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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO 001-12211
ECHELON INTERNATIONAL CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
FLORIDA 59-2554218
----------------------- ----------------------
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
ONE PROGRESS PLAZA, SUITE 1500
ST. PETERSBURG, FLORIDA 33701 TELEPHONE (727) 803-8200
--------------------------------------- -------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (REGISTRANT'S TELEPHONE NUMBER)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
Common stock, par value $.01 per share, 6,810,020 shares, as of August 11,
1998
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
PART I.
Item 1. Financial Statements ................................................ 2
Item 2. Management's Discussion and Analysis of Financial Condition and 13
Results of Operations ...............................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk .......... 22
PART II.
Item 4. Submission of Matters to a Vote of Security Holders ................. 22
Item 5. Other Information ................................................... 22
Item 6. Exhibits and Reports on Form 8-K .................................... 22
Signatures ................................................................... 23
</TABLE>
<PAGE>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ECHELON INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
(IN MILLIONS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
REAL ESTATE, LEASES, LOANS & OTHER INVESTMENTS:
Real estate, net (Note 2) ...................................................... $ 151.9 $ 115.1
Aircraft under operating lease (net of accumulated depreciation
of $9.0 million and $8.4 million, respectively)................................ 3.5 4.1
Leases and loans receivable, net (Note 3) ...................................... 185.5 196.3
Investments in and advances to unconsolidated partnerships (Note 6) ............ 43.5 47.2
------- -------
384.4 362.7
------- -------
ASSETS HELD FOR SALE ........................................................... 2.5 2.5
------- -------
CURRENT ASSETS:
Cash and equivalents (includes restricted deposits of $1.1 million
and $1.5 million, respectively)................................................ 11.1 7.8
Marketable securities .......................................................... 23.1 42.0
Accounts receivable, net ....................................................... 1.4 1.2
Current portion of leases and loans receivable ................................. 38.1 39.8
Inventories, at cost ........................................................... .9 1.1
Other .......................................................................... 1.1 1.7
------- -------
75.7 93.6
------- -------
OTHER NON-CURRENT ASSETS ....................................................... 2.2 1.7
------- -------
Total assets ................................................................ $ 464.8 $ 460.5
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and other liabilities ......................................... $ 8.3 $ 6.1
Accounts and interest payable to former parent ................................. -- 1.3
Current portion of funding for limited partnership investments (Note 6) ........ 4.0 9.5
Current portion of deferred income taxes ....................................... 11.6 8.4
Current portion of long-term debt (Note 4) ..................................... 12.4 12.2
------- -------
Total current liabilities ................................................... 36.3 37.5
LONG-TERM DEBT (Note 4) ........................................................ 72.0 64.9
DEFERRED INCOME TAXES .......................................................... 138.0 145.8
OTHER LIABILITIES .............................................................. 2.9 3.2
COMMITMENTS AND CONTINGENCIES (Note 9)
Total liabilities ........................................................... 249.2 251.4
------- -------
STOCKHOLDERS' EQUITY (Note 5)
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued..... -- --
Common stock, $.01 par value, 25,000,000 shares authorized,
6,882,958 issued and 6,810,020 outstanding in 1998, and
6,785,241 issued and 6,716,722 outstanding in 1997 .......................... .1 .1
Additional paid in capital .................................................... 281.7 279.5
Retained deficit .............................................................. (64.2) (70.5)
Unrealized gain on available-for-sale securities, net of tax .................. .5 1.5
Treasury stock, at cost (72,938 shares in 1998 and 68,519 shares in 1997) ..... (1.6) (1.5)
Unearned compensation ......................................................... (.9) --
------- -------
Total stockholders' equity .................................................. 215.6 209.1
------- -------
Total liabilities and stockholders' equity .................................. $ 464.8 $ 460.5
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
2
<PAGE>
ECHELON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES AND REVENUES:
Real estate operations:
Rental, other operations and marina revenues .......................... $ 5.3 $ 5.0 $ 9.9 $ 10.7
Sales of development properties and development rights ................ .4 -- 3.1 .3
Equity in losses of limited partnership investments ................... (.1) (.3) (.6) (.8)
Leasing and lending operations:
Earned income on finance and operating leases ......................... 1.3 1.3 2.2 2.3
Interest income ....................................................... 1.1 1.9 2.2 4.1
Equity in earnings of unconsolidated partnerships ..................... .4 .6 2.5 2.2
Gain on sale of loans ................................................. -- -- -- 4.1
Investment income and realized gains on sales of investments ........... .7 .9 3.0 1.6
------ ----- ------ ------
9.1 9.4 22.3 24.5
------ ----- ------ ------
OPERATING EXPENSES:
Rental, other operations and marina expenses ........................... 2.8 2.8 5.3 6.8
Cost of development properties and development rights sold ............. -- -- 1.6 .3
Depreciation ........................................................... 1.4 1.3 2.7 2.5
Provision for (recovery of) lease, real estate and loan losses ......... (1.6) (.7) (1.6) (.7)
Interest expense on long-term debt, net of amounts capitalized ......... 1.2 2.5 2.6 5.2
Marketing and other administrative ..................................... 2.2 1.8 5.1 4.6
Other (income) expenses, net ........................................... -- .2 -- (1.4)
------ ----- ------ ------
6.0 7.9 15.7 17.3
------ ----- ------ ------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM .................................................... 3.1 1.5 6.6 7.2
INCOME TAX EXPENSE ..................................................... .2 .1 .3 1.1
------ ----- ------ ------
INCOME BEFORE EXTRAORDINARY ITEM ....................................... 2.9 1.4 6.3 6.1
EXTRAORDINARY ITEM:
Loss on extinguishment of debt, net of income
tax benefit of $.5 million in 1997................................... -- -- -- (.8)
------ ----- ------ ------
NET INCOME ............................................................. $ 2.9 $ 1.4 $ 6.3 $ 5.3
====== ===== ====== ======
Basic earnings per common share:
Income before extraordinary item ...................................... $ .43 $ .21 $ .93 $ .90
Extraordinary item, net of tax ........................................ -- -- -- (.12)
------ ----- ------ ------
Net income per common share ........................................... $ .43 $ .21 $ .93 $ .78
====== ===== ====== ======
Diluted earnings per common share:
Income before extraordinary item ...................................... $ .41 $ .21 $ .91 $ .90
Extraordinary item, net of tax ........................................ -- -- -- (.12)
------ ----- ------ ------
Net income per common share ........................................... $ .41 $ .21 $ .91 $ .78
====== ===== ====== ======
Basic weighted average shares of common stock outstanding .............. 6.8 6.8 6.8 6.8
====== ===== ====== ======
Diluted weighted average shares of common stock outstanding ............ 6.9 6.8 6.9 6.8
====== ===== ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ECHELON INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
--------- ---------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income ................................................................... $ 6.3 $ 5.3
Adjustment to reconcile net income to cash provided by
(used in) operating activities:
Depreciation and amortization of financing costs ............................ 2.8 3.0
Extraordinary loss on extinguishment of debt ................................ -- .8
Deferred income taxes ....................................................... (4.6) (3.9)
Amortization related to finance leases ...................................... (.9) (.7)
Provision for (recovery of) lease, loan and real estate losses .............. (1.6) (.7)
Stock-based compensation expense ............................................ .7 --
Gain on sales of assets ..................................................... (3.0) (4.2)
Equity in income of unconsolidated partnerships, net ........................ (1.9) (1.4)
Changes in working capital:
Accounts payable and other liabilities ..................................... 1.9 (6.9)
Other working capital changes .............................................. .6 1.4
Other ....................................................................... (.6) 4.4
------- -------
(.3) (2.9)
------- -------
INVESTING ACTIVITIES:
Purchases of marketable securities ........................................... (7.7) (45.4)
Proceeds from sales of marketable securities ................................. 26.7 --
Proceeds from sales and collections of leases and loans ...................... 15.8 60.9
Real estate property additions ............................................... (40.6) (3.6)
Net proceeds from sales of real estate properties and development rights ..... 2.9 .4
Contributions to unconsolidated partnerships ................................. (5.7) (6.1)
Distributions from unconsolidated partnerships ............................... 5.6 7.9
------- -------
(3.0) 14.1
------- -------
FINANCING ACTIVITIES:
Issuance of long-term debt ................................................... 9.0 --
Repayment of long-term debt .................................................. (2.5) (66.5)
Issuance of common stock ..................................................... .2 --
Purchase of treasury stock ................................................... (.1) --
------- -------
6.6 (66.5)
------- -------
Net increase (decrease) in cash and equivalents ............................... 3.3 (55.3)
BEGINNING CASH AND EQUIVALENTS ................................................ 7.8 63.3
------- -------
ENDING CASH AND EQUIVALENTS
(includes restricted deposits of $1.1 million in 1998)........................ $ 11.1 $ 8.0
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized ........................................ $ 2.2 $ 4.9
======= =======
Income taxes, net of refunds ................................................ $ 4.6 $ 6.6
======= =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING &
FINANCING ACTIVITIES:
Change in funding commitments for limited partnership investments ........... $ -- $ 6.1
======= =======
Issuance of common stock related to LTIP .................................... $ .4 $ --
======= =======
Change in unrealized gain (loss) on available-for-sale securities, net
of tax of $.6 million in both 1998 and 1997................................ $ (1.0) $ .9
======= =======
Delayed equity amortization on leveraged leases ............................. $ .8 $ .8
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying consolidated financial
statements include all adjustments deemed necessary to summarize fairly and
reflect the financial position and results of operations of Echelon
International Corporation (the "Company") for the interim periods presented.
