board's review of the business, operations, losses,
financial condition, asset quality and capital levels of Allstate on
both an historical and a prospective basis. The Harbourton board
considered the results of the due diligence investigation conducted by
Harbourton's management, including, among other things, assessments of
Allstate's credit policies, asset quality, interest rate risk and
adequacy of loan loss reserves.
o The ability of the combined company to utilize Allstate's net operating
loss carryforwards to offset the federal income tax liability that
would otherwise be incurred on Harbourton's pre-tax income.
o The respective contributions of each party to the combined entity,
including the 49.5% equity position that the Harbourton shareholders
will have in the combined entity, and the cash to be paid to
Harbourton's shareholders;
o
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The merger is expected to be tax-free for Harbourton for federal income
tax purposes as well as to Harbourton shareholders with respect to the
Allstate common stock that they receive. See " - Federal Income Tax
Consequences of the Merger."
o The Harbourton board also considered the nature and scope of the
conditions to the merger and the likelihood of these conditions being
satisfied.
o The non-financial terms of the merger agreement, including that
Harbourton will have significant representation on the board of
directors of Allstate and that the President of Harbourton will be the
President of the combined company.
o The current and prospective economic and competitive environment facing
the financial services industry generally, and Harbourton in
particular, including the continued rapid consolidation in the industry
and the increasing importance of operational scale and financial
resources in maintaining efficiency and remaining competitive over the
long term.
The Harbourton board has determined that the terms of the merger and
the merger agreement are fair to, and in the best interests of, Harbourton and
its shareholders. In reaching its determination to approve and deem advisable
the merger agreement, and the transactions contemplated therein, the Harbourton
board did not assign any relative or specific weights to the various factors
considered by it, and individual directors may have given differing weights to
different factors.
No Opinion of Independent Financial Advisor
The Board of Directors of Allstate negotiated the terms of the merger
agreement with Harbourton and Value Partners. The Board believes that the merger
consideration to be paid to Harbourton's shareholders is fair, from a financial
point of view, to Allstate and its shareholders. The Board considered the fact
that Harbourton is controlled by Value Partners and that Value Partners was able
to, and did, obtain control of Allstate upon completion of the Notes Conversion.
In deciding not to obtain a fairness opinion from an independent
banking firm, the Board considered the following factors:
o the total stock and cash consideration to be paid to Harbourton's
shareholders will equal Harbourton's total stockholders' equity as of the
end of the month preceding completion of the merger;
o the shares of Allstate common stock to be issued in the merger were
assigned a value of $0.95 per share, which is the same price at which the
Allstate Notes were converted into Allstate common stock;
o the assigned value of $0.95 per share of Allstate common stock exceeds
recent market prices for the common stock (see "Stock Prices and Dividend
Information");
o the need for Allstate to acquire a profitable business in order to utilize
Allstate's net operating loss carryforwards;
o the limited opportunities currently available to Allstate in light of its
recent losses, low equity and reduced business activities; and
o the anticipated costs of obtaining an independent fairness opinion.
Shareholder Action
Section 228 of the Delaware General Corporation Law permits
shareholders to approve any action that would be taken at any annual or special
meeting of shareholders without a meeting by written consent of the holders of
the minimum number of votes that would be necessary to authorize the action at
the meeting. The Delaware General Corporation Law requires that a majority of
the outstanding shares of Allstate common stock entitled to vote must approve
the proposed merger of Allstate and Harbourton. Because the directors of
Allstate and certain affiliated entities (including Value Partners) owning an
aggregate of 78.1% of the outstanding shares of Allstate common stock have
already agreed to provide their written consent to the merger, no additional
approval is required from any other Allstate shareholders.
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The outstanding common stock of Harbourton is owned by three
shareholders (including Value Partners). Each of them has agreed to vote in
favor of the merger of Harbourton with and into Allstate.
Tax Treatment
This summary of the federal income tax consequences of the merger may
not contain all the information that is important to you. It is not a complete
analysis or listing of all potential tax effects of the merger agreement; it
does not address tax consequences to persons subject to special treatment under
tax laws (such as dealers in securities, banks, insurance companies, tax-exempt
organizations, non-United States persons and shareholders who acquired their
shares as compensation); and it does not address the tax laws of any state,
local or foreign jurisdiction. It is based upon the Internal Revenue Code,
treasury regulations and administrative rulings and court decisions as of the
date of this document, all of which are subject to change. Shareholders should
consult their tax advisors as to the particular effect of their own particular
facts and circumstances on the federal income tax consequences of the merger to
them, and also as to the effect of any state, local, foreign and other federal
tax laws.
Under current federal income tax law, based upon assumptions and
representations to be made by Allstate and Harbourton, and assuming that the
merger is consummated in the manner set forth in the merger agreement, it is
anticipated that the following federal income tax consequences will result:
o the merger will qualify as a reorganization under Section 368(a) of the
Internal Revenue Code;
o no gain or loss will be recognized by Allstate or Harbourton as a result of
the merger;
o Harbourton shareholders who receive shares of Allstate common stock and
cash in exchange for their Harbourton shares in the merger will recognize
gain, if any, up to the amount of cash received. If the exchange has the
effect of a distribution of a dividend (determined with application of
Section 318(a) of the Internal Revenue Code on a shareholder-by-shareholder
basis), then the amount of gain recognized that is not in excess of such
shareholder's ratable share of undistributed earnings and profits should be
treated as a dividend. No loss should be recognized on the exchange;
o the basis of the Allstate common stock received by a Harbourton shareholder
will be the same as the basis of the Harbourton common stock surrendered in
the merger, decreased by the amount of cash received, and increased by the
amount that is treated as a dividend (if any) and by the amount of gain
recognized on the exchange (not including any portion of that gain that was
treated as a dividend);
o the holding period of the shares of Allstate common stock received by a
Harbourton shareholder will include the holding period of the Harbourton
common stock surrendered in exchange, provided that the surrendered shares
of Harbourton common stock were held as a capital asset at the time of the
merger; and
o cash received by a Harbourton shareholder in the merger in lieu of a
fractional share interest will be treated as having been received as a
distribution in full payment in exchange for the fractional share interest,
and will qualify as capital gain or loss (assuming the Harbourton common
stock surrendered in exchange was held as a capital asset by the
shareholder at the time of the merger).
Completion of the merger is conditioned upon the receipt of an opinion
from Allstate's tax counsel, Elias, Matz, Tiernan & Herrick L.L.P., Washington,
D.C., that the merger will have the anticipated tax consequences described
above. The opinion will be based upon representations to be made by Allstate and
Harbourton and upon the assumption that the merger will be consummated in
accordance with the terms of the merger agreement. The opinion will also be
based entirely upon the Internal Revenue Code, regulations then in effect or
proposed under the Internal Revenue Code, then current administrative rulings
and practice and judicial authority, all of which are subject to change,
possibly with retroactive effect. A partner in Elias, Matz, Tiernan & Herrick
was one of three directors of Harbourton until he resigned in October 2000.
Completion of the merger is also conditioned upon the receipt of a tax
opinion from PricewaterhouseCoopers LLP to the effect that for federal income
tax purposes, the net operating loss carryforwards of Allstate will not be
impaired for purposes of offsetting future operating income due to the
completion of the Notes Conversion and the merger.
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You can find the details of the tax opinion requirements in Sections
7.1(e) and (f) of Appendix A. No ruling has been or will be requested from the
IRS. Unlike a ruling from the IRS, the opinions of counsel and the accountants
are not binding on the IRS. There can be no assurance that the IRS will not take
a position contrary to the positions reflected in such opinions or that such
opinions would be upheld by the courts if challenged.
Accounting Treatment
Because Allstate and Harbourton are under common control, the merger
will be treated as a combination of a pooling of interests and a purchase under
generally accepted accounting principles, even though the cash consideration
exceeds 10% of the total merger consideration. Under the "pooling of interests"
method of accounting, which applies to the portion of Harbourton to be acquired
from Value Partners, Ltd., the controlling shareholder of both Allstate and
Harbourton, the recorded assets, liabilities, stockholders' equity, income and
expense of Allstate and Harbourton are combined and recorded at their historical
cost-based amounts. The interest which is being acquired from minority
shareholders is being accounted for at fair value under the purchase method.
Under the pooling of interests method of accounting, 95.7% of the historical
cost basis of the assets and liabilities of Allstate and Harbourton will be
combined upon completion of the merger and carried forward at their previously
recorded amounts, and the stockholders' equity accounts of Allstate and
Harbourton will also be combined. The 4.3% interest which is being acquired from
minority shareholders will be accounted for at fair value, which is determined
by reference to the market value of Allstate stock issued to the minority
owners, under the purchase method. The consolidated income and other financial
statements of Allstate issued after completion of the merger will be restated
retroactively for the period beginning on the date that the companies came under
the common control of Value Partners, October 26, 2000, to reflect the
consolidated operations of Allstate and Harbourton as if the merger had taken
place on that date. The accounting policies of Allstate and Harbourton are
substantially comparable.
Corporate Structure after the Merger
The merger will combine Allstate and Harbourton into a single company
under the name "Allstate Financial Corporation."
Regulatory Matters
Neither Allstate nor Harbourton need to obtain any approvals or
consents from any federal or state governmental entities to complete the merger.
No filings are required to be made under the federal anti-trust laws because of
the size of the parties. In addition, the Allstate common stock to be issued in
the merger will not be registered under any federal or state securities laws
since Harbourton only has three shareholders. The Allstate common stock to be
issued in the merger will be restricted as to transfer. See " - Resales of
Allstate Common Stock by Affiliates of Harbourton."
Obligations of the Post-Merger Corporation
If the merger is completed:
o The post-merger corporation must indemnify former officers, directors and
employees of the parties and their subsidiaries.
o The post-merger corporation must provide employment benefits to persons
who were employees of Allstate or Harbourton or their respective
subsidiaries immediately prior to the merger.
You can find the details of these obligations in Sections 6.9 and 6.10
of Appendix A. See also "The Merger - Interests of Directors and Officers in the
Merger that are Different from Your Interests" on pages 15 and 16.
What We Must Do to Complete the Merger
To complete the merger we must:
o Obtain approvals from the shareholders of both companies.
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o Obtain tax opinions from legal counsel and from PricewaterhouseCoopers LLP.
o Obtain the written consents of Harbourton's senior lender and certain third
party participants in Harbourton's loans.
o Avoid any material adverse effect on either of our companies.
o Avoid any breach of our representations and warranties.
o Fulfill our obligations under the merger agreement.
o Exchange customary documents at closing.
You can find details of the conditions to the merger in Article 7 of
Appendix A. We cannot guarantee that all of these conditions will be satisfied
or waived.
Interests of Directors and Officers in the Merger that are Different from
Your Interests
The merger agreement provides that the Board of Directors of Allstate
following the merger shall consist of up to seven directors, with up to three of
the members to be designated by Harbourton. Allstate will designate a number of
directors equal to the number designated by Harbourton plus one additional
director. All of the designated directors will serve until the next annual
meeting of Allstate's shareholders.
The executive officers of Allstate following the merger will consist of
Messrs. Campbell and Jackson from Allstate and Messrs. McLendon and Cluett from
Harbourton. Mr. Campbell will continue as Chairman of the Board, and Mr. Jackson
will be Senior Vice President, Chief Financial Officer, Secretary and Treasurer.
Mr. McLendon will serve as President and Mr. Cluett will serve as Senior Vice
President.
Allstate has agreed to honor the existing employment agreements that
Harbourton has with Messrs. McLendon and Cluett upon completion of the merger.
The merger agreement provides that Allstate will indemnify all current
and former directors, officers and employees of Allstate, Harbourton and their
respective subsidiaries to the fullest extent permitted by Delaware law.
Other Provisions of the Merger Agreement
Although the completion of the merger requires shareholder approval,
many provisions of the merger agreement became effective immediately upon its
signing. No shareholder action was required to make these provisions binding
obligations of Allstate and Harbourton.
Representations and Warranties. Each party has made representations and
warranties to the other party with respect to various matters, including its
financial statements, capital structure, business, loans, investments and
benefit plans. These representations and warranties must be true and correct
upon both signing of the merger agreement and the completion of the merger. A
party can terminate the merger agreement if the other party's representations
and warranties are not true and correct, resulting in a material adverse effect
on that other party. If the merger is completed, or if the merger agreement is
terminated for some unrelated reason, the representations and warranties become
void. You can find details of these obligations in Articles 3, 4 and 5 of
Appendix A.
Cooperation and Conduct of Business. Each party has agreed to cooperate
in completing the merger and to avoid extraordinary transactions between the
signing of the merger agreement and the completion of the merger. These
provisions become void if the merger is completed. These provisions also become
void if the merger agreement is terminated, except for those related to
confidentiality, joint press releases and shared expenses. You can find details
of these obligations in Article 6 of Appendix A.
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Waiver and Amendment. Section 8.4 of Appendix A allows either party to
extend the time for the performance of any obligation by the other party, and to
waive (to the extent permitted by law) any condition or obligation of the other
party. Section 8.5 allows the boards of the parties to amend the merger
agreement without shareholder approval so long as the merger consideration is
not changed and the effect on the shareholders is not materially adverse.
Termination. The merger agreement may be terminated by mutual agreement of
the parties (even after shareholder approval), or by a non-breaching party under
any of the following circumstances:
o In response to a material breach which is not cured within 30 days after
written notice.
o If any required regulatory or shareholder approval is not obtained.
o If the merger is not completed by February 28, 2001.
You can find details of the termination provisions in Sections 8.1 and
8.2 of Appendix A.
Exchange of Certificates
Promptly after the merger is completed, we will send to each holder of
Harbourton common stock a letter of transmittal for use in the exchange and
instructions explaining how to surrender Harbourton certificates. Holders of
Harbourton common stock that surrender their certificates, together with a
properly completed letter of transmittal, will receive the appropriate merger
consideration. Holders of unexchanged shares of Harbourton common stock will not
be entitled to receive any dividends or other distributions payable by Allstate
after the effective time until their certificates are surrendered. However, when
those certificates are surrendered for shares of Allstate common stock, any
unpaid dividends or distributions will be paid, without interest.
Allstate stock certificates will not be exchanged as part of the
merger. These certificates will continue to represent shares of Allstate common
stock.
Resales of Allstate Common Stock by Affiliates of Harbourton
The shares of Allstate common stock to be issued in the merger will not
be registered under the Securities Act of 1933, as amended ("Securities Act")
and will be restricted as to transfer. Affiliates of Harbourton may not sell
their shares of Allstate common stock acquired in the merger except pursuant to
an effective registration statement under the Securities Act covering those
shares or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act. Each of the three shareholders
of Harbourton are deemed to be affiliates of Harbourton.
Each of the three shareholders of Harbourton has entered into an
agreement with Allstate which acknowledges that the following legends will be
placed on their certificates representing Allstate common stock issued in the
merger:
The shares represented by this certificate were issued in a transaction
to which Rule 145 promulgated under the Securities Act of 1933, as
amended, applies. The shares of common stock evidenced by this
certificate have not been registered under the Securities Act of 1933,
as amended, or any state securities act, and may not be sold, pledged
or otherwise transferred without registration under such acts or an
opinion of counsel satisfactory to the Issuer that such registration is
not required.
-17-
<PAGE>
THE TRANSFER OF THE SECURITIES REPRESENTED HEREBY IS SUBJECT TO
RESTRICTION PURSUANT TO ARTICLE 9 OF THE CERTIFICATE OF INCORPORATION
OF THE CORPORATION, A COPY OF WHICH IS AVAILABLE UPON REQUEST TO THE
CORPORATION OR ITS TRANSFER AGENT. ARTICLE 9 PROHIBITS THE TRANSFER OF
THE SECURITIES TO ANY PERSON, ENTITY OR GROUP ("TRANSFEREE") WHO
DIRECTLY OR INDIRECTLY OWNS (OR WHO WOULD DIRECTLY OR INDIRECTLY OWN
AFTER GIVING EFFECT TO THE PROPOSED TRANSFER) MORE THAN 4.9% OF ANY
CLASS OF SECURITIES OF THE CORPORATION, OR THE TRANSFER BY ANY
TRANSFEROR WHO DIRECTLY OR INDIRECTLY OWNS 5% OR MORE OF ANY CLASS OF
SECURITIES OF THE CORPORATION, IN EACH CASE UNLESS APPROVED BY AT LEAST
TWO-THIRDS OF THE BOARD OF DIRECTORS OF THE CORPORATION.
Appraisal Rights
The following summary of the provisions of Section 262 of the Delaware
General Corporation Law is not intended to be a complete statement of the
provisions and is qualified in its entirety by reference to the full text of
Section 262 of the Delaware General Corporation Law, a copy of which is attached
to this document as Appendix B and is incorporated into this summary by
reference.
Under Delaware law, both Allstate and Harbourton shareholders are
entitled to appraisal rights in connection with the merger. However, all three
of Harbourton's shareholders have agreed to vote in favor of the merger and to
not exercise their appraisal rights.
If the merger is completed, each holder of Allstate common stock who
(1) files written notice with Allstate of an intention to exercise rights to
appraisal of his shares prior to November 30, 2000, (2) continues to hold his
Allstate common stock until the merger is completed, and (3) follows the other
procedures set forth in Section 262, will be entitled to be paid for his
Allstate common stock by the surviving corporation the fair value in cash of his
shares of Allstate common stock. The fair value of shares of Allstate common
stock will be determined by the Delaware Court of Chancery, exclusive of any
element of value arising from the merger. The shares of Allstate common stock
with respect to which holders have perfected their appraisal rights in
accordance with Section 262 and have not effectively withdrawn or lost their
appraisal rights are referred to in this document as the "dissenting shares."
Within ten days after the effective date of the merger, Allstate, as
the surviving corporation in the merger, will mail a notice to all shareholders
who have complied with (1), (2) and (3) above notifying such shareholders of the
effective date of the merger. Within 120 days after the effective date, either
Allstate or the holders of Allstate common stock may file a petition in the
Delaware Court of Chancery for the appraisal of their shares, although holders
of dissenting shares may, within 60 days of the effective date, withdraw their
demand for appraisal. Allstate does not presently intend to file such a
petition. Within 120 days of the effective date, the holders of dissenting
shares may also, upon written request, receive from Allstate a statement setting
forth the aggregate number of shares not voted in favor of the merger and with
respect to which demands for appraisals have been received.
Appraisal rights are available only to the record holder of shares. If
you wish to exercise appraisal rights but have a beneficial interest in shares
which are held of record by or in the name of another person, such as a broker
or nominee, you should act promptly to cause the record holder to follow the
procedures set forth in Section 262 to perfect your appraisal rights.
A demand for appraisal should be signed by or on behalf of the
shareholder exactly as the shareholder's name appears on the shareholder's stock
certificates. If the shares are owned of record in a fiduciary capacity, such as
by a trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may execute a demand for appraisal on behalf of a record holder;
however, in the demand the agent must identify the record owner or owners and
expressly disclose that the agent is executing the demand as an agent for the
record owner or owners. A record holder such as a broker who holds shares as
nominee for several beneficial owners may exercise appraisal rights for the
shares held for one or more beneficial owners and not exercise rights for the
shares held for other beneficial owners. In this case, the written demand should
state the number of shares for which appraisal rights are being demanded. When
no number of shares is stated, the demand will be presumed to cover all shares
held of record by the broker or nominee.
-18-
<PAGE>
If any holder of Allstate common stock who demands appraisal of his
shares under Section 262 fails to perfect, or effectively withdraws or loses,
the right to appraisal, his shares will continue to represent shares of Allstate
common stock. Dissenting shares lose their status as dissenting shares if:
o the merger is abandoned;
o the dissenting shareholder fails to make a timely written demand for
appraisal;
o the dissenting shares are covered by a written consent executed in favor of
the merger;
o neither Allstate nor the shareholder files a complaint or intervenes in a
pending action within 120 days after the effective date of the merger; or
o the shareholder delivers to Allstate, as the surviving corporation, within
60 days of the effective date of the merger, or thereafter with Allstate's
approval, a written withdrawal of the shareholder's demand for appraisal of
the dissenting shares, although no appraisal proceeding in the Delaware
Court of Chancery may be dismissed as to any shareholder without the
approval of the court.
Failure to follow the steps required by Section 262 of the Delaware
General Corporation Law for perfecting appraisal rights may result in the loss
of appraisal rights, in which event an Allstate shareholder will be entitled to
receive the consideration with respect to the holder's dissenting shares in
accordance with the merger agreement. In view of the complexity of the
provisions of Section 262 of the Delaware General Corporation Law, Allstate
shareholders who are considering objecting to the merger should consult their
own legal advisors.
STOCK PRICES AND DIVIDEND INFORMATION
Allstate common stock is quoted on the OTC Bulletin Board under the
symbol "ASFN". The following table sets forth the reported high and low bid
prices of shares of Allstate common stock, as furnished by the National
Association of Securities Dealers, Inc. These bids represent prices among
dealers, do not include retail mark-ups, mark-downs or commissions, and may not
represent actual transactions. There is a limited market for the Allstate common
stock.
Allstate
Common Stock
High Low
1998
First Quarter $9.00 $5.69
Second Quarter 8.38 5.44
Third Quarter 7.25 3.38
Fourth Quarter 4.38 2.63
1999
First Quarter 4.50 3.50
Second Quarter 7.09 2.03
Third Quarter 2.13 0.47
Fourth Quarter 0.56 0.36
2000
First Quarter 1.31 0.36
Second Quarter 0.81 0.19
Third Quarter 0.75 0.44
Fourth Quarter 0.57 0.50
(through November 6, 2000)
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<PAGE>
Allstate has not paid any dividends on its common stock and does not
anticipate paying cash dividends on the Allstate common stock in the foreseeable
future. The Board of Directors currently intends to retain any future earnings
to fund growth of the combined company.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined balance sheet as
of June 30, 2000 combines the unaudited historical consolidated balance sheets
of Allstate and Harbourton as if we had merged on June 30, 2000, after giving
effect to certain pro forma adjustments described in the accompanying notes. The
following unaudited pro forma combined statements of income for the six months
periods ended June 30, 2000 and 1999 and for each of the years in the two-year
period ended December 31, 1999 present the combined historical consolidated
income statements of Allstate and Harbourton as if we had merged effective as of
August 28, 1998 (the date of inception of Harbourton). Both Allstate's and
Harbourton's fiscal years end December 31. Pro forma per share amounts are based
on an exchange ratio of 9.42 shares of Allstate common stock (the exchange ratio
which would have been in effect had both the Notes Conversion and the merger
closed on June 30, 2000) for each share of Harbourton common stock. The merger
is expected to close in the fourth quarter of 2000.
The unaudited pro forma combined balance sheet and related footnotes
account for the merger using a combination of the "pooling-of-interests" and the
"purchase" methods of accounting. Under the "pooling-of-interests" method of
accounting, which applies to the portion of Harbourton to be acquired from Value
Partners, Ltd., the controlling shareholder of both Allstate and Harbourton, the
recorded assets, liabilities, stockholders' equity, income and expense of
Allstate and Harbourton are combined and recorded at their historical cost-based
amounts except as described below and in the footnotes. The interest which is
being acquired from minority shareholders is being accounted for at fair value
under the purchase method. The unaudited pro forma condensed combined income
statements and related footnotes account for the merger using the
"pooling-of-interests" method of accounting, as if the merger had taken place at
the beginning of the income statement period. The accounting policies of
Allstate and Harbourton are substantially comparable.
The unaudited pro forma combined financial statements are for
illustrative purposes only. The companies may have performed differently had
they been combined during the periods presented. The exchange ratio will be
different for the actual merger than the one used in the pro forma. You should
not rely on the unaudited pro forma combined financial information as being
indicative of the historical results that we would have had or the future
results that we will experience after the merger. These unaudited pro forma
combined financial statements should be read in conjunction with, and are
qualified in their entirety by, the separate historical consolidated financial
statements and notes thereto of Allstate and Harbourton included in this
document.
Pro Forma Effect of the Notes Conversion
Allstate has 10% Convertible Subordinated Notes due September 30, 2003
("Allstate Notes,") convertible into common stock of Allstate at $6.50 per share
and bearing a fixed interest rate of 10%. The notes are unsecured and
subordinated in payment to all other senior debt of Allstate. Allstate was in
default on the interest payment due December 31, 1999 and all payments due
thereafter on June 30, 2000, and on certain financial covenants as well. On
October 5, 2000, Allstate filed a plan of arrangement with the Delaware Court of
Chancery that proposed a conversion of $4.3 million of the $4.6 million of the
Allstate Notes, together with accrued but unpaid interest, into common stock of
Allstate at a price of $0.95 per share of common stock (the "Notes Conversion").
The Delaware court approved the Notes Conversion on October 6, 2000, and minor
changes were made to the approval order on October 11, 2000. The conversion of
the Allstate Notes (plus accrued and unpaid interest thereon at 12.5% through
the date of the exchange) into common stock of Allstate at a price of $0.95 per
share occurred on October 26, 2000. Of the $4.6 million of principal outstanding
on the Allstate Notes, holders of $4.3 million elected the conversion. Holders
of the remaining $266,000 of notes waived default interest and received interest
at the 10% note rate on the same day. The remaining holders retained their right
to convert their notes into Allstate common stock at $6.50 per share. In the pro
forma statements, the Notes Conversion is illustrated for balance sheet purposes
as if it had occurred on June 30, 2000, and for income statement purposes as if
it had occurred prior to the respective period.
-20-
<PAGE>
Unaudited Pro Forma Condensed Combined Balance Sheet as of June 30, 2000
<TABLE>
<CAPTION>
Pro Forma
Adjustments Pro Forma
Allstate for Notes Allstate Harbourton Adjustment Pro Forma
Historical Conversion as Adjusted Combined for Merger
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,076 (20)(a) $ 1,056 $ 397 $ 1,453 (1,894)(d) (442)
Total receivables, net 4,491 4,491 9,512 14,003 (123)(e) 13,880
Securities held for sale 380 380 -- 380 380
Other assets 159 159 506 665 (7)(f) 658
------- ------- -------- -------- -------- ------- --------
Total assets $ 6,106 $ 6,086 $ 10,415 $ 16,501 (2,025) $14,476
Convertible subordinated
notes $ 4,954 (4,331)(b) $ 623 $ -- $ 623 -- $ 623
Loan payable -- -- 1,035 1,035 -- 1,035
Other liabilities 740 (421)(b) 319 516 835 (7)(f) 828
-------- ------- -------- -------- -------- ------- --------
Total liabilities 5,694 942 1,551 2,493 (7) 2,493
-------- ------- -------- -------- -------- ------- --------
Common stock, $.01 par value 40 50(c) 92 8 99 65 (g) 165
Additional paid-in capital 18,963 4,596(c) 23,558 8,045 31,603 (1,272)(g) 30,331
Treasury stock (4,962) (4,962) -- (4,962) (4,962)
Retained earnings (deficit) (14,006) 86(c) (13,920) 811 (13,109) (811)(g)(13,920)
Unrealized gains on
investment securities 376 376 -- 376 -- 376
-------- ------- -------- -------- -------- ------- --------
Total stockholders' equity 412 5,144 8,864 14,007 (2,018) 11,991
-------- ------- -------- -------- -------- ------- --------
Total liabilities and
stockholders' equity $ 6,106 $ 6,086 $ 10,415 $ 16,501 (2,025) $14,476
</TABLE>
Notes to unaudited pro forma condensed combined balance sheet as of
June 30, 2000
(1) Adjustments for the Notes Conversion consist of :
(a) ($19,876) in interest paid to non-converting noteholders
(b) ($4,331,000) in notes and ($421,392) in interest, which equals the sum of:
o ($404,527) in interest to converting holders at a rate of 12.5% simple,
at $0.95 per share o ($19,876) in cash interest paid to non converting
holders o $7,519 in loss on the conversion of accrued interest to
converting holders o ($4,507) gain on interest foregone by settlement with
non converting holders (c) $49,848 in par value and $4,596,217 in
additional paid in capital, which equals the sum of :
o $2,754,083 in additional paid in capital of common stock issued (at $.5625,
the closing price on June 30, 2000)
o $1,924,077 in capital contributions from converting noteholders (notes
surrendered less value of common stock received), net of ($7,519) in losses
on conversion of accrued interest
o $4,507 in capital contributions of interest foregone by non-converting
noteholders
o ($86,451) in direct expenses of the transaction, previously charged to
expense in the three months ended June 30, 2000.
-21-
<PAGE>
(2) Adjustments for the merger consist of:
(d) ($1,894,343) is the cash portion of the acquisition price ( Harbourton book
value less 7,336,176 shares times $0.95 per share)
(e) ($122,826) is negative goodwill generated by the excess of the fair value
of the net assets acquired over the cost of the portion (4.32%) of the
common stock of Harbourton being acquired from minority shareholders. The
acquisition of these shares is treated as a purchase. This amount is
allocated to the non-current portion of notes receivable as a valuation
allowance. The amount is equal to the book value, $8,863,710, less the book
acquisition price, 7,336,176 shares times $0.5625 market price per share
(=$4,126,599) plus $1,894,343 cash, or $2,842,786, times the minority
holders' portion of the shares being acquired. The pro forma market price
is the closing trading price of Allstate on June 30, 2000. The average
market price used to account for the merger will be obtained by averaging
the closing market price of Allstate common stock before, after and
including the date of the announcement.
(f) $7,362 represents an Allstate rent security deposit held by Harbourton
(g) Stock issuance adjustments include:
o $73,362 in new par value of shares issued, less $7,786 in Harbourton par
value cancelled.
o $6,896,005 in additional paid in capital of new shares issued, less
$8,045,214 in additional paid in capital of Harbourton shares cancelled,
less ($122,826) in excess of the fair value of the net assets acquired over
the cost of minority interest shares, and ($810,710) in Harbourton retained
earnings acquired.
Unaudited Pro Forma Condensed Combined Income Statement for the
Six Months Ended June 30, 2000
<TABLE>
<CAPTION>
Pro Forma
Allstate Harbourton Merger Pro Forma
Historical Historical Adjustments Combined
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenue ................ $ 407 $ 1,119 (15)(a) $1,511
----- ------- ------- ------
Expenses:
Compensation and fringe benefits 285 321 606
General and administrative 543 424 967
Interest expense ........ 347 -- (289)(b) 58
Provision for credit losses (recovery) (366) -- (366)
Direct organizational costs -- (49) (49)
Depreciation and amortization -- 6 6
----- ------- ------- ------
Total expenses .......... 809 703 (289) 1,222
------- ------- ------
Income (loss) before income tax expense (402) 416 274 288
Income tax expense ........... -- 159 (159)(c) --
----- ------- ------- ------
Net income (loss) ............ $(402) $ 257 $ 288
======= ======= =====
Net income (loss) per share:
Basic and diluted $(0.17) $0.34 $0.03(d)
</TABLE>
Notes to unaudited pro forma condensed combined income statement for the six
months ended June 30, 2000.
(a) Harbourton income from participation sold to Allstate
(b) Interest recorded on converted Allstate Notes, which are shown as if
converted prior to the beginning of the period (c) Allstate net operating tax
loss carryforward applied to reduce income tax expense (d) Pro forma basic and
diluted earnings per share is calculated utilizing Allstate's weighted-average
shares outstanding for
the six months ended June 30, 2000 of 2,354,862 combined with Harbourton's
weighted-average shares outstanding for the six months ended June 30, 2000,
764,778 , times the exchange rate used in the June 30, 2000 pro forma
balance sheet (9.42), for a total proforma weighted average of 9,559,071.
-22-
<PAGE>
Unaudited Pro Forma Condensed Combined Income Statement for 1999
<TABLE>
<CAPTION>
Pro Forma
Allstate Harbourton Merger Pro Forma
Historical Historical Adjustments Combined
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Total revenue ......................... $ 3,621 $1,417 $ 5,038
------ -------- -----
Expenses:
Compensation and fringe benefits . 2,059 453 2,512
General and administrative ....... 3,001 298 3,299
Interest expense ................. 1,293 -- (408)(a) 885
Provision for credit losses ...... 10,178 -- 10,178
Other expense .................... 339 13 352
-------- ------ -------- -----
Total expenses ................... 16,869 764 17,226
-------- -----
Income (loss) before income tax expense (13,248) 654 (12,188)
Income tax expense .................... 4,003 252 (252)(b) 4,003
------ -------- -----
Net income (loss) ..................... $(17,251) $ 402 ($16,191)
====== ======== =====
Net income (loss) per share:
Basic and diluted ................ $(7.42) $ 0.76 ($2.22)(c)
</TABLE>
Notes to unaudited pro forma condensed combined income statement for 1999
(a) Interest recorded on converted Allstate Notes, which are shown as if
converted prior to the beginning of the period.