Results of the second quarter of 1998 are not necessarily indicative of results
for the full year. These consolidated financial statements should be read in
conjunction with the financial statements and notes thereto in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997.
Certain amounts previously reported in the Form 10-Q for the three and six
months ended June 30, 1997 have been reclassified to conform with the 1998
presentation.
(2) REAL ESTATE
The depreciable lives and carrying values of the Company's real estate are
as follows:
<TABLE>
<CAPTION>
DEPRECIABLE JUNE 30, DECEMBER 31,
LIVES (YEARS) 1998 1997
--------------- ---------- -------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Real estate held for and under development:
Land and land improvements ............... $ 36.7 $ 31.7
Construction in progress ................. 25.5 3.8
------ ------
62.2 35.5
------ ------
Income producing:
Land and land improvements ............... 15.5 15.2
Buildings and improvements ............... 5-40 89.1 78.0
Equipment and other ...................... 3-10 3.5 2.9
------ ------
108.1 96.1
------ ------
170.3 131.6
Less: accumulated depreciation ............ 18.4 16.5
------ ------
$151.9 $115.1
====== ======
</TABLE>
Capitalized interest during the development of specific projects was $.6
million and $.2 million during the six months ended June 30, 1998 and the year
ended December 31, 1997, respectively.
5
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) LEASES AND LOANS RECEIVABLE
Investments in leases and loans receivable are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ -------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Finance leases:
Rentals receivable ......................... $ 159.4 $ 169.2
Unguaranteed residual values ............... 105.6 105.6
Guaranteed residual values ................. 6.0 6.0
Unearned income ............................ (55.0) (56.4)
Deferred investment tax credits ............ (13.0) (13.3)
------- -------
Total finance leases ..................... 203.0 211.1
Commercial finance loans receivable ......... 39.1 45.1
Allowance for losses ........................ (18.5) (20.1)
------- -------
223.6 236.1
Less: current portion ....................... 38.1 39.8
------- -------
$ 185.5 $ 196.3
======= =======
</TABLE>
Finance leases consist of a direct finance lease and leveraged lease
investments which are primarily in aircraft. The majority of the leases have
remaining terms of 8 to 13 years, with one lease currently scheduled to mature
in 20 years. Rentals receivable from finance leases represent unpaid rentals
less principal and interest on nonrecourse third-party debt. The Company's
share of rentals receivable is subordinate to the debt holders who have
security interests in the leased assets.
The Company's commercial finance loans are secured by first mortgage liens
on the related commercial real estate or by security interests in aircraft.
These loans are further collateralized, where applicable, by an assignment to
the Company of the borrowers' lease agreements, and, in some cases, third party
guaranties.
During June 1998, the Company received complete repayment on a $3.0
million real estate loan that was considered to be impaired. As a result of the
loan payoff, Echelon reversed the $1.6 million allowance for losses on leases
and loans previously recorded for this loan.
6
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) LONG-TERM DEBT
The Company's long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
INTEREST JUNE 30, DECEMBER 31,
RATE 1998 1997
--------------- ---------- -------------
(UNAUDITED)
(IN MILLIONS)
<S> <C> <C> <C>
Northwestern Mutual Life Insurance
Company ........................................... 7.09% $44.7 $45.0
Salomon Brothers Realty Corp. ...................... 7.16%(a) 13.0 13.0
SouthTrust Bank .................................... 7.26%(a) 9.0 --
Delayed equity obligation on finance lease ......... 10.00% 17.1 18.5
Other .............................................. 8.50%(a) 0.6 0.6
----- -----
84.4 77.1
Less: current portion of long-term debt ............ 12.4 12.2
----- -----
$72.0 $64.9
===== =====
</TABLE>
- ----------------
(a) Interest rate at June 30, 1998.
In July 1997, the Company closed on a $16.5 million construction loan at
an interest rate of LIBOR plus 1.60% per annum which is being utilized to fund
development of ECHELON AT BAY ISLE KEY, a 369-unit multi-family residential
community on land that the Company owns in the Tampa Bay area. During the six
months ended June 30, 1998, the Company made construction draws on this loan
totaling $9.0 million. The initial term of the construction loan is two years,
with the ability to extend the loan for an additional five years from the
completion of construction. Teacher's Insurance and Annuity Association of
America ("TIAA") has committed to provide the permanent financing for this
development, as discussed below.
In April 1998, the Company closed on a $18.6 million construction loan at
an interest rate of LIBOR plus 1.50% per annum which will be utilized to fund
the development of ECHELON AT THE RESERVE, a 314-unit multi-family residential
community on land that the Company owns in CARILLON PARK in the Tampa Bay area.
As of June 30, 1998, Echelon had not made any construction draws on this loan.
The Company will begin making construction draws after the Company's initial
equity funding of $6.2 million of the construction costs, including a $2.2
million land contribution. The initial term of the construction loan is three
years, with the ability to extend the loan for an additional two years from the
completion of construction. TIAA has committed to provide the permanent
financing for this development, as discussed below.
In May 1998, the Company executed an amendment to the Salomon Brothers
Realty Corp. loan, which increases the amount of available credit on the
existing loan to $30.0 million and reduces the interest rate on the entire loan
to LIBOR plus 1.50% per annum. Echelon's real estate loan portfolio and a
commercial property, BAYBORO STATION, secure the loan. The entire loan matures
in May 2000 with the ability to extend through May 2002.
In May 1998, Echelon executed a commitment letter with AmSouth Bank for a
$50.0 million Advised Guidance Line of Credit. The line of credit will be used
to provide construction financing for multi-family and commercial projects in
the Company's pipeline, as approved by AmSouth Bank. Each advance from the line
of credit will be considered a loan. The interest rate for each loan will be
the lesser of the prime rate of interest or the LIBOR rate plus 1.50% per
annum. The term for each
7
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(4) LONG-TERM DEBT--(CONTINUED)
multi-family loan is 36 months and for each commercial loan is 30 months. The
repayment terms of the loans are interest only, with the entire principal and
any accrued interest due at the maturity of the loans.