(b) No income tax charge is shown for current period, but the provision taken
by Allstate to establish a valuation allowance
for the deferred tax asset is not adjusted
(c) Pro forma basic and diluted earnings per share is calculated utilizing
Allstate's weighted-average shares outstanding for the year ended December
31,1999 of 2,324,616 combined with Harbourton's weighted-average shares
outstanding for the year ended December 31,1999, 527,096 , times the
exchange rate used in the June 30, 2000 pro forma balance sheet (9.42), for
a total pro forma weighted average of 7,289,860.
Unaudited Pro Forma Condensed Combined Income Statement for 1998
<TABLE>
<CAPTION>
Pro Forma
Merger
Allstate Harbourton Adjustments Pro Forma
Historical Historical(a) Combined
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenue ............................. $ 10,301 $476 $ 10,777
-------- ----- ------
Expenses:
Compensation and fringe benefits ..... 3,448 118 3,566
General and administrative ........... 4,964 123 5,087
Interest expense ..................... 1,903 -- (228) (b) 1,675
Provision for credit losses (recovery) 9,599 -- 9,599
Depreciation and amortization ........ -- 5 5
-------- ---- -------- ----- ------
Total expenses ....................... 19,913 246 19,932
-------- ----- ------
Income (loss) before income tax expense ... (9,612) 230 (9,155)
(benefit)
Income tax expense (benefit) .............. (3,556) 78 (91) (c) (3,387)
---- -------- ----- ------
Net income (loss) ......................... $ (6,056) $152 $ (5,768)
Net income (loss per share:
Basic and diluted .................... $ (2.61) $0.55 ($1.18)(d)
</TABLE>
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<PAGE>
Notes to unaudited pro forma condensed combined income statement for 1998
(a)For the period since inception on August 28, 1998 to December 31, 1998
(b)Interest recorded on converted Allstate Notes, which are shown as if
converted prior to the beginning of the period (c) Income tax benefit is
calculated at 37% rate on pro forma (loss) amount. (d) Pro forma basic and
diluted earnings per share is calculated utilizing Allstate's weighted-average
shares outstanding for the year ended December 31,1998 of 2,322,222
combined with Harbourton's weighted-average shares outstanding for the year
ended December 31,1998, 274,526, times the exchange rate used in the
June 30, 2000 pro forma balance sheet (9.42), for a total pro forma weighted
average of 4,908,257.
BUSINESS OF ALLSTATE
Allstate was incorporated in 1982 in the Commonwealth of Virginia, and
reincorporated in Delaware in 2000. Unless the context requires or otherwise
permits, all references to "Allstate" include Allstate Financial Corporation and
its wholly-owned subsidiaries. Allstate is a commercial finance institution that
provided financing to small and middle-market businesses through loans secured
by accounts receivable, inventory, machinery and equipment, and real estate. In
October 1999, Allstate sold the factoring business, the portion of the business
that purchased discounted invoices with recourse. Allstate will continue to
receive revenue from this sale for the foreseeable future. In 1997, Allstate
began a program of purchasing invoices without recourse, assuming the risk that
an account debtor may become insolvent. This activity ceased during 1998.
Allstate's 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, and it is
now engaged solely in managing its existing portfolio.
Allstate incurred net losses of $17.3 million in 1999 and $6.1 million
in 1998. As a result, Allstate was not in compliance with the covenants in its
revolving bank line of credit. Pursuant to a forbearance agreement with its
senior lenders, Allstate sold a majority of its performing assets in order to
repay its bank line of credit. Allstate does not have current sources of
capital, outside of collections of existing receivables, to fund new advances to
clients. Allstate has indicated the merged companies would pursue principally
the existing business plan developed by Harbourton to provide residential real
estate financing and mezzanine investments.
Allstate's independent auditors issued an unqualified audit opinion and
stated that the recurring losses from operations and the March 31, 2000
expiration of the working capital loan raise substantial doubt about Allstate's
ability to continue as a going concern. Allstate developed a strategic
turnaround plan which consisted of the following elements:
o The conversion of the Allstate Notes (plus accrued and unpaid interest
thereon at 12.5% through the date of the exchange) into common stock of the
Allstate at a price of $0.95 per share. Of the $4.6 million of principal
outstanding on the Allstate Notes, $4.3 million elected the conversion, and
on October 26, 2000, the new shares were issued. Holders of the remaining
$266 thousand of notes waived default interest and received interest at the
10% note rate on the same day.
o The reincorporation of Allstate under Delaware law to take advantage of
provisions favorable to the recapitalization plan.
o A limitation on transfers of common stock by existing or potential holders
of over 4.9% of outstanding shares, thereby helping to preserve Allstate's
"NOL's" for future use.
o An increase in the number of authorized shares from 10,000,000 to
20,000,000 to facilitate the conversion and enable Allstate to consider
possible acquisitions of, or business combinations with, firms in financial
services, involving the issuance of new shares.
o The negotiation of the merger agreement with Harbourton.
The conversion of the Allstate Notes to equity will reduce
Allstate's interest costs and position it to more effectively obtain new senior
funding to expand its loan portfolio or to make acquisitions of other financial
services businesses.
Allstate's corporate offices in McLean, Virginia house all of its
credit and client administration activities.
Principal Products
Allstate's principal products are financing for small and medium-sized
businesses, usually those with annual sales of $1 million to $10 million dollars
per year. Through its offering of advances secured by accounts receivable,
inventory, machinery and equipment, and real estate ("Asset-Based Lending" or
"ABL"), Allstate provides its clients with the ability to expand their working
capital and acquire productive business assets.
-24-
<PAGE>
During October 1999, Allstate sold its factoring portfolio. Allstate
will receive a premium over time based on the performance of the Purchased
Receivables sold. Allstate does not intend to re-enter the factoring business.
Allstate and Harbourton intend to principally pursue the business plan
developed by Harbourton to provide residential real estate financing and
mezzanine investments.
Distribution Methods
The ABL product was marketed through referrals from business
consultants, lawyers, accountants, commercial and investment bankers. Allstate
required extensive financial information and reporting from clients who seek to
qualify for its ABL product, and believed that these kinds of referral sources
will be more likely to provide prospects that will qualify for such financing.
Competition
In its ABL business, Allstate faced competition from other asset-based
lenders, and commercial banks that offer secured financing. Due to the size of
facilities that it offered, Allstate competed with both regional sources of
financing and large national organizations. Many of these competitors have
significant financial, marketing and operational resources, and may have access
to capital at lower costs than Allstate can obtain.
Sources of Capital
Allstate's requirement for capital is a function of the level of its
investment in receivables. Allstate funds this investment through its equity,
convertible subordinated notes, and internally generated funds. It does not have
access to a line of credit from an outside source. Allstate is not generally
funding new advances to clients.
Allstate also had two issues of convertible subordinated notes. The
notes due September 30, 2000 were convertible into common stock of Allstate at
$7.50 per share and required interest payments based on a spread over the prime
rate. These notes, of which $357 thousand were outstanding at June 30, 2000,
were paid in full on October 2, 2000. The 10% Convertible Subordinated Notes due
September 30, 2003 are convertible into common stock of Allstate at $6.50 per
share and bear a fixed interest rate of 10%. The notes are unsecured and
subordinated in payment to all other senior debt of Allstate. Allstate was in
default on the interest payment due December 31, 1999 and all scheduled interest
payments due through September 30, 2000, and on certain financial covenants
relating to the subordinated notes due September 30, 2003. On October 5, 2000,
Allstate filed a plan of arrangement with the Delaware Court of Chancery that
proposed a conversion of $4.3 million of the $4.6 million of the Allstate Notes,
together with accrued but unpaid interest at 12.5%, into common stock of
Allstate at a price of $0.95 per share of common stock . The Delaware court
approved the Notes Conversion on October 6, 2000, and minor changes were made to
the approval order on October 11, 2000. The conversion of the Allstate Notes
(plus accrued and unpaid interest thereon at 12.5% through the date of the
exchange) into common stock of Allstate at a price of $0.95 per share occurred
on October 26, 2000. Of the $4.6 million of principal outstanding on the
Allstate Notes, holders of $4.3 million elected the conversion. Holders of the
remaining $266 thousand of notes waived default interest and received interest
at the 10% note rate on the same day. The remaining holders retained their right
to convert their notes into Allstate common stock at $6.50 per share.
Allstate believes funds from the collection of impaired assets will be
sufficient to complete the merger transaction and to finance Allstate's funding
requirements for the remainder of the fiscal year.
Client Base
Allstate's clients are small- to medium-sized growth and turnaround
companies with annual revenues typically between $1 million and $10 million.
Allstate's clients have not typically qualified for traditional bank financing
because they are either too new, too small, undercapitalized (over-leveraged),
unprofitable or otherwise unable to satisfy the requirements of a bank lender.
Accordingly, there is a significant risk of default and client failure inherent
in Allstate's business.
-25-
<PAGE>
The following table indicates the composition of Allstate's receivables by
type of client business as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
1999 1998
---- ----
Business of Client Receivables Percent Receivables Percent
------------------ ----------- ------- ----------- -------
In Thousands In Thousands
<S> <C> <C> <C> <C>
Importer and distributor of:
-----------------------------------------------------------
Jewelry and jewelry boxes $4,847 39.7% $8,797 20.6%
-----------------------------------------------------------
Videotapes 610 5.0 1,401 3.3
-----------------------------------------------------------
Computer components and software1 923 7.5 1,414 3.3
-----------------------------------------------------------
Plastic bags -- -- 12,452 29.2
-----------------------------------------------------------
Importer, manufacturer and distributor of 147 1.3
apparel wear, accessories and other
durable goods 3,423 8.0
-----------------------------------------------------------
Life insurance contracts 1,890 15.5 2,629 6.2
-----------------------------------------------------------
Provider of trucking and air freight 1,590 13.0 2,668 6.3
-----------------------------------------------------------
Provider of publishing, direct mail and
advertising 1,333 10.9 3,206 7.5
-----------------------------------------------------------
Contracts for construction and construction
Supply 438 3.6 2,228 5.2
-----------------------------------------------------------
Legal claims receivable 221 1.9 371 0.9
-----------------------------------------------------------
Food industry 61 0.5 1,036 2.4
-----------------------------------------------------------
Provider of computer training -- -- 1,350 3.2
-----------------------------------------------------------
Provider of engineer and health temps -- -- 334 0.8
-----------------------------------------------------------
Provider of uniform sales & rentals -- -- 125 0.3
-----------------------------------------------------------
Other 138 1.1 1,215 2.8
------- ---- ------- ----
Total $12,198 100.0% $42,649 100.0%
======= ====== ======= ======
</TABLE>
1 Includes a participation of others of $744,435 at December 31, 1999 and
$759,424 at December 31, 1998.
-26-
<PAGE>
The following table indicates the composition of Allstate's receivables by
state of client location as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
Client State Receivables Percent Receivables Percent
$000 $000
<S> <C> <C> <C> <C>
New York $5,779 47.4% $25,963 60.9%
-------------------------------------------
New Jersey 2,396 19.6 5,375 12.6
-------------------------------------------
Virginia 2,111 17.3 3,000 7.0
-------------------------------------------
California1 1,573 12.9 2,731 6.4
-------------------------------------------
Pennsylvania 147 1.2 707 1.7
-------------------------------------------
Wisconsin 124 1.0 125 0.3
-------------------------------------------
Delaware 68 0.6 404 0.9
-------------------------------------------
Florida -- -- 1,979 4.6
-------------------------------------------
North Carolina -- -- 727 1.7
-------------------------------------------
Connecticut -- -- 423 1.0
-------------------------------------------
Minnesota -- -- 330 0.8
-------------------------------------------
District of Columbia -- -- 213 0.5
-------------------------------------------
Maryland -- -- 208 0.5
-------------------------------------------
Rhode Island -- -- 204 0.5
-------------------------------------------
New Mexico -- -- 160 0.4
-------------------------------------------
Illinois -- -- 50 0.1
-------------------------------------------
Georgia -- 50 0.1
--------- -- --------- --
-------------------------------------------
Total $12,198 100.0% $42,649 100.0%
======= ====== ======= ======
</TABLE>
1 Includes a participation of others of $744,435 at December 31, 1999 and
$759,424 at December 31, 1998.
The tables above reflect the composition of Allstate's receivables by
client industry and state of client location at the dates indicated. Tables for
the 1998 year include purchased invoices of Allstate's factoring activities.
Because Allstate's major clients tend to change significantly over time, these
tables are not likely to reflect the composition of Allstate's receivables by
client industry or state of location at future points in time.
From time to time, a single client or single industry may account for a
significant portion of Allstate's receivables. Allstate has adopted a policy to
generally restrict the size of any one new client to a maximum of $500 thousand,
and has reduced the size of the existing clients who were over that limit.
Allstate has entered into two participations in the amounts of $850 thousand and
$1.2 million which are managed by Harbourton. These facilities are expected to
be outstanding for a limited term. Although Allstate carefully monitors client
and industry concentration, there can be no assurance that the risks associated
with client or industry concentration could not have a material adverse effect
on Allstate.
Historically, Allstate has not expected to maintain a funding relationship
with a client for more than two years. Allstate expected that its clients would
qualify for more competitively priced bank or asset-based financing within that
time period, or would be liquidated. Therefore, Allstate's major clients have
tended to change significantly over time. Although Allstate 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 and has had a
material adverse effect on Allstate.
-27-
<PAGE>
Obligor (Account Debtor) Information
Allstate sold its factoring portfolio in October 1999 and does not intend
to re-enter the factoring business. The quality of the purchased invoices was
Allstate's primary security against credit losses from its factoring activities.
Allstate generally did not purchase accounts receivable that had aged
significantly.
As of December 31, 1999 and 1998, Allstate's receivables included zero ($0)
and $23.7 million of purchased invoices on which approximately zero (0) and
4,200 entities, respectively, were obligated. If Allstate did not receive
payment on a Factored account receivable within 90 days after its acquisition or
if at any time prior to 90 days Allstate determined that it was unlikely to
receive payment, Allstate required the client to repay the amount Allstate
advanced on the receivable plus the amount of discount earned. If, after 90
days, follow up calls to account debtors led Allstate to believe that an invoice
is collectable within a reasonable period of time, Allstate may have allowed the
advance to remain outstanding in return for an additional discount from the
client. In that event, the earned discount owed on the original period of the
advance was collected from the client at the end of 90 days and earned discounts
thereafter accrued as if the account receivable were a new purchase.
From time to time, a single account debtor or several account debtors may
have been obligated on a significant portion of Allstate's gross factored
accounts receivable. As of December 31, 1999 and 1998, the largest single
account debtor accounted for approximately zero (0%) and 2%, respectively, of
Allstate's gross purchased invoices.
Government Regulation
State usury laws generally limit the amount of interest that a creditor may
contract for, charge or receive in connection with the lending of money. In the
Commonwealth of Virginia, which is where Allstate's operating offices are
located, there are no restrictions on the rates of interest and fees which may
be charged to commercial borrowers.
Employees
Allstate currently has three full-time employees. None of Allstate's
employees is a party to any collective bargaining agreement, and management
considers its relations with employees to be satisfactory.
Description of Property
Allstate sublets approximately 1,500 square feet of office space in a
commercial building located in McLean, Virginia. The cost of renting the new
location will be approximately $30,000 during 2000. Allstate subleases from, and
shares certain of the expenses of occupancy with, Harbourton.
Prior to March 2000, Allstate's principal offices occupied approximately
8,000 square feet of space in an office building in Arlington, Virginia.
Allstate's lease on this property expires in December 2001. The cost of renting
this office space was approximately $178 thousand in 1999 compared to $184
thousand in 1998. In July 2000, Allstate was released from its obligations under
the lease, in exchange for payment of all rent arrearage.
Commencing November 1997, Allstate also occupied approximately 2,500 square
feet of space in an office building in New York City. The costs of renting this
facility were $81 thousand in 1998 and $14 thousand in 1997. Allstate elected to
terminate the lease in February 1999 for a one-time fee of $35 thousand. At the
same time the Allstate leased an executive suite facility in New York City for a
term ending July 1999. The annual rent on the new facility was approximately $26
thousand. The lease was terminated in July 1999.
-28-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF ALLSTATE
Year ended December 31, 1999 vs. year ended December 31, 1998
During 1999, Allstate suffered a high level of credit losses. Due to these
losses, Allstate was not in compliance with the covenants in its revolving bank
line of credit. Allstate negotiated an agreement with the bank group which
called for the bank group to forebear from exercising its rights to demand
payment (that agreement, and successor agreements, are hereinafter called the
"Forebearance Agreement(s)") while Allstate attempted to obtain sufficient
liquidity to repay the bank group. With no other immediate source of financing,
Allstate, with the concurrence of the bank group, elected to find buyers for the
majority of its performing assets. On October 29, 1999 Allstate sold the
Purchased Receivables and the Advances Receivable related to its factoring
business to Metro Factors, Inc. ("Metro"), for $6 million, a price that
approximated the carrying value of the assets involved. Simultaneous with the
sale, Allstate purchased a participation in certain of the Advances Receivable
associated with the factoring clients for $1.5 million. Metro acts as the
servicer with regard to these participations. Allstate will receive a premium
over time based on the performance of the Purchased Receivables sold to Metro.
Allstate did not record any gain or loss on this transaction. At the time of the
sale, Allstate took a restructuring charge to downsize the operations. In
addition, in December 1999, Allstate sold the Advances Receivable of one of its
ABL relationships. The proceeds of both asset sales were applied to the
revolving bank line of credit.
In its factoring product line, Allstate purchased invoices at their face
amount, and made an advance payment to its client against the collection of the
invoices. The amount (less negotiated discounts) of the advance payment was
based upon the size, age and type of accounts being purchased, the quality of
client documentation and Allstate's judgment as to the payment history and
creditworthiness of the obligors. Allstate generated revenue through purchase
discounts, which were negotiated on a client-by-client basis.
Allstate's ABL product line provided asset-based loans to Allstate's
clients, primarily working capital and equipment loans, at negotiated spreads
over the prime rate. In its ABL activities, Allstate typically analyzed the
accounts receivable collateral, obtains appraisals, based on liquidation value,
of the other collateral offered and extends credit based upon a negotiated
percentage of the appraised collateral values. Under investment policies in
place prior to entering into the Forebearance Agreement, Allstate targeted ABL
relationships in the $1 million to $3 million range. At December 31, 1999,
Allstate had performing ABL Advances Receivables of $3.9 million, including the
$1.5 million in participations acquired as part of the sale of the factoring
portfolio. During January 2000, a second ABL was paid off, with the proceeds
paying the revolving bank line of credit in full. Allstate has one remaining
larger ($1.5 million) ABL. Due to Allstate's reduced level of liquidity, this
client was informed that its line of credit would not be renewed at its March
31, 2000 maturity date. Due to its lack of liquidity and reduced equity
position, Allstate has revised its lending policies and is targeting borrowing
relationships in the $250 thousand range. Allstate will continue to service its
current accounts, and plans to reinvest the proceeds of collections of
performing and nonperforming accounts in such new investments.
At December 31, 1999 and 1998, Allstate had zero ($0) and $832 thousand in
income taxes receivable, and zero ($0) and $4.0 million in deferred income
taxes, respectively. Income taxes receivable represent the amounts of taxes
refundable for the years then ended. The deferred income taxes represent
projected decreases in taxes payable in future years as a result of
carryforwards at the end of each year. During 1999, Allstate took an allowance
of $4.0 million against deferred income taxes since it had become unlikely that
Allstate would realize these tax savings in the near future.
Other assets decreased 93.3%, to $44 thousand from $654 thousand at
December 31, 1999 and 1998, respectively. This decrease was the result of a
decrease in land and buildings held for resale.
The following table breaks down total revenue by type of transaction for
the periods indicated and the percentage relationship of each type of
transaction to total revenue.
-29-
<PAGE>
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998
Type of Revenue Earned Revenue Percent Earned Revenue Percent
<S> <C> <C> <C> <C>
Discount on purchased invoices $1,555,359 43.0% $4,229,332 41.1%
-------------------------------------------
Earnings on advances receivable 1,659,871 45.8 3,719,873 36.1
-------------------------------------------
Earnings on purchased life
insurance policies -- -- 15,000 0.1
-------------------------------------------
Fees and other income 406,106 11.2 2,337,013 22.7
------- ---- --------- ----
-------------------------------------------
Total revenue $3,621,336 100.0% $10,301,218 100.0%
========== ====== =========== ======
</TABLE>
Total revenue decreased by 65% in 1999 versus 1998, to $3.6 million from
$10.3 million. Within total revenue, discounts on purchased invoices decreased
63% in 1999 as compared to 1998. Allstate sold its factoring portfolio in
October 1999.
Earnings on advances receivable decreased by 55% in 1999 versus 1998. This
was attributable to a significant reduction in performing loan balances. Fees
and other income decreased 83% in 1999 as compared to 1998, to $406 thousand
from $2.3 million, respectively. The decrease was because of the decrease in
volume and the sale of the factoring portfolio.
The following table sets forth certain items of expense for the periods
indicated and the percentage relationship of each item to total expenses in the
period.
<TABLE>
<CAPTION>
For the Years Ended December 31,
1999 1998
Type of Expense Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Compensation and fringe benefits $2,058,877 12.2% $3,447,656 17.3%
-----------------------------------------------
General and administrative 3,000,755 17.8 4,963,636 24.9
-----------------------------------------------
Interest expense 1,293,217 7.7 1,903,336 9.6
-----------------------------------------------
Provision for credit losses 10,177,825 60.3 9,598,503 48.2
-----------------------------------------------
Expenses from discontinued
Operations 79,619 0.5 -- --
-----------------------------------------------
Restructuring charge 259,221 1.5
------- --- ----------- ------
-- --
-----------------------------------------------
Total expenses $16,869,514 100.0% $19,913,131 100.0%
=========== ====== =========== ======
</TABLE>
Compensation and fringe benefits decreased $1.4 million, or 40%, due to
sale of the factoring portfolio and general downsizing of the business, offset
by severance paid to several officers, which was not part of the restructuring.
General and administrative expense, in total, decreased $2.0 million, or
40%. The amounts in 1998 included approximately $1.0 million in proxy related
professional fees and expenses. The remainder of the decrease was due to the
downsizing of Allstate.
Interest expense decreased $610 thousand, or 32%, due to decreases in the
average amount outstanding under Allstate's bank line of credit, partially
offset by increases in interest rates under the forbearance agreement.
The provision for credit losses represented the largest category of expense
as a component of revenue in 1999 and 1998. In 1999, Allstate provisioned for
losses on two large ABL's in the amount of approximately $9.2 million. Allstate
also provisioned an increase to the valuation allowance on the remaining life
insurance policies by $710 thousand, and took a provision of $200 thousand
against a client that filed bankruptcy in 1998.
During 1998, Allstate had charge-offs of $9.6 million, while recovering or
reclassifying $59 thousand. Of the charge-offs, approximately $5.3 million were
related to accounts placed on non-performing status prior to 1998 and which
continued to deteriorate in 1998, including $908 thousand related to the 1998
disposition at a loss of real estate collateral securing an advance and the
deterioration of collections on health club notes, $1.3 million due to the
bankruptcy of a major obligor during 1998, $890 thousand due to a decision
rendered in 1998 adverse to Allstate in a lawsuit, and $857 thousand due to the
failure of a client during 1998. Of the $4.1 million of charge-offs related to
loans placed on non-accrual status in 1998, $3.4 million related to a single
client who filed
-30-
<PAGE>
for bankruptcy in 1998. Net charge-offs for 1998 of $9.5 million and the
provision of $9.6 million resulted in an allowance for credit losses of $2.8
million, or 7.93% of receivables (net of earned income), exclusive of life
insurance policies, outstanding as of December 31, 1998. None of the allowance
at December 31, 1998 was allocated to non-performing accounts, which were
carried at net realizable value of $3.0 million. Allstate determines overall
reserve levels based on an analysis which takes into account a number of factors
including a determination of the risk involved with each individual client, plus
additional considerations based on concentration and asset class.
In 1999 Allstate charged-off $9.2 million, while recovering $536
thousand. The recoveries related primarily to clients that filed bankruptcy in
1998. At December 31, 1999, the allowance for losses, net of amounts allocated
to impaired assets, was $329 thousand. This represents 8.31% of the performing
ABL portfolio at December 31, 1999. As a percentage of the ABL loans Allstate
expects to continue to hold, the reserve was 46.27% at December 31, 1999.
Allstate believes that the allowance for credit losses is adequate in light of
the risks inherent in the portfolio at year-end 1999.
Allstate incurred a restructuring charge during the third quarter of
1999. The restructuring charge relates to the sale of the factoring portfolio
and is comprised of employee severance pay, write-down or write-off of assets,
and lease termination payments. As of December 31, 1999, Allstate has not
expended and continues to accrue $34 thousand related to lease termination
payments.
Allstate was operating under a Forbearance Agreement negotiated with
its bank lenders. As of December 24, 1999, the Forbearance Agreement expired.
The line of credit availability at December 31, 1999 was zero ($0). Under the
Forebearance Agreement, the interest rate on the line of credit was equal to the
agent lender's base rate plus 2.25%. After the expiration the rate charged was
the agent lender's base rate plus 4.75%. The loan was repaid in full in January
2000.
To augment its working capital during the forebearance period, Allstate
obtained a $1,000,000 working capital loan from Value Partners. The working
capital loan bears a 10% rate of interest, which is payable quarterly, and
repayment terms of 25% of collections of certain assets. The outstanding balance
of the loan is due March 31, 2000. Allstate may seek to extend the due date of
the outstanding balance of the loan. As of December 31, 1999, Allstate owed
$799,772 on the working capital loan. It was paid in full in April 2000.
As of December 31, 1997, Allstate had convertible subordinated notes
(collectively the "Old Notes") outstanding with an aggregate principal of $5.0
million. The Old Notes were issued in exchange for 785,475 shares of Allstate's
common stock (currently held by Allstate as treasury stock). The Old Notes (i)
matured on September 30, 2000, (ii) bear interest at the prime rate plus 1.25%
per annum (9.75% per annum at December 31, 1999), (iii) were convertible into
common stock of the Allstate at $7.50 per share, were (iv) were subordinated in
right of payment to Allstate's secured revolving credit facility.
The Old Notes had a provision that upon the occurrence of certain
"fundamental changes", the holders had the right to have these notes redeemed at
par. The election of the new Board of Directors at the May 1998 shareholder
meeting was deemed to have constituted a fundamental change under that
provision. As a result, Allstate:
o Advised all noteholders of their right to redeem the notes at par;
o Issued new convertible subordinated notes to Value Partners to provide
Allstate with a funding source to repurchase all notes tendered under
the fundamental change provision;
o Repurchased the tendered notes; and
o Offered all remaining noteholders, that were accredited investors, the
opportunity to exchange their Old Notes for newly issued convertible
subordinated notes.
The old noteholders tendered $2.9 million of Old Notes for repurchase at
par. Additionally, Old Notes with a par of $1.7 million were exchanged for
Allstate Notes during 1998.
As of December 31, 1999, Allstate had convertible subordinated notes (Old
and New Notes) outstanding of $5.0 million. Allstate was in default of the
interest payment on the Allstate Notes as of December 31, 1999.
Allstate expended $181 thousand and $52 thousand on premises and equipment
in 1999 and 1998, respectively, principally in connection with upgrades to
computer equipment, office furniture and equipment. Allstate funded such
expenditures from internally generated funds or borrowings under the line of
credit. Allstate does not plan to continue to significantly enhance its
management information systems.
-31-
<PAGE>
Three and Six Months Ended June 30, 2000 vs. Three and Six Months
Ended June 30, 1999
Results of Operations. The following table sets forth certain items of
revenue and expense for the periods indicated and indicates the percentage
relationships of each item to total revenue.
<TABLE>
<CAPTION>
Three Months ended June 30, Six Months ended June 30,
-------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
% of % of % of % of
REVENUE ....... ($000) Revenue ($000) Revenue ($000) Revenue ($000) Revenue
------ -------- -------- ----- ------- -------- ------ -------
Earned discounts and $ 85 41.7 $ 598 80.7 $ 217 53.2 $ 2,213 87.2
interest
Fees and other revenue 119 58.3 143 19.3 190 46.8 324 12.8
------ -------- -------- ----- ------- -------- ------ -------
TOTAL REVENUE . 204 100.0 741 100.0 407 100.0 2,537 100.0
------ -------- -------- ----- ------- -------- ------ -------
EXPENSES
Compensation & fringe 116 57.0 654 88.2 285 70.0 1,264 49.8
benefits
General and ... 325 159.4 1,349 182.0 543 133.2 1,755 69.2
administrative
Interest expense 205 100.7 335 45.3 347 85.1 711 28.0
Provision for credit (366) (179.3) 8,376 1,130.2 (366) (89.7) 8,376 330.1
------ -------- -------- ------ ------- -------- ------ -------
losses
TOTAL EXPENSES 281 137.9 10,714 1,445.7 809 198.6 12,105 477.1
------ -------- -------- ------- ------- -------- ------ -------
LOSS BEFORE INCOME TAX
EXPENSE ....... (77) (37.9) (9,973) (1,345.7) (402) (98.6) (9,568) (377.1)
------ -------- -------- ------- ------- -------- ------ -------
INCOME TAX EXPENSE -- 0.00 3,872 522.4 -- 0.00 4,021 158.5
--------------- ----- ------ -------- -------- ----- ------ -------- ------
NET LOSS ...... $ (77) (137.9) $(13,845) (823.3) $(402) (98.6) $(13,590) (535.6)
</TABLE>
Total Revenue. Total revenue consists of (i) interest earnings on ABL
advances receivable and, in previous periods, discounts on purchased invoices
earned in Allstate's factoring business from the purchase of accounts receivable
and (ii) fees and other revenue, which consists primarily of the premium which
the Allstate receives over time based on the performance of the Purchased
Receivables sold during 1999, along with application fees, commitment or
facility fees and other transaction related financing fees.
The following tables break down total revenue by type of transaction for the
periods indicated and the percentage relationship of each type of transaction to
total revenue.
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
2000 1999
<S> <C> <C> <C> <C>
Type of Revenue Earned Revenue Percent Earned Revenue Percent
------------------------------------ --------------- ---------- --------------- ---------
Discount on purchased invoices $ -- -- $312,582 42.2
------------------------------------
Earnings on advances receivable 85,038 41.7 285,680 38.5
------------------------------------
Fees and other revenue 118,783 58.3 142,872 19.3
------- ---- ------- ----
------------------------------------
Total revenue $203,821 100.0 $741,134 100.0
======== ===== ======== =====
</TABLE>
-32-
<PAGE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
2000 1999
<S> <C> <C> <C> <C>
Type of Revenue Earned Revenue Percent Earned Revenue Percent
------------------------------------ ---------------- --------- -------------- ----------
Discount on purchased invoices $ -- -- $693,273 27.3
------------------------------------
Earnings on advances receivable 216,928 53.2 1,519,460 59.9
------------------------------------
Fees and other revenue 190,546 46.8 324,446 12.8
------- ---- ------- ----
------------------------------------
Total revenue $407,474 100.0 $2,537,179 100.0
======== ===== ========== =====
</TABLE>
Total revenue decreased by $537 thousand and $2.1 million, or 72.5% and
83.9%, in the three and six month periods ended June 30, 2000 versus the same
periods in 1999. Within total revenue, Allstate had no discounts on purchased
invoices in 2000 due to the sale of the factoring business. Earnings on advances
receivable decreased by $200 thousand and $1.3 million, or 70.2% and 85.7% in
the three and six months ending June 30, 2000 versus the same periods in 1999.
The decrease in earnings on advances was attributable to the decrease in the
outstanding balances of advances receivable. Allstate added two new clients
during the quarter ending June 30, 2000, but the new advances were offset by
pay-downs by existing clients.