In May 1998, the Company also executed a commitment letter with TIAA for a
$55.5 million loan at an interest rate of 7.15% per annum. The proceeds of the
loan are to be used for the permanent financing of four specific projects,
which will also collateralize the loan. The terms of the loan provide for the
funding for each project to occur based on specific conditions. Each loan
disbursement shall constitute a separate note, which will mature 10 years from
the date of the first loan disbursement. The first loan disbursement requires
interest-only payments for the first 12 months and monthly principal and
interest payments based on a 30-year amortization schedule. The remaining
disbursements require monthly principal and interest payments based on a
30-year amortization schedule. Under the terms of the commitment, TIAA requires
the Company to remit a refundable application fee. The Company negotiated the
application fee to be maintained in the form of stand-by letters of credit,
which will be reduced as the loans mature. As of June 30, 1998, Echelon has a
total of $1.1 million of certificates of deposits securing these letters of
credit.
In July 1998, the Company closed on a loan amendment with Northwestern
Mutual Life Insurance Company which increases the amount of the existing loan
by $11.0 million and reduces the interest rate on the entire loan to 6.98% per
annum. The loan is now secured by two additional commercial properties in
Echelon's real estate portfolio, CENTRAL STATION (formerly known as SOUTHCORE
COMMERCIAL) and MCNULTY PARKING GARAGE. The entire loan matures seven years
from the date of closing.
(5) STOCKHOLDERS' EQUITY
During the six months ended June 30, 1998, the Company had the following
stockholders' equity related transactions:
/bullet/ Issuance of 90,181 shares of restricted Common Stock under the
Echelon International Corporation Long-Term Incentive Plan ("LTIP")
in accordance with executive employment contracts. In conjunction
with the issuance of the restricted Common Stock, the Company
recorded $1.6 million of unearned compensation and subsequently
recognized $.7 million of compensation expense during the six months
ended June 30, 1998. The unearned compensation will be amortized as
compensation expense over the vesting period of the restricted
Common Stock.
/bullet/ Issuance of 120,250 stock options under the LTIP and the Echelon
International Corporation 1996 Stock Option Plan ("SOP"). The stock
options were granted at market value on the date of grant. The stock
options granted under the LTIP are performance based options which
cliff vest at the end of nine years with a provision for early
vesting if certain performance goals are achieved. The stock options
granted under the SOP vest over a five year period.
/bullet/ Issuance of 6,262 shares of Common Stock in conjunction with the
Company's SOP.
/bullet/ Issuance of 1,274 shares of Common Stock under the Echelon
International Corporation Non-Employee Directors' Stock Plan.
/bullet/ Repurchase of 4,419 shares of Common Stock, which resulted in
additional treasury stock, at cost, of $.1 million.
8
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) STOCKHOLDERS' EQUITY--(CONTINUED)
The net income and common shares used to compute basic and diluted
earnings per share is presented in the following table:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ----------------
1998 1997 1998 1997
------ ------ ------ -------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
BASIC
Weighted average number of shares:
Average common shares outstanding ................... 6.8 6.8 6.8 6.8
=== === === ===
Net income used to compute basic earnings per share:
Net income .......................................... $2.9 $1.4 $6.3 $5.3
==== ==== ==== ====
Basic earnings per common share ...................... $.43 $.21 $.93 $.78
==== ==== ==== ====
DILUTED
Weighted average number of shares:
Average common shares outstanding ................... 6.8 6.8 6.8 6.8
Dilutive effect for stock options and contingently
issuable common shares ............................ .1 -- .1 --
---- ---- ---- ----
Weighted average shares ............................. 6.9 6.8 6.9 6.8
==== ==== ==== ====
Net income used to compute diluted earnings per share:
Net income .......................................... $2.9 $1.4 $6.3 $5.3
==== ==== ==== ====
Diluted earnings per common share .................... $.41 $.21 $.91 $.78
==== ==== ==== ====
</TABLE>
(6) CONDENSED STATEMENTS OF INCOME AND DISCLOSURES OF
UNCONSOLIDATED PARTNERSHIPS
The Company has a 50% interest in a joint venture, which is engaged in the
business of leasing aircraft equipment. Additionally, the Company has
investments in affordable housing limited partnerships of which no investment
exceeded 12% as of both June 30, 1998 and December 31, 1997. The Company
accounts for its investments in the joint venture and limited partnerships by
the equity method of accounting.
9
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) CONDENSED STATEMENTS OF INCOME AND DISCLOSURES OF
UNCONSOLIDATED PARTNERSHIPS--(CONTINUED)
Presented below is summarized financial information for the aircraft
equipment and leasing joint venture for the three and six months ended June 30,
1998 and 1997, respectively. Amounts reflect 100% of the joint venture's
balances and results of its operations for these periods.
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------ ---------------------
1998 1997 1998 1997
------ --------- --------- ---------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues ........... $912 $1,409 $5,075 $2,870
Expenses ........... 15 126 30 252
---- ------ ------ ------
Net income ......... $897 $1,283 $5,045 $2,618
==== ====== ====== ======
</TABLE>
The joint venture's revenues for the six months ended June 30, 1998
include a $3.2 million gain on the sale of two aircraft engines.
The Company's investments in affordable housing investments through
limited partnerships range between a total ownership percentage of 7.1% to
11.6% as of June 30, 1998. Echelon recorded losses of $.6 million and $.8
million on these investments for the six months ended June 30, 1998 and 1997,
respectively.
During 1997, Echelon signed commitments to provide total capital
contributions of $25.8 million to affordable housing tax credit limited
partnerships. Echelon has funded $19.1 million and $13.4 million of these
commitments as of June 30, 1998 and December 31, 1997, respectively. The total
commitments of $25.8 million are included as investments in unconsolidated
partnerships in the Company's consolidated balance sheets. As of June 30, 1998,
the remaining commitments to be funded within one year are $4.0 million and are
included in the current portion of funding for limited partnership investments,
and commitments to be funded thereafter are $2.7 million and are included in
other long-term liabilities on the consolidated balance sheet. The Company's
overall investment return includes both the tax benefits resulting from the
losses generated by these investments and the realization of the housing tax
credits from the investments.
(7) EFFECTIVE INCOME TAX RATE
The Company's effective income tax rate differs from the statutory income
tax rate primarily due to tax credits related to the Company's investment in
affordable housing limited partnerships, amortization of investment tax credits
related to the Company's leveraged lease portfolio, and differences in rates
between previously deferred taxes and current effective tax rates.
(8) RELATED PARTY TRANSACTIONS
In April 1998, the Board of Directors approved an interest-free loan
program for Executive Officers for the purpose of assisting the Executive
Officers in meeting tax liabilities associated with the lapse of restrictions
on restricted Common Stock. During May 1998, the Company issued $.3 million of
unsecured promissory notes to two Executive Officers in conjunction with this
loan program. The promissory notes mature in April 2003. The Company recognized
$.1 million in salary expense in conjunction with the imputation of interest on
these promissory notes.
10
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
The Company is subject to regulation with respect to the environmental
effects of its operations. The Company's disposal of hazardous waste through
third party vendors may result in costs to clean up facilities found to be
contaminated. Federal and state statutes authorize governmental agencies to
compel responsible parties to clean up certain abandoned or uncontrolled
hazardous waste sites. The Company may be responsible for environmental cleanup
at certain sites. Based on information currently available to the Company,
Echelon estimates that its share of liability for cleaning up these sites
ranges from $.1 million to $1.0 million, and has reserved $.2 million for
potential costs. Management currently believes that the ultimate outcome of
these matters will not have a material adverse effect upon the Company's
results of operations, financial condition or liquidity.