Fees and other revenue decreased $24 thousand and $134 thousand, or 16.9%
and 41.3%, in the three and six months ended June 30,2000 as compared to the
same periods in 1999. Fee income related to the factoring business and to new
facilities or renewals and increases to existing accounts decreased due to the
lower level of direct business, while the premium Allstate expects to collect
over time based on the performance of the Purchased Receivables sold in 1999
increased.
Compensation and Fringe Benefits. Comparing the three and six month periods
ending June 30, 2000 and 1999, compensation and fringe benefits fell by $538
thousand and $979 thousand, respectively, or 82.2% and 77.4%. The differences in
each period were due to primarily to a decreased number of employees.
General and Administrative Expense. Total general and administrative
expenses during the three and six month periods ended June 30, 2000 fell by $1
million and $1.2 million, or 75.9% and 69.1%, compared with the corresponding
periods in 1999, respectively. All categories of expense were lower due to
Allstate's greatly reduced operation.
Interest Expense. Interest expense fell by $130 thousand, or 38.8%, for the
three months ending June 30, 2000 compared with the corresponding period in
1999. For the six months ending June 30, 2000,` interest was $364 thousand
lower, or 51.2%. The decrease in interest expense is primarily attributable to a
decrease in the average amount of debt outstanding, due to the payoff of the
bank revolving credit and the supplemental working capital loan. The savings on
interest due to the decrease in the amount of debt outstanding was partially
offset in the three and six month periods ending June 30, 2000 because Allstate
is subject to the penalty rate of 14% per annum on the New Notes.
Provision for Credit Losses. During the three and six months ended June 30,
2000, Allstate had charge-offs of $3.6 and $3.6 million, while recovering $7
thousand and $23 thousand. During the three and six months ending June 30, 1999,
Allstate had charge-offs of $8 thousand and $78 thousand, while recovering $178
thousand and $355 thousand. During the three months ending June 30, 2000,
Allstate also collected $272 thousand in excess of the allocated reserve on an
impaired asset. To account for that collection, and to adjust the amount of
unallocated reserves in light of the decrease in the amount of receivables at
June 30, 2000, Allstate took a negative provision of ($365) thousand for the
three months and six months ended June 30, 2000. At $438 thousand, the allowance
was 14.0% of total receivables (net of participations and unearned income),
exclusive of life insurance policies, outstanding as of June 30, 2000. At June
30, 2000, $172 thousand of the allowance was allocated to non-performing
accounts. At March 31,2000 the comparable figures were $4.3 million, or 50.4%,
with $4 million allocated to non-performing accounts.
Allstate determines overall reserve levels based on an analysis which takes
into account a number of factors including a determination of the risk involved
with each individual client. Based on this analysis, Allstate believes the
allowance for credit losses is adequate in light of the risks inherent in the
portfolio at June 30, 2000. Allstate carefully monitors the portfolio, but a
deterioration in one or more clients could have a material adverse effect on
Allstate.
-33-
<PAGE>
Receivables. Receivables consist of the following, at the dates indicated.
<TABLE>
<CAPTION>
June 30, 2000 December 31,1999
<S> <C> <C>
Invoices and insurance claims $209,631 $234,445
-----------------------------------
Less: unearned discount (13,953) (13,953)
-----------------------------------
Life insurance policies (net) 1,789,962 1,889,962
--------- ---------
-----------------------------------
Total purchased receivables $1,985,640 $2,110,454
========== ==========
-----------------------------------
-----------------------------------
Advances receivable $3,688,143 $10,073,989
-----------------------------------
Less: participation (744,623) (744,623)
--------- ---------
-----------------------------------
Total advances receivable $2,943,520 $9,329,366
========== ==========
</TABLE>
Non-performing receivables included within the above totals were $983
thousand at June 30, 2000 and $5.4 million at December 31, 1999.
On April 5, 2000, Allstate and a client entered into a settlement
agreement, in which Allstate agreed to accept $1.2 million in cash in settlement
of a balance on an impaired loan of $4.8 million. As a result, Allstate charged
off $3.6 million of the balance against a previously established reserve.
Simultaneously, Allstate also exercised, for a total consideration of $4
thousand, a warrant to purchase four million shares of common stock in the
client's parent corporation, with a market value on June 30, 2000 of $380
thousand. The common stock is subject to restrictions on sale or transfer
according to Rule 144 of the Securities Act of 1933.
Uncertainties and Subsequent Events. Allstate continued to incur net losses
in the quarter ended June 30, 2000, although it has made further cuts in
expenses and overhead. Through the collection of impaired assets, Allstate
repaid the Value Partners supplemental working capital loan, and believes it now
has sufficient cash to support its operations for the remainder of the fiscal
year. Allstate continued to be in default on the Allstate Notes until the
completion of the Notes Conversion on October 26, 2000.
Impact of Inflation. Management believes that inflation has not had a
material effect on Allstate's income, expenses or liquidity during the during
the past two years or the six month periods ending June 30, 2000 and 1999.
Allstate's advances receivable bear interest primarily at fixed rates, and the
majority of its notes payable are at fixed rates. Since the majority of the
notes have converted to equity, an environment of rising or falling interest
rates would have little adverse affect on Allstate's net interest spread.
BUSINESS OF HARBOURTON
General
Harbourton Financial Corporation was incorporated under Delaware law in
August 1998 for the purpose of acquiring substantially all of the assets and
liabilities of Harbourton Residential Capital Corporation for $1.8 million, net
of cash received from Harbourton Residential Capital. Harbourton's sole
stockholders are Value Partners, which owns 95.7% of Harbourton's outstanding
shares of common stock, and J. Kenneth McLendon, Harbourton's President, and
James M. Cluett, Harbourton's Senior Vice President, who own the remaining 4.3%
of Harbourton's common stock. Mr. McLendon previously served as the President of
Harbourton's predecessor corporation, Harbourton Residential Capital
Corporation. Harbourton has offices located at 8180 Greensboro Drive, Suite 525,
McLean, Virginia and 7250 Hanover Drive, Hanover, Maryland. Harbourton shares
office space with Allstate at the Virginia office.
Harbourton's business is to provide development and construction
financing to builders and developers in several markets in the eastern United
States, primarily the mid-Atlantic states and Florida. In many cases, Harbourton
will sell a participation interest in the loans it originates to another
investor or financial institution. In such instances, the participant is
responsible for funding a percentage of the loan amount, ranging from 20% to
85%, in return for a portion of the interest income received from the borrowers.
Harbourton originates and closes the loans, retains a participation interest and
retains the servicing rights for which it receives additional fees plus a higher
proportion of the interest income. As of June 30, 2000, Harbourton had $31.9
million of gross loans receivable of which it had sold participation interests
of $21.7 million in the aggregate. Harbourton's loan activities are not subject
to government regulation.
-34-
<PAGE>
Lending Activities
Harbourton provides loans to builders and developers for residential
land development and for the construction of single-family homes, attached
residences, townhouses and condominiums and for the conversion of residential
rental properties to units for sale. Harbourton's loans typically are for the
development of raw land into finished building lots for sale to homebuilders,
including planned unit developments and for the construction of residential
housing units. Harbourton will consider loans ranging in size from $500,000 to
$20 million. Harbourton typically limits the term of its loans to a period of 18
to 48 months, with an average term being 30 months.
Harbourton's loans generally have a floating rate of interest based on
the prime rate, as published in the Wall Street Journal, plus a premium. In
addition, Harbourton receives loan closing and administration fees. On some
loans, Harbourton also receives a participation in the profits when the house is
sold by the builder to a customer.
While Harbourton approaches and underwrites its lending activities much
in the same way as a traditional bank, its small size, non-regulated status and
the expertise of its personnel permit it to review, underwrite and fund loans
within a relatively quick time-frame, generally within three to four weeks after
the receipt of documentation. Harbourton also generally will provide a greater
amount of project financing than a traditional bank. Harbourton generally makes
its determination to fund a project based upon the expected costs of
construction, financial strength and expertise of the borrowers and the
appraised value of the project. Rather than relying solely on the discounted
appraised value, Harbourton attempts to minimize risk by, among other factors,
requiring its borrowers to maintain a significant equity interest in the
project, relative to the costs to complete the construction. Harbourton's
borrowers typically will provide an equity interest in the project equal to 10%
to 15% of costs, in addition to providing personal and/ or corporate guarantees
from the principals.
Harbourton's loans generally are secured by a first or second mortgage
on the properties being developed. Where the developer/builder does not have
sufficient equity after first mortgage financing has been provided by a
traditional banking institution, Harbourton will provide mezzanine or "gap"
financing secured by a subordinate or second mortgage. This product frees
developers from the need to seek equity from additional investors as is
typically the case. In either event, Harbourton attempts to obtain loan yields
which are substantially higher than those received by traditional banking
sources.
As of June 30, 2000, Harbourton has 12 loans outstanding. The
loans are summarized in the following table.
<TABLE>
<CAPTION>
---------------------------- ------------------------ -------------------- --------- -------------- ---------------- -------------
PARTICIPATION
LOAN INTEREST RETAINED
TERM MAXIMUM SOLD LOAN AMOUNT
DESCRIPTION TYPE SECURITY MOS. LOAN
---------------------------- ------------------------ -------------------- --------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C>
116 stacked town homes on Acq., Dev., & Const. 1st Deed Trust 36 $5,900,000 85% $795,360
6.09 acres located in Revolving Loan
Herndon, Fairfax County,
Virginia
6 luxury homes located in Acq., Dev., & Const. 1st Deed Trust 18 $3,580,000 85% $242,000
Alexandria, Virginia Revolving Loan
67 single homes located in Acq., Dev., & Const. 1st Deed Trust 30 $4,426,000 85% $291,195
Glenndale, Prince George's Revolving Loan
County, Virginia
4 luxury homes located in
McLean, Fairfax County, Acq., Dev., & Const. 1st Deed Trust 30 $3,000,000 85% $210,900
Virginia Revolving Loan
337 lot planned community Mezzanine Loan 2nd Deed Trust 36 $1,734,522 None $1,566,602
located in Fuquay-Varina, Assgmt LLC Int.
Wake County, Raleigh Area,
North Carolina
</TABLE>
-35-
<PAGE>
<TABLE>
<CAPTION>
PARTICIPATION
LOAN INTEREST RETAINED
TERM MAXIMUM SOLD LOAN AMOUNT
DESCRIPTION TYPE SECURITY MOS. LOAN
-------------- ------ ---------- ------ ------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
54 condominium units Acq., Dev., & Const. 1st Deed Trust 30 $4,150,000 85% $308,804
located in the City of Revolving Loan
Raleigh, North Carolina
320 mixed lot planned Mezzanine Loan 2nd Deed Trust 36 $3,000,000 50% $1,400,578
community located in Assgmt. LLC Int.
Chapel Hill, North Carolina
56 town house development Mezzanine Loan 2nd Deed Trust 12 $5,200,000 None $600,000
in Morrisville, Wake Assgmt. LLC Int.
County, North Carolina
78 town house development Acq., Dev., & Const. 1st Deed Trust 30 $3,400,000 85% $430,172
in Boynton Beach, Palm Revolving Loan
Beach County, Florida
82 town homes on the Acq., Dev., &Const. 1st Deed Trust 36 $10,500,000 85% $1,161,000
intracoastal waterway, Revolving Loan
Delray Beach, Palm Beach
County, Florida
82 luxury condominium Mezzanine Loan 2nd Deed Trust 24 $4,750,000 20.48% $3,300,000
homes and marina on the Assgmt. LLC Int.
Atlantic Ocean &
intracoastal waterway,
Broward County, Florida
</TABLE>
Harbourton's loans generally are made on units on a pre-sold or
inventory basis. However, Harbourton limits the number of unsold units under
construction to its builders, with the actual limit based on Harbourton's
assessment of the anticipated and actual project absorption, the builder's
present outstanding obligations, the location of the property and prior sales in
the subject development and the surrounding area. In making its underwriting
determination to fund a loan, Harbourton primarily relies upon its assessment of
market information for the project under consideration, including information
relative to pricing, competition, absorption and profit margins. Development
costs are reviewed by a third party engineer to ensure adequacy of development
budgets. Harbourton also considers the experience and reputation of the
developer and its financial condition, cash flow projections and appraised
values of the property.
Harbourton's first mortgage construction and development loans are
generally structured as revolving lines of credit. However, disbursements or
"draws" are made only upon an inspection by Harbourton personnel or a qualified
engineer which verifies that the project is proceeding in accordance with a
pre-determined schedule and is within approved budget allowances. Harbourton
requires monthly payments of interest during the term of the loan and principal
curtailments are made as individual units or lots are released.
Construction and development lending is considered to involve certain
risks including: (1) the relatively large amounts advanced to individual
borrowers, ( 2) the complexity of estimating costs to complete construction ,
(3) sales demand for the units under construction, and (4) the variables in
estimating the future value of the collateral securing loans.
-36-
<PAGE>
Harbourton attempts to minimize its lending risks by, among other
things, periodically inspecting properties under construction and reviewing
construction progress before additional draws are disbursed, ensuring funds are
available to complete scheduled work. Harbourton finances builders with whom it
has established relationships or ones who enjoy strong reputations in the
industry. In addition, Harbourton's practice of selling participation interests
in its loans reduces its exposure to risk.
Participation Interests
Harbourton often sells participation interests in its loans to
specialty finance companies and banking institutions. In one instance, Allstate
purchased a 20.5% participation interest in one of Harbourton's loans. A
participant is responsible for funding its share of the loan in return for a
proportionate share of interest payments received on the loan less an amount
retained by Harbourton for its underwriting and servicing, which amount
generally is equal to 100 to 150 basis points (with 100 basis points being equal
to 1%). However, in the event the borrower defaults on the loan, Harbourton will
subordinate to the participant the right to receive future loan payments until
the default is cured.
Each participation sold is treated as an individual transaction, with
no cross-collateralization, and exposure limited to the extent of the Harbourton
investment. Harbourton is responsible for loan origination, structure,
underwriting and conformance of the loan to the participant's underwriting
standards. Harbourton also is responsible for loan document preparation,
settlement coordination and, with the assistance of local counsel, legal
compliance. Harbourton services and monitors all loans for itself and any
participants which includes responding to funding requests, verification of work
in progress, repayments, releases of collateral, placement of insurance,
reviewing borrower financial reports and preparing reports for participants.
Each participant underwrites, reviews and approves the individual loan
transaction prior to closing and funding of their participation.
Harbourton has entered into a master loan participation agreement with
Residential Funding Corporation, a subsidiary of General Motors Acceptance
Corporation. Pursuant to this facility, Residential Funding has agreed to buy
participation interests on loans originated by Harbourton on a revolving basis
up to a maximum of $55.0 million. As of June 30, 2000, Residential Funding had
acquired participation interests in five of the ten participations sold by
Harbourton for an aggregate of $31.0 million.
Loan Participation and Administration
Harbourton services and administers all of the loans it originates,
including those in which it has sold participation interests. Harbourton has
acquired proprietary computer software which tracks its construction loan
portfolio including inspection data, loan advances, monthly billing and payment
data, receipt and monitoring of borrower financial statements and other matters.
Harbourton provides reports to participants on regular intervals (at least
monthly) and includes sales/settlements, loan payoffs, loan balances outstanding
by individual units, if applicable, interest payments received to date, loan
payoffs to date, etc. Custom reporting to meet an individual participant's
requirements is available to each participant.
Harbourton funds requests to borrowers one to two times per month after
field inspections have confirmed work in place and all costs are verified
through invoices. Lien waivers and releases are obtained where necessary. All
development fundings are verified including an updated cost-to-complete by a
reputable engineer working on contract for Harbourton.
Loan Fees
In addition to current interest earned on loans, Harbourton receives
loan fees or "points" for many of the loans it originates. Loan points are a
percentage of the principal amount of the loan and are charged to the borrower
in connection with the origination of the loan.
In accordance with SFAS No. 91, which addresses the accounting for
non-refundable fees and costs associated with originating or acquiring loans,
Harbourton's loan origination fees and certain related direct loan origination
costs are offset, and the resulting net amount is deferred and amortized as
interest income over the contractual life, adjusted for prepayments, of the
related loans as an adjustment to the yield of such loans. At June 30, 2000,
Harbourton had $353,922 of such deferred loan fees.
-37-
<PAGE>
Deferred Interest Income
On some loans, Harbourton receives deferred interest payments at a
negotiated rate as well as a current interest payment. The deferred portion is
typically received when settlements to third party purchasers occur. For
financial reporting purposes, the interest which is deferred is not recognized
into current income but is recognized proportionately as settlements occur in
the project.
Market Area and Competition
Harbourton currently is concentrating its lending efforts in three
primary market areas - the Washington, D.C. metropolitan area including the
Maryland and Northern Virginia suburbs; Palm Beach and Broward counties,
Florida; and the Raleigh, North Carolina metropolitan area. Harbourton faces
significant competition from banks and savings associations, specialty finance
companies and mortgage banking companies. Many of these competitors have
significantly greater resources than Harbourton.
Sources of Funds
Harbourton relies upon a number of sources for funds for its lending
operations, including sales of participation interests in individual loans,
Harbourton's stockholders' equity, which amounted to $8.9 million at June 30,
2000, cash flows from outstanding loans, and the availability of a $2 million
bank line of credit. At June 30, 2000, Harbourton had drawn $1.0 million on its
existing bank line of credit.
Legal Proceedings
Harbourton is involved in routine legal proceedings occurring in the
ordinary course of business which, in the aggregate, are believed by
Harbourton's management to be immaterial to its financial condition and results
of operations.
Employees
Harbourton had five full-time employees and one part-time employee at
June 30, 2000. None of these employees is represented by a collective bargaining
agent, and Harbourton believes that it enjoys good relations with its personnel.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF HARBOURTON
Formation in August 1998
Harbourton incorporated and began operations on August 28, 1998.
Harbourton issued 400,000 shares of common stock in 1998 at $10.00 per share,
for total gross proceeds of $4.0 million.
The proceeds of the stock issuance were used to acquire all of the
assets and liabilities of Harbourton Residential Capital Corporation ("HRCC") on
August 28, 1998. The acquisition was accounted for using the purchase method.
The total purchase price of $2.5 million approximated the fair value the net
assets acquired. The net assets of HRCC included $700,000 of cash, with the
remainder primarily consisting of net loans held for investment.
General
Harbourton originates acquisition, development and residential
construction loans primarily in its market area of the mid-Atlantic and
Southeastern states, including Maryland, Virginia, District of Columbia,
Delaware, Pennsylvania, North Carolina and Florida. Harbourton also sells
participation interests in certain of its loans. Pursuant to the current
participation agreements, Harbourton passes through interest to the participants
based on their participation interest amounts, and earns a fee for servicing the
loans.
-38-
<PAGE>
Financial Condition
Harbourton has total stockholders' equity of $8.9 million at June 30,
2000, representing 85.1% of total assets at such date. In addition to the $4.0
million stock issuance in 1998, Harbourton issued $3.7 million of stock in 1999
and $370,000 of stock in the first half of 2000. Since inception through June
30, 2000, Harbourton has earned cumulative net income of $811,000.
In accordance with Harbourton's business plan, cash and equivalents
have declined from $1.9 million at December 31, 1998 to $396,000 at June 30,
2000, as Harbourton has used its excess liquidity to fund increases in net loans
held for investment.
Total loans receivable amounted to $31.9 million at June 30, 2000
compared to $19.6 million at December 31, 1999 and $14.9 million at December 31,
1998. Harbourton generally sells participation interests in the loans that it
originates, with the participation interests typically amounting to 20% to 85%
of the loan. The participant is required to fund advances on the loans based
upon their participation interest, and Harbourton funds the remainder. Total
participation interests amounted to $21.7 million at June 30, 2000, compared to
$11.9 million at December 31, 1999 and $12.4 million at December 31, 1998. The
increase in the participation interests between December 31, 1999 and June 30,
2000 reflect the significant volume of new loans originated. The slight decrease
in the participation interest between December 31, 1998 to December 31, 1999 was
due to a substantial loan payoff with a participation interest of 85%, in
mid-1999.
Loan fees and certain direct loan origination costs related to retained
interests are deferred and recognized over the life of the loan on a
straight-line basis. Deferred loan fees amounted to $354,000 at June 30, 2000,
$326,000 at December 31, 1999 and $292,000 at December 31, 1998.
On certain loans, Harbourton is entitled to a deferred interest based
on the outstanding amount of the investment in the loan times the rate of
preferred return. Harbourton may also be entitled to a percentage share of the
underlying project's profit in addition to loan fees and interest. The deferred
interest and any profit percentage are recognized pro rata in income as the
borrower conveys title to third-party purchasers. Deferred interest income
amounted to $331,000 at June 30, 2000, $222,000 at December 31, 1999 and $0 at
December 31, 1998.
Net loans held for investment increased by $2.5 million or 34.8% in the
first half of 2000 and by $4.7 million or 219.3% in 1999. The increase in the
first half of 2000 was primarily funded with the proceeds of a new $1.0 million
senior bank line available to Harbourton during the period and $582,000 of cash
and equivalents. The increase in 1999 was primarily funded by the $3.7 million
stock issuance in 1999.
At June 30, 2000, Harbourton had no allowance for loan losses and had
incurred no loan charge-offs. In light of the absence of losses in its loan
portfolio since inception on August 28, 1998, current positive market conditions
and other factors deemed relevant, management of Harbourton has determined that
the absence of any allowance for loan losses is appropriate at this time. In the
event loans become impaired, or there are adverse changes with respect to a
borrower, a particular project or the economy in general, provisions for loan
losses would be incurred in the future. Any such provisions could materially
adversely affect net income.
In May 2000, Harbourton obtained a senior secured credit facility from
a local FDIC insured financial institution to provide funding for additional
investments and working capital, in the amount of $2,000,000. The loan is a
revolving line of credit, carries an interest rate at the prime rate plus a
premium, and has a term of one year. The loan contains certain financial
covenants generally found in this type of transaction.
Results of Operations for the Six Months Ended June 30, 2000 and 1999
Revenues. Loan income increased by $504,028 or 85.6% in the first half
of 2000 over the comparable 1999 period. The increase was primarily due to the
substantial increase in net loans held for investment. In addition, Harbourton
recognized $100,000 of revenue derived from its share of additional profit in
selected projects in the six months ended June 30, 2000, compared to no such
profit income in the first half of 1999. Harbourton receives two forms of
interest income on its loans. The current portion is accrued into income monthly
based on the outstanding amount of the investment in the loan at a market rate
of interest, which during the above periods was generally between 10% and 12%.
The deferred interest which Harbourton is entitled to recognize on certain loans
as the borrower conveys title to third-party purchasers typically ranges from 3%
to 13%.
-39-
<PAGE>
Expenses. The following table indicates Harbourton's expenses both in
dollars and as a percentage of total revenues for the periods shown.
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
% of % of
$ Revenues $ Revenues
<S> <C> <C> <C> <C>
Salaries and benefits- Net $271,963 28.7% $162,506 26.3%
General and administrative 424,468 37.9 134,697 21.8
Depreciation and amortization 6,496 0.6 6,997 1.1
-------- --- ----- ---
Total $702,927 62.8% $304,200 49.2%
======== ===== ======== =====
</TABLE>
Salaries and benefits increased by $109,457 or 66.3% in the first half
of 2000 over the comparable 1999 period. Salaries and benefits expense increased
due to growth in loans resulting in an increase in the number of employees, as
well as salary increases.
General and administrative expense includes professional fees, lease
rental costs, office expenses, and other miscellaneous expenses. General and
administrative expense increased by $289,771 or 215.3% in the first half of 2000
over the comparable 1999 period, primarily due to increased legal expense
incurred due to litigation expense. This expense related to a case initiated by
Harbourton as the plaintiff to recover fees related to a loan commitment.
Harbourton records its furniture, fixtures and equipment at cost and
depreciates the property using the straight-line method over estimated useful
lives ranging from three to five years. Depreciation and amortization expense
decreased by $501 or 7.16% in the first half of 2000 from the first half of
1999.
Income Taxes. Income tax expense increased by $40,154 or 33.7% in the
first half of 2000 over the comparable 1999 period primarily due to a 32.6%
increase in pre-tax income. In addition, the effective tax rate was 38.0% in the
2000 period compared to 38.5% in the 1999 period.
Net Income. Net income increased by $62,010 or 31.8% in the first half
of 2000 over the comparable 1999 period. The increase reflects the growing
portfolio of loans held for investment, and the additional deferred interest
recognized as the portfolio matures.
Results of Operations for 1999 and 1998 (From Inception on August 28, 1998)
Harbourton was in existence for approximately four months in 1998,
which accounts for each category of revenues and expenses being substantially
higher in 1999.
Revenues. Total revenues were $1.4 million in 1999 and $476,000 for the
short 1998 year. On an annualized basis, total revenues in 1998 approximated
total revenues in 1999.
Expenses. The following table shows Harbourton's expenses both in dollars
and as a percentage of total revenues for the
periods shown.
<TABLE>
<CAPTION>
Year ended December 31,1999 and for the period August 28, 1998 (inception)
through December 31, 1998,
1999 1998
% of % of
$ Revenues $ Revenues
<S> <C> <C> <C> <C>
Salaries and benefits $452,648 31.9% $117,781 24.8%
General and administrative 297,765 21.0 122,778 25.8
Depreciation and amortization 13,330 0.9 5,345 1.1
------- ------ ------ ---
Total $763,743 53.9% $245,904 51.7%
======= ===== ======= =====
</TABLE>
Salaries and benefits increased in 1999 both proportionately from the
short 1998 year and as a percentage of total revenues. The increase in salaries
and benefits expense increased due to the addition of employees and salary
increases.
-40-
<PAGE>
General and administrative expense decreased in 1999 both
proportionately from the short 1998 year and as a percentage of total revenues.
The decrease in general and administrative expense is due to the reduction in
rent expense and other office related expenses.
Income Taxes. Income tax expense amounted to 38.5% of pre-tax income in
1999 and 33.8% of pre-tax income in 1998. The higher tax rate is due to the
increase in taxable income resulting in a higher tax bracket.
Net Income. Net income increased by $250,000 or 164.4% in 1999 over the
short 1998 year. If net income for 1998 were annualized, net income would have
decreased in 1999.
Liquidity and Capital Resources
Harbourton's requirement for capital is a function of the level of its
investment in net loans held for investment. Harbourton has funded this
investment primarily through stock issuances aggregating $8.1 million.
Harbourton expects to fund future growth through internally generated funds and,
as needed, borrowings. The amount of the participation interests sold in a
particular loan partially depends upon the amount of funds then available to
Harbourton, as well as adherence to Harbourton's policy of limiting its exposure
to risk in any particular project.
Harbourton has used a substantial portion of its $1.9 million of cash
and cash equivalents at December 31, 1998, as cash and cash equivalents have
declined to $396,000 at June 30, 2000. In the first half of 2000, Harbourton
borrowed $1.0 million to help finance its increase in net loans held for
investment, which represented its first borrowing since inception.
Harbourton is required to fund advances under its loan agreements. At
June 30, 2000, Harbourton is committed to fund advances up to a maximum amount
of $52.5 million under all loan agreements for the life of the agreements, of
which $20.6 million remains unfunded at that date. Participation interests in
these commitments totaled $36.4 million at June 30, 2000, of which $14.7 million
remains unfunded at that date by the loan participants.
Harbourton believes that it has sufficient sources of funds to meet its
current commitments. To continue growing its loan portfolio, however, Harbourton
may need to obtain additional equity financing or incur additional borrowings.
Impact of Inflation
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles,
which generally require the measurement of financial position and operating
results in terms of historical dollars, without considering changes in relative
purchasing power over time due to inflation. Unlike most industrial companies,
virtually all of Harbourton's assets and liabilities are monetary in nature. As
a result, interest rates generally have a more significant impact on
Harbourton's performance than does the effect of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
FUTURE SHAREHOLDER PROPOSALS
Any proposal which a shareholder wishes to have included in the proxy
materials of Allstate relating to the next annual meeting of shareholders of
Allstate, which is scheduled to be held in May 2001, must be received at the
principal executive offices of Allstate, 8180 Greensboro Drive, Suite 525,
McLean, Virginia 22206, Attention: Corporate Secretary, no later than December
15, 2000. If such proposal is in compliance with all of the requirements of Rule
14a-8 under the 1934 Act, it will be included in the proxy statement and set
forth on the form of proxy issued for such annual meeting of shareholders.
Allstate urges shareholders to send any such proposals by certified mail, return
receipt requested.
-41-
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Allstate files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy such information at
the following public reference rooms of the SEC:
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison St.
Washington, D.C. 20549 New York, NY 10048 Suite 1400
Chicago, IL 60661-2511
Please call the SEC at 1-800-SEC-0330 for further information on the
public reference rooms. Our SEC filings are also available to the public from
commercial document retrieval services and at the world wide web site maintained
by the SEC at "http://www.sec.gov." You may also obtain copies of such
information by mail from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
Allstate supplied all information contained in this document relating
to Allstate, and Harbourton supplied all such information relating to
Harbourton.
You should rely only on the information contained in this document. We
have not authorized anyone to provide you with information that is different
from what is contained in this document. You should not assume that the
information contained in this document is accurate as of any date other than the
date of this document, and neither the mailing of this document to shareholders
nor the issuance of Allstate common stock in the merger shall create any
implication to the contrary.
-42-
<PAGE>
Index to Consolidated Financial Statements
Allstate
Page Number(s)
Financial Statements for the years ended December 31, 1998 and 1999:
Independent Auditors' Reports on Consolidated Financial
Statements and Schedule F1-F2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F3
Consolidated Statements of Operations for the years
ended December 31, 1999 and 1998 F4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1999 and 1998 F5
Consolidated Statements of Cash Flows for the years
ended December 31,1999 and 1998 F6-F7
Notes to Consolidated Financial Statements F8
Financial Statements for the six months ended June 30, 1999 and 2000
Consolidated Balance Sheets at June 30, 2000 (unaudited)
and December 31,1999 F26
Consolidated Condensed Statements of Operations for the Three and Six
Months Ended June 30, 2000 and 1999 (unaudited) F27
Consolidated Condensed Statements of Shareholders' Equity for the
Year Ended December 31, 1999 and Six Months Ended
June 30,2000 (unaudited) F28
Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (unaudited) F29
Notes to Consolidated Condensed Financial Statements (unaudited) F30
-43-
<PAGE>
Harbourton
Page Number
Financial Statements for the years ended December 31, 1998 and 1999:
Independent Auditors' Report on Consolidated Financial
Statements F34
Consolidated Balance Sheets as of December 31, 1999 and 1998 F35
Consolidated Statements of Operations for the year ended December
31,1999 and for the period August 28, 1998 (inception) through
December 31, 1998 F36
Consolidated Statements of Shareholders' Equity for the year
ended December 31,1999 and for the period August 28,1998(inception)
through December 31, 1998 F37
Consolidated Statements of Cash Flows for the year ended
December 31,1999 and for the period August 28, 1998 (inception)
through December 31, 1998 F38
Notes to Consolidated Financial Statements F39
Financial Statements for the six months ended June 30, 1999 and 2000
Consolidated Balance Sheets at June 30, 2000)
and June 30,1999 (unaudited) F43
Consolidated Statements of Operations for the Six
Months Ended June 30, 2000 and 1999 (unaudited) F44
Consolidated Statements of Shareholders' Equity for
the Year and Six Months Ended June 30, 2000 and for
August 28, 1998(Inception)to June 30, 2000(unaudited) F45
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999 (unaudited) F46-F47
Notes to Consolidated Financial Statements (unaudited) F48
-44-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Allstate Financial Corporation and subsidiaries
Arlington, Virginia
We have audited the accompanying consolidated balance sheet of Allstate
Financial Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the 1999 information on the
financial statement schedule listed in the Index at Item 13(a)2. These financial
statements and financial statement schedule are the responsibility of
Harbourton's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements and financial
statement schedule referred to above present fairly, in all material respects,
the financial position of Allstate Financial Corporation and subsidiaries as of
December 31, 1999, and the results of their operations and their cash flows for
the year ended December 31, 1999 in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note M to the
financial statements, the Company has suffered recurring losses from operations
and its line of credit available for working capital expires March 31, 2000.
This raises substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note M. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
McGladrey & Pullen, LLP
Raleigh, NC
March 17, 2000
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Allstate Financial Corporation and subsidiaries
Arlington, Virginia
We have audited the accompanying consolidated balance sheet of Allstate
Financial Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
for the year ended December 31, 1998 listed in the Index at Item 13(a) 2. These
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Allstate Financial Corporation and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles. Also, in our opinion, such financial statement schedule
for the year ended December 31, 1998, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Deloitte & Touche, LLP
Washington, D.C.
February 4, 1999
(March 30, 1999 as to the obtaining of debt waivers described in Note F)
F-2
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
---- ----
ASSETS
<S> <C> <C>
-------------------------------------------------------------------------------
Cash $ 353,962 $2,420,644
--------- ----------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Purchased receivables 2,110,454 22,302,284
-------------------------------------------------------------------------------
Advances receivable 9,329,366 15,652,457
--------- ----------
-------------------------------------------------------------------------------
11,439,820 37,954,741
-------------------------------------------------------------------------------
Less: Allowance for credit losses (4,316,399) (2,799,931)
----------- ----------
-------------------------------------------------------------------------------
Total receivables - net 7,123,421 35,154,810
--------- ----------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Income tax receivable - 831,656
-------------------------------------------------------------------------------
Deferred income taxes - 3,960,946
-------------------------------------------------------------------------------
Furniture, fixtures and equipment, net 151,375 166,400
-------------------------------------------------------------------------------
Other assets 43,643 653,957
------ -------
-------------------------------------------------------------------------------
TOTAL ASSETS $7,672,401 $43,188,413
========== ===========
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
-------------------------------------------------------------------------------
Accounts payable and accrued expenses $1,009,921 $1,081,655
-------------------------------------------------------------------------------
Credit balances of factoring clients - 4,559,570
-------------------------------------------------------------------------------
Notes payable 1,366,051 15,014,717
-------------------------------------------------------------------------------
Convertible subordinated notes 4,954,000 4,958,000
--------- ---------
-------------------------------------------------------------------------------
TOTAL LIABILITIES 7,329,972 25,613,942
--------- ----------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
-------------------------------------------------------------------------------
Preferred stock, authorized 2,000,000 shares with
-------------------------------------------------------------------------------
no par value; no shares issued or outstanding - -
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Common stock, authorized 10,000,000 shares with no par
-------------------------------------------------------------------------------
value; 3,105,828 issued; 2,324,616 outstanding at December
-------------------------------------------------------------------------------
31, 1999 and 2,324,083 outstanding at December 31, 1998,
-------------------------------------------------------------------------------
Exclusive of shares held in treasury 40,000 40,000
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Additional paid-in-capital 18,874,182 18,874,182
-------------------------------------------------------------------------------
Treasury stock, 781,212 shares at December 31, 1999
-------------------------------------------------------------------------------
and 781,745 shares at December 31, 1998 (4,967,472) (4,986,520)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(Deficit) Retained earnings (13,604,281) 3,646,809
------------ ---------
-------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 342,429 17,574,471
------- ----------
-------------------------------------------------------------------------------
$ 7,672,401 $43,188,413
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999
1999 1998
<S> <C> <C>
REVENUE
----------------------------------------------------------------------------------
Earned discounts and interest $ 3,215,230 $7,964,205
----------------------------------------------------------------------------------
Fees and other revenue 340,536 2,337,013
----------------------------------------------------------------------------------
Revenue from discontinued operations 65,570 -
---------- -----------
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
TOTAL REVENUE 3,621,336 10,301,218
--------- ----------
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
EXPENSES
----------------------------------------------------------------------------------
Compensation and fringe benefits 2,058,877 3,447,656
----------------------------------------------------------------------------------
General and administrative 3,000,755 4,963,636
----------------------------------------------------------------------------------
Interest expense 1,293,217 1,903,336
----------------------------------------------------------------------------------
Provision for credit losses 10,177,825 9,598,503
----------------------------------------------------------------------------------
Expenses from discontinued operations 79,619 -
----------------------------------------------------------------------------------
Restructuring Charge 259,221 -
--------- ----------
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
TOTAL EXPENSES 16,869,514 19,913,131
---------- ----------
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
LOSS BEFORE INCOME TAX EXPENSE (13,248,178) (9,611,913)
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT) 4,002,912 (3,556,400)
--------- -----------
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
NET LOSS $(17,251,090) $(6,055,513)
============= ============
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
NET LOSS PER COMMON SHARE
----------------------------------------------------------------------------------
Basic and Diluted $ (7.42) $ (2.61)
========== =========
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING
----------------------------------------------------------------------------------
Basic and Diluted 2,324,616 2,322,222
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
------------------------------- --------------- -------------------- --------------------- -------------------- -------------------
Additional
Common Paid in Treasury Retained
Stock Capital Stock Earnings Total
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1998 $40,000 $18,852,312 $(5,030,594) $9,702,322 $23,564,040
-------------------------------
Amortization of Treasury 28,084
Stock Costs
-- -- 28,084 --
-------------------------------
Conversion of Convertible 15,990
Subordinated Notes to 2,132
shares of common stock
-- -- 15,990 --
-------------------------------
3,500 Options exercised 21,870
-- 21,870 -- --
-------------------------------
Net Loss - - - (6,055,513) (6,055,513)
------- ----------- ----------- ----------- -----------
-------------------------------
-------------------------------
Balance - December 31, 1998 40,000 18,874,182 (4,986,520) 3,646,809 17,574,471
-------------------------------
Amortization of Treasury
Stock Costs
-- -- 15,050 -- 15,050
-------------------------------
Conversion of Convertible 3,998
Subordinated Notes to 533
shares of common stock
-- -- 3,998 --
-------------------------------
Net Loss - - - (17,251,090) (17,251,090)
----- ----------- ----------- ------------ ------------
-------------------------------
Balance - December 31, 1999 $40,000 $18,874,182 $(4,967,472) $(13,604,281) $ 342,429
======= =========== ============ ============= =========
</TABLE>
See notes to Consolidated Financial Statements
F-5
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
1999 1998
------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(17,251,090) $(6,055,513)
Adjustments to reconcile net loss
to cash provided (used) by operating activities:
Depreciation - net 69,759 112,334
Impairment of software - 218,202
Loss on disposition of furniture, equipment, and
Automobiles 113,895 49,487
Provision for credit losses 10,177,825 9,598,503
Changes in operating assets and liabilities:
Other assets 610,314 1,748,150
Accounts payable and accrued expenses (71,734) 661,299
Income taxes receivable 831,656 -
Deferred income taxes 3,960,946 (3,976,142)
--------- -----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (1,558,429) 2,356,320
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of receivables and advances (117,988,306) (202,674,562)
Collection and sale of receivables, including life insurance
contracts, and advances 135,841,870 197,126,096
(Decrease)/Increase in credit balances of factoring clients (4,559,570) 834,314
Sale of furniture, fixtures, and equipment 12,765 -
Purchase of furniture, fixtures and equipment (181,394) (52,183)
--------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 13,125,365 (4,766,335)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 82,768,908 100,417,016
Proceeds from subordinated debt - 4,597,000
Proceeds from working capital loan 1,000,000 -
Principal payments on line of credit (97,217,346) (99,820,361)
Principal payments on subordinated debt (4,000) (4,613,000)
Principal payments on working capital loan (200,228) -
Treasury stock acquisition costs 19,048 28,084
Options exercised 21,870
--------- ------
-
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (13,633,618) 630,609
------------ -------
NET DECREASE IN CASH (2,066,682) (1,779,406)
CASH, Beginning of period 2,420,644 4,200,050
--------- ---------
(Continued)
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
CASH, End of period $ 353,962 $ 2,420,644
========= ===========
Interest paid $1,295,214 $ 1,802,979
========== ===========
Income taxes paid $ 32,466 $ 419,742
======== =========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Conversion of Factoring Clients to ABL Loans $9,309,511 $ -
========== ======
Issuance of common stock in exchange
for convertible subordinated notes $ 3,998 $ 15,990
======== ========
(Concluded)
</TABLE>
See Notes to Consolidated Financial Statements
F-7
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Allstate Financial Corporation and its
subsidiaries (collectively, the "Company") conform to generally accepted
accounting principles and the general practices within the financial services
industry. Those policies that materially affect the determination of financial
position, results of operations, and cash flows are summarized below. In
preparing its financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
dates shown in the consolidated balance sheets and the statements of income.
Actual results could differ significantly from those estimates. In the normal
course of business, the Company encounters economic risks. Economic risk is
comprised of interest rate risk, credit risk, and market risk. Interest rate
risk is the risk that unfavorable discrepancies will occur between the rates of
interest earned by the Company on its receivables portfolio and its own costs of
borrowing funds in the market. Credit risk is the risk of default on the
Company's purchased receivable and advance portfolio that results from the
borrowers' inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of collateral underlying purchased
receivable and advance receivables and the valuation of the Company's owned real
estate.
The determination of the allowance for credit losses is based on estimates that
are susceptible to significant changes in the economic environment and market
conditions. Management believes that, as of December 31, 1999, the allowance for
credit losses is adequate based on the information currently available. A
worsening in the state of the general economy or a protracted economic decline
could increase the likelihood of losses due to credit and market risks and could
create the need for substantial additions to the allowance for credit losses.
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after elimination of all material inter-company
transactions. During 1999 due to the Company shedding significant assets, the
Lifetime Options Inc. A Viatical Settlement Company subsidiary now comprises a
significant portion of total assets.
Purchased and Advance Receivables and Allowance for Credit Losses
Purchased receivables consist of invoices and insurance claims, which have been
purchased with or without recourse to the seller, and life insurance policies.
Invoices are stated at the face amount outstanding, net of unearned discounts
and participations. Insurance claims are stated at the agreed amount of the
settlement assigned to the Company, net of unearned discounts. Life insurance
policies are stated at the purchase price paid for the policies plus accrued
earnings, net of an allowance based on management's estimate of the discounted
present value of the expected cash flows from the contracts. Because most of the
purchased life insurance policies are underwritten by highly rated insurance
companies (and, in many cases, backed by state guaranty funds), management
believes that credit risk is not material.
Advances Receivable are interest-bearing loans collateralized by clients'
pledged assets and general liens and are stated at the aggregate principal
amount outstanding plus accrued earnings.
F-8
<PAGE>
The allowance for credit losses represents the provision charged to operations,
less purchased receivables or advances receivables charged off, net of
recoveries. The allowance for credit losses is maintained at a level that, in
management's judgment, is sufficient to absorb losses inherent in the receivable
portfolio. The allowance for credit losses is based upon management's review and
evaluation of the receivable portfolio. Factors considered in the establishment
of the allowance for credit losses include management's evaluation of specific
receivables, the adequacy of underlying collateral, historical loss experience,
expectations of future economic conditions and their impact on particular
industries and individual clients, and other discretionary factors. The
allowance for credit losses is based on estimates of potential future losses,
and ultimate losses may vary from the current estimates. These estimates are
typically reviewed quarterly and as adjustments become necessary, the effects of
the change in estimates are charged against the allowance for credit losses in
the period in which they become known. When any receivable becomes doubtful as
to collection of discount or interest income, the account is placed on
non-performing status and, in accordance with The Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 114,
Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosure, is considered by management to be "impaired". When a receivable
becomes non-performing the Company discontinues the accrual of earnings for
financial statement purposes. If the Company determines that it is not likely to
recover, from any source, the amount of its initial advance and the earned but
unpaid discount or interest thereon, then the Company increases the allowance
for credit losses or reduces the carrying value of the non-performing,
receivable to its estimated fair value and makes a charge to its allowance for
credit losses in an amount equal to the difference between the Company's
investment in the non-performing receivable and its estimated fair value.
Purchased and advance receivables are fully charged off against the allowance
when the Company has exhausted its efforts against the client's customer, the
client, guarantors, other third parties and any additional collateral retained
by the Company.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost. Depreciation is computed
using straight line and accelerated methods over the estimated useful lives of
the related assets.
Other Assets
At the date of acquisition, other assets are recorded at fair value less
estimated selling costs. Write-downs, if any, to fair value at the date of
acquisition are charged against the allowance for credit losses. Subsequent to
acquisition, the asset is adjusted to the lower of cost or fair value less
estimated costs to sell and adjustments, if any, are charged against the
allowance for credit losses. Operating expenses pertaining to other assets are
expensed in operations in the period in which they are incurred. Gains or losses
on the disposition of other assets are first reflected in the allowance for
credit losses. Any gain which exceeds the amount, if any, previously written-off
is reflected in current income.
The amounts ultimately recovered by the Company from other assets could differ
materially from the amounts used in arriving at the net carrying value of the
assets because of future market factors beyond the Company's control,
adversarial actions taken by the client or other owners of the foreclosed
property or changes in the Company's strategy for recovering its investment.
F-9
<PAGE>
Fair Value of Financial Instruments
In accordance with the requirements of SFAS No. 107, Disclosure About Fair Value
of Financial Instruments, which requires the disclosure of fair value
information about financial instruments when it is practicable to estimate that
fair value and excessive costs would not be incurred, the following methods and
assumptions were used in estimating the fair value of financial instruments:
Cash and Cash Equivalents--The carrying amounts for cash and cash
equivalents approximate fair value.
Purchased, advance receivables and commitments - The carrying amount of
receivables approximate fair value because of the short maturity of these
instruments.
Notes payable, consisting of adjustable and fixed rate notes, are recorded
at book values, which approximate the respective fair values.
Convertible subordinated notes payable are primarily fixed rate. The
carrying amount of these notes approximates fair value because the interest
rate, conversion price, and period to maturity have not significantly
changed since the dates that the notes were issued.
Unearned and Earned Discounts on Purchased Receivables
At the time of purchase, the unearned discount is deducted from the face amount
of the invoice and is recorded as a reduction to such invoice. Unearned
discounts are recognized as income in accordance with the respective terms of
the agreements between the Company and each of its clients. The Company
recognizes discounts on the first day of each time interval. The Company's
method of recognizing earned discounts does not differ materially from the
interest method. At the time an invoice is purchased, a due date is set based on
the client's sales terms. This due date is used to identify past due
receivables. The accrual of earned discounts is discontinued when, in the
opinion of management, the collection of additional earnings from the client's
customer, the client, guarantors or collateral held, if any, is unlikely.
Invoices which have been identified as past due may continue to accrue earnings
if, in the opinion of management, collection of the earnings from one or more of
the above sources is likely.
When invoices are placed on non-performing status, earned discounts theretofore
accrued in the current year are charged against current year's earnings if, in
the opinion of management, the collection of such earnings is unlikely. Earned
discounts accrued in prior years are charged to the allowance for credit losses
if, the opinion of management, the collection of such earnings is unlikely.
Interest and Discounts Earned on Advances Receivable
Interest and discounts earned on advances receivable accrue on the average
monthly or semi-monthly outstanding amount or on the daily balance of the
advance. Accrued earnings are typically required to be paid in full no less
frequently than monthly in arrears.
F-10
<PAGE>
Fees and Other Income
Fee income includes application fees, letter of credit and guaranty fees, and
commitment or facility fees received from clients. Commitment and facility fees
are deferred and recognized over the term of the commitment or facility on a
straight-line basis. Application fees are paid by clients to the Company to
cover the cost of performing credit investigations and field examinations and
are recognized when received. Letter of credit and guaranty fees are usually for
a sixty- to ninety-day period and are recognized when the letter of credit or
letter of guaranty is issued.
Other income includes supplemental discounts (i.e., early termination fees),
interest income and miscellaneous income.
Revenue from discontinued operations
Revenue from discontinued operations includes amounts received and accrued from
the purchaser of the Company's previous factoring clients. The amounts are
calculated by the purchaser as a percentage of net interest income and remitted
monthly in arrears.
Income Taxes
Deferred taxes are provided on a liability method whereby deferred tax assets
are recognized for deductible temporary differences and operating loss and tax
credit carryforwards and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liablities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
B. RECEIVABLES
<TABLE>
<CAPTION>
Receivables consist of the following at December 31:
1999 1998
---------------------------------------------- ----------------------- ------------------------
<S> <C> <C>
Invoices and insurance claims $ 234,445 $23,731,826
----------------------------------------------
Less: Unearned discount (13,953) (3,299,175)
----------------------------------------------
Less: Participations - (759,424)
----------------------------------------------
Life Insurance policies 1,889,962 2,629,057
--------- ---------
----------------------------------------------
----------------------------------------------
Total Purchased receivables - net $2,110,454 $22,302,284
========== ===========
----------------------------------------------
----------------------------------------------
Advances receivable $10,073,989 $16,288,673
----------------------------------------------
Less: Unearned discount - (636,216)
----------------------------------------------
Less: Participations (744,623) -
--------- -------------
----------------------------------------------
----------------------------------------------
Total Advances receivable - net $9,329,366 $15,652,457
========== ===========
</TABLE>
Invoices purchased usually become due within a maximum of 90 days. After this
time, the Company generally requires the client to repay the amount advanced on
the receivable plus the earned discount under the full recourse provisions of
its agreements. If at any time the Company determines that it is unlikely to
receive payment on a
F-11
<PAGE>
purchased invoice, the Company retains the right to require its clients to repay
the amount the Company has advanced on the receivable plus the amount of
discount earned.
Advances receivable may be made on a revolving basis or require monthly
amortization. Revolving advances receivable secured by current assets (e.g.
accounts receivable or inventory) are subject to a daily or weekly borrowing
base formula and come due in a single, lump sum payment at the maturity of the
agreement between the Company and its client.
<TABLE>
<CAPTION>
Changes in the allowance for credit losses were as follows:
-------------------------------------------------------------- ---------------------------
<S> <C>
BALANCE, January 1, 1998 2,738,931
--------------------------------------------------------------
Provision for credit losses 9,598,503
--------------------------------------------------------------
Receivables charged off (9,596,124)
--------------------------------------------------------------
Recoveries 58,621
------
--------------------------------------------------------------
BALANCE, December 31, 1998 2,799,931
--------------------------------------------------------------
Provision for credit losses 10,177,825
--------------------------------------------------------------
Receivables charged off (9,197,053)
--------------------------------------------------------------
Recoveries 535,696
-------
--------------------------------------------------------------
--------------------------------------------------------------
BALANCE, December 31, 1999 $4,316,399
==========
--------------------------------------------------------------
</TABLE>
Impaired loans recognized in conformity with SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, which requires the Company to measure the
value of each impaired loan based on the present value of its expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, the loan's observable market price or the fair value of the
collateral if the loan is collateral dependent; as amended by SFAS No. 118,
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, which allows the Company to use existing methods for recognizing
interest income on impaired loans, are as follows:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------------------------------------------------------ ------------------ ------------------
<S> <C> <C>
Total recorded investment in impaired loans $5,354,476 $2,633,856
------------------------------------------------------------------
Amount of recorded investment in impaired loans for which there
is no related allowance $367,455 $2,633,856
------------------------------------------------------------------
Amount of recorded investment in impaired loans for which there
is a related allowance $4,987,021 -
------------------------------------------------------------------
Related allowance for impaired loans $3,987,021 -
------------------------------------------------------------------ ------------------ ------------------
</TABLE>
The average recorded investment in impaired loans during 1999 and 1998 was
$7,809,301 and $2,065,105, respectively.
See note J-Financial obligations with off-balance sheet risk and credit
concentrations.
F-12
<PAGE>
C. FURNITURE, FIXTURES AND EQUIPMENT
The Company's investment in furniture, fixtures, and equipment consists of the
following:
<TABLE>
<CAPTION>
December 31,
1999 1998
------------------------------------------ ----------------------- -------------------------
<S> <C> <C>
Furniture, fixtures and equipment $447,800 $ 634,296
------------------------------------------
Automobiles - 21,290
------------------------------------------
Less: Accumulated depreciation (296,425) (489,186)
- --------- ---------
------------------------------------------
$151,375 $ 166,400
======== =========
</TABLE>
Furniture, fixtures and equipment is pledged as collateral under a revolving
line of credit (see Note F).
D. OTHER ASSETS
Other assets consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------------------- --------------------------------------------------
1999 1998
----------------------------------------- ------------------------ -------------------------
<S> <C> <C>
Land held for sale $ - $375,000
-----------------------------------------
Condominium held for sale - 172,575
-----------------------------------------
Employee advance - 6,000
Prepaid expenses - 42,602
Miscellaneous receivables 43,643 57,780
------ ------
$43,643 $653,957
======= ========
----------------------------------------- ------------------------ -------------------------
</TABLE>
E. CREDIT BALANCES DUE CLIENTS
At December 31, 1999 and 1998, credit balances of factoring clients consisted
of: (i) a holdback reserve of zero ($0) and $3,139,873, respectively, which is
payable to clients upon the collection of receivables, (ii) a factors reserve of
zero ($0) and $7,250 in 1999 and 1998 (which represents amounts due to factoring
clients subject to contractual limitation) and (iii) cash collateral of zero
($0) and $1,412,447, respectively.
F-13
<PAGE>
F. NOTES PAYABLE AND CONVERTIBLE SUBORDINATED NOTES
Notes payable consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------- ----------------------------------
1999 1998
----------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
Notes payable; due on demand;
interest payable at1/4% over prime;
unsecured $ - $ 14,717
-----------------------------------------------------------
Revolving line of credit;due immediately,interest at prime
plus 4.75% and .5%, in 1999 and 1998, respectively
566,279 15,000,000
-----------------------------------------------------------
Note payable, due March 31, 2000, interest at 10%,
unsecured 799,772
------- ----------
-
-----------------------------------------------------------
Total notes payable $1,366,051 $15,014,717
========== ===========
-----------------------------------------------------------
Convertible Subordinated Notes; due September 30,
2000; interest payable at 1.25% over prime;
unsecured $357,000 $361,000
-----------------------------------------------------------
Convertible Subordinated Notes; due September 30,
2003; interest payable at 10% fixed; unsecured 4,597,000 4,597,000
--------- ---------
-----------------------------------------------------------
Total convertible subordinated notes $4,954,000 $4,958,000
========== ==========
----------------------------------------------------------- ---------------- -----------------
</TABLE>
At December 31, 1999 and 1998, the prime rate was 8.50% and 7.75%, respectively.
Aggregate annual principal payments on notes payable for the five years
subsequent to December 31, 1999, are as follows:
Years Ending December 31, Amount
------------------------------------- ------------------------------
-------------------------------------
2000 $ 1,723,051
-------------------------------------
2001 -
-------------------------------------
2002 -
-------------------------------------
2003 4,597,000
-------------------------------------
2004 -
----------------
-------------------------------------
Total $6,320,051
==========
F-14
<PAGE>
As of December 31, 1998, the Company had $1,217,407 available under a
$25,000,000 million secured revolving line of credit from a group of banks. The
revolving line of credit contained various sub facilities that limited its use.
The entire facility could be used for borrowing to finance the purchase of
invoices or advances secured by accounts receivable. However, the Company could
(i) borrow only $5,000,000 collateralized by advances secured by machinery and
equipment, (ii) borrow only $2,500,000 collateralized by advances secured by
inventory, and (iii) issue only up to $5,000,000 of Letters of Credit.
Borrowings under the credit facility bore interest at a spread over the bank's
base rate or a spread over LIBOR, at the Company's election. The Company was
subject to covenants that are typical in revolving credit facilities of this
type. At December 31, 1998, the Company was in default of the covenants, which
related to interest coverage and the maximum amount of funds which may be
advanced to any one client. Waivers of the defaults were received from the
members of the bank group.
As of December 31, 1999, the Company was operating under a forbearance agreement
negotiated with its bank lenders. As of December 24, 1999, the forbearance
agreement expired. The line of credit availability at December 31, 1999 was
zero. The interest rate on the line of credit was equal to the agent lender's
base rate plus 4.75%. The loan was repaid in full in January 2000. The Company
may seek replacement financing.
To augment its working capital during the forebearance period the Company
obtained a $1,000,000 working capital loan from Value Partners. The working
capital loan bears a 10% rate of interest, which is payable quarterly, and
repayment terms of 25% of collections of certain assets. The outstanding balance
of the loan is due March 31, 2000. The Company may seek to extend the due date
of the outstanding balance of the loan. As of December 31, 1999, the Company
owed $799,772 on the working capital loan.
As of December 31, 1997, the Company had convertible subordinated notes
(collectively the "Old Notes") outstanding with an aggregate principal of
$4,974,000. The Old Notes were issued in exchange for 785,475 shares of the
Company's common stock (currently held by the Company as treasury stock). The
Old Notes (i) mature on September 30, 2000, (ii) bear interest at the prime rate
plus 1.25% per annum, (iii) are convertible into common stock of the Company at
$7.50 per share, and (iv) are subordinated in right of payment to the Company's
secured revolving credit facility.
The Old Notes had a provision that upon the occurrence of certain "fundamental
changes", the holders had the right to have these notes redeemed at par. The
election of the new Board of Directors at the May 1998 shareholder meeting was
deemed to have constituted a fundamental change under that provision. The
Company:
o Advised all noteholders of their right to redeem the notes at par.
o Issued new convertible subordinated notes to Value Partners to provide
the Company with a funding source to repurchase all notes tendered
under the fundamental change provision.
o Repurchased the tendered notes.
o Offered all remaining noteholders, that were accredited investors, the
opportunity to exchange their Old Notes for newly issued convertible
subordinated notes.
The old noteholders tendered $2,896,000 of Old Notes for repurchase at par.
Additionally, Old Notes with a par of $1,701,000 were exchanged for the new
issue of convertible subordinated notes.
F-15
<PAGE>
During 1998, convertible subordinated notes were issued (collectively the "New
Notes") that (i) have a maturity of September 30, 2003, (ii) bear interest at a
fixed rate of 10% per annum, (iii) are not redeemable at the option of the
Company, (iv) are convertible into the Company's common stock at $6.50 per share
and (v) are subordinated in the right of payment to the Company's secured
revolving credit facility. The New Notes have financial covenants that are
similar to, but less restrictive than, the covenants in the Company's revolving
line of credit. At December 31, 1999, the Company was in default of several of
the covenants of the New Notes. The Company is negotiating with the debt holders
to resolve these defaults. There can be no assurance that an agreement will be
reached.
As of December 31, 1999 and 1998, the Company had convertible subordinated notes
(Old and New Notes) outstanding of $4,954,000 and $4,958,000, respectively.
G. STOCK OPTION AND BENEFIT PLAN
Stock Option Plans In October 1995, FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. This Statement gives the Company the option of either:
1) continuing to account for stock options and other forms of stock compensation
paid to employees under the current accounting rules (APB No. 25, Accounting for
Stock Issued to Employees) while providing the disclosures required under SFAS
No. 123, or 2) adopting SFAS No. 123. The Company continues to account for stock
options under APB No. 25 and provides the additional disclosures as required by
SFAS No. 123.
Qualified Plan
The Company has reserved 275,000 shares of common stock for issuance under its
qualified stock option plan, which expires February 7, 2000. Options to purchase
common stock are granted at a price equal to the fair market value of the stock
at the date of grant or 110% of fair market value of the stock at the date of
grant for stockholders owning 10% or more of the combined voting stock of the
Company. The following table summarizes qualified stock option transactions for
the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Number of Options Option Price
Per Share
-------------------------------------------------- --------------- -----------------
<S> <C> <C>
Outstanding, January 1, 1998 148,800 $5.37 to $7.75
--------------------------------------------------
Granted 30,200 $5.00 to $7.75
--------------------------------------------------
Exercised (3,500) $5.62 to $6.50
--------------------------------------------------
Forfeited or expired (57,900) $5.62 to $14.00
--------
--------------------------------------------------
Outstanding, December 31, 1998 117,600 $5.00 to $7.75
Granted 95,000 $4.00 to $6.54
Exercised - -
Forfeited or expired (112,000) $4.00 to $7.75
---------
--------------------------------------------------
Outstanding, December 31, 1999 100,600 $4.00 to $6.50
=======
Exercisable, December 31, 1999 90,501
======
</TABLE>
F-16
<PAGE>
Non-Qualified Plan
The Company has reserved 150,000 shares of common stock for issuance under its
non-qualified stock option plan, which expires February 7, 2000. Options to
purchase shares of common stock are granted at a price equal to the fair value
of the stock at the date of grant except in the case of options granted to
directors, in which case the minimum price is the greater of $7.00 and 110% of
fair value at the time of grant. The following table summarizes non-qualified
stock option transactions from 1998 through 1999:
<TABLE>
<CAPTION>
Number of Options Option Price
Per Share
-------------------------------------------------- ----------- -----------------
<S> <C> <C>
Outstanding, January 1, 1998 69,000 $7.00 to $14.00
--------------------------------------------------
Granted 35,000 $7.00
--------------------------------------------------
Forfeited or expired (2,000) $14.00
-------
--------------------------------------------------
--------------------------------------------------
Outstanding, December 31, 1998 102,000 $7.00
Granted 30,000 $7.00
Forfeited or expired (67,000) $7.00
--------
--------------------------------------------------
--------------------------------------------------
Outstanding, December 31, 1999 65,000 $7.00
======
Exercisable, December 31, 1999 65,000 $7.00
======
</TABLE>
<TABLE>
<CAPTION>
Qualified and Non-Qualified Plans
The table below summarized the option activity for both plans for the years
ended December 31:
1999 1998
------------------------------------------------------------- -------------- ------------
<S> <C> <C>
Outstanding at January 1 219,600 217,800
-------------------------------------------------------------
Granted 125,000 65,200
-------------------------------------------------------------
Exercised - (3,500)
-------------------------------------------------------------
Forfeited or expired (179,000) (59,900)
--------- --------
-------------------------------------------------------------
Outstanding at December 31 165,600 219,600
======= =======
-------------------------------------------------------------
Exercisable at December 31 155,501 151,201
======= =======
</TABLE>
The weighted average fair value at date of grant for options granted during 1999
and 1998 was $1.85 and $0.98, respectively. The fair value of options at date of
grant was estimated using the Black-Scholes model with an expected option life
of 1.5-3.0 years and 2.5 years in 1999 and 1998, respectively, and the following
weighted average assumptions, respectively, for 1999 and 1998: dividend yield -
none either year; interest rate - 6.29% and 6.86%; volatility 65.00% and 38.00%
for the respective year.
F-17
<PAGE>
Weighted average option exercise price information (both plans) for years ended
December 31:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------ -------------------- -----------------
Per Share
<S> <C> <C>
Outstanding at January 1 $6.37 $6.24
------------------------------------------------------------
Granted 5.76 5.01
------------------------------------------------------------
Exercised - 6.25
------------------------------------------------------------
Forfeited or Expired 6.26 5.76
---- ----
------------------------------------------------------------
------------------------------------------------------------
Outstanding at December 31 $5.84 $6.37
===== =====
------------------------------------------------------------
------------------------------------------------------------
Exercisable at December 31 $5.94 $6.49
===== =====
</TABLE>
The Company's net loss would have increased by $166,614 or $0.07 per share basic
and dilutive for 1999, in stock-based compensation cost for the Company's
qualified and non-qualified stock option plans if the plan had been determined
based on the fair value at the grant dates for awards under the plans. The
Company's net loss would have been increased by $88,335 or $0.04 per share basic
and dilutive for 1998.
Retirement Plan
Effective January 1, 1990, the Company adopted the Allstate Financial
Corporation 401(k) Retirement Plan (the "Plan") for the benefit of the Company's
employees. The Plan provides for the deferral of up to 15% of a participating
employee's salary, subject to certain limitations, and a discretionary
contribution by the Company. The Company's contribution is allocated to
participating employees based on relative compensation. The Company's
contribution for the years ended December 31, 1999 and 1998 was zero ($0) and
$46,701, respectively. During 1999, the plan was terminated and all monies were
distributed.
Effective April 1, 1999, the Company became a participant in a nationally
managed 401(k) plan (1999 plan) for the benefit of the Company's employees. The
1999 plan provides for the deferral of up to 17% of a participant's salary,
subject to certain annual limitations, and a matching contribution of up to 3%
by the Company. The Company's contribution for the year ended December 31, 1999
was $18,233.