The Company is currently involved in the construction of several
commercial projects and multi-family residential communities and had
outstanding construction commitments with contractors with remaining amounts
totaling $37.9 million at June 30, 1998.
As of June 30, 1998, Echelon had a total of 11 contingent contracts,
letters of intent or joint venture agreements, subject to the Company's final
due diligence, to acquire land for the development of an estimated 3,100
multi-family residential units at an aggregate estimated development cost of
$247.0 million.
Through a previous partnership, the Company remains contingently liable
for first mortgage bonds issued to residents of the life care communities owned
by the former partnership. The contingent liability reduces over time as those
who were residents at the time of the sale of the Company's interest
discontinue their residency. If the current owners fail to perform their
obligations and if the partnership assets, consisting primarily of land and
buildings, were worthless, the Company could be liable for an additional $26.5
million as of December 31, 1997. The Company considers the incidence of this
liability to be remote based on asset values and the indemnification agreement
from the current owners to the Company.
(10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which established standards for reporting comprehensive
income. SFAS No. 130 defines comprehensive income as the change in equity of an
enterprise except those resulting from stockholder transactions. All components
of comprehensive income are required to be reported in a new financial
statement that is displayed with equal prominence as existing financial
statements. The Company adopted this standard as of January 1, 1998.
11
<PAGE>
ECHELON INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- -------------------
1998 1997 1998 1997
-------- ------ --------- -------
(IN MILLIONS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income ............................................. $ 2.9 $1.4 $ 6.3 $5.3
----- ---- ------ ----
Other comprehensive income, net of tax:
Change in unrealized holding gain on available-for-sale
securities during period ............................ (.5) 1.3 .1 .9
Less: reclassification adjustment for realized gains
included in net income ............................ (.1) -- (1.1) --
----- ---- ------ ----
Other comprehensive income .......................... (.6) 1.3 (1.0) .9
----- ---- ------ ----
Comprehensive income ................................... $ 2.3 $2.7 $ 5.3 $6.2
===== ==== ====== ====
</TABLE>
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which established accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. The Company will be
required to adopt this standard for the quarter ended September 30, 1999 and,
based on current circumstances, does not believe the application of the new
rules will have a material impact on the Company's consolidated financial
statements.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Echelon International Corporation is a real estate company which develops,
owns and manages commercial and multi-family residential real estate (the "Real
Estate Business"). The Company also owns and manages a portfolio of financial
assets consisting primarily of leased aircraft and other assets and
collateralized financing of commercial real estate and aircraft (the "Leasing
and Lending Business"). Echelon is continuing to withdraw from the aircraft and
real estate lending business to focus on its core real estate operations.
Prior to December 18, 1996 ("Distribution Date"), the Company operated as
a wholly-owned subsidiary of Florida Progress Corporation ("Florida Progress").
Effective on the Distribution Date, Florida Progress distributed the Company's
stock to Florida Progress shareholders (one share of the Company for each
fifteen shares of Florida Progress) as a tax-free dividend (the
"Distribution"). The Distribution established the Company as a publicly held
corporation, separate from Florida Progress.
The Company's operations for the six months ended June 30, 1998 include
the following transactions:
/bullet/ The sale of 6.57 acres of land in Carillon Park for $2.7 million,
resulting in a pre-tax gain of $1.1 million.
/bullet/ The sale of two aircraft engines by Progress Potomac Capital
Ventures, in which Echelon has a 50% interest, for $5.7 million,
resulting in a pre-tax gain of $1.6 million to Echelon.
/bullet/ The collection in full of a $3.0 million real estate loan
receivable from Madison Building, Inc. which was originally
scheduled to mature in November 1998. As a result of the loan
payoff, Echelon reversed the $1.6 million allowance for losses on
leases and loans previously recorded, resulting in after-tax income
of $1.0 million.
/bullet/ The collection of a $2.3 million deferred rent note receivable
from Continental Airlines which was originally scheduled to mature
in 2000.
/bullet/ The purchase of the land for the development of ECHELON AT
NORTHLAKE, a 256-unit multi-family residential community in Atlanta,
Georgia, at a cost of $4.0 million. Construction is planned to begin
in the third quarter of 1998.
/bullet/ The ongoing construction of two multi-family residential
communities, ECHELON AT BAY ISLE KEY and ECHELON AT THE RESERVE,
both located in the Gateway Area of Tampa Bay, and ongoing
construction and tenant improvements on four commercial projects;
BAYBORO STATION, CENTRAL STATION (FORMERLY KNOWN AS SOUTHCORE
COMMERCIAL), MCNULTY PARKING GARAGE and CASTILLE AT CARILLON. Total
capital expenditures for all developments were $40.6 million in the
first half of 1998.
Because of the Company's on-going execution of targeted strategies,
including dispositions of non-strategic assets and pursuit of additional
strategic initiatives, the results of operations in the second quarter and
first six months of 1998 are not necessarily indicative of future results.
13
<PAGE>
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 1997
Net income for the three months ended June 30, 1998 was $2.9 million or
$.43 and $.41 basic and diluted earnings per share, respectively. Net income
for the six months ended June 30, 1998 was $6.3 million or $.93 basic and $.91
diluted earnings per share, respectively. This compares to net income of $1.4
million or $.21 basic and diluted earnings per share and $5.3 million or $.78
basic and diluted earnings per share for the same periods in 1997.
REVENUES
Sales and revenues for the three months ended June 30, 1998 decreased $.3
million and decreased $2.2 million for the first six months of 1998, in
comparison with the same periods in 1997. The decrease in sales and revenues is
primarily due to a decrease in interest income from leasing and lending
operations, as further discussed below.
Sales of development properties and development rights in the first six
months of 1998 were $3.1 million compared to $.3 million in the first six
months of 1997. The increase in the sales of development properties and
development rights resulted from the sales of land and development rights in
CARILLON PARK in the first six months of 1998. The CARILLON PARK land sale was
to a third party owner for land contiguous to the owner's current land
holdings. The sale of development rights in CARILLON PARK was to a third party
owner for further development of its current land holdings. Echelon intends to
develop much of the unsold CARILLON PARK land for its own account and, if and
when market conditions warrant, to possibly market the remaining land to third
parties. Rental, other operations and marina revenues for first six months of
1998 decreased $.8 million over the same period in 1997 primarily due to the
Company's decision to discontinue the sale of boats as a component of marina
operations.
As part of Echelon's strategy to focus on real estate development, Echelon
has invested in, and intends to invest further in, affordable housing
developments entitled to the benefits of housing tax credits. The Company's
overall investment return includes both the tax benefits resulting from the
losses generated by these investments and the realization of the housing tax
credits from the investments. Equity in losses of real estate partnerships
reduced revenue for the three and six months ended June 30, 1998 by $.1 million
and $.6 million, respectively. Equity in losses on these same investments
reduced revenue for the three and six month periods ended June 30, 1997 by $.3
million and $.8 million, respectively. These losses occurred as a result of the
Company recording its share of losses from housing tax credit limited
partnerships. The Company recorded a $.6 million and $1.3 million tax credit
for the three and six months ended June 30, 1998, respectively, as reduction of
income tax expense.
Interest income from leasing and lending operations for the six months
ended June 30, 1998 declined by $1.9 million compared to the first half of 1997
as a result of the sales and payoffs of loans receivable as the Company
continues to execute its strategy to liquidate non-strategic assets and
redirect the capital to real estate acquisition and development.