F-18
<PAGE>
H. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------- ----------------------------------------------
1999 1998
----------------------------------------------------- ------------------------- --------------------
<S> <C> <C>
Federal:
-----------------------------------------------------
Current $ 32,466 $ 45,187
-----------------------------------------------------
Deferred 3,683,680 (3,366,887)
--------- -----------
-----------------------------------------------------
3,716,146 (3,321,700)
--------- -----------
-----------------------------------------------------
State:
-----------------------------------------------------
Current 9,500 -
-----------------------------------------------------
Deferred 277,266 (234,700)
------- ---------
-----------------------------------------------------
286,766 (234,700)
------- ---------
-----------------------------------------------------
Total income tax expense (benefit) $4,002,912 $(3,556,400)
========== ============
-----------------------------------------------------
-----------------------------------------------------
Tax (benefit) expense at statutory rate $(4,504,040) $(3,268,050)
-----------------------------------------------------
Change in (benefit) expense resulting from:
State income taxes, net of Federal income
tax effect (428,023) (154,903)
-----------------------------------------------------
Valuation Allowance 9,232,642
-----------------------------------------------------
Other (297,667) (133,447)
--------- ---------
-----------------------------------------------------
$4,002,912 $(3,556,400)
-----------------------------------------------------
-----------------------------------------------------
Effective tax rate 37.0% 37.0%
===== =====
</TABLE>
The deferred tax asset consists of:
<TABLE>
<CAPTION>
December 31,
1999 1998
--------------------------------------------------------- --------------------- --------------------
<S> <C> <C>
Deferred tax asset:
---------------------------------------------------------
Operating Loss Carryforwards 7,506,082 2,750,273
---------------------------------------------------------
Allowance for credit losses $1,726,560 $1,124,030
---------------------------------------------------------
Fixed assets - 86,644
--------- ------
---------------------------------------------------------
9,232,642 3,960,946
---------------------------------------------------------
Valuation allowance (9,232,642) -
---------- -
---------------------------------------------------------
Total $ $3,960,946
======= ==========
</TABLE>
The Company has reduced all deferred tax assets to zero by utilizing a valuation
allowance because the deferred tax assets more than likely will not be realized.
The Company's net operating loss ("NOL") at December 31, 1999, amounted to
$18,765,205. The Company's use of the NOL's prior to the expirations of their
carry-forward periods may be limited by the provisions of Section 382 of the
Internal Revenue Code of 1986 ("the Code"), if it is determined that it has
undergone a change of ownership,
F-19
<PAGE>
as defined by the section. The carry-forward period associated with the NOL
expires according to the following schedule:
Year of expiration Amount
------------------------------ ---------------------------------
------------------------------ ---------------------------------
2018 $6,875,682
2019 11,889,523
- ----------
Total $18,765,205
===========
I. RELATED-PARTY TRANSACTIONS
In 1998 the "Allstate Financial Corporation Independent Shareholders/Directors
Committee" (the "Committee"), which was composed of Value Partners, Ltd., a
major shareholder; David W. Campbell, William H. Savage, Edward A. McNally, and
Lindsay B. Trittipoe, independent directors of the Company; and C. Scott
Bartlett, a former director of the Company, proposed the election of a slate of
directors in opposition to the nominees proposed by the Company's management. In
their proxy filing, the Committee advised shareholders that, if successful in
the election, they would seek reimbursement for their expenses from the Company.
The Company paid directly or reimbursed Value Partners, Ltd. for expenses
incurred by the Committee in the amount of $397,318 in 1998. This reimbursement
was recorded in the consolidated statement of operations as a general and
administrative expense.
Value Partners, Ltd., was paid approximately $314,000 and $207,000 in 1999 and
1998, respectively, in interest on convertible subordinated notes. Value
Partners, Ltd. held convertible subordinated notes of $4,197,000 at December 31,
1999 and 1998. In addition, the Company owes Value Partners, Ltd., interest of
$104,000 that was due December 31, 1999. As stated in Note F, the Company is
working with the holders of the New Notes to resolve this default situation.
There can be no assurance that an agreement will be reached.
In September 1999, Value Partners, Ltd. made a $1 million loan to the Company.
The note bears interest at 10%, payable quarterly, and is due in full on March
31, 2000. Also, the Company is required to made principal payments on this debt
as certain assets are received in cash. Value Partners, Ltd. received $12,161 in
interest on this loan during 1999. As of December 31, 1999 the loan balance was
$799,772.
J. FINANCIAL OBLIGATIONS WITH OFF-BALANCE SHEET RISK AND CREDIT CONCENTRATIONS
The Company is a party to financial obligations with off-balance sheet risk in
the normal course of business to meet the financing needs of its clients. These
financial obligations include conditional commitments to purchase receivables,
obligations under guaranties issued by the Company and reimbursement obligations
under letters of credit issued for the Company's account. These obligations
involve, to varying degrees, elements of credit risk in excess of the amount
recognized on the balance sheet.
The Company's maximum exposure to credit loss under financial obligations with
off-balance sheet risk is represented by the contractual or notional amount of
these obligations. The Company uses the same credit policies in making
conditional commitments and incurring contingent obligations as it does for
on-balance sheet obligations.
F-20
<PAGE>
These commitments have fixed expiration dates or other termination clauses and
usually require payment of a fee by the client. Since many of the commitments
may expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company receives collateral
to secure letters of credit and guarantees. The Company no longer engages in
this line of business.
Financial obligations whose contract or notional amounts represent credit risk
are as follows:
December 31,
1999 1998
Conditional Commitments to purchase Receivables $ - $47,810,000
====== ===========
-
For the year ended December 31, 1999, three clients accounted for 25.8% of the
Company's total earned discounts and interest. Two of these clients were
written-off during 1999 and the third client paid off all outstanding balances
prior to the end of 1999. At December 31, 1999, two clients accounted for 51.53%
of the Company's total receivables. One of these clients is classified as
non-performing and the Company has allocated specific reserves for this client.
For the year ended December 31, 1998, three clients accounted for 46.4% of the
Company's total earned discounts and interest. At December 31, 1998, three
clients accounted for 48.7% of the Company's total receivables. Although the
Company monitors account debtor concentration and regularly evaluates the credit
worthiness of account debtors, there can be no assurances that account debtor
concentration could not have a material adverse effect on the Company.
K. NET INCOME PER SHARE
In March 1997, FASB issued SFAS No. 128, Earnings Per Share. SFAS No. 128
supersedes APB No. 15 to conform earnings per share to international standards
as well as to simplify the complexity of the computation under APB No. 15. SFAS
No. 128 requires dual presentation of basic and diluted earnings per share on
the face of the income statement. Basic earnings per share excludes dilution and
is computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common
stock. SFAS No. 128 is effective for both interim and annual periods ending
after December 15, 1997. For the years ending December 31, 1999 and 1998, there
is no difference between the basic and diluted earnings per share.
F-21
<PAGE>
The following table details the calculation of the basic and diluted earnings
per share.
<TABLE>
<CAPTION>
Income (Loss) Shares (Denominator) Per-Share
(Numerator) Amount
-------------------------------------------- ---------------- -------------------- ----------
<S> <C> <C> <C>
Year Ended December 31, 1998
--------------------------------------------
Basic EPS
Net (loss) $(6,055,513) 2,322,222 $(2.61)
--------------------------------------------
Effect of dilutive securities
Stock options - -
------------ -------- -
Diluted EPS
Net (loss) plus assumed
Conversions $(6,055,513) 2,322,222 $(2.61)
============= ========= =======
--------------------------------------------
Year Ended December 31, 1999
--------------------------------------------
Basic EPS
Net (loss) $(17,251,090) 2,324,616 $(7.42)
--------------------------------------------
Effect of dilutive securities
Stock options - -
----------- ----------- -
Diluted EPS
Net (loss) plus assumed
Conversions $(17,251,090) 2,324,616 $(7.42)
============= ========= =======
</TABLE>
During 1999 and 1998, respectively, there were various options to purchase
165,600 and 103,700 shares of common stock which were not included in the
computation of the diluted EPS because the options' exercise price was greater
than the average market price of the common shares.
The Company incurred net losses for the years ended December 31, 1999 and 1998.
Since the inclusion of stock options in the computation of diluted EPS would
have had an antidilutive effect, the common shares associated with the options
were excluded from the computation.
The convertible subordinated notes, which convert into the Company's common
stock at $6.50 and $7.50 per share, were also excluded from the computation of
the diluted EPS because the conversion price was greater than the market price
at any given point during which they were outstanding for the two years ended
December 31, 1999.
L. COMMITMENTS AND CONTINGENCIES
The Company leases office space under operating leases with Consumer Price Index
escalations and rental escalations based on increases in base operating expenses
as defined in the agreements. The Company's headquarters lease was renegotiated
during 1995 and extended for six years to December 1, 2001 at a reduced rental.
The Company also pays rent for storage space and office equipment. The Company
is currently negotiating with the landlord to reduce or eliminate the space the
Company is occupying. There can be no assurance that the situation will be
resolved.
F-22
<PAGE>
Future minimum rental payments are as follows:
----------------------------------------- ------------------------
Years Ending December 31, Amount
----------------------------------------- ------------------------
2000 $215,000
-----------------------------------------
2001 189,000
-----------------------------------------
2002 -
-----------------------------------------
2003 -
-----------------------------------------
2004 -
-----------------------------------------
Total $404,000
========
----------------------------------------- ------------------------
Rental expense for the years ended December 31, 1999 and 1998 was $184,768 and
$330,226, respectively.
The Company is a counterclaim defendant in Allstate Financial Corporation v.
A.G. Construction, Inc. (n/k/a A.G. Plumbing, Inc.), American General
Construction Corp., Adam Guziczek and Cheryl Lee Guziczek (hereinafter
collectively referred to as "AG") pending in the United States Bankruptcy Court
for the Southern District of New York. In a 1993 action the Company undertook an
attempt to recover against AG. An answer and counterclaim was filed against the
Company. The counterclaim asserted claims for usury, diversion of proceeds of
public improvement contracts, and overpayments to the Company by AG in excess of
$2,000,000 (hereinafter the "Counterclaims"). No specific damage claims amount
was set forth in the Counterclaims.
No action was ever taken by the trustee in the AG bankruptcy proceedings to
pursue the Counterclaims. On June 2, 1997, the trustee for the AG bankruptcy
estate filed a motion to abandon these claims against the Company. On October 7,
1997, New York Surety Company (hereinafter referred to as the "Surety"), which
provided the payment and performance bond to AG in connection with the
construction jobs performed for the City of New York, filed pleadings objecting
to the abandonment of such claims against the Company, asserting that it was
subrogated to AG's claims. The proposed complaint adopts the Counterclaims and
seeks an accounting. The Surety asserts damages of approximately $4,000,000. On
April 9, 1998, the bankruptcy court remanded the matter to state court.
On June 24, 1998, the Surety was formally declared insolvent by the
Superintendent of Insurance of the State of New York (hereinafter referred to as
the "Superintendent") and as such the Superintendent was judicially appointed as
rehabilitator of the Surety to conduct its business. At this time, it is
uncertain whether the Superintendent will continue to pursue the litigation
against the Company.
The Company believes it has meritorious defenses to the Counterclaims and
intends to vigorously defend all claims. However, the litigation is in the
preliminary stage and the probability of a favorable or unfavorable outcome and
the potential amount of loss, if any, cannot be determined or estimated at this
time.
Except as described above, the Company is not party to any litigation other than
routine proceedings incidental to its business, and the Company does not expect
that these other proceedings will have a material adverse effect on the Company.
F-23
<PAGE>
M. UNCERTAINTIES
The Company has incurred net losses of $17 million and $6 million in the years
ending December 31, 1999 and 1998, respectively. During the last four years, the
Company has incurred severe loan losses that caused the Company's bank lenders
to restrict the line of credit and request repayment. The Company was forced to
sell assets to comply with the lenders' request. The need to use the proceeds of
sales to repay the bank lenders made it impractical for the Company to solicit
and make loans to new clients. The Company is also in default on its New Notes,
and has outstanding litigation (see Note L) which presents additional contingent
liabilities.
In response to this situation, the Company has taken several steps in an effort
to return the Company to profitability. The Company has consummated the sale of
the factoring portfolio and certain ABL loans, reduced staffing and other
expenses, repaid the bank lenders, and moved to smaller office space.
The Company is also developing a strategic turnaround plan (the "Plan") that
contemplates, among other things, a recapitalization of the Company in the form
of the exchange of the New Notes for common stock. The board of directors has
appointed a committee of outside directors to negotiate with the holders of the
New Notes over the terms of the exchange.
Other major elements of the Plan include:
o A limitation on transfers of common stock by existing or potential holders
of over 4.9% of outstanding shares, thereby helping to preserve the NOL's
for future use.
o An increase in the number of authorized shares to facilitate the conversion
and enable the Company to consider possible acquisitions of, or business
combinations with, firms in financial services involving the issuance of
new shares.
o The possible re-incorporation of the Company under Delaware law to take
advantage of provisions favorable to the Plan.
The Company has held preliminary discussions with Value Partners, Ltd., a large
shareholder of the Company and the holder of a majority of the New Notes, with
respect to the Plan. Value Partners is supportive of the of the major elements
of the Plan and has encouraged the company to finalize the details and present
the Plan for approval by the Board and recommendation to the shareholders at the
annual meeting. The actual exchange rate at which the New Notes will be
converted into common stock will be negotiated by the committee of the board of
directors. In addition, the final terms of the Plan will depend in part upon an
analysis of the effects of Section 382 of the Code and the preservation of the
Company's NOL carry-forwards. See Note H - Income Taxes.
Certain elements of the plan will require shareholder approval and will be
presented to the shareholders for a vote at the Company's annual meeting. The
board of directors has postponed the date of the annual meeting in order to
allow sufficient time for the Plan to be finalized. The Company believes that
when the Plan is approved by the shareholders and implemented, the Company will
be positioned for future growth. The Company believes the conversion of the New
Notes to equity will reduce the Company's interest costs and position it to more
effectively obtain new senior funding to expand its loan portfolio. The
satisfactory completion of the Plan is essential, as the Company has
insufficient cash flow to service the interest payments on the New Notes.
F-24
<PAGE>
However, there can be no assurance that the Plan will be approved by the
shareholders, that the final terms of the conversion can be agreed upon, that
the Company will be successful in redeploying the amounts it currently has
invested in nonperforming assets into new ABL relationships, or that new
financing will be obtained.
If the plan can be accomplished, management believes that the Company will
continue as a going concern.
THIS SPACE INTENTIONALLY LEFT BLANK.
F-25
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2000 December 31,1999
--------------------------------------------------------------------- -------------- ----------------
(Unaudited)
<S> <C> <C>
ASSETS
---------------------------------------------------------------------
Cash $1,075,623 $353,962
---------------------------------------------------------------------
---------------------------------------------------------------------
Purchased receivables 1,985,640 2,110,454
---------------------------------------------------------------------
Advances receivable 2,943,520 9,329,366
--------- ---------
---------------------------------------------------------------------
4,929,160 11,439,820
---------------------------------------------------------------------
Less: Allowance for credit losses (438,263) (4,316,399)
--------- -----------
---------------------------------------------------------------------
Total receivables - net 4,490,897 7,123,421
--------- ---------
---------------------------------------------------------------------
---------------------------------------------------------------------
Securities Held for Sale 380,000 -
---------------------------------------------------------------------
Furniture, fixtures and equipment, net 116,291 151,375
---------------------------------------------------------------------
Other assets 43,175 43,643
------ ------
---------------------------------------------------------------------
TOTAL ASSETS $6,105,986 $7,672,401
========== ==========
---------------------------------------------------------------------
---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
---------------------------------------------------------------------
Accounts payable and accrued expenses $740,471 $1,009,921
---------------------------------------------------------------------
Notes payable - 1,366,051
---------------------------------------------------------------------
Convertible subordinated notes 4,954,000 4,954,000
--------- ---------
---------------------------------------------------------------------
TOTAL LIABILITIES 5,694,471 7,329,972
--------- ---------
---------------------------------------------------------------------
---------------------------------------------------------------------
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 3,105,828; outstanding 2,324,616
---------------------------------------------------------------------
at December 31,1999, 2,499,616 at June 30,2000.
---------------------------------------------------------------------
exclusive of shares held in treasury 40,000 40,000
---------------------------------------------------------------------
Additional paid-in-capital 18,963,432 18,874,182
---------------------------------------------------------------------
Treasury stock, 781,212 shares (4,961,812) (4,967,472)
---------------------------------------------------------------------
Accumulated deficit (14,006,105) (13,604,281)
---------------------------------------------------------------------
Accumulated other comprehensive income:
---------------------------------------------------------------------
unrealized gains on investment securities 376,000 -
------- -
---------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 411,515 342,429
------- -------
---------------------------------------------------------------------
---------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $6,105,986 $7,672,401
========== ==========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-26
<PAGE>
<TABLE>
<CAPTION>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
-------------------------------------------- ------------------------------------- ---------------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------- ----------------- ------------------- --------------------- -----------------------
2000 1999 2000 1999
---- ---- ---- ----
--------------------------------------------
<S> <C> <C> <C> <C>
REVENUE
--------------------------------------------
Earned discounts and interest $85,038 $598,262 $216,928 $2,212,733
--------------------------------------------
Fees and other revenue 118,783 142,872 190,546 324,446
------- ------- ------- -------
--------------------------------------------
--------------------------------------------
TOTAL REVENUE 203,821 741,134 407,474 2,537,179
------- ------- ------- ---------
--------------------------------------------
--------------------------------------------
EXPENSES
--------------------------------------------
Compensation and fringe benefits 116,254 653,683 285,242 1,263,696
--------------------------------------------
General and administrative 324,969 1,349,357 542,831 1,754,650
--------------------------------------------
Interest expense 205,369 335,390 346,714 710,964
--------------------------------------------
Provision for credit losses (recovery) (365,489) 8,376,057 (365,489) 8,376,057
--------- --------- ---------- ---------
--------------------------------------------
--------------------------------------------
TOTAL EXPENSES 281,103 10,714,487 809,298 12,105,367
------- ---------- ------- ----------
--------------------------------------------
--------------------------------------------
LOSS BEFORE INCOME TAX
EXPENSE (77,282) (9,973,353) (401,824) (9,568,188)
--------------------------------------------
--------------------------------------------
INCOME TAX EXPENSE 3,871,938 - 4,021,849
--------- --------- -------- --------
--------------------------------------------
--------------------------------------------
NET LOSS $(77,282) $(13,845,291) $(401,824) $(13,590,037)
========= ============= ========== =============
--------------------------------------------
--------------------------------------------
NET LOSS PER COMMON SHARE
--------------------------------------------
Basic and Diluted $(.03) $(5.96) $(.17) $(5.85)
====== ======= ====== =======
--------------------------------------------
--------------------------------------------
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING
--------------------------------------------
Basic and Diluted 2,359,282 2,324,438 2,354,862 2,324,289
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-27
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1999 AND THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
-------------------------- ----------- ----------------- ---------------- ------------------- ----------------- ---------------
Common Additional Paid Treasury Accumulated Other Retained Earnings Total
Stock in Capital Stock Comprehensive (Deficit)
Income
-------------------------- ----------- ----------------- ---------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance - January 1,
1999 $40,000 $18,874,182 $4,986,520 - $3,646,809 $17,574,471
Amortization of
treasury stock costs
- - 15,050 - - 15,050
Conversion of
convertible
subordinated notes to
533 shares of common
stock - - 3,998 - - 3,998
Net (Loss) (17,251,090) (17,251,090)
----- -------- --------- -------- ----------- -----------
Balance - December 31,
1999
$40,000 $18,874,182 $(4,967,472) $(13,604,281) $ 342,429
======= =========== ============ ========= ============= =========
Amortization of
treasury stock
acquisition costs
(unaudited) - 5,660 - 5,660
Unrealized gains on
investment securities
(unaudited) - 376,000 376,000
Issue of 175,000 shares
to non-employee
directors (unaudited)
89,250 - 89,250
Net (Loss) (unaudited)
- (401,824) (401,824)
Balance - June 30, 2000
(unaudited)
$40,000 $18,963,432 $(4,961,812) 376,000 $(14,006,105) $411,515
======= =========== ============ ======= ============= ========
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-28
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 2000 June 30, 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (Loss) $(401,824) $(13,590,037)
Adjustments to reconcile net (loss)
to cash provided (used) by operating activities:
Depreciation - net 32,855 33,039
Provision for credit losses (365,489) 8,376,057
Changes in operating assets and liabilities:
Other receivables 468 595,281
Accounts payable and accrued expenses (269,450) (419,244)
Income taxes receivable and deferred income taxes - 4,783,778
---------------- --------------
NET CASH (USED) BY OPERATING ACTIVITIES (1,003,440) (221,126)
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of receivables and advances (886,000) (88,329,796)
Collection of purchased receivables
and advances receivable 3,959,994 97,773,630
(Decrease) in credit balances of factoring clients - (3,814,377)
Sale (Purchase) of furniture, fixtures and equipment 11,498 (166,719)
---------------- --------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 3,085,492 5,462,738
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from lines of credit - 54,129,626
Principal payments on lines of credit (1,366,051) (61,230,898)
Treasury stock acquisition costs 5,660 8,147
---------------- --------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,360,391) (7,093,125)
---------------- --------------
NET INCREASE (DECREASE) IN CASH 721,661 (1,851,513)
CASH, Beginning of period 353,962 2,420,644
---------------- -------------
CASH, End of period $1,075,623 $569,131
================ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $67,250 $375,285
================ =============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES
Conversion of factoring clients to ABL loans $ - $9,309,511
================ =============
Issuance of common stock in exchange
for convertible subordinated notes $ - $3,998
================ ============
Issuance of common stock as directors' fees $89,250 $ -
</TABLE>
See Notes to Consolidated Condensed Financial Statements
F-29
<PAGE>
ALLSTATE FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. General. The consolidated financial statements of Allstate Financial
Corporation and subsidiaries (the "Company") included herein are unaudited for
the periods ended June 30, 2000 and 1999; however, they reflect all adjustments
which, in the opinion of management, are necessary to present fairly the results
for the periods presented. The December 31, 1999 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.
Allstate Financial Corporation 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, 2000 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, 1999.
2. Lines of Credit. In January 2000, the Company repaid its bank lenders in
full. Previously the Company obtained a $1,000,000 supplemental working capital
loan from Value Partners, a major shareholder. On April 5, 2000 the Company
repaid the working capital loan in full. The Company does not have any outside
source of liquidity to fund new business, and is relying on collections of
existing accounts and impaired assets to fund its current clients.
3. Certain Contingencies. The Company is a counterclaim defendant in
Allstate Financial Corporation v. A.G. Construction, Inc. (n/k/a A.G. Plumbing,
Inc.), American General Construction Corp., Adam Guziczek and Cheryl Lee
Guziczek ("AG") pending in the United States Bankruptcy Court for the Southern
District of New York. In a 1993 action the Company undertook an attempt to
recover against AG. An answer and counterclaim was filed against the Company.
The counterclaim asserted claims for usury, diversion of proceeds of public
improvement contracts, and overpayments to the Company by AG in excess of
$2,000,000 (the "Counterclaims"). No specific damage claims amount was set forth
in the Counterclaims. No action was ever taken by the trustee in the AG
bankruptcy proceedings to pursue the Counterclaims. On June 2, 1997, the trustee
for the AG bankruptcy estate filed a motion to abandon these claims against the
Company. On October 7, 1997, New York Surety Company ( the "Surety"), which
provided the payment and performance bond to AG in connection with the
construction jobs performed for the City of New York, filed pleadings objecting
to the abandonment of such claims against the Company, asserting that it was
subrogated to AG's claims. The proposed complaint adopted the Counterclaims and
sought an accounting. The Surety asserted damages of approximately $4,000,000.
On April 9, 1998, the bankruptcy court remanded the matter to state court. On
June 24, 1998, the Surety was formally declared insolvent by the Superintendent
of Insurance of the State of New York (the "Superintendent") and as such the
Superintendent was judicially appointed as rehabilitator of the Surety to
conduct its business. At that time, it was uncertain whether the Superintendent
would continue to pursue the litigation against the Company.
In August 2000, Allstate entered into a settlement of the A.G. matter . In
exchange for a payment of $105,000, the successors to the party that filed the
counterclaim agreed to drop their objection to the trustee's abandonment of the
claim against Allstate.
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 other proceedings will have a material adverse effect on the
Company.
The Company previously occupied approximately 8,000 square feet of space in
an office building in Arlington, Virginia as its principal location. The
Company's lease on this property would have expired in December 2001. The cost
of renting this office space was approximately $178,000 in 1999. At the end of
May, 2000 the Company was released from its obligations for the remainder of the
lease term. The Company sublets approximately 1,500 square feet of office space
in a commercial building located in McLean, Virginia. The cost of renting at the
new location will be approximately $30,000 during 2000. The Company subleases
from, and shares certain of the expenses of occupancy with, a separate financial
services firm that is majority owned by Value Partners, the Company's majority
shareholder.
F-30
<PAGE>
4. Credit Concentrations. For the three months ended June 30, 2000,
interest and fees from two clients each accounted for over 10% of the Company's
total earned revenue, representing 30.6% of the Company's total revenue, as
compared to 57.0% of revenue from the three largest clients, each of which
accounted for over 10% of the total, in the three months ended March 31, 2000.
At June 30, 2000, one client accounted for more than 10% of the Company's
total receivables. The loan, which represented 17.3% of total receivables, is a
participation in a loan which was originated by and is serviced by a separate
financial services firm that is majority owned by Value Partners, the Company's
majority shareholder. At March 31, 2000, one client, not including non-
performing clients whose allocated reserves reduced their net outstandings to
under 10% of receivables, accounted for more than 10% of the Company's total
receivables, with a total of 15.4%.
On April 5, 2000, the Company and a client entered into a settlement
agreement, in which the Company agreed to accept $1,200,000 in cash in
settlement of a balance on an impaired loan of $4,735,684. As a result, the
Company charged off $3,535,684 of the balance against a previously established
reserve. Simultaneously the Company also exercised, for a total consideration of
$4,000, a warrant to purchase four million shares of common stock in the
Client's parent corporation. These shares are held for sale with a market value
on June 30, 2000 of $380,000. The common stock is subject to restrictions on
sale or transfer according to Rule 144 of the Securities Act of 1933.
5. Stock Options. The Company maintains three stock option plans: (1) an
Incentive Stock Option Plan ("Qualified Plan"), (2) a Non-Qualified Stock Option
Plan ("Non-Qualified Plan"), and (3) its 2000 Stock Option Plan ("2000 Plan"),
which allows for grants of both qualified and non-qualified options. No
additional grants can be made under the Qualified or Non-Qualified Plans as of
February 7, 2000. The 2000 Plan was approved by the board of directors of the
Company on June 13, 2000, and is subject to the approval of the Company's
shareholders. Subsequently, on August 8, 2000, the plan was approved by the
shareholders. The Company continues to account for stock options under APB 25
and provides the additional disclosures as required by SFAS No. 123.
Qualified Plan - The Company had reserved 275,000 shares of common stock
for issuance under its Qualified Plan. Options to purchase common stock
were granted at a price equal to the fair market value of the stock on the
date of grant or 110% of fair market value of the stock at the date of
grant for stockholders owning 10% or more of the combined voting stock of
the Company.
Non-Qualified Plan - The Company had reserved 150,000 shares of common
stock for issuance under its Non-Qualified Plan. Options to purchase shares
of common stock were granted at a price equal to the fair value of the
stock at the date of grant, except in the case of options granted to
directors, in which case the minimum price was the greater of $7.00 or 110%
of fair value at the time of grant.
2000 Plan - The Company reserved the lesser of 450,000 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 199,969. No
options have been granted under the 2000 Plan.
The table below summarizes the option activity for all three plans for the
three months ended June 30, 2000.
Three Months Ended
June 30, 2000
Outstanding April 1 155,400
Granted -
Exercised -
Forfeited or expired -
Outstanding 155,400
=======
Exercisable 155,300
=======
6. Restricted Stock Plan. The Company's board of directors approved the
Company's 2000 Restricted Stock Plan for Non-Employee Directors on June 13,
2000. This plan reserved 175,000 shares of common stock for issuance to
non-employee directors for past services. All of the shares were awarded on June
13, 2000, subject to the approval of the plan by the shareholders. The closing
price of the Company's common stock as traded on the Nasdaq OTC Market on June
13 was $.51. Subsequently, on August 8, 2000, this plan was approved by the
shareholders.
F-31
<PAGE>
7. Income taxes. Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment. The Company has reduced the deferred tax assets by utilizing
a valuation allowance, because the deferred tax assets more than likely will not
be realized. The remaining tax assets equal the deferred tax liabilities
resulting from the unrealized gain on investment securities.
8. Uncertainties and Subsequent Events. Allstate continued to incur net
losses in the quarter ended June 30, 2000, although it made further cuts in
expenses and overhead. Subsequent to June 30, 2000, Allstate realized
collections of $1.2 million on two non-accrual accounts and collected life
insurance proceeds on two Lifetime Options' insureds for a total of $266,000. In
combination with cash on hand at June 30, 2000, Allstate believes it has the
financial resources to complete the merger and to support its operations for the
remainder of the fiscal year. Although the results for the September 30, 2000
quarter have not yet been reported, Allstate operated at a profit in the three
months ended September 30, 2000, due primarily to a combination of decreased
expenses and recoveries of amounts previously charged-off.
The Company continued to be in default on its Subordinated Notes Due
September 2003 ("Allstate Notes") until the Notes Conversion (as defined below)
on October 26, 2000.
At the reconvened annual meeting of the shareholders of Allstate held on
August 29, 2000, the Allstate shareholders approved the reincorporation of
Allstate as a Delaware corporation, including the following provisions in
Allstate's Delaware certificate of incorporation and bylaws:
o A limitation on transfers of common stock by existing or potential
holders of over 4.9% of outstanding shares, thereby helping to preserve
the Company's net operating loss carryforwards ("NOL's") for future
use.
o An increase in the number of authorized shares from 10,000,000 to
20,000,000 to facilitate the conversion and enable the Company to
consider possible acquisitions of, or business combinations with, firms
in financial services, involving the issuance of new shares.
The reincorporation into Delaware was completed on September 1, 2000.
The committee of outside directors appointed by the board of directors
negotiated the conversion of the Allstate Notes held by Value Partners, Ltd.
(plus accrued and unpaid interest thereon at 12.5% through the date of the
exchange) into common stock of the Company at a price of $.95 per share, which
is an important element of the Plan. The Company offered the same terms of
exchange to the remaining holders of the Allstate Notes, a majority of whom also
agreed to the terms of the exchange. On October 5, 2000, Allstate filed a plan
of arrangement with the Delaware Court of Chancery, setting forth the proposed
conversion of the Allstate Notes, together with accrued but unpaid interest,
into common stock of Allstate at a price of $0.95 per share of common stock (the
"Notes Conversion"). The Delaware court approved the Notes Conversion on October
6, 2000, and minor changes were made to the approval order on October 11, 2000.
On October 26, 2000, Allstate Notes with an aggregate principal amount of $
$ 4,331,000, together with $ 578,970 of accrued but unpaid interest at a
negotiated default rate of 12.5% simple interest, were converted into 5,168,388
shares of newly issued Allstate common stock. The remaining $ 266,000 of
Allstate Notes were brought current. Value Partners held Allstate Notes with a
principal balance of $4,197,000 and received 5,008,481 shares of Allstate common
stock as a result of the Notes Conversion. Following the Notes Conversion, Value
Partners held a total of 5,676,849 shares of Allstate common stock, representing
74.0% of the currently outstanding shares. Value Partners is now deemed to be in
control of Allstate.
The conversion of the New Notes to equity will reduce the Company's
interest costs and position it to more effectively obtain new senior funding to
expand its loan portfolio or to make acquisitions of other financial services
businesses.
F-32
<PAGE>
Effective September 18, 2000 and September 25, 2000, respectively, Charles
G. Johnson resigned as the President and as a director of Allstate for personal
reasons. David W. Campbell, Allstate's Chairman of the Board, was appointed
interim President. In addition Timothy G. Ewing, who controls the general
partner of Value Partners, was appointed a director of Allstate effective
September 18, 2000.
On October 2, 2000 Allstate paid the Convertible Subordinated Notes Due
September 30, 2000 in full.
On October 25, 2000 Allstate and Harbourton entered into the merger
agreement.
9. Securities held for Sale. The Company's investments in marketable equity
securities are classified as available-for-sale. Investments classified as
available-for-sale are measured at market value and net unrealized gains and
losses are recorded as a component of stockholders' equity until realized.
10. Comprehensive Income. SFAS No. 130, Reporting Comprehensive Income,
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains, and losses) in a full set of
general-purpose financial statements. This statement requires that all items
that are recognized under accounting standards as components of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. The following table discloses the
components of the Company's comprehensive income:
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net (loss) $(77,282) $(13,845,291) $(401,824) $(13,590,037)
Other comprehensive income:
Unrealized gains
on investment securities 376,000 376,000
------- ------------- -------- ------------
Comprehensive income $278,718 $(13,845,291) $(25,824) $(13,590,037)
======== ============= ========= =============
</TABLE>
F-33
<PAGE>
Report of Independent Public Accountants
To the Board of Directors of Harbourton Financial Corp.:
We have audited the accompanying statements of financial condition of Harbourton
Financial Corp. (the "Company") as of December 31, 1999 and 1998, and the
related statements of operations, changes in stockholders' equity and cash flows
for the year ended December 31, 1999, and for the period August 28, 1998
(Inception), to December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
1999 and 1998, and the results of its operations and its cash flows for the year
ended December 31, 1999, and for the period August 28, 1998 (Inception), to
December 31, 1998, in conformity with accounting principles generally accepted
in the United States.
Arthur Anderson LLP
Vienna, Virginia
February 15, 2000
F-34
<PAGE>
Harbourton Financial Corp.
Statements of Financial Condition
As of December 31, 1999 and 1998
<TABLE>
<CAPTION>
Assets
1999 1998
<S> <C> <C>
Cash and cash equivalents $ 971,317 $1,871,130
Restricted cash 45,341 10,750
Loans held for investment, net of deferred income of
$548,530 and $292,099, respectively 7,183,291 2,249,969
Interest receivable 118,261 37,177
Other receivables 76,298 99,125
Property and equipment, net of accumulated depreciation
of $18,661 and $32,060, respectively 19,243 19,784
Income taxes receivable 32,267 --
Total assets $8,446,018 $4,287,935
Liabilities and Stockholders' Equity
Liabilities:
Accrued liabilities and accounts payable $ 209,039 $ 58,157
Income taxes payable -- 77,733
Total liabilities 209,039 135,890
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $.01 par value, 1,000,000 shares
authorized, 745,428 and 405,762 shares issued and
outstanding, respectively 7,454 4,057
Additional paid-in capital 7,675,546 3,995,943
Retained earnings 553,979 152,045
Total stockholders' equity 8,236,979 4,152,045
Total liabilities and stockholders' equity $8,446,018 $4,287,935
</TABLE>
F-35
<PAGE>
Harbourton Financial Corp.
Statements of Operations
For the Year Ended December 31, 1999, and
For the Period August 28, 1998 (Inception), to December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Revenues:
Loan income $1,331,992 $463,711
Other income 85,358 11,971
Total revenues 1,417,350 475,682
Expenses:
Salaries and benefits 452,648 117,781
Depreciation and amortization 13,330 5,345
General and administrative 297,765 122,778
Total expenses 763,743 245,904
Net income before provision for income taxes 653,607 229,778
Provision for income taxes 251,673 77,733
Net income $ 401,934 $152,045
</TABLE>
F-36
<PAGE>
Harbourton Financial Corp.
Statements of Changes in Stockholders' Equity
For the Year Ended December 31, 1999, and
For the Period August 28, 1998 (Inception), to December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Additional
Common Stock Paid-In Capital Retained
Earnings Total
Balance, August 28, 1998
(Inception) $ $ $
$ -- -- -- --
Issuance of shares 4,057 3,995,943 -- 4,000,000
Net income -- -- 152,045 152,045
Balance, December 31, 1998 4,057 3,995,943 152,045 4,152,045
Issuance of shares 3,397 3,679,603 -- 3,683,000
Net income -- -- 401,934 401,934
Balance, December 31, 1999 $7,454 $7,675,546 $553,979 $8,236,979
</TABLE>
F-37
<PAGE>
Harbourton Financial Corp.
Statements of Cash Flows
For the Year Ended December 31, 1999, and
For the Period August 28, 1998 (Inception), to December 31, 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Cash flows from operating activities:
Net income $ 401,934 $ 152,045
Adjustments to reconcile net income to net cash flows
provided by operating activities-
Depreciation and amortization 13,330 5,345
Changes in operating assets and liabilities:
Interest receivable (81,084) (2,489)
Other receivables 22,827 (75,413)
Accrued liabilities and accounts payable 150,882 23,705
Income taxes, net (110,000) 77,733
Net cash provided by operating activities 397,889 180,926
Cash flows from investing activities:
Increase in loans held for investment, net (4,933,322) (485,267)
Purchase of property and equipment, net (12,789) (11,201)
Payment for purchase of assets of Harbourton
Residential Capital Corporation, net of cash acquired -- (1,802,578)
Net cash used in investing activities (4,946,111) (2,299,046)
Cash flows from financing activities:
Proceeds from issuance of shares 3,683,000 4,000,000
Net cash provided by financing activities 3,683,000 4,000,000
Net (decrease) increase in cash and cash equivalents (865,222) 1,881,880
Cash and cash equivalents, beginning of period 1,881,880 --
Cash and cash equivalents, end of period $1,016,658 $1,881,880
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 361,673 $ --
</TABLE>
F-38
<PAGE>
Harbourton Financial Corp.
Notes to Financial Statements
For the Year Ended December 31, 1999, and
For the Period August 28, 1998 (Inception), to December 31, 1998
1. Summary of Significant Accounting Policies:
General
Harbourton Financial Corp. (the "Company") incorporated and began operations on
August 28, 1998. The Company's operations began with the acquisition of the
assets and liabilities of Harbourton Residential Capital Corporation ("HRCC") on
August 28, 1998 (see Note 2).
The Company provides a broad range of services to the residential building
community. Its primary business is providing development and construction
financing to building companies in the Mid-Atlantic region in Maryland,
Virginia, North Carolina and the Southeast region in Florida. The Company
operates as a standalone entity with full capabilities of administering both
debt and equity investments in real estate development and construction. The
accounting and reporting policies of the Company conform to generally accepted
accounting principles ("GAAP") and prevailing practices within the mortgage
banking industry.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect the reported amount of
assets and liabilities, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Loans Held for Investment
Loans held for investment consist of the retained interest in loans originated
by the Company, net of deferred income.
Loan Income
Loan fees and certain direct loan origination costs related to retained
interests are deferred and recognized over the life of the loan on a
straight-line basis. Loan fees received and certain direct loan origination
costs allocated to the participation interest sold are recognized as advances
are made and funded by the participants. The Company receives two forms of
interest income. The current portion is accrued into income monthly based on the
outstanding amount of the investment in the loan at a market rate of interest.
In addition, on certain loans, the Company is entitled to an additional
preferred return based on the outstanding amount of the investment in the loan
times the rate of preferred return. The preferred return is recognized in income
as the borrower conveys title to third-party purchasers. At December 31, 1999,
the Company had lending arrangements with the following returns:
Current portion 10% to 12%
Deferred portion 3% to 13%
In certain lending arrangements, the Company is entitled to a percentage share
of underlying project profit in addition to loan fees and interest. The Company
recognizes this income as the borrower conveys title to third-party purchasers.
Property and Equipment
Property and equipment includes furniture, fixtures, and equipment recorded at
cost.
F-39
<PAGE>
Major additions are capitalized while routine replacements, maintenance and
repairs are charged to expense. Depreciation is computed using the straight-line
method over estimated useful lives ranging from 3 to 5 years. The cost and
accumulated depreciation for property and equipment retired, sold, or otherwise
disposed of are removed from the accounts, and any resulting gains or losses are
reflected in income.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
Under the asset and liability method of SFAS No. 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled.
Statements of Cash Flow
For purposes of the Statement of Cash Flows, the Company considers cash and
overnight investments with original maturities of 90 days or less as cash and
cash equivalents.
Reclassification
Certain 1998 amounts have been reclassified to conform with the 1999 financial
statement presentation.
2. Loans Held for Investment:
The Company's main line of business is originating acquisition, development and
construction loans and, in certain instances, selling a participation interest
(typically between 80 percent and 95 percent) in those loans. The participant is
required to fund advances on these loans based upon their participation interest
and the Company funds the remainder. The interest retained by the Company is
subordinate to that of the participant such that the Company assumes the risk
for any losses up to the amount of retained interest in the loan. Currently, the
Company has participation agreements with three entities. Pursuant to the
current participation arrangements, the Company passes through interest to the
participants based on their participation interest amounts.
<TABLE>
<CAPTION>
At December 31, 1999 and 1998, loans held for investment, net is comprised of the following:
<S> <C> <C>
1999 1998
Loans receivable - gross $19,629,239 $14,892,879
Portion sold to participants (11,897,418) (12,350,811)
Deferred loan fees (326,067) (292,099)
Deferred interest income (222,463) --
Loans held for investment, net $ 7,183,291 $ 2,249,969
</TABLE>
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." The statement significantly changed the
accounting treatment for transfers of financial assets requiring financial
assets to be accounted for on a financial-component basis. After a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
The transferor has surrendered control over transferred assets if and only if
the transferred assets have been isolated from the transferor, the transferee
obtains the right to pledge or exchange the transferred assets, and the
transferor does not maintain effective control over the transferred assets.
F-40
<PAGE>
3. Commitments and Contingencies:
The Company leases office space and equipment under noncancelable operating
leases. Future minimum rental commitments under existing operating leases having
an initial or remaining noncancelable lease terms in excess of one year at
December 31, 1999, are as follows:
Year Ended
December 31
2000 $109,449
2001 113,268
2002 116,621
2003 48,137
Total
Rent expense totaled $59,947 for 1999 and $12,914 for the period August 28, 1998
(Inception), to December 31, 1998. The Company originates construction and land
development loans primarily in its market area of the Mid-Atlantic and
Southeastern states including Maryland, Virginia, District of Columbia,
Delaware, Pennsylvania, North Carolina and Florida. These loans are
collateralized by deeds of trust on the underlying real property. The Company
uses standard underwriting practices, which are generally accepted in the
mortgage banking industry. These underwriting practices are designed to meet the
requirements of the various mortgage agencies and attract the best investment
opportunities.
The Company also sells participation interests in certain of its loans as
discussed in Note 2 above. The Company is exposed to credit risk under these
participation agreements to the extent that the participant fails to perform
under the participation agreement. Currently, the Company has three
participants, all of which meet the credit requirements of the Company. Any
future participants will be reviewed closely by the Company to ensure they meet
credit requirements.
The Company is required to fund advances under its loan agreements. At December
31, 1999, the Company is committed to fund advances up to a maximum amount of
$33,164,224 under all loan agreements for the life of the agreements.
Participation interests in these commitments totaled $22,997,000 at December 31,
1999.
The aggregate balance of custodial escrow funds maintained in connection
with the loans serviced as of December 31, 1999 and 1998, was $0 and $90,000,
respectively. These balances are not included in the accompanying statement of
financial condition. However, the Company receives income reflected as other
income on the accompanying statement of operations. 4. Estimated Fair Value of
Financial Instruments:
The following estimated fair values of the Company's financial instruments as of
December 31, 1999 and 1998, are presented in accordance with generally accepted
accounting principles, which define fair value as the amount at which a
financial instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. These estimated fair values,
however, may not represent the liquidation value or the market value of the
Company.
1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and cash equivalents $1,016,658 $1,016,658 $1,881,880 $1,881,880
Loans held for investment,
net 7,183,291 7,183,291 2,249,969 2,249,969
F-41
<PAGE>
The following methods and assumptions were used to estimate the fair values at
December 31, 1999 and 1998:
Cash and Cash Equivalents
Carrying amount approximates fair value.
Loans held for investment, net
Carrying amount approximates fair value as all loans are at rates that
approximate current lending rates.
5. Income Taxes:
The provision for income taxes for the year ended December 31, 1999 and for the
period August 28, 1998 (Inception), to December 31, 1998, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C> <C> <C> <C> <C>
Current Deferred Total Current Deferred Total
Federal $149,669 $62,194 $211,863 $129,147 $(65,335) $63,812
State 28,835 10,975 39,810 25,451 (11,530) 13,921
$178,504 $73,169 $251,673 $154,598 $(76,865) $77,733
</TABLE>
A reconciliation of the statutory Federal income tax rate to the Company's
effective income tax rate for the year ended December 31, 1999, and for the
period August 28, 1998 (Inception), to December 31, 1998 is as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Statutory Federal income tax rate 32.4% 27.8%
State taxes, net of federal benefit 5.2% 5.1%
Disallowed meal and entertainment expenses .9% .9%
Effective income tax rate 38.5% 33.8%
</TABLE>
Deferred income taxes result from temporary differences in the recognition of
income and expense for tax versus financial reporting purposes. The sources of
these temporary differences and the related tax effects at December 31, 1999 and
1998 are as follows:
1999 1998
Deferred tax assets:
Loan fees $ -- $70,972
Organizational costs 3,516 5,893
$3,516 $76,865
F-42
<PAGE>
Harbourton Financial Corp.
Statements of Financial Condition
As of June 30, 2000 and 1999
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
2000 1999
Cash and cash equivalents $ 389,274 $390,406
Restricted cash 7,320 --
Loans held for investment, net of deferred income of $684,445 and
$437,048, respectively 9,686,548 4,915,479
Interest receivable 127,130 63,541
Other receivables 190,071 9,845
Property and equipment, net of accumulated depreciation of $24,707 and
$12,640, respectively 14,264 23,675
Income taxes receivable -- 26,692
Total assets $10,414,607 $5,429,638
Liabilities and Stockholders' Equity
Liabilities:
Loan Payable $1,035,000 $ --
Accrued liabilities and accounts payable 468,742 92,873
Income taxes payable 47,156 --
Total liabilities 1,550,898 92,873
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares authorized, no shares
issued or outstanding -- --
Common stock, $.01 par value, 1,000,000 shares authorized, 778,582 and
450,000 shares issued and outstanding, respectively 7,785 4,000
Additional paid-in capital 8,045,214 4,986,000
Retained earnings 810,710 346,765
Total stockholders' equity 8,863,709 5,336,765
Total liabilities and stockholders' equity $10,414,607 $5,429,638
</TABLE>
F-43
<PAGE>
Harbourton Financial Corp.
Statements of Operations
For the Periods ended June 30, 2000 and June 30, 1999
2000 1999
Revenues:
Loan income $1,092,514 $588,486
Other income 29,578
26,441
Total revenues 1,118,955 618,064
Expenses:
Salaries and benefits 271,963 162,506
Depreciation and amortization 6,997
6,496
General and administrative 424,468 134,697
Total expenses 702,927 304,200
Net income before provision for income taxes 416,028 313,864
Provision for income taxes 159,297 119,143
Net income $ 256,731 $194,721
F-44
<PAGE>
HARBOURTON FINANCIAL CORP.
Statements of Changes in Stockholders' Equity
For the Period Ended June 30, 2000, and for August 28, 1998 (Inception), to June
30, 2000
<TABLE>
<CAPTION>
Additional
Common Paid - In Retained
Stock Capital Earnings Total
----------- ------------ ------------- ---------
<S> <C> <C> <C> <C>
Balance, August 28, 1998
(Inception ) $ -- $ -- $ -- $ --
Issuance of Shares 4,057 3,995,943 -- 4,000,000
Net Income - - 152,045 152,045
-------- ---------- ------- -------
Balance, December 31, 1998
4,057 3,995,943 152,045 4,152,045
Issuance of Shares 3,396 3,679,603 -- 3,682,999
Net Income - - 401,934 401,934
-------- ---------- ------- -------
Balance, December 31, 1999
7,454 7,675,546 553,979 8,236,978
Issuance of Shares 332 339,668 -- 370,000
Net Income -- - 256,731 256,731
--------- ---------- ------- -------
Balance, June 30,2000
$7,786 $8,045,214 $810,000 $8,863,709
</TABLE>
F-45
<PAGE>
Harbourton Financial Corp.
Statement Of Cash Flows
For the Period ended June 30, 2000
Cash flows from operating activities: 6/30/00
-----------
Net Income ........................ $ 256,731
Adjustments to reconcile net income to net cash flows
Net cash flows-
Provided by operating activities -
Provided by operating activities-
Depreciation and Amortization .... 6,496
Changes in operating assets and liabilities
Interest receivable ............ (8,869)
Other receivables ............... (113,773)
Accrued liabilities and accounts payable 259,703
Income taxes, net ............... 79,422
----------
Net cash provided by operating activities 479,710
Cash flows from investing activities:
Increase in loans held for investment, net (2,503,256)
Purchase of property and equipment, net (1,517)
----------
Net cash used in investing activities (2,504,773)
Cash flows from financing activities:
Proceeds from issuance of shares 370,000
Proceeds from bank loan ......... 1,035,000
-----------
Net cash provided by financing activities 1,405,000
Net (decrease) increase in cash and cash equivalents (620,063)
Cash and cash equivalents, beginning of period 1,016,658
Cash and cash equivalents, end of period $ 396,595
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 79,875
===========
F-46
<PAGE>
Harbourton Financial
Statement Of Cash Flows
For the Period ended June 30, 1999
................................ 6/30/99
Cash flows from operating activities:
Net Income ........................ $ 194,721
Adjustments to reconcile net income to net cash flows
Net cash flows-
Provided by operating activities -
Provided by operating activities-
Depreciation and Amortization .... 6,997
Changes in operating assets and liabilities
Interest receivable ............ (26,364)
Other receivables ............... 89,280
Accrued liabilities and accounts payable 34,715
Income taxes, net ............... (104,425)
-----------
Net cash provided by operating activities 194,924
Cash flows from investing activities:
Increase in loans held for investment, net (2,665,510)
Purchase of property and equipment, net (10,888)
------------------------------------ -----------
Net cash used in investing activities (2,676,398)
Cash flows from financing activities:
Proceeds from issuance of shares 990,000
Proceeds from bank loan ......... 0
------------------------------------ -----------
Net cash provided by financing activities 990,000
1
Net (decrease) increase in cash and cash equivalents (1,491,474)
-----------
1
Cash and cash equivalents, beginning of period 1,881,880
-----------
Cash and cash equivalents, end of period $ 390,406
===========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 223,568
===========
F-47
<PAGE>
Harbourton Financial Corp.
Notes to Financial Statements
For the Six Months Ended June 30, 2000
1. General. The consolidated financial statements of Harbourton Financial
Corporation ("Harbourton") included herein are unaudited for the periods ended
June 30, 2000 and 1999; 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. Harbourton believes that the
disclosures are adequate to make the information presented not misleading. The
results of operations for the six months ended June 30, 2000 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 Harbourton's audited financial statements for the years ended
December 31, 1999 and 1998.
2. Line of Credit. On May 11, 2000, Harbourton obtained a senior secured
credit facility from a local FDIC insured financial institution, in the amount
of $2,000,000. The facility is a revolving line of credit, carries an interest
rate of the prime rate plus a premium, and has a term of one year. The lender
has been granted a security interest in two of Harbourton's loans having a
combined original principal indebtedness of $4,320,000, and a general assignment
of Harbourton's right to all collections from notes. The loan contains financial
covenants of the type generally found in this type of facility.
3. Merger Agreement. On October 25, 2000, Harbourton entered into a
definitive merger agreement with Allstate Financial Corporation, a company
controlled by Harbourton's majority shareholder. The agreement calls for
Allstate to issue 7,516,162 shares of common stock, plus make a cash payment of
approximately $1,900,000, to purchase all of the outstanding common stock of
Harbourton. The transaction is expected to close in the fourth quarter of 2000.
F-48
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of October 24, 2000, by
and between Harbourton Financial Corporation ("Harbourton") and Allstate
Financial Corporation ("Allstate").
WHEREAS, Harbourton and Allstate desire to combine their respective
companies through a merger so that the respective shareholders of Harbourton and
Allstate will have an equity ownership in the combined company;
WHEREAS, it is intended that to accomplish this result, Harbourton will
be merged with and into Allstate, with Allstate being the Surviving Corporation;
WHEREAS, it is intended that for federal income tax purposes the Merger
shall qualify as a reorganization within the meaning of Section 368 of the Code
and this Agreement shall constitute a plan of reorganization pursuant to Section
368 of the Code;
WHEREAS, concurrently with the execution and delivery of this
Agreement, and as a condition and inducement to the Parties' willingness to
enter into this Agreement, Harbourton and each of the directors of Allstate, and
Allstate and each of the directors of Harbourton, are entering into voting
agreements in the forms attached hereto as Exhibits A and B, respectively; and
WHEREAS, concurrently with the execution and delivery of this
Agreement, and as a condition and inducement to Allstate's willingness to enter
into this Agreement, each of the affiliates of Harbourton for purposes of Rule
145 of the Securities Act is entering into an affiliate agreement in the form
attached hereto as Exhibit C;
NOW, THEREFORE, in consideration of such inducements and of the mutual
promises and agreements contained herein, the Parties agree as follows:
ARTICLE 1. DEFINITIONS AND RULES OF INTERPRETATION
1.1. Definitions
The following meanings shall apply for purposes of this Agreement.
"Agreement" means this Agreement and Plan of Merger. "Allstate" means
Allstate Financial Corporation, a Delaware corporation.
"Allstate Dissenting Shares" means those shares of Allstate Common
Stock of which the holders thereof have exercised their Dissenters' Rights.
"Allstate Notes" means the 10% Convertible Subordinated Notes due
September 30, 2003 issued by Allstate. "Allstate Option Plans" means
the Allstate 2000 Stock Option Plan and all prior stock option plans.
"Alternative Proposal" means any bona fide written proposal, public
announcement or filing with the SEC or any other
Government Entity by any person other than a Party to engage in a merger,
consolidation, purchase or lease of substantially all assets, purchase of
securities representing more than 20% of the voting power, or any similar
transaction, involving a Party or any of its Subsidiaries.
"Board" means the Board of Directors of an entity, or any committee
duly authorized to act on behalf of the Board of Directors of such entity with
respect to the relevant matter.
"Cash Consideration" has the meaning set forth in Section 2.4(c)
hereof.
A-1
<PAGE>
"Cause" means termination because of the employee's personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties or willful
violation of any law, rule or regulation (other than traffic violations or
similar offenses).
"Certificate" means any certificate which prior to the Effective Time
represented shares of Harbourton Common Stock. "Certificate of Merger"
means the certificate of merger to be executed and filed by the Parties
with the Secretary of
State of the State of Delaware pursuant to the DGCL to make the Merger
effective. "Claim" has the meaning attributed to it in Section 6.9.
"Closing" means the closing of the transactions contemplated by this
Agreement. "Closing Date" means the date on which the Closing occurs.
"Code" means the Internal Revenue Code of 1986, as amended.
"Conversion Date" shall be the date selected by Allstate, which shall
occur by November 6, 2000 or by such later date as Allstate and the holders of
the Allstate Notes may mutually agree in writing.
"Common Stock" means the common stock of any entity which has only one
authorized class of common stock. "Delivered" means provided by a Party
or any of its Subsidiaries to the other Party. "DGCL" means the
Delaware General Corporation Law.
"Dissenters' Rights" means the appraisal rights that holders of
Harbourton Common Stock and Allstate Common Stock have as a result of the Merger
pursuant to Section 262 of the DGCL.
"Effective Time" means the time that the Merger becomes effective under
the DGCL.
"Employee Plans" means all stock option, restricted stock, employee
stock purchase and stock bonus plans, pension, profit- sharing and retirement
plans, deferred compensation, consultant, bonus and group insurance agreements
and all other incentive, health, welfare and benefit plans and arrangements
maintained for the benefit of any present or former directors or employees of a
Party or any of its Subsidiaries, whether written or oral.
"Encumbrance" means any lien, claim, charge, restriction, security
interest, rights of third parties, or encumbrance. "Environmental
Claim" means any written notice from any Governmental Entity or third
party alleging potential liability
(including potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on, or resulting from the
presence, or release into the environment, of any Materials of Environmental
Concern.
"Environmental Laws" means any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, judgment, decree, injunction or agreement with any Governmental
Entity relating to (i) the protection, preservation or restoration of the
environment (including air, water vapor, surface water, groundwater, drinking
water supply, surface soil, subsurface soil, plant and animal life or any other
natural resource), and/or (ii) the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production, release
or disposal of Materials of Environmental Concern. The term Environmental Law
includes (x) the Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 42 U.S.C. '9601, et seq; the Resource Conservation
and Recovery Act, as amended, 42 U.S.C. '6901, et seq; the Clean Air Act, as
amended, 42 U.S.C. '7401, et seq; the Federal Water Pollution Control Act, as
amended, 33 U.S.C. '1251, et seq; the Toxic Substances Control Act, as amended,
15 U.S.C. '9601, et seq; the Emergency Planning and Community Right to Know Act,
42 U.S.C. '1101, et seq; the Safe Drinking Water Act, 42 U.S.C. '300f, et seq;
and all comparable state and local laws, and (y) any common law (including
common law that may impose strict liability) that may impose liability or
obligations for injuries or damages due to, or threatened as a result of, the
presence of or exposure to any Materials of Environmental Concern.
A-2
<PAGE>
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended. "ERISA Affiliate" has the meaning set forth in Section
4.20(f). AERISA Affiliate Plan" has the meaning set forth in Section
4.20(f). "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Financial Statements" means both a Party's Annual Financial Statements
and its Interim Financial Statements.
(a) "Financial Reports" means consolidated balance sheets,
consolidated statements of income and statements of changes in shareholders'
equity and cash flows, including any related notes and schedules.
(b) "Annual Financial Statements" means all the Financial
Reports covered by a Party's most recent year-end audit report. (c)
"Interim Financial Statements" means the Financial Reports covering the
period from January 1, 2000 through the
latest available date and the corresponding period in 1999.
"GAAP" means generally accepted accounting principles applied
consistently with prior practices.
"Governmental Entity" means any federal or state court, administrative
agency or commission or other governmental authority or instrumentality.
"Harbourton" means Harbourton Financial Corporation, a Delaware
corporation. "Harbourton Options" means options to purchase shares of
Harbourton Common Stock.
"Harbourton-Owned Shares" means any shares of Harbourton's Common Stock
which are owned beneficially or of record by any Party or any Subsidiary of a
Party, other than shares held in a fiduciary capacity for the benefit of third
parties or as a result of debts previously contracted.
"Indemnified Liabilities" has the meaning attributed to it in Section
6.9. "Indemnified Parties " has the meaning attributed to it in Section
6.9.
"Insider Loans" means loans from a Party or any of its Subsidiaries to
any officer, director or employee of that Party or any of its Subsidiaries or
any associate or related interest of any such person.
"IRS" means the Internal Revenue Service or any successor thereto.
"Knowledge Qualification" means to the best knowledge, after reasonable
investigation, of the Party receiving the benefit of the qualification.
"Material Adverse Effect" means, with respect to a Party, any effect
that is material and adverse to the condition (financial or otherwise), results
of operations or business of that Party and its Subsidiaries taken as whole, or
that materially impairs the ability of that Party to consummate the Merger,
provided, however, that Material Adverse Effect shall not be deemed to include
the impact of (a) changes in laws and regulations or interpretations thereof
that are generally applicable to financial services companies, (b) changes in
GAAP that are generally applicable to financial services companies, (c) expenses
incurred in connection with this Agreement and the Merger, (d) actions or
omissions of a Party (or any of its Subsidiaries) taken with the prior informed
written consent of the other Party in contemplation of the Merger or (e) changes
attributable to or resulting from changes in general economic conditions
generally affecting financial services companies, including changes in the
prevailing level of interest rates.
"Materials of Environmental Concern" means pollutants, contaminants,
wastes, toxic substances, petroleum and petroleum products and any other
materials regulated under Environmental Laws.
"Merger" means the merger of Harbourton into Allstate, with Allstate
being the Surviving Corporation.
"Merger Consideration" has the meaning set forth in Section 2.4(a)
hereof.
"Party" means Harbourton or Allstate, whichever is applicable. "PBGC"
means the Pension Benefit Guaranty Corporation, or any successor
thereto. "Pension Plan" has the meaning set forth in Section 4.20(c).
A-3
<PAGE>
"Previously Disclosed" means disclosed in a written disclosure schedule
delivered on or prior to the date hereof by the disclosing Party to the other
Party specifically referring to the appropriate section of this Agreement and
describing in reasonable detail the matters contained therein.
"Recapitalization Plan" means the plan of arrangement filed by Allstate
on October 5, 2000 with the Delaware Court of Chancery, setting forth the
proposal conversion of the Allstate Notes and the agreements between Allstate
and the holders of the Allstate Notes, which was approved by the court on
October 6, 2000, with the approval order amended on October 11, 2000.
"Restricted Stock" means the issued and outstanding shares of Common
Stock of a Party that are subject to restriction as to their transfer under the
Securities Act.
"Rights" means all warrants, options, rights, convertible securities
and other arrangements or commitments which obligate an entity to issue or
dispose of any of its capital stock or other ownership interests, excluding the
Allstate Notes.
"SEC" means the Securities and Exchange Commission. "Securities Act"
means the Securities Act of 1933, as amended.
"Securities Documents" means all reports, offering circulars, proxy
statements, registration statements and all similar documents filed, or required
to be filed, pursuant to the Securities Laws.
"Securities Laws" means the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of 1940,
as amended; the Trust Indenture Act of 1939, as amended; and the rules and
regulations of the SEC promulgated thereunder.
"Stock Consideration" has the meaning set forth in Section 2.4(b)
hereof.
"Subsidiary" when used with respect to any Party means any entity,
whether incorporated or unincorporated, which is consolidated with such party
for financial reporting purposes.
"Surviving Corporation" means Allstate after the Merger.
1.2 Rules of Interpretation
The captions contained in this Agreement are for reference purposes
only and are not part of this Agreement. All provisions of this Agreement are
subject to applicable law and to the other terms and conditions of this
Agreement. No provision of this Agreement shall be construed to require a party
or its affiliate to take any action which would violate applicable law.
The word "accurate" includes the concept "true and complete."
The word "agreement" includes every sort of contract, commitment, or
understanding, whether written or oral. The word "authority" includes
the concept "all requisite power and authority." The word "authorized"
includes the concepts "duly approved and authorized," "adopted,"
"advised," and any other similar
term which may be required by law.
All forms of the verb "include" includes the concept "without
limitation." With respect to any securities, "outstanding" means
"issued and outstanding."
ARTICLE 2. PLAN OF MERGER
2.1. The Merger
At the Effective Time, Harbourton shall be merged into Allstate. The
separate corporate existence of Harbourton shall cease, Allstate shall be the
Surviving Corporation, and Allstate shall continue its corporate existence under
the DGCL.
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2.2. Surviving Corporation
(a) The name of the Surviving Corporation shall be "Allstate Financial
Corporation." The headquarters of the Surviving Corporation shall be located at
8180 Greensboro Drive, Suite 525, McLean, Virginia 22102.
(b) The certificate of incorporation and the bylaws of the Surviving
Corporation as of the Effective Time shall be the certificate of incorporation
and bylaws of Allstate as currently in existence.
(c) The Board of Directors of the Surviving Corporation shall consist
of up to seven members, with up to three of the members to be designated by
Harbourton. Allstate shall designate a number of directors equal to the number
designated by Harbourton plus one additional director. All of the directors
shall serve until the next annual meeting of the Allstate shareholders.
(d) The executive officers of the Surviving Corporation as of the Effective
Time shall be the following persons:
David W. Campbell Chairman of the Board
J. Kenneth McLendon President
James Cluett Senior Vice President
C. Fred Jackson Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
2.3. Closing
Within 15 days following the satisfaction or waiver of all the
conditions set forth in Article VII (other than the delivery of certificates,
opinions and other instruments and documents to be furnished at Closing), the
Closing shall take place on a date and at a time and place mutually designated
in writing by the Parties. The Certificate of Merger shall be filed on the
Closing Date.
2.4. Treatment of Capital Stock
(a) Subject to the provisions of this Agreement, at the Effective Time,
automatically by virtue of the Merger and without any action on the part of any
person or entity:
(1) Each share of Allstate Common Stock shall continue unchanged as a share of
Surviving Corporation Common Stock, except for any Allstate Dissenting
Shares.
(2) All Harbourton-Owned Shares shall be canceled and retired without
consideration or conversion.
(3) Each other outstanding share of Harbourton Common Stock shall be converted
into the right to receive the per share Merger Consideration, which shall
equal the sum of the per share Stock Consideration and the per share Cash
Consideration as such terms are defined in Sections 2.4(b) and 2.4(c)
below.