Equity in earnings of unconsolidated partnerships decreased $.2 million
and increased $.3 million, respectively, in the three and six months ended June
30, 1998 as compared to the same periods in 1997. The increase for the six
months ended June 30, 1998 is due primarily to the $1.6 million pretax gain on
the sale of an asset in January 1998 in a joint venture in which Echelon has a
50% interest. Revenues in the six months of 1997 included $.9 million from a
pretax gain on the sale of an asset in a partnership in which Echelon had
approximately a 26% interest. As of December 31, 1997, the Company had no
ownership interest in this partnership.
During the first half of 1998, there were no gains on sales of loans. The
gain on sale of loans of $4.1 million in the six months ended June 30, 1997 was
the result of the recognition of a deferred gain on loans receivable that were
sold.
14
<PAGE>
Investment income and realized gain on sale of investments increased $1.4
million for the six months ended June 30, 1998 in comparison with the same
period of 1997 primarily as a result of $1.8 million of net gains on sales of
marketable securities in the six months ended June 30, 1998.
OPERATING EXPENSES
Operating expenses for the three and six months ended June 30, 1998
decreased by $1.9 million and $1.6 million, respectively, compared to the same
periods in 1997.
Rental, other operations and marina expenses decreased $1.5 million during
the six months ended June 30, 1998 as compared to the same period in 1997
primarily due primarily to the Company's decision to discontinue the sale of
boats, as discussed above.
Interest expense on long-term debt, net of amounts capitalized, decreased
$1.3 million and $2.6 million during the three and six months ended June 30,
1998, respectively, compared to the same periods 1997 due to the reduction of
debt resulting from loan receivable sales and payoffs and asset sales and the
refinancing of the Company's debt at a lower interest rate in the fourth
quarter of 1997.
The provision for (recovery of) lease, loan and real estate losses was
$(1.6) million for the six months ended June 30, 1998 as a result of complete
repayment of a real estate loan for which the Company had previously recorded a
$1.6 million allowance for loan losses.
Marketing and other administrative expenses were $2.2 million and $5.1
million in the three and six months ended June 30, 1998, respectively. This
compares to marketing and other administrative expenses of $1.8 million and
$4.6 million in the same periods of 1997. This represents a $.5 million
increase during the six months ended June 30, 1998 as compared to the same
period in 1997. In both 1998 and 1997, marketing and other administrative
expenses include the full year accrual of management incentive and long-term
incentive compensation recorded as a result of the Company achieving the annual
1998 and 1997 goals in the first quarter of each of the years, respectively. In
addition, prior to the formation of the Company's multi-family and commercial
pipeline of potential projects, certain costs were appropriately expensed
rather than capitalized. As specific projects are approved, costs related to
these projects will be capitalized.
Other income of $1.4 million in the six months ended June 30, 1997 was
primarily the result of a $1.3 million gain related to the sale of the
Company's interest in a previously written-off oil rig lease.
EXTRAORDINARY ITEM
The Company had no extraordinary items during the six months ended June
30, 1998. During the six months ended June 30, 1997, the Company recorded an
after-tax extraordinary loss of $(.8) million on the write-off of $1.3 million
of financing costs related to the early extinguishment of debt.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF LIQUIDITY
The Company's sources of liquidity have been primarily from the continued
maturity and collection of Echelon's loan portfolio, proceeds from the sale of
certain non-strategic assets, operating cash flow and, with respect to
Echelon's real estate development, from project-based and other financings.
Future sources of funds may also come from the capital markets.
At the Distribution date, Echelon and Florida Progress entered into a
distribution agreement, which requires Echelon to maintain liquidity levels of
at least $25.0 million and $17.0 million throughout 1998 and 1999,
respectively.
15
<PAGE>
CASH FLOW USED IN OPERATING ACTIVITIES
Cash flow used in operating activities was $.3 million for the six months
ended June 30, 1998. The primary use of $4.6 million of cash related to
previously deferred tax liabilities becoming due and payable as a result of
collections of lease payments. Deferred income taxes from leveraged leasing
activities, which are reflected in cash flows from operating activities, are
offset by related collections from lessees, which are included in cash flows
from investing activities. The primary source of cash was an increase in
accounts payable and other liabilities of $1.9 million.
CASH FLOW USED IN INVESTING ACTIVITIES
Echelon's net cash flow used in investing activities for the first six
months of 1998 was $3.0 million. The foregoing cash flows reflect the $15.8
million in proceeds received from the collection of leases and loans. The
collection of leases and loans includes $2.3 million from Continental Airlines
for the payoff of a deferred rent note receivable originally scheduled to
mature in 2000 and $3.0 from Madison Building, Inc. for the payoff of a real
estate loan originally scheduled to mature in November 1998. Echelon expects
investing activities to continue to be a net use of funds as Echelon continues
to build the Real Estate Business. Purchases of marketable securities,
including debt securities with maturities greater than three months, were $7.7
million and proceeds from sales of marketable securities were $26.7 million
during the six months ended June 30, 1998.
Capital expenditures, which are reported as real estate property
additions, were $40.6 million for the six months ended June 30, 1998. The
capital expenditures were primarily for the ongoing construction of two
multi-family residential communities, ECHELON AT BAY ISLE KEY and ECHELON AT
THE RESERVE, the land purchase for the development of ECHELON AT NORTHLAKE and
construction and tenant improvements on four commercial projects, BAYBORO
STATION, CENTRAL STATION (FORMERLY KNOWN AS SOUTHCORE COMMERCIAL), MCNULTY
GARAGE and CASTILLE AT CARILLON. For the remainder of 1998, capital
expenditures for tenant improvements, land development, commercial office
development and multi-family residential development are projected to be
approximately $33.0 million to $53.0 million. These expenditures are expected
to be funded through project-based and other financings and from existing cash
and marketable securities.
CASH FLOW FROM FINANCING ACTIVITIES
During the six months ended June 30, 1998, the Company made draws on the
BAY ISLE KEY construction loan of $9.0 million and scheduled loan repayments on
the Company's outstanding debt of $2.5 million.
OFF-BALANCE SHEET RISK
The Company is currently involved in the construction of several
commercial projects and multi-family residential communities and had
outstanding construction commitments with contractors with remaining amounts
totaling $37.9 million at June 30, 1998.
As of June 30, 1998, Echelon had a total of 11 contingent contracts or
letters of intent, subject to the Company's final due diligence, to acquire
land for the development of an estimated 3,100 multi-family residential units
at an aggregate estimated development cost of $247.0 million. No assurance can
be given that Echelon will acquire this land or develop the multi-family
residential units or that the Company will be able to secure financing for the
construction of these developments.
Through a previous partnership, Echelon remains contingently liable for
first mortgage bonds issued to residents of the life care communities owned by
such partnership. The contingent liability reduces over time as those who were
residents at the time of the sale of Echelon's partnership interest discontinue
their residency. If the current owners were to fail to perform their
obligations and if the partnership assets, consisting primarily of land and
buildings, were worthless, Echelon could be liable
16
<PAGE>
for an additional $26.5 million as of December 31, 1997. Echelon considers the
incidence of this liability to be remote based on asset values and the
indemnification agreement from the current owners to Echelon.
GENERAL OVERVIEW OF STRATEGIC PLAN
The overriding objective of the Echelon management team, and of all
Echelon's employees, is to create superior long-term value for stockholders.
To achieve this objective, Echelon will dynamically grow its real estate
assets and operations through the execution of targeted strategies. While these
targeted strategies evidence the Company's best decisions to date, the
strategies are flexible enough to be recast to deal with changing economic
conditions, capital market fluctuations, business cycles and other market
conditions. Echelon continuously evaluates its strategic direction and the
section below updates and summarizes Echelon's current strategies.