(4) Holders of Allstate Dissenting Shares who exercise and perfect their
Dissenters' Rights shall receive a cash payment for such shares from the
Surviving Corporation. Any holders of Allstate Dissenting Shares shall be
entitled to payment for such shares only to the extent permitted by and in
accordance with the provisions of the DGCL; provided, however, that if, in
accordance with the DGCL, any holder of Dissenting Shares shall forfeit
such right to payment of the fair value of such shares then such shares
shall continue as Allstate Common Stock. Allstate Dissenting Shares shall
not, after the Effective Time, be entitled to vote for any purpose or
receive any dividends or other distributions and shall be entitled only to
such rights as are afforded in respect of dissenting shares pursuant to the
DGCL.
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(b)(1) The aggregate Stock Consideration shall be determined pursuant
to the following formula, subject to adjustment as set forth in Section
2.4(b)(2) below:
x = .495 (y/.505), where
x = the number of shares of Allstate Common Stock to be
issued to the Harbourton shareholders, rounded down
to the nearest number of whole shares, and
y = the total number of shares of Allstate Common Stock
issued and outstanding on the Closing Date following
completion of the Recapitalization Plan and
immediately prior to the Effective Time.
(2) The total number of shares of Allstate Common Stock represented by
x as calculated pursuant to Section 2.4(b)(1) above shall be reduced by the
number of Allstate Dissenting Shares as to which holders of Allstate Common
Stock have demanded (and have not withdrawn or lost) their appraisal rights
under Section 262 of the DGCL as of the Effective Time. If there are any
Allstate Dissenting Shares as of the Effective Time, then the stockholders of
Harbourton shall be entitled to receive an additional cash payment equal to (a)
the number of shares of Allstate Common Stock by which the Aggregate Stock
Consideration set forth in Section 2.4(b)(1) above is reduced, multiplied by (b)
$0.95.
(3) The per share Stock Consideration shall equal x/z, where x has the
meaning set forth in Section 2.4(b)(1) above (as may be adjusted pursuant to
Section 2.4(b)(2) above) and z equals the total number of shares of Harbourton
Common Stock issued and outstanding immediately prior to the Effective Time,
excluding any Harbourton-Owned Shares.
(c)(1) The aggregate Cash Consideration to be paid by Allstate to
Harbourton's share-holders shall equal (1) the aggregate GAAP book value of
Harbourton as of the last day of the calendar month immediately preceding the
Effective Time, minus (2) $0.95 times x, where x has the meaning set forth in
clause (b) above, subject to adjustment as set forth in Section 2.4(c)(2) below.
The per share Cash Consideration shall equal the aggregate Cash Consideration
divided by the total number of shares of Harbourton Common Stock issued and
outstanding immediately prior to the Effective Time, excluding any
Harbourton-Owned Shares.
(3) In the event that Allstate's participation interest in the Lakelands
project loan originated by Harbourton is not repaid in full prior to the
Effective Time, then Allstate may elect to reduce the aggregate Cash
Consideration to be paid to Value Partners pursuant to Section 2.4(c)(1) above
by the dollar amount of the participation interest and instead assign all of its
rights in such participation interest to Value Partners, provided that any
accrued but unpaid interest on the participation interest shall be paid by
Harbourton to Allstate at the Effective Time.
2.5 Shareholder Rights; Stock Transfers
At the Effective Time, holders of Certificates shall cease to be and
shall have no rights as shareholders of Harbourton. After the Effective Time,
there shall be no transfers on the stock transfer books of Harbourton. If
Certificates are presented for transfer after the Effective Time, they shall be
delivered to the Surviving Corporation or the Exchange Agent for cancellation
against delivery, without interest, of the Merger Consideration.
2.6 Fractional Shares
No fractional shares of Surviving Corporation Common Stock will be
issued in the Merger; instead, the Surviving Corporation shall pay to each
Certificate holder who would otherwise be entitled to a fractional share an
amount in cash (without interest) determined by multiplying such fraction by the
average of the high bid and low asked prices of Allstate Common Stock, as
reported by the Nasdaq OTC Bulletin Board for the last trading day immediately
preceding the Closing Date. No dividend or distribution with respect to Allstate
Common Stock shall be payable on or with respect to any fractional share
interest, and no such fractional share interest shall entitle the owner thereof
to vote or to any other rights of a shareholder. For the purposes of determining
any such fractional
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share interests, all shares of Surviving Corporation Common Stock to be
issued to a Harbourton shareholder in the Merger shall be combined so as to
calculate the maximum number of whole shares of Surviving Corporation Common
Stock issuable to such Harbourton shareholder.
2.7 Options
On or before the date hereof, each Harbourton Option shall be either
exercised or otherwise converted into shares of Harbourton Common Stock or
cancelled. Upon execution of this Agreement through the Effective Time, there
shall be no outstanding Harbourton Options.
2.8 Exchange Procedures
(a) As promptly as practicable after the Effective Time, the Surviving
Corporation shall send transmittal materials to each holder of record of
Certificates, which transmittal materials shall specify that risk of loss and
title to Certificates shall pass only upon acceptance of such Certificates by
the Surviving Corporation. Upon acceptance of a Certificate (or indemnity
reasonably satisfactory to the Surviving Corporation, if any of such
Certificates are lost, stolen or destroyed), the Surviving Corporation shall
deliver the Merger Consideration payable with respect to such shares. The
Surviving Corporation shall be entitled to conclusively rely upon the stock
transfer books of Harbourton to establish the identity of the Certificate
holders. In the event of a dispute with respect to ownership of any Certificate,
the Surviving Corporation shall be entitled to deposit any consideration in
respect thereof in escrow with an independent third party and thereafter be
relieved with respect to any claims thereto.
(c) Neither the Surviving Corporation nor any Party shall be liable to
any Certificate holder for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
(d) No holder of an unsurrendered Certificate shall be eligible to
receive dividends or distributions on Surviving Corporation Common Stock.
Upon exchange of a Certificate for Surviving Corporation Common Stock,
the holder thereof shall be entitled to receive any dividends or distributions,
without interest, declared and paid after the Effective Time.
2.9 Additional Actions
If, at any time after the Effective Time, the Surviving Corporation
shall consider that any further assignments or assurances in law or any other
acts are necessary or desirable to (i) vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or
under any of the rights, properties or assets of Harbourton acquired by the
Surviving Corporation in the Merger, or (ii) otherwise carry out the purposes of
this Agreement, Harbourton and its proper officers and directors shall be deemed
to have granted to the Surviving Corporation an irrevocable power of attorney to
execute and deliver all such proper deeds, assignments and assurances in law and
to do all acts necessary or proper to vest, perfect or confirm title to and
possession of such rights, properties or assets in the Surviving Corporation and
otherwise to carry out the purposes of this Agreement; and the proper officers
and directors of the Surviving Corporation are fully authorized in the name of
Harbourton or otherwise to take any and all such action.
ARTICLE 3. MUTUAL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE PARTIES
As of the date hereof, and except as Previously Disclosed, each Party
represents and warrants to the other Party as
follows:
3.1 Capital Structure
Its authorized and issued and outstanding capital stock is correctly
set forth in the table below. All issued and outstanding shares of its stock
have been duly authorized and validly issued, are fully paid and nonassessable,
and have not been issued in violation of the preemptive rights of any person.
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Stock ........ Authorized Issued Treasury Outstanding
----------------------- ---------- --------- -------- -----------
Harbourton Common Stock 1,000,000 787,612 0 787,612
Harbourton Preferred
Stock ................. 500,000 None None None
Allstate Common Stock 20,000,000 3,280,828 781,212 2,499,616
Allstate Preferred
Stock ................. 2,000,000 None None None
As of the date hereof, Allstate has $4,597,000 of Allstate Notes issued and
outstanding, plus accrued interest thereon. Certain holders of the Allstate
Notes have agreed to convert their notes into Allstate Common Stock on the
Conversion Date, and certain other holders have the option of either converting
their Allstate Notes on the Conversion Date or retaining their Allstate Notes.
Its outstanding Rights and shares of Restricted Stock are correctly set
forth in the table below. It has Previously Disclosed a schedule of its Rights
and Restricted Stock that includes the name of each holder of Rights and of
Restricted Stock, the number of Rights held by each holder, the number of shares
of Restricted Stock held by each holder thereof, the exercise price of each
option and the vesting date of each option.
Outstanding Rights Restricted Stock
Harbourton 0 0
Allstate 155,400 175,000
3.2 Subsidiaries
It has Previously Disclosed a list of all its Subsidiaries. All outstanding
shares or ownership interests of its Subsidiaries are validly issued, fully
paid, nonassessable and owned beneficially and of record by it or one of its
Subsidiaries free and clear of any Encumbrance. There are no Rights authorized,
issued or outstanding with respect to any of its Subsidiaries. 3.3 This
Agreement
(a) It has authority to enter into this Agreement, and any other
documents and instruments that are executed by it on the date hereof that relate
to the Merger and, subject to any necessary approvals from Governmental
Entities, its shareholders and as Previously Disclosed other third parties, to
consummate the Merger.
(b) Its Board has authorized the execution, delivery and performance of
this Agreement and any other documents and instruments that are executed by it
on the date hereof that relate to the Merger and the consummation of the Merger.
It has properly executed and delivered this Agreement and any other documents
and instruments that are executed by it on the date hereof that relate to the
Merger, which are its valid and binding obligations, and neither this Agreement
nor any of such other documents or instruments executed by it on the date hereof
that relate to the Merger violates its certificate of incorporation, bylaws, or
any law, judgment or order of any Governmental Entity applicable to it.
(c) No "business combination," "moratorium," "control share" or other
state anti-takeover statute or regulation prohibits, restricts or subjects to
any material condition its ability to perform its obligations under this
Agreement or any of the other documents or instruments that are executed by it
on the date hereof that relate to the Merger.
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3.4 Financial Statements; No Adverse Change
It has Delivered Financial Statements which have been prepared in
accordance with GAAP, fairly present its consolidated financial position, and
contain adequate reserves for losses. Since the period covered by its most
recent Interim Financial Statements Delivered prior to the date hereof, it and
its Subsidiaries have conducted their businesses only in the ordinary course and
it has not suffered a Material Adverse Effect. Except as disclosed in such
Interim Financial Statements, no circumstances exist that could reasonably be
expected to result in a Material Adverse Effect. It and its Subsidiaries have no
liabilities, known or unknown, asserted or unasserted, absolute, contingent or
otherwise, that are required under GAAP to be reflected in audited financial
statements or the notes thereto which are not reflected in its Annual Financial
Statements other than liabilities incurred in the ordinary course of business
since such date.
3.5 Interim Events
Since its most recent Interim Financial Statements it has not paid or
declared any dividend or made any other distribution to shareholders or taken
any action (other than loan originations) which if taken after the date hereof
would require the prior written consent of the other Party hereunder.
ARTICLE 4. MUTUAL REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE
PARTIES AND THEIR SUBSIDIARIES
As of the date hereof, except as Previously Disclosed and subject to the
standard set forth in Section 9.8, each Party as to itself and separately as to
each of its Subsidiaries, represents and warrants to the other Party as follows:
4.1 Organization and Good Standing
It is duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization and has authority to own, operate and
lease its assets and properties and to carry on its business. It is qualified to
do business and is in good standing in each jurisdiction where the character of
its assets or the nature of its business requires it to be qualified. It has
Delivered accurate copies of its certificate of incorporation and bylaws as
currently in effect. Its minute books contain complete and accurate records of
all meetings and other corporate actions taken by its shareholders and Board.
Its stock ledgers reflect all transactions in its capital stock, since its
inception.
4.2 Compliance with Law
(a) It is in compliance with all laws, regulations, ordinances, rules,
judgments, orders or decrees applicable to its operations and business.
(b) It has all permits, licenses, certificates of authority, orders and
approvals of, and has made all filings, applications and registrations with, all
Governmental Entities that are required in order to permit it to carry on its
business as it is presently being conducted.
(c) It has not received in the last three years any notification or
communication from any Governmental Entity or the staff thereof asserting
that it was not in compliance with any statutes, regulations or ordinances,
threatening to revoke any license, franchise, permit or authorization; or
threatening or contemplating any enforcement action.
4.3 Governmental Approvals
No approval of, or filing with, any Governmental Entity is required by
it for the consummation of the Merger except for:
(a) The filing of the Certificate of Merger.
(b) Any state securities filings.
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(c) Any anti-trust filings or approvals.
It is not aware of any reasons relating to it why such consents and
approvals should not be granted, free of any conditions or requirements which
would materially reduce the value of the Merger.
4.4 No Violations
Neither the execution of this Agreement nor the consummation of the Merger
will result in any violation, breach, termination, default or loss of a material
benefit under, or permit the acceleration of any obligation under, or require
the consent of a third party under, or result in the creation of any Encumbrance
on any of the property or assets under, any of its agreements or other
instruments.
4.5 No Broker's or Finder's Fees
No agent, broker, investment banker, person or firm acting on its behalf or
under its authority will be entitled to any fee or commission in connection with
the Merger.
4.6 Litigation and Other Proceedings
It is not a defendant in nor is any of its property subject to any pending
(or, subject to the Knowledge Qualification, threatened), claim, action, suit,
investigation or proceeding or subject to any judicial order, judgment or
decree.
4.7 Environmental Matters
(a) It is in compliance with all Environmental Laws. It has not
received any communication alleging that it is not in such compliance and,
subject to the Knowledge Qualification, there are no present circumstances that
would prevent or interfere with the continuation of such compliance.
(b) Subject to the Knowledge Qualification, none of the properties
owned, leased or operated by it has been or is in violation of or liable under
any Environmental Law.
(c) Subject to the Knowledge Qualification, there are no past or
present actions, activities, circumstances, conditions, events or incidents that
could reasonably form the basis of any Environmental Claim or other claim or
action or governmental investigation that could result in the imposition of any
liability against or obligation on the part of it or any person or entity whose
liability or obligation for any Environmental Claim it has or may have retained
or assumed either contractually or by operation of law.
(d) It has not conducted (i) any phase one environmental
investigations during the past three years (other than in connection with
loan originations or purchases) or (ii) any phase two environmental
investigations during the past three years, in each case, with respect to any
properties owned by it, leased by it or securing loans held by it.
4.8 Tax Matters
(a) It has timely filed all federal, state and local (and, if
applicable, foreign) income, franchise, excise, real property, personal property
and other tax returns required by applicable law to be filed by it (including
estimated tax returns, income tax returns, information returns and withholding
and employment tax returns) and has paid, or where payment is not required to
have been made, has set up an adequate reserve or accrual for the payment of,
all taxes in respect of the periods covered by such returns and, as of the
Effective Time, will have paid, or where payment is not required to have been
made will have set up an adequate reserve or accrual for the payment of, all
taxes for any subsequent periods ending on or prior to the Effective Time. It
will not have any liability for any such taxes in excess of the amounts so paid
or reserves or accruals so established.
(b) All federal, state and local (and, if applicable, foreign) income,
franchise, excise, real property, personal property and other tax returns filed
by it are accurate. It either is not delinquent in the payment of any tax,
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assessment or governmental charge or has requested an extension of time
without penalty within which to file any tax returns in respect of any fiscal
year or portion thereof. Its federal, state and local income tax returns that
are open to audit have not been audited by the applicable tax authorities and no
deficiencies for any tax, assessment or governmental charge have been proposed,
asserted or assessed (tentatively or otherwise) against it which have not been
settled and paid. There are currently no agreements in effect with respect to it
to extend the period of limitations for the assessment or collection of any tax.
No audit, examination or deficiency or refund litigation with respect to any
such return is pending or, subject to the Knowledge Qualification, threatened.
(c) It (i) is not a party to any agreement providing for the allocation
or sharing of taxes, (ii) is not required to include in income any adjustment
pursuant to Section 481(a) of the Code or by reason of any change in accounting
method (nor does it have any knowledge that the IRS has proposed any such
adjustment or change of accounting method) and (iii) has not filed a consent
pursuant to Section 341(f) of the Code or agreed to have Section 341(f)(2) of
the Code apply.
(d) It has withheld amounts from its employees and shareholders in
compliance with the tax withholding provisions of applicable federal, state and
local laws, has filed all federal, state and local returns and reports for all
periods for which such returns or reports would be due with respect to income
tax withholding, social security, unemployment taxes, income and other taxes and
all payments or deposits with respect to such taxes have been timely made.
4.9 Insurance
It is insured for reasonable amounts with financially sound and reputable
insurance companies against such risks as companies or institutions engaged in a
similar business would, in accordance with good business practice, customarily
be insured and has maintained all insurance required by its agreements. It has
not, during the past five years, had an insurance policy canceled or non-renewed
or been denied any insurance coverage for which it has applied.
4.10 Labor
No work stoppage involving it is pending or, subject to the Knowledge
Qualification, threatened. It is not involved in or, subject to the Knowledge
Qualification, threatened with or affected by, any labor dispute, discrimination
or sexual harassment claims, arbitration, lawsuit or administrative proceeding
involving any of its employees. It is not a party to any collective bargaining
agreement.
4.11 Indemnification
Subject to the Knowledge Qualification, no action or failure to take action
by any present or former director, advisory director, officer, employee or agent
of it has occurred which would give rise to a claim or a potential claim by any
such person for indemnification from it.
4.12 Loan Portfolio
Each loan reflected as an asset on its Annual Financial Statements and each
loan originated or acquired thereafter is evidenced by appropriate and
sufficient documentation and constitutes a legal, valid and binding obligation
of the obligor named therein, enforceable in accordance with its terms, except
to the extent that the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws or equitable principles
or doctrines. All such loans are free and clear of any Encumbrance It has
Previously Disclosed a complete list of the real estate acquired by it through
foreclosure, repossession or deed in lieu thereof which are currently held by
it.
4.13
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Investment Portfolio
All investment securities held by it are carried on its financial books and
records in accordance with GAAP. None of its investment securities are subject
to any restriction, whether contractual or statutory, which materially impairs
its ability to freely dispose of such investment securities at any time, other
than those restrictions imposed on securities held to maturity under GAAP.
4.14 Defaults
There has not been any default in any obligation to be performed by it
under any agreement and it has not waived any material right under any
agreement. Subject to the Knowledge Qualification, no other party to any
agreement is in default in any obligation to be performed by such party.
4.15 Real Estate Loans and Investments
Except for properties acquired by it in settlement of loans, there are no
facts, circumstances or contingencies known to it which exist and would require
a reduction under GAAP in the present carrying value of any of its real estate
investments, joint ventures, other investments or other loans (either
individually or in the aggregate with its other loans and investments).
4.16 Derivatives Contracts
It is not a party to and has not agreed to enter into an exchange-traded or
over-the-counter swap, forward, future, option, cap, floor or collar financial
contract or any other contract not included in its Annual Financial Statement
which is a derivatives contract (including various combinations thereof) and it
does not own any securities that are referred to as structured notes.
4.17 Employee Benefit Plans
(a) It has Previously Disclosed all Employee Plans (other than those
that relate to benefits which previously have been fully accrued as a liability
or expensed and for which there is no future financial reporting obligation) and
has heretofore delivered accurate copies of each (including amendments and
agreements relating thereto) together with, in the case of qualified plans, (i)
the most recent financial reports and actuarial reports prepared with respect
thereto, (ii) the most recent annual reports filed with any Governmental Entity
with respect thereto, and (iii) all rulings and determination letters and any
open requests for rulings or letters that pertain thereto.
(b) Each Employee Plan has been operated and administered in accordance
with its terms and with applicable law, including, to the extent applicable,
ERISA, the Code, the Age Discrimination in Employment Act, and the regulations
or rules promulgated thereunder; and all filings, disclosures and notices
required by ERISA, the Code, the Securities Act, the Exchange Act, the Age
Discrimination in Employment Act and any other applicable law have been timely
made.
(c) Each Employee Plan which is an Aemployee pension benefit plan"
within the meaning of Section 3(2) of ERISA (a APension Plan") and which is
intended to be qualified under Section 401(a) of the Code has received a
favorable determination letter (including a determination that the related trust
under such Pension Plan is exempt from tax under Section 501(a) of the Code)
from the IRS, and it is not aware of any circumstances likely to result in
revocation of any such favorable determination letter.
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(d) There is no pending or, subject to the Knowledge Qualification,
threatened legal action, suit or claim relating to any Employee Plan (other than
routine claims for benefits) or against any related trust thereto or fiduciary
thereof.
(e) It has not engaged in a transaction, or omitted to take any action,
with respect to any Employee Plan that has or would reasonably be expected to
subject it to a tax or penalty imposed by either Section 4975 of the Code or
Section 502 of ERISA, assuming for purposes of Section 4975 of the Code that the
taxable period of any such transaction expired as of the date hereof.
(f) No liability (other than for payment of premiums to the PBGC which
have been made or will be made on a timely basis) under Title IV of ERISA has
been or is expected to be incurred by it with respect to any
ongoing, frozen or terminated Asingle-employer plan", within the
meaning of Section 4001(a)(15) of ERISA, currently or formerly maintained by it,
or any single-employer plan of any entity (an AERISA Affiliate") which is
considered one employer with it under Section 4001(a)(14) of ERISA or Section
414(b) or (c) of the Code (an AERISA Affiliate Plan").
(g) Neither it nor any ERISA Affiliate has contributed, or has been
obligated to contribute, to a multiemployer plan under Subtitle E of Title IV of
ERISA at any time since September 26, 1980.
(h) No notice of a Areportable event", within the meaning of Section
4043 of ERISA for which the 30-day reporting requirement has not been waived,
has been required to be filed for any Employee Plan or by any ERISA Affiliate
Plan within the 12-month period ending on the date hereof. The PBGC has not
instituted proceedings to terminate any Pension Plan or ERISA Affiliate Plan
and, subject to the Knowledge Qualification, no condition exists that presents a
risk that such proceedings will be instituted by the PBGC.
(i) There is no pending investigation or enforcement action by the
PBGC, DOL or IRS or any other Governmental Entity with respect to any Employee
Plan.
(j) Under each Pension Plan and ERISA Affiliate Plan that is a defined
benefit plan, as of the date of the most recent actuarial valuation performed
prior to the date hereof, the actuarially determined present value of all
Abenefit liabilities", within the meaning of Section 4001(a)(16) of ERISA (as
determined on the basis of the actuarial assumptions contained in such actuarial
valuation of such Pension Plan or ERISA Affiliate Plan), did not exceed the then
current value of the assets of such Pension Plan or ERISA Affiliate Plan and
since such date there has been neither a material adverse change in the
financial condition of such Pension Plan or ERISA Affiliate Plan nor any
amendment or other change to such Pension Plan or ERISA Affiliate Plan that
would increase the amount of benefits thereunder which reasonably could be
expected to change such result.
(k) All contributions required to be made under the terms of any
Employee Plan or ERISA Affiliate Plan have been timely made.
(l) Neither any Pension Plan nor any ERISA Affiliate Plan has an
Aaccumulated funding deficiency" (whether or not waived) within the meaning of
Section 412 of the Code or Section 302 of ERISA and all required payments to the
PBGC with respect to each Pension Plan or ERISA Affiliate Plan have been made on
or before their due dates.
(m) Neither it nor any ERISA Affiliate (i) has provided, or would
reasonably be expected to be required to provide, security to any Pension Plan
or to any ERISA Affiliate Plan pursuant to Section 401(a)(29) of the Code, or
(ii) has taken any action, or omitted to take any action, that has resulted, or
would reasonably be expected to result, in the imposition of an Encumbrance
under Section 412(n) of the Code or pursuant to ERISA.
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(n) It has no obligation to provide retiree health and life insurance
or other retiree death benefits under any Employee Plan, other than benefits
mandated by Section 4980B of the Code. There has been no communication to its
employees that would reasonably be expected to promise or guarantee such
employees retiree health or life insurance or other retiree death benefits.
(o) It has neither made any payments, nor is obligated to make any
payments by virtue of the consummation of the Merger or otherwise, nor a party
to any agreement or any Employee Plan, that under any circumstances could
obligate it or its successor to make payments or deemed payments that (i) are
not or will not be deductible because of Sections 162(m) or 280G of the Code or
(ii) require the Surviving Corporation or any of its Subsidiaries to record any
charge or expense therefor (or any tax gross-up payments) for financial
reporting purposes on a post-acquisition basis. Neither the execution of this
Agreement nor the consummation of the Merger will constitute a change in control
for purposes of any of its Employee Plans or any of the employment agreements,
change in control severance agreements, severance compensation plan or benefit
restoration plan to which it or any of its Subsidiaries is a party. 4.18
Properties
(a) All real and personal property owned by it or presently used in its
business is in good condition (ordinary wear and tear excepted) and is
sufficient to carry on its business in the ordinary course of business
consistent with its past practices. It has good and marketable title free and
clear of all Encumbrances (other than equitable rights of redemption laws
relating to property acquired by it in foreclosure) to all of its properties and
assets, real and personal, except
(i) liens for current taxes not yet due or payable,
(ii) pledges to secure deposits,
(iii) such imperfections of title, easements and non-monetary
Encumbrances affecting real property, if any, which do not adversely affect the
value or use of such real property, and
(iv) any monetary Encumbrances, reflected in its Annual
Financial Statements.
(b) All real and personal property that is leased or licensed by it is
held pursuant to leases or licenses which are valid and enforceable in
accordance with their respective terms and such leases and licenses will not
terminate or lapse prior to the Effective Time or thereafter by reason of
completion of the Merger. All improved real property owned or leased by it is in
compliance with all applicable laws including zoning laws.
4.19 Certain Agreements
It is not a party to, is not bound or affected by, and does not receive
and is not obligated to pay benefits (other than those that relate to benefits
which previously have been fully accrued as a liability or expensed and for
which there is no future financial reporting obligation) under:
(a) any agreement, arrangement or commitment, including any
agreement, indenture or other instrument, relating to the borrowing of money
by it or the guarantee by it of any obligation;
(b) any agreement, arrangement or commitment relating to the employment
of a consultant or the employment, election or retention in office of any
present or former director, advisory director, officer or employee;
(c) any agreement, arrangement or understanding pursuant to which any
payment (whether of severance pay or otherwise) is or may become due to any
present or former director, advisory director, officer or employee;
(d) any agreement, arrangement or understanding pursuant to which it is
obligated to indemnify any present or former director, advisory director,
officer, employee or agent;
(e) any agreement, arrangement or understanding which limits its
freedom to compete in any line of business or with any person;
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(g) any agreement pursuant to which loans have been sold by it, which
impose any potential recourse obligations (by representation, warranty, covenant
or other contractual terms) upon it; or
(h) any subservicing agreement.
4.20 Material Interests of Certain Persons
(a) No officer, director or employee of it or any "associate" (as such
term is defined in Rule 14a-1 under the Exchange Act) or related interest of any
such person has any material interest in any material agreement or property
(real or personal, tangible or intangible), used in, or pertaining to, its
business.
(b) Except as set forth in its proxy statement for its most recent
annual meeting of shareholders there are no outstanding Insider Loans. All
outstanding Insider Loans were made in the ordinary course of business and on
substantially the same terms as those prevailing at the time for comparable
transactions with third parties and were, with respect to executive officers and
directors, approved by its Board in accordance with applicable law and
regulations.
4.21 No Impediments
It has not taken or agreed to take any action, nor does it have
knowledge of any fact or circumstance, that would (i) materially impede or delay
the consummation of the Merger or the ability of the Parties to obtain any
approval of any Governmental Entity required for consummation of the Merger or
to perform their covenants and agreements under this Agreement or (ii) prevent
the Merger from qualifying as a reorganization within the meaning of Section
368(a) of the Code.
4.22 Disclosures
None of the representations and warranties by a Party as to itself or
its Subsidiaries pursuant to Articles III, IV or V hereof or any of the
information Previously Disclosed or Delivered by a Party or on its behalf,
contains any untrue statement of a material fact, or omits to state any material
fact required to be stated or necessary to make any such information, in light
of the circumstances, not misleading.
ARTICLE 5. ADDITIONAL REPRESENTATIONS AND WARRANTIES OF HARBOURTON
As of the date hereof, and except as Previously Disclosed, Harbourton
represents and warrants to Allstate as follows:
5.1 Registration Obligations
Harbourton is not under any obligation, contingent or otherwise, which will
survive the Effective Time by reason of any agreement to register any of its
securities under the Securities Act or other federal or state securities laws or
regulations.
ARTICLE 6. COVENANTS
6.1 Reasonable Best Efforts
Subject to the terms and conditions of this Agreement, each Party shall use
its reasonable best efforts in good faith to take, or cause to be taken, all
actions, and to do, or cause to be done, all things necessary or advisable under
applicable laws and regulations so as to permit and otherwise enable completion
of the Merger by November 30, 2000 or as soon thereafter as reasonably
practicable, and shall cooperate fully with the other to that end.
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6.2 Action by Shareholders; Dissenters' Rights
(a) The shareholders of Allstate shall approve the Merger by written
consent in lieu of a meeting pursuant to Section 228 of the DGCL. The
shareholders of Harbourton shall approve the Merger at a special meeting of
shareholders to be called and held as soon as practicable, and in any event no
later than November 30, 2000. The Merger must be approved by holders of a
majority of the outstanding Allstate Common Stock entitled to vote thereon and
by holders of a majority of the outstanding Harbourton Common Stock entitled
to vote thereon.
(b) Allstate shall notify the holders of Allstate Common Stock of their
Dissenters' Rights in the manner and within the time required by Section
262(d)(2) of the DGCL.
6.3 Regulatory Matters
(a) The Parties shall cooperate with each other and use their
reasonable best efforts to promptly prepare and file all necessary
documentation, to effect all applications, notices, petitions and filings, and
to obtain as promptly as practicable all permits, consents, approvals and
authorizations of all Governmental Entities and third parties which are
necessary or advisable to consummate the Merger. Each Party shall have the right
to review in advance, and to the extent practicable each will consult with the
other on, in each case subject to applicable laws relating to the exchange of
information, all the information which appears in any filing made by the other
Party or written materials submitted by the other Party to any third party or
any Governmental Entity in connection with the Merger. In exercising the
foregoing right, each of the Parties shall act reasonably and as promptly as
practicable. The Parties agree that they will consult with each other with
respect to the obtaining of all permits, consents, approvals and authorizations
of all third parties and Governmental Entities necessary or advisable to
consummate the Merger and each Party will keep the other appraised of the status
of matters relating to completion of the Merger.
(b) Each Party shall promptly furnish the other Party with copies of
written communications received from, or delivered to, any Governmental Entity
in respect of the Merger.
6.4 Investigation and Confidentiality
(a) Each Party shall permit the other Party and its representatives
reasonable access to its and its Subsidiaries properties and personnel, and
shall disclose and make available upon reasonable request to the extent such
disclosure is permitted by law and will not result in the loss or potential loss
of any attorney-client privilege, all books, papers and records relating to its
and its Subsidiaries assets, stock ownership, properties, operations,
obligations and liabilities, including all books of account (including the
general ledger), tax records, minute books of meetings of boards of directors
(and any committees thereof) and shareholders, certificate of incorporation,
bylaws, material agreements, filings with any Governmental Entity, accountants'
work papers, litigation files, loan files, plans affecting employees, and any
other business activities or prospects in which the examining Party may have a
reasonable interest, provided that such access and any such reasonable request
shall be reasonably related to the Merger and shall not unduly interfere with
normal operations of the other Party and its Subsidiaries. Each Party shall make
its directors, officers, employees and agents and authorized representatives
(including counsel and independent public accountants) and those of its
Subsidiaries available to confer with the other Party and its representatives,
provided that such access shall be reasonably related to the Merger and shall
not unduly interfere with the normal operations of such Party and its
Subsidiaries.
(b) All information furnished previously in connection with the Merger
or pursuant hereto shall be treated as the sole property of the Party furnishing
the information until completion of the Merger and, if the Merger shall not
occur, the Party receiving the information shall either destroy or return to the
furnishing Party all documents or other materials containing, reflecting or
referring to such information, shall use its best efforts to keep confidential
all such information, and shall not directly or indirectly use such information
for any competitive or other commercial purposes. The obligation to keep such
information confidential shall continue for five years from the date of this
Agreement but shall not apply to (i) any information which (x) the Party
receiving the information can establish was already in its possession prior to
the disclosure thereof by the other Party; (y) was then generally known to the
public; or (z) became known to the public through no fault of the Party
receiving the information; or (ii) disclosures pursuant to a legal requirement
or in accordance with an order of a court of competent jurisdiction, provided
that the Party which is the subject of any such legal requirement or order shall
use its best efforts to give the other Party at least ten business days' prior
notice thereof.