MULTI-FAMILY
As previously communicated, multi-family residential development has been
identified as the primary driver of Echelon's growth over the next five years.
During the next five years, Echelon expects to develop or acquire 20 to 40
multi-family residential communities, each comprised of approximately 150 to
350 units. Included in these developments are two to five affordable housing
developments of 150 to 250 units each. Within the next 12 months, the Company
plans to be under construction on approximately 2,400 to 3,800 units. In
consideration of market opportunities, the Company intends to integrate its
build-and-hold developments with merchant build developments to maximize
stockholder return.
Echelon is capitalizing on the opportunity provided by its existing
inventory of property in the Tampa Bay area as well as pursuing other locations
in the southeast and southwest United States. Currently, the following
multi-family communities are, or will be, under development in 1998:
/bullet/ Construction of the clubhouse and the first 8 buildings, of a
total of 14 buildings, for ECHELON AT BAY ISLE KEY, a 369-unit
multi-family residential community in the Gateway area of Tampa Bay,
were completed through July 1998. Leasing is in process and to date,
over 150 units have been leased. Construction will be completed by
the fourth quarter of 1998, with stabilization projected to be ahead
of the original schedule.
/bullet/ Phase Two of ECHELON AT BAY ISLE KEY, which will add up to 84
units to the community, is planned to begin construction in the next
six months.
/bullet/ In CARILLON PARK, construction has begun on the 314 units of Phase
One of ECHELON AT THE RESERVE. In total, CARILLON PARK has remaining
capacity for 1,169 units.
/bullet/ ECHELON AT NORTHLAKE, located in Atlanta, Georgia, will be a
256-unit multi-family residential community. The land for the
development was purchased in May 1998 at a cost of $4.0 million, and
construction is planned to begin in the third quarter of 1998.
/bullet/ ECHELON AT WOODLAND PARK, located in Tulsa, Oklahoma, will be a
232-unit multi-family residential community. The land for the
development was purchased in July 1998 at a cost of $1.0 million,
and construction is planned to begin in the third quarter of 1998.
Next, to achieve geographic diversity, the Company has established a
pipeline of development sites in select markets in the southeast and southwest
United States. Initial target markets are identified using a sophisticated
proprietary software system, rather than by random market visits. The market
research software delivers a more objective and pragmatic assessment of
markets, while minimizing the
17
<PAGE>
time necessary to screen potential markets. Following initial target market
selection, markets are inspected by experienced Echelon management. This
systematic approach may reduce the market selection cycle time and allow
Echelon developers the opportunity to identify and reach a target market ahead
of competition and site price escalation. This software system also assists in
designing the appropriate community for each target market.
As of August 1998, Echelon's development program has produced the current
pipeline of 10 sites under contract, letter of intent or joint venture
negotiations, subject to the Company's final due diligence. The Company's
pipeline currently includes the following developments:
<TABLE>
<CAPTION>
ESTIMATED
NUMBER
DEVELOPMENT NAME OF UNITS LOCATION
- ---------------------------------------- ---------- ---------------------------
<S> <C> <C>
Echelon at Briargate ................... 395 Colorado Springs, Colorado
Echelon at Twenty Mile Village ......... 326 Parker, Colorado
Echelon at Keller Town Center .......... 276 Keller, Texas
Echelon at Lakeside .................... 168 Plano, Texas
Echelon at Mission Ranch ............... 294 Mesquite, Texas
Echelon at Chaney Place ................ 300 Orlando, Florida
Echelon at Uptown ...................... 200 Orlando, Florida
Echelon at the Ballpark ................ 393 Memphis, Tennessee
Echelon at Watters Creek ............... 185 Allen, Texas
Echelon at Memorial Creek .............. 292 Tulsa, Oklahoma
---
Total ............................... 2,829
=====
</TABLE>
The Company expects to maintain an active pipeline of ten to twenty sites
in target markets.
The Company also plans to develop and manage affordable housing
communities that are entitled to the benefits of Housing Tax Credits. Echelon
has resubmitted the application to the State of Florida for ECHELON AT
BAYBRIDGE. The development of this 228-unit multi-family residential community
on the Company's 4th Street property requires the housing tax credits to be
awarded by the Florida Housing Finance Corporation.
The Company continues to evaluate possible acquisitions, which include
other multi-family development companies and/or multi-family assets. Some
growth of the multi-family portfolio is expected to result from strategic
acquisition.
COMMERCIAL
During the next five years, the Company expects to hold its core office
buildings and expand its commercial real estate portfolio by developing, or
acquiring, 750,000 to 1,500,000 square feet of commercial office space. A
substantial amount of this space will be developed on Echelon's existing land
inventory in the Tampa Bay area of Florida, with the balance developed through
land acquisition in other southeast and southwest target markets in the United
States.
Currently, the following commercial projects, all located in the Tampa Bay
area, are under development:
/bullet/ The construction and improvements for BAYBORO STATION (80,991
rentable square feet) were completed in the second quarter of 1998.
Florida Power Corporation has leased 100% of the building under a
10-year lease and moved into the building in April and May of 1998.
18
<PAGE>
/bullet/ The construction and tenant improvements for CENTRAL STATION
(FORMERLY KNOWN AS SOUTHCORE COMMERCIAL) (133,279 rentable square
feet) were completed in the second quarter 1998. Florida Power
Corporation has leased 100% of the building under a 15-year lease
and moved into the building in June and July of 1998.
/bullet/ The construction of MCNULTY PARKING GARAGE, containing 714 parking
spaces and 9,000 square feet of ground floor retail space, is
continuing with an on-schedule completion date in December 1998.
MCNULTY PARKING GARAGE will provide parking for the tenants of
CENTRAL STATION, MCNULTY STATION and BARNETT TOWER.
/bullet/ The construction of CASTILLE AT CARILLON, which is two office
buildings totaling 103,900 square feet, began in May 1998. Echelon
plans to occupy approximately 25,000 square feet as its corporate
headquarters as the Company has leased 100% of the office space
currently occupied in BARNETT TOWER. The Company also has letters of
intent for over 15,000 rentable square feet from third party tenants
and is currently in discussion with other third party tenants for an
additional 30,000 rentable square feet.
/bullet/ 700 CARILLON, a 147,100 square foot office building, will provide
state-of-the-art building technology, along with parking of five
cars per thousand rentable square feet of office space. The design
of 700 CARILLON is complete and ready to submit for building
permits. The construction of the office building will commence when
anchor tenants are secured.
/bullet/ The conceptual design plans are continuing for CARILLON TOWN
CENTER, an entertainment, retail, office, hotel and athletic club
project, designed to add amenities to CARILLON PARK. Construction
will commence when anchor tenants are secured. The ownership
structure of CARILLON TOWN CENTER may include ownership by Echelon,
joint ventures, or the sales of land for development to third
parties.
Although the Company plans to hold its core office buildings during this
planning period, short, medium and long-term exit strategies have been
developed for all currently owned commercial real estate. The Company intends
to sell non-core commercial and industrial properties as opportunities arise.
Echelon continues to evaluate the acquisition of other commercial real
estate development companies, real estate based operating companies and/or
commercial real estate assets as opportunities become available. Some growth of
the commercial portfolio is expected to come from strategic acquisitions.
REAL ESTATE MANAGEMENT AND BROKERAGE SERVICES
The real estate management and brokerage services business segment is
complementary to the Company's multi-family and commercial real estate
operations. Growth is expected to occur primarily as a result of the growth in
the multi-family and commercial real estate operations, and the growth of
third-party revenue associated with leasing and property and asset management.
In addition, Echelon continues to evaluate the acquisition of real estate
management and/or brokerage companies as opportunities become available. Some
growth in the real estate management and brokerage services is expected to come
from strategic acquisitions.
INVESTMENTS IN FINANCIAL ASSETS
The Company generally plans to hold its leveraged lease portfolio until
maturity or until market values exceed termination values. At that time, the
Company will either sell or re-lease the assets, depending upon which
alternative provides the greatest risk-adjusted return. The Company will
continue to execute a financial strategy that integrates the tax benefits
provided by its investments in affordable housing limited partnerships with the
deferred tax liability of the leveraged lease portfolio in order to reduce its
federal income tax liability.
19
<PAGE>
Operating leases and direct finance leases in aircraft and related
equipment will continue to be actively managed to maximize their value, which
may include the sale of the assets.
Significant transactions involving the Company's investment in financial
assets during the six months ended June 30, 1998 include the following:
/bullet/ During the six months ended June 30, 1998, a joint venture in
which Echelon has a 50% interest, sold two aircraft engines which
resulted in a pre-tax gain of $1.6 million to the Company.
/bullet/ During the three months ended June 30, 1998, Echelon was paid in
full on a deferred rent note receivable of $2.3 million from
Continental Airlines. The note receivable was originally scheduled
to mature in 2000.
/bullet/ During the three months ended June 30, 1998, Echelon was paid in
full on a $3.0 million real estate loan from Madison Building, Inc.
The real estate loan was originally scheduled to mature in November
1998. As a result of the loan payoff, Echelon reversed the $1.6
million allowance for losses on leases and loans previously
recorded, resulting in after-tax income of $1.0 million.
As communicated previously, Echelon will continue to withdraw from the
aircraft and real estate lending business to focus on its core real estate
operations. The Company will collect the outstanding loan balances as soon as
practical, maximize the value of each asset, and redeploy the capital from the
loan portfolio to repay debt and/or invest in real estate operations. Echelon
expects to liquidate the loan portfolio by 2002.
Echelon expects to obtain sufficient capital from its operations, asset
sales, loan collections, project based and other financings, and the capital
markets sufficient to execute its strategic plan. However, no assurance can be
given that such capital will be available in sufficient amounts to execute this
plan.
20
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The Company considers certain statements contained herein regarding
matters that are not historical facts are forward-looking statements, including
certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Because such statements involve
risks and uncertainties, actual strategies and the timing, and expected results
thereof, may differ materially from those expressed or implied by such
forward-looking statements.
Echelon wishes to caution readers that in addition to the important
factors described elsewhere in this Form 10-Q, the following important factors,
among others, could affect Echelon's actual results and could cause Echelon's
actual consolidated results during 1998, and beyond, to differ materially from
those expressed or implied in any forward-looking statements made by, or on
behalf of Echelon.
Echelon's anticipated increase in its level of real estate development
activities will require a significant amount of capital and the ability to
acquire land identified for future real estate development. Accordingly, the
extent of Echelon's real estate development will depend upon the amount of
funds generated through operating activities, maturity and collection of loans,
planned asset sales, project-based and other financings and the capital markets
and the ability to acquire land identified for future real estate development.
There can be no assurance that operating activities, maturity and collection of
loans, planned asset sales and project-based and other financings or the
capital markets will generate net proceeds for Echelon in amounts and at times
necessary to enable Echelon to carry out these development activities. There
can also be no assurance that Echelon will be able to acquire land identified
for future real estate development.
/bullet/ The successful implementation of Echelon's strategic and business
plans will depend in a large part on certain key officers, including
Mr. Darryl A. LeClair, President and Chief Executive Officer and Mr.
W. Michael Doramus, Executive Vice President, who have managed
Echelon's businesses and participated in the development of
Echelon's business plan. Due to the unique experience of these key
officers and their knowledge of Echelon's assets, such individuals
could not be easily replaced, and the loss of such key officers
could have a material adverse effect on the Company. Echelon has
obtained a key-man life insurance policy for Mr. LeClair.
/bullet/ As a real estate development and management company, Echelon is
and will be subject to certain risks incident generally to the
ownership, development and management of real estate properties.
These risks include the cyclical nature of real estate markets,
governmental regulations and the need for governmental approvals,
general risk of acquisition, development, and construction, tenant
defaults, possible environmental liabilities, and competition from
other real estate owners and developers.
/bullet/ Currently, substantially all of Echelon's owned real estate
properties are located in the State of Florida, primarily in the
Tampa Bay area, including St. Petersburg and Tampa, and over 85% of
Echelon's commercial rental space (measured by rentable square
footage) is located in this area. Due to this current lack of
geographical diversification, Echelon is dependent upon the
continued demand for office, multi-family residential, industrial
and other commercial space in the Tampa Bay area. Echelon may be
adversely affected in the event the demand for office space in St.
Petersburg or Tampa declines or the St. Petersburg or Tampa economy
experiences a downturn. Like other real estate markets, the Florida
commercial real estate market has experienced periodic economic
fluctuations.
/bullet/ Aircraft leasing involves numerous risks, including risks stemming
from the obsolescence or physical deterioration of aircraft and the
possibility of defaults by lessees. In addition, fluctuations in
general business and economic conditions, the adoption of
restrictive regulations and legislation, changes in consumer demand
for air travel, fluctuations in fuel prices and other factors over
which lessors of aircraft have no control could be expected to
affect adversely the supply and demand for aircraft or aircraft
leases and may cause cost increases relating to the leasing of
aircraft that cannot be offset by increased leasing revenues. No
assurance can be given that a decline in the health of the airline
industry would not have an adverse effect on Echelon's business or
results of operations.
21
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company will be required to include additional disclosures regarding
certain quantitative and qualitative information about market risk exposures
for the year ending December 31, 1998.
PART II
OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Echelon International Corporation
was held on June 2, 1998. There were 6,802,484 shares of common stock entitled
to vote. The following matters were voted upon at the meeting:
1) Election of Directors
Class II - Terms expiring 2001
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
----------- ---------------
<S> <C> <C>
Thomas W. Mahr .................... 6,145,997 90,673
L. Raymond Eastin ................. 6,195,119 41,551
</TABLE>
2) Ratification of appointment of KPMG Peat Marwick LLP as the Company's
independent certified public accountants for fiscal year 1998:
<TABLE>
<S> <C>
Votes for ............. 6,175,936
Votes against ......... 19,372
Abstentions ........... 41,362
</TABLE>
ITEM 5. OTHER INFORMATION
Echelon International Corporation issued a news release dated August 12,
1998, announcing 1998 second quarter financial results. A copy of the news
release is filed as Exhibit 99.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ------------------------------------------------------------------------------------
<S> <C>
27 Financial Data Schedule of Echelon International Corporation
99 Echelon International Corporation News Release dated August 12, 1998 regarding 1998
second quarter financial results.
</TABLE>
(b) Reports on Form 8-K:
On May 28, 1998, Echelon International Corporation filed the following
report on Form 8-K:
Form 8-K dated May 28, 1998, reporting under Item 5 "Other Events" the
information to be included in investor information sessions held
subsequent to the Company's Annual Meeting on June 2, 1998.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME AND SIGNATURE TITLE DATE
- -------------------------------- ------------------------------ ----------------
<S> <C> <C>
/s/ LARRY J. NEWSOME Principal Financial Officer August 13, 1998
--------------------------- Senior Vice President and
Larry J. Newsome
Chief Financial Officer
/s/ JAMES R. HOBBS, JR. Principal Accounting Officer August 13, 1998
--------------------------- Vice President and Controller
James R. Hobbs, Jr.
</TABLE>
23
EXHIBIT 99
Susan Glatthorn Johnson
Senior Vice President
Echelon International Corporation
Phone: 727-803-8250
E-mail: [email protected]
Cynthia L. Sanders
Manager of Financial Reporting
Echelon International Corporation
Phone: 727-803-8231
E-mail: [email protected]
FOR IMMEDIATE RELEASE
ECHELON INTERNATIONAL REPORTS SECOND-QUARTER RESULTS
ONGOING DEVELOPMENT OF NEW MULTI-FAMILY RESIDENTIAL COMMUNITIES
AND COMMERCIAL REAL ESTATE
ST. PETERSBURG, FL., August 12, 1998 - Echelon International Corporation (NYSE:
EIN), a real estate company which develops, owns and manages multi-family
residential and commercial real estate, today announced financial results for
the second quarter and six months ended June 30, 1998.
Net income was $2.9 million, or 41 cents per diluted share for the quarter ended
June 30, 1998 and $6.3 million or 91 cents per diluted share for the first six
months of 1998. This compares to net income of $1.4 million, or 21 cents per
diluted share and $5.3 million or 78 cents per diluted share for the same
periods in 1997. This represents an increase in net income of 107% for the
quarter ended June 30, 1998 and an increase of 19% for the first six months of
1998, in comparison with the same periods for 1997.
Revenues were $9.1 million and $22.3 million for the second quarter and first
six months of 1998 respectively, compared to $9.4 million and $24.5 million for
the same periods last year. The $2.2 million decrease in revenues for the first
six months of 1998 is primarily the result of:
- a decrease in gain on sale of loans of $4.1 million,
- a decrease in interest income from leasing and lending operations of
$1.9 million resulting from the sales and payoffs of loans receivable
as the Company continues to execute its strategy to liquidate
non-strategic assets, re-directing the capital to real estate
development and acquisition,
which are offset by,
-more-
<PAGE>
Echelon International
1998 Second-Quarter Earnings Release
Page 2
- an increase in real estate operations of $2.2 million due primarily to
an increase in the sales of development properties and development
rights of $2.8 million in comparison with the same period of 1997, and
- an increase in investment income and realized gains on sales of
investments of $1.4 million as a result of the Company's investment in
marketable securities in the second quarter of 1997.
As of June 30, 1998, the Company's debt/equity ratio, including the current
portion of long-term debt, was 28/72, with a cash position, including marketable
securities of $34.2 million.
Darryl A. LeClair, Echelon chairman, president and chief executive officer,
commented,
"We're pleased about our solid success to date in implementing both our
multi-family and commercial development growth strategies.
In multi-family development:
- ECHELON AT BAY ISLE KEY, a 369-unit multi-family residential community
in the Tampa Bay area, and ECHELON AT THE RESERVE, a 314-unit
development in Carillon Park, are both under construction,
- ECHELON AT NORTHLAKE, a 256-unit multi-family residential community in
Atlanta, Georgia, and ECHELON AT WOODLAND PARK, a 232-unit multi-family
residential community in Tulsa, Oklahoma, are both under development
with construction planned to begin on both communities by the end of
the third quarter of this year,
- Construction will also begin on Phase Two of ECHELON AT BAY ISLE KEY,
an 84-unit multi-family residential community, in the next six months.
Phase Two will utilize many of the existing amenities of Phase One,
which will decrease the per unit operating costs for these communities.
- Our multi-family pipeline currently includes ten sites under contract
or letter of intent. These sites are in addition to the sites already
owned by the Company.
-more-
<PAGE>
Echelon International
1998 Second-Quarter Earnings Release
Page 3
In commercial development:
- Construction is now complete on CENTRAL STATION (formerly known as
SouthCore Commercial) (133,279 rentable square feet) and is 100%
occupied by a single-use tenant under a fifteen-year lease. As
previously discussed, BAYBORO STATION (80,991 rentable square feet)
construction is also complete and the building is 100% occupied by a
single-use tenant under a ten-year lease.
- MCNULTY PARKING GARAGE (714 parking spaces and 9,000 rentable square
feet of retail space) and CASTILLE AT CARILLON (103,900 rentable square
feet) are both under construction, with completion planned for the end
of 1998 and the second quarter of 1999 respectively. The 9,000 rentable
square feet of retail space in the MCNULTY PARKING GARAGE is currently
under a letter of intent for 100% of the space.
- Design plans are complete for the 700 CARILLON office building.
Construction will commence on this project when anchor tenants are
secured.
- Design plans are continuing for CARILLON TOWN CENTER, an entertainment
and retail complex designed to add amenities to Carillon Park. The
ownership structure for CARILLON TOWN CENTER may include ownership by
Echelon, joint ventures, or sales of land for development to third
parties. Construction will commence on this project when anchor tenants
are secured."
Commenting on the quarter, Larry J. Newsome, Echelon senior vice president and
chief financial officer, stated,
"Our second-quarter financial performance was in line with our
expectations and consistent with our goal of liquidating our non-strategic
assets. This will allow us to continue to invest in our real estate
development and acquisitions.
We've made further progress in the liquidation of our non-strategic
assets, as evidenced by:
-more-
<PAGE>
Echelon International
1998 Second-Quarter Earnings Release
Page 4
- the collection of a $3.0 million real estate loan receivable that was
considered to be impaired. As a result of the loan payoff, Echelon
reversed the $1.6 million allowance for losses on loans and leases
previously recorded, resulting in after-tax income of $1.0 million,
- the collection of a $2.3 million deferred rent note receivable
scheduled to mature in 2000.
In the area of development financing, we have capitalized on the current
interest rate levels, and executed several construction and permanent
financing commitments during the second quarter:
- In early August, a loan amendment was executed with Northwestern Mutual
Life Insurance Company which increases the amount of our existing loan
by $11.0 million and reduces the interest rate on the entire loan from
an annual rate of 7.09% to 6.98%. The total loan commitment is now $56
million.
- In May, we executed a commitment with AmSouth Bank for a $50.0 million
Advised Guidance Line of Credit. The interest rate on this line is the
lesser of the prime rate of interest or the LIBOR rate plus 1.50% per
annum. This loan will be used to provide the construction financing for
multi-family and commercial projects in the Company's pipeline.
- In May, we also executed a commitment letter with Teacher's Insurance
and Annuity Association of America for a $55.5 million loan at an
interest rate of 7.15% per annum. This loan will be used for the
permanent financing of specific projects, which will also collateralize
the loan."
Echelon International Corporation is a real estate company which develops, owns
and manages multi-family residential and commercial real estate. The Company
also owns and manages a portfolio of aircraft leases and aircraft and real
estate loans. Echelon is continuing to withdraw from the real estate and
aircraft lending business to focus on its core real estate operations.
-more-
<PAGE>
Echelon International
1998 Second-Quarter Earnings Release
Page 5
NOTE: CERTAIN STATEMENTS CONTAINED IN THIS PRESS RELEASE REGARDING OTHER THAN
HISTORICAL FACTS ARE FORWARD-LOOKING STATEMENTS AND ARE MADE UNDER THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. SUCH STATEMENTS, INCLUDING THOSE
CONCERNING ECHELON'S EXPECTED SOURCES AND USES OF FUNDS AND CAPITAL EXPENDITURES
AND ITS BUSINESS STRATEGY INCLUDING ITS PLANS TO GRADUALLY WITHDRAW FROM THE
AIRCRAFT AND REAL ESTATE LENDING BUSINESS AND FOCUS ON ITS CORE REAL ESTATE
OPERATION, INVOLVE RISKS AND UNCERTAINTIES. THE ACTUAL STRATEGIES AND THE TIMING
AND EXPECTED RESULTS OF SUCH MAY DIFFER MATERIALLY FROM THOSE