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6.5 Press Releases
The Parties shall mutually agree as to the form and substance of any press
release related to this Agreement or the Merger, and consult with each other as
to the form and substance of other public disclosures which may relate to the
Merger, provided, however, that nothing contained herein shall prohibit either
Party, following notification to the other Party, from making any disclosure
which such Party believes is required by law or regulation.
6.6 Business of the Parties
(a) During the period from the date of this Agreement and continuing
until the Effective Time, except as expressly contemplated or permitted by this
Agreement or with the prior written consent of the other Party, each Party shall
carry on its business and cause its Subsidiaries to carry on their businesses
only in the ordinary course consistent with past practice. During such period,
each Party also will use, and will cause each of its Subsidiaries to use, all
reasonable efforts to (x) preserve its business organization intact, (y) keep
available the present services of its employees and (z) preserve the goodwill of
its customers and others with whom business relationships exist.
Without limiting the generality of the foregoing, except with the prior
written consent of the other Party or as expressly contemplated hereby, between
the date hereof and the Effective Time, neither Party nor any of its
Subsidiaries shall:
(i) declare, set aside, make or pay any dividend or other
distribution (whether in cash, stock or property or any combination
thereof) in respect of its capital stock, except for dividends or
distributions by a wholly owned Subsidiary of a Party to such Party;
(ii) issue any shares of its capital stock, other than
pursuant to the Recapitalization Plan or upon the exercise of options
outstanding on the date hereof to acquire a Party's Common Stock;
issue, grant, modify or authorize any Rights; purchase any shares of
its Common Stock; or effect any recapitalization, reclassification,
stock dividend, stock split or like change in capitalization, other
than pursuant to the Recaptialization Plan;
(iii) amend its certificate of incorporation or bylaws; or
waive or release any material right or cancel or compromise any
material debt or claim;
(iv) increase the rate of compensation of any of its
directors, officers or employees, or pay or agree to pay any bonus or
severance to, or provide any other new benefit or incentive to, any of
its directors, officers or employees, except (A) as may be required
pursuant to Previously Disclosed commitments existing on the date
hereof; and (B) as may be required by law;
(v) enter into or, except as may be required by law, modify
any Employee Plan or other benefit, incentive or welfare contract, plan
or arrangement, or any trust agreement related thereto, in respect of
any of its directors, officers or employees;
(vi) originate or purchase any loan in excess of $500,000
without prior notification to the other Party; (vii) except
for the sale of loan participation interests in the ordinary
course of business and except as
otherwise permitted hereunder, enter into (v) any agreement for the
purchase, sale, transfer or other disposition of any material
properties or material assets (other than real estate acquired in
foreclosure (or by deed in lieu thereof) or repossessed assets, in each
case, with a carrying value on a Party's Financial
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Reports of less than $500,000 individually) or the placing of
any Encumbrance thereon or (w) any other transaction, agreement,
arrangement or commitment not made in the ordinary course of business,
(x) any agreement, indenture or other instrument relating to its
borrowing of money or its guarantee of any such obligation, except in
the ordinary course of business consistent with past practice, (y) any
agreement, arrangement or commitment relating to the employment of an
employee or consultant, or amend any such existing agreement,
arrangement or commitment; provided that a Party or its Subsidiaries
may employ an employee or consultant in the ordinary course if the
employment of such employee or consultant is terminable by such Party
or its Subsidiary, as the case may be, at will without liability, other
than as required by law; or (z) any agreement with a labor union;
(viii) change its method of accounting in effect for its
Annual Financial Statements, except as required by changes in laws or
regulations or GAAP, or change any of its methods of reporting income
and deductions for federal income tax purposes from those employed in
the preparation of its federal income tax return for such year, except
as required by changes in laws or regulations;
(ix) enter into or renew any lease of real or personal
property or any service agreement provided the consent of the other
Party shall not be unreasonably withheld or delayed, or fail to give
any required notice to prevent a lease or service agreement from being
renewed; or make any capital expenditures in excess of $50,000
individually or $100,000 in the aggregate (provided the consent of the
other Party shall not be unreasonably withheld or delayed), other than
pursuant to binding commitments Previously Disclosed and existing on
the date hereof, proposed expenditures Previously Disclosed and
expenditures necessary to maintain existing assets in good repair;
(x) file any applications or make any contract with respect to
branching or site location or relocation; (xi) purchase any
security or acquire in any manner whatsoever (other than to
realize upon collateral for a
defaulted loan) control over or any equity interest in any business or
entity, other than marketable securities (which do not exceed 1% of the
securities outstanding within such class) in the ordinary course of
business;
(xii) except with respect to real estate acquired in
foreclosure (or by deed in lieu thereof) or repossessed assets, enter
or agree to enter into any agreement or arrangement granting any
preferential right to purchase any of its assets or rights or requiring
the consent of any party to the transfer and assignment of any such
assets or rights;
(xiii) except as necessitated in its reasonable opinion due to
changes in interest rates, and in accordance with safe and sound
banking practices, change or modify in any material respect any of its
lending or investment policies, except to the extent required by law;
(xiv) enter into any futures contract, option contract,
interest rate caps, interest rate floors, interest rate exchange
agreement or other agreement for purposes of hedging the exposure of
its interest-earning assets and interest-bearing liabilities to changes
in market rates of interest;
(xv) take any action that would cause any of the
representations and warranties contained herein not to be true and
correct in any material respect at Closing or that would cause any of
the conditions of Article VII hereof not to be satisfied;
(xvi) take any action that would materially impede or delay
the completion of the Merger or the ability of either Party to perform
its covenants and agreements under this Agreement; or
(xviii) agree to do any of the foregoing.
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(b) Each Party shall promptly notify the other Party in writing of the
occurrence of any matter or event known to and directly involving it or any
of its Subsidiaries, other than any changes in conditions that affect
financial services companies generally, that would have, either
individually or in the aggregate, a Material Adverse Effect on it. 6.7
Certain Actions
Neither Party nor any of its Subsidiaries or any of their respective
directors, officers, employees, representatives or agents shall solicit or
encourage inquiries or proposals with respect to, furnish any information
relating to, or participate in any negotiations or discussions concerning, any
Alternative Proposal, provided, however, that the Board of a Party may furnish
such information (but limited to the information provided to the other Party in
connection with or relating to this Agreement and the Merger) or participate in
such negotiations or discussions if such Board, after having consulted with and
considered the advice of outside counsel, has determined that the failure to do
the same would, in the good faith opinion of such Board, result in a breach of
the fiduciary duty of the Board under applicable law. Each Party will promptly
inform the other Party orally and in writing of any such request for information
or of any negotiations or discussions, as well as instruct its directors,
officers, employees, representatives and agents and those of its Subsidiaries to
refrain from taking any action prohibited by this section.
6.8 Current Information
During the period from the date hereof to the Closing Date, each Party
shall, upon request of the other Party, cause one or more of its designated
representatives to confer on a monthly or more frequent basis with
representatives of the requesting Party regarding its and its Subsidiaries
financial condition, operations and businesses and matters relating to the
completion of the Merger.
6.9 Indemnification
(a) After the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless each person who is now, or who has been at
any time before the date hereof or who becomes before the Effective Time, an
officer, director or employee of either Party or any of its respective
Subsidiaries (the "Indemnified Parties") against all losses, claims, damages,
costs, expenses (including attorney's fees), liabilities or judgments or amounts
that are paid in settlement (which settlement shall require the prior written
consent of the Surviving Corporation, which consent shall not be unreasonably
withheld) of or in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, or administrative (each a "Claim"), in
which an Indemnified Party is, or is threatened to be made, a party or a witness
based in whole or in part on or arising in whole or in part out of the fact that
such person is or was a director, officer or employee of either Party or any of
its respective Subsidiaries if such Claim pertains to any matter or fact
arising, existing or occurring before the Effective Time (including, without
limitation, the Merger, regardless of whether such Claim is asserted or claimed
before, or at or after, the Effective Time (the "Indemnified Liabilities"), to
the fullest extent permitted under applicable state law in effect as of the date
hereof or as amended applicable to a time before the Effective Time and under
such Party's certificate of incorporation or bylaws as in effect on the date
hereof (as the case may be). The Surviving Corporation shall pay expenses in
advance of the final disposition of any such action or proceeding to each
Indemnified Party to the full extent permitted by applicable state law in effect
as of the date hereof or as amended applicable to a time before the Effective
Time upon receipt of any undertaking required by applicable law. Any Indemnified
Party wishing to claim indemnification under this Section 6.9(a), upon learning
of any Claim, shall notify the Surviving Corporation (but the failure so to
notify the Surviving Corporation shall not relieve it from any liability which
it may have under this Section 6.9(a) except to the extent such failure
materially prejudices the Surviving Corporation) and shall deliver to the
Surviving Corporation any undertaking required by applicable law. The Surviving
Corporation shall ensure, to the extent permitted under applicable law, that all
limitations of liability existing in favor of the Indemnified Parties as
provided in a Party's certificate of incorporation or bylaws (as the case may
be), as in effect as of the date hereof, or allowed under applicable state law
as in effect as of the date hereof or as such law may be amended applicable to a
time before the Effective Time, with respect to Indemnified Liabilities shall
survive the consummation of the Merger.
(b) From and after the Effective Time, the directors, officers and
employees of each Party hereto or any of its Subsidiaries who become directors,
officers or employees of the Surviving Corporation or any of its Subsidiaries,
shall have indemnification rights having prospective application with respect to
acts or omissions occurring after the Effective Time. The prospective
indemnification rights shall consist of such rights to which directors, officers
and employees of the Surviving Corporation and its Subsidiaries are entitled
under the provisions of the certificate of incorporation and bylaws of the
Surviving Corporation and its Subsidiaries, as in effect from time to time after
the Effective Time, as applicable, and provisions of applicable state law as in
effect from time to time after the Effective Time.
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(c) The obligations of the Surviving Corporation provided under
paragraphs (a) and (b) of this Section 6.9 are intended to be enforceable
against the Surviving Corporation directly by the Indemnified Parties and shall
be binding on all respective successors and permitted assigns of the Surviving
Corporation.
6.10 Employees and Employee Benefit Plans
(a) Full time employees of Harbourton and its Subsidiaries who remain
employed after the Effective Time will be eligible to participate in benefit
plans of the Surviving Corporation and its Subsidiaries that are generally
available to their full-time employees on a uniform and non-discriminatory basis
with credit for years of service with Harbourton and its Subsidiaries for the
purpose of determining eligibility for participation, vesting and entitlement to
vacation time and sick pay (but not for the purpose of accrual or restoration of
benefits under any Allstate Employee Plan or any future benefit plan of the
Surviving Corporation or any of its Subsidiaries where benefits are calculated
on an actuarial basis, including any qualified or non-qualified defined benefit
plan or restoration plan). Contributions to (and accrual of benefits, to the
extent applicable, if any, under) benefit plans of the Surviving Corporation and
its Subsidiaries on behalf of continuing full-time employees of Harbourton and
its Subsidiaries shall only relate to qualifying compensation earned by such
employees after the Effective Time. The Surviving Corporation shall use its best
efforts to cause any and all pre-existing condition limitations (to the extent
such limitations did not apply to a pre-existing condition under the
corresponding Harbourton group health plan) and eligibility waiting periods
under its group health plans to be waived with respect to such participants and
their eligible dependents.
(b) The Surviving Corporation agrees to honor the terms of all
Previously Disclosed employment, consulting, severance and termination
agreements, severance plans, benefit restoration plans, stock option plans, and
restricted stock plans to which Harbourton or Allstate or any of their
respective Subsidiaries is a party, other than those that are being terminated
and/or replaced at the Effective Time. Nothing herein is intended to limit the
right of the Surviving Corporation to amend or terminate any of the foregoing in
accordance with their terms. The Surviving Corporation hereby expressly assumes
at the Effective Time every such agreement which by its terms requires express
assumption by a successor. Such express assumption shall occur by virtue of
Allstate's execution of this Agreement without any further action required by
the Surviving Corporation upon the completion of the Merger.
(c) The Surviving Corporation agrees to honor the employment agreements
with Messrs. McLendon and Cluett attached hereto as Exhibits D and E,
respectively.
6.11 Litigation Matters
Each Party will consult with the other about any proposed settlement, or
any disposition of, any litigation.
6.12 Conforming Entries
(a) Harbourton recognizes that Allstate and its Subsidiaries may have
adopted different loan, accrual and reserve policies (including loan
classifications and levels of reserves for possible loan losses). Subject to
applicable law, from and after the date hereof to the Closing, Harbourton and
Allstate shall consult and cooperate with each other with respect to conforming
the loan, accrual and reserve policies of Harbourton and its Subsidiaries to
those policies of Allstate and its Subsidiaries, as specified in each case in
writing from Allstate to Harbourton, based upon such consultation and subject to
the conditions in Section 6.12(c) below.
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(b) Subject to applicable law, Harbourton and Allstate shall consult
and cooperate with each other with respect to determining, as specified in a
written notice from Allstate to Harbourton, based upon such consultation and
subject to the conditions in Section 6.12(c) below, the amount and the timing
for recognizing for financial accounting purposes Harbourton's expenses of the
Merger and any restructuring charges relating to or to be incurred in connection
with the Merger.
(c) Subject to applicable law, Harbourton and its Subsidiaries shall
(i) establish and take such reserves and accruals at such time as Allstate shall
reasonably request to conform the loan, accrual and reserve policies of
Harbourton and its Subsidiaries to the policies of Allstate and its
Subsidiaries, and (ii) establish and take such accruals, reserves and charges in
order to implement such policies and to recognize for financial accounting
purposes such expenses of the Merger and any restructuring charges related to or
to be incurred in connection with the Merger, in each case at such times as are
reasonably requested by Allstate, but in no event prior to five days before the
Closing Date; provided, however, that on the date such reserves, accruals and
charges are to be taken, Allstate shall certify to Harbourton that all
conditions to Allstate's obligation to consummate the Merger set forth in
Sections 7.1 and 7.3 hereof (other than the delivery of certificates, opinions
and other instruments and documents to be delivered at the Closing by
Harbourton, the delivery of which shall continue to be conditions to Allstate's
obligation to consummate the Merger) have been satisfied or waived; and
provided, further, that Harbourton and its Subsidiaries shall not be required to
take any such action that is not consistent with GAAP. (d) No reserves, accruals
or charges taken in accordance with this section may be a basis to assert a
violation of a breach of a representation, warranty or covenant of Harbourton
herein.
6.13 Disclosure Supplements
From time to time prior to the Closing, each Party shall promptly
supplement or amend any materials Previously Disclosed or Delivered pursuant
hereto with respect to any matter hereafter arising which, if existing,
occurring or known at the date of this Agreement, would have been required to be
set forth or described in materials Previously Disclosed or Delivered or which
is necessary to correct any information in such materials which has been
rendered materially inaccurate thereby. No such supplement or amendment to such
materials shall be deemed to have modified the representations, warranties and
covenants of the disclosing Party for the purpose of determining whether the
conditions set forth in Article VII hereof have been satisfied.
6.14 Failure to Fulfill Conditions
If a Party determines that a condition to its obligations to consummate the
Merger may not be fulfilled, it will promptly notify the other Party. Each Party
will promptly inform the other Party of any facts applicable to it that would be
likely to prevent or materially delay approval of the Merger by any Governmental
Entity or third party or which would otherwise prevent or materially delay
completion of the Merger.
6.15 Surviving Corporation Common Stock
Allstate shall reserve for issuance a sufficient number of shares of
its Common Stock for the purpose of issuing the Merger Consideration to
Harbourton's shareholders. Allstate covenants that the Surviving Corporation
Common Stock to be issued in the Merger will be duly authorized, validly issued,
fully paid and nonassessable and not subject to any preemptive rights or other
Encumbrance.
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6.16 Tax Opinion
Each Party agrees to use reasonable efforts to obtain a written tax opinion
of counsel, dated as of the Closing, in order to satisfy the condition set forth
in Section 7.1(e).
6.17 New Affiliates
Harbourton shall use its best efforts to cause any person becoming an
affiliate of Harbourton for purposes of Rule 145 of the Securities Act after the
date hereof to enter into an affiliate agreement in the form attached hereto as
Exhibit C.
ARTICLE 7. CONDITIONS PRECEDENT
7.1 Conditions Precedent - the Parties
The respective obligations of both Parties to effect the Merger shall
be subject to the satisfaction of the following conditions at or prior to the
Closing unless waived by the Parties to the extent permitted by Section 8.4.
(a) The shareholders of each Party shall have approved the Merger by the
requisite vote required by law.
(b) All approvals and consents from any Governmental Entity, the approval or
consent of which is required for the completion of the Merger, shall have
been received and all statutory waiting periods in respect thereof shall
have expired; and the Parties shall have procured all other approvals,
consents and waivers of each person (other than the Governmental Entities
referred to above) whose approval, consent or waiver is necessary to the
completion of the Merger; provided, however, that no approval or consent
referred to in this Section 7.1(b) shall be deemed to have been received if
it shall include any condition or requirement that, in the aggregate, would
materially reduce the economic or business benefits of the Merger to the
Surviving Corporation as the Parties shall reasonably and in good faith
agree.
(c) Neither Party shall be subject to any statute, rule, regulation, injunction
or other order or decree which shall have been enacted, entered,
promulgated or enforced by any Governmental Entity which prohibits,
restricts or makes illegal completion of the Merger.
(d) No proceeding initiated by any Government Entity seeking an order,
injunction or decree issued by any court or agency of competent
jurisdiction or other legal restraint or prohibition preventing the
completion of the Merger shall be pending or threatened. (e) Allstate shall
have received an opinion of Elias, Matz, Tiernan & Herrick L.L.P., dated as
of the Closing, to the effect that for federal income tax purposes:
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(i) The Merger will qualify as a "reorganization" under Section 368(a) of the
Code.
(ii) No gain or loss will be recognized by any Party by reason of the
consummation of the Merger.
(iii)The gain, if any, to be realized by any shareholder of Harbourton who
receives Surviving Corporation Common Stock and cash in exchange for
Harbourton Common Stock should be recognized, but not in excess of the
amount of cash received. If the exchange has the effect of the distribution
of a dividend (determined with application of Section 318(a) of the Code),
then the amount of gain recognized that is not in excess of such
shareholder's ratable share of undistributed earnings and profits should be
treated as a dividend. The determination of whether the exchange has the
effect of the distribution of a dividend should be made on a
shareholder-by-shareholder basis. No loss should be recognized on the
exchange.
(iv) The basis of the Surviving Corporation Common Stock received by each
shareholder of Harbourton who exchanges Harbourton Common Stock for cash
and Surviving Corporation Common Stock in the Merger will be the same as
the basis of the Harbourton Common Stock surrendered in the Merger,
decreased by the amount of cash received, and increased by the amount that
is treated as a dividend (if any), and by the amount of gain recognized on
the exchange (not including any portion of that gain that was treated as a
dividend).
(v) The holding period of the Surviving Corporation Common Stock received by a
shareholder of Harbourton in the Merger will include the holding period of
the Harbourton Common Stock surrendered in exchange therefor, provided that
such shares of Harbourton Common Stock were held as a capital asset by such
shareholder at the Effective Time.
(vi) Cash received by a Harbourton shareholder in lieu of a fractional share
interest of Surviving Corporation Common Stock which such shareholder would
otherwise be entitled to receive (or the deemed issuance of a fractional
share interest by the Surviving Corporation and deemed redemption thereof
by it) will qualify as capital gain or loss (assuming the Harbourton Common
Stock was a capital asset in such shareholder's hands at the Effective
Time).
In rendering such opinion, Elias, Matz, Tiernan & Herrick, L.L.P. may require
and rely upon representations and covenants, including those contained in
certificates of officers of Harbourton, Allstate and others, reasonably
satisfactory in form and substance to such counsel.
(f) Allstate shall receive a tax opinion from PricewaterhouseCoopers
LLP, dated as of the Closing, to the effect that for federal income tax purposes
the net operating loss carryforwards of Allstate will not be impaired for
purposes of offsetting future operating income due to the completion of the
Recapitalization Plan and of the Merger.
(g) The Conversion Date shall have occurred.
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7.2 Conditions Precedent - Harbourton
The obligations of Harbourton to effect the Merger shall be subject to
satisfaction of the following conditions at or prior to the Closing unless
waived by Harbourton to the extent permitted by Section 8.4.
(a) Between the date hereof and the Closing, Allstate and/or its
Subsidiaries shall not have been affected by any event or change which has had
or caused a Material Adverse Effect on Allstate.
(b) The representations and warranties of Allstate made herein shall be
true and correct as of the date hereof and (other than the representations and
warranties in Section 3.1 with respect to the effects of the Recapitalization
Plan, the conversion of Allstate Notes and any exercise of Rights) as of the
Closing as though made anew at the Closing (as if the Closing Date was the date
hereof for such purpose), in each case as to the representations and warranties
of Allstate under Article IV subject to the standard set forth in Section 9.8.
(c) Allstate shall have performed in all material respects all
obligations and complied in all material respects with all covenants and
agreements required to be performed and complied with by it pursuant to this
Agreement on or prior to the Closing.
(d) Allstate shall have delivered to Harbourton a certificate, dated
the Closing Date and signed by its Chief Executive Officer and by its Chief
Financial Officer, to the effect that the conditions set forth in Sections
7.2(a) through 7.2(c) have been satisfied.
(e) Allstate shall have furnished Harbourton with such certificates of
its officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 7.1 and 7.2 as such conditions relate to
Allstate and its Subsidiaries as Harbourton may reasonably request.
7.3 Conditions Precedent - Allstate
The obligations of Allstate to effect the Merger shall be subject to
satisfaction of the following conditions at or prior to the Closing unless
waived by Allstate to the extent permitted by Section 8.4.
(a) Between the date hereof and the Closing, Harbourton and/or its
Subsidiaries shall not have been affected by any event or change which has had
or caused a Material Adverse Effect on Harbourton.
(b) The representations and warranties of Harbourton set forth herein
shall be true and correct as of the date hereof and (other than the
representations and warranties in Section 3.1 with respect to the effects of any
exercise of Rights) as of the Closing as though made anew at the Closing (as if
the Closing Date was the date hereof for such purpose), in each case as to the
representations and warranties of Harbourton under Article IV subject to the
standard set forth in Section 9.8.
(c) Harbourton shall have performed in all material respects all
obligations and complied in all material respects with all covenants and
agreements required to be performed and complied with by it pursuant to this
Agreement on or prior to the Closing.
(d) Harbourton shall have delivered to Allstate a certificate, dated
the Closing Date and signed by its Chief Executive Officer and by its Chief
Financial Officer, to the effect that the conditions set forth in Sections
7.3(a) through 7.3(c) have been satisfied.
(e) Harbourton shall have furnished Allstate with such certificates of
its officers or others and such other documents to evidence fulfillment of the
conditions set forth in Sections 7.1 and 7.3 as such conditions relate to
Harbourton and its Subsidiaries as Allstate may reasonably request.
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(e) Each affiliate of Harbourton for purposes of Rule 145 of the Securities Act
shall have entered into an affiliate agreement in the form attached hereto
as Exhibit C.
ARTICLE 8. TERMINATION, WAIVER, AMENDMENT AND SPECIFIC PERFORMANCE
8.1 Termination
This Agreement may be terminated by a written instrument prior to the
Effective Time:
(a) by the mutual consent of the Parties;
(b) by the non-breaching Party if the other Party has breached in any
material respect any of its covenants, agreements or representations and
warranties (but in the case of representations and warranties under Article IV
subject to the standard set forth in Section 9.8) herein, and such breach has
not been cured within 30 days after written notice;
(c) by either Party, (i) if any Governmental Entity of competent
jurisdiction shall have issued a final nonappealable order prohibiting the
completion of the Merger; or (ii) if application for any necessary prior
approval of a Governmental Entity is denied or withdrawn at the request or
recommendation of the Governmental Entity, provided that such denial or request
or recommendation for withdrawal is not due to the terminating Party's breach of
any provision of this Agreement;
(d) by either Party if the shareholders of the other Party do not
approve the Merger; and
(e) by either Party if the Effective Time has not occurred by the close
of business on February 28, 2001, provided that the terminating Party is not
then in breach of any of its covenants, agreements or representations and
warranties (but in the case of representations and warranties under Article IV
subject to the standard set forth in Section 9.8 herein). 8.2 Effect of
Termination
In the event that this Agreement is terminated it shall become void and
have no effect, except for:
(a) the provisions relating to confidentiality set forth in Section
6.4, (b) the provision relating to press releases set forth in Section
6.5, (c) the provision relating to expenses set forth in Section 9.1,
and
(d) a termination pursuant to Section 8.1(b) or 8.1(d) shall not
relieve the breaching Party from any liability or damages if such termination
arises out of its willful breach of any provision of this Agreement; in such
event the non-breaching Party shall be entitled to such monetary remedies and
relief against the breaching Party as are available at law. 8.3 Survival of
Representations, Warranties and Covenants
All representations, warranties, agreements and covenants in this
Agreement or in any other document or instrument delivered pursuant hereto or in
connection herewith shall expire on, and be terminated and extinguished at, the
Effective Time other than agreements or covenants contained herein or therein
that by their terms are to be performed after the Effective Time. No such
representations, warranties, agreements or covenants shall be deemed to be
terminated or extinguished so as to deprive the Surviving Corporation or any
affiliate of a Party of any defense at law or in equity which otherwise would be
available against the claims of any person, including any shareholder or former
shareholder.
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8.4 Waiver
Each Party hereto by written instrument approved by its Board and
signed by an executive officer of such Party, may at any time (whether before or
after approval of this Agreement by the Parties' shareholders) extend the time
for the performance of any of the obligations or other acts of the other Party
hereto and may waive (i) any inaccuracies of the other Party in the
representations or warranties contained in this Agreement or any document
delivered pursuant hereto, (ii) compliance with any of the covenants,
undertakings or agreements of the other Party, (iii) to the extent permitted by
law, satisfaction of any of the conditions precedent to its obligations
contained herein or (iv) the performance by the other Party of any of its
obligations set forth herein.
8.5 Amendment or Supplement
This Agreement may be amended at any time by mutual written agreement
of the Parties approved by their Boards and signed by an executive officer of
each Party, provided that any such amendment after the shareholders of the
Parties have approved this Agreement shall not modify either the amount or form
of the Merger Consideration or otherwise materially adversely affect such
shareholders without the approval of the shareholders to the extent required by
applicable law.
8.6 Specific Performance
The Parties acknowledge and agree that the Merger contemplated herein
is unique and that any remedy at law for breach is inadequate to compensate the
aggrieved Party. Accordingly, each Party shall have the right to seek specific
performance of this Agreement and the other Party's duties, obligations,
covenants and agreements herein in order to cause the Merger to be consummated.
To this end, each Party, to the extent permitted by law, irrevocably waives any
defense it might have based on the adequacy of a remedy at law which might be
asserted as a bar to specific performance or any other equitable relief.
ARTICLE 9. MISCELLANEOUS
9.1 Expenses
Except as otherwise provided below, each Party hereto shall bear and
pay all costs and expenses incurred by it in connection with this Agreement and
the Merger, including fees and expenses of its own financial consultants,
investment bankers, accountants and counsel.
9.2 Entire Agreement
This Agreement together with any other documents or instruments
executed by the Parties relating to the subject matter hereto concurrently with
or on the same day as the execution of this Agreement contains the entire
agreement among the Parties with respect to the Merger and supersedes all prior
arrangements or understandings with respect thereto, written or oral, other than
documents referred to herein which are to be executed after the date hereof. The
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the Parties hereto and their respective successors. Nothing in this
Agreement, expressed or implied, is intended to confer upon any person, other
than the Parties, and their respective successors, any rights, remedies,
obligations or liabilities other than as set forth in Article II and in Sections
6.9 and 6.10 hereof. 9.3 No Assignment
None of the Parties hereto may assign any of its rights or obligations
under this Agreement to any other person.
9.4 Notices
All notices or other communications which are required or permitted
hereunder shall be in writing and sufficient if delivered personally, telecopied
(with confirmation) or sent by overnight mail service or by registered or
certified mail (return receipt requested), postage prepaid, addressed as
follows:
If to Harbourton:
J. Kenneth McLendon, President
Harbourton Financial Corporation
8180 Greensboro Drive, Suite 525
McLean, Virginia 22102
(703) 821-1601
(703) 821-2815 (fax)
With a required copy to:
Jack R. Bird, Esq.
Bergman, Stein & Bird, L.L.P.
4514 Travis Street, Suite 300
Dallas, Texas 75205
(214) 528-2444
(214) 599-0602 (fax)
If to Allstate:
David W. Campbell, Chairman
Allstate Financial Corporation
8180 Greensboro Drive, Suite 525
McLean, Virginia 22102
(703) 883-9757
(703) 821-1371 (fax)
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With a required copy to:
Gerald F. Heupel, Jr., Esq.
Elias, Matz, Tiernan & Herrick L.L.P.
734 15th Street, N.W.
Washington, DC 20005
(202) 347-0300
(202) 347-2172
9.5 Counterparts
This Agreement may be executed in any number of counterparts, and each
such counterpart shall be deemed to be an original instrument, but all such
counterparts together shall constitute but one agreement.
9.6 Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware applicable to agreements made and entirely to
be performed within such jurisdiction. The Parties hereby designate Wilmington,
Delaware to be the proper jurisdiction and venue for any suit or action arising
out of this Agreement.
9.7 Severability
Any term, provision, covenant or restriction contained in this
Agreement held to be invalid, void or unenforceable shall be ineffective to the
extent of such invalidity, voidness or unenforceability, but neither the
remaining terms, provisions, covenants or restrictions contained in this
Agreement nor the validity or enforceability thereof in any other jurisdiction
shall be affected or impaired thereby. Any term, provision, covenant or
restriction contained in this Agreement that is so found to be so broad as to be
unenforceable shall be interpreted to be as broad as is enforceable.
9.8 Standard of Breach
None of the representations or warranties contained in Article IV shall
be deemed untrue or incorrect, and no Party shall be deemed to have breached its
representations or warranties therein as a consequence of the existence of any
fact, circumstance or event, which would not, either individually or taken
together with all other facts, circumstances or events, have a Material Adverse
Effect on any Party.
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
executed by their duly authorized officers and attested by their officers
thereunto duly authorized, all as of the day and year first above written.
Attest ALLSTATE FINANCIAL CORPORATION
/s/ C. Fred Jackson By: /s/ David. W. Campbell
------------------- ----------------------
C. Fred Jackson, Secretary David W. Campbell, Chairman
Attest HARBOURTON FINANCIAL CORPORATION
/s/ James M. Cluett By: /s/ J. Kenneth McLendon
------------------- -----------------------
J. Kenneth McLendon, President
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<PAGE>
Appendix B
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
262 APPRAISAL RIGHTS. - (a) Any stockholder of a corporation of this
State who holds shares of stock on the date of the making of a demand pursuant
to subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to ss. 228 of this title shall be entitled to an appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss.251 (other than a merger effected pursuant to ss.251(g)
of this title), ss.252, ss.254, ss.257, ss.258, ss.263 or ss.264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement and of merger or consolidation, were
either (i) listed on a national securities exchange or designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights shall be available
for any shares of stock of the constituent corporation surviving a merger if the
merger did not require for its approval the vote of the stockholders of the
surviving corporation as provided in subsection (f) of ss.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to ss.ss.251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss.253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation.
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(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss.228 or
ss.253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or within 10
days after such effective date; provided, however, that if such second notice is
sent more than 20 days following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholder entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e)Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective
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date of the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all of
the shares entitled to an appraisal.
(k) From and after the effective date of merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the
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merger or consolidation); provided, however, that if no petition for an
appraisal shall be filed within the time provided in subsection (e) of this
section, or if such stockholder shall deliver to the surviving or resulting
corporation a written withdrawal of such stockholder's demand for an appraisal
and an acceptance of the merger or consolidation, either within 60 days after
the effective date of the merger or consolidation as provided in subsection (e)
of this section or thereafter with the written approval of the corporation, then
the right of such stockholder to an appraisal shall cease. Notwithstanding the
foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed
as to any stockholder without the approval of the Court, and such approval may
be conditioned upon such terms as the Court deems just.
(1) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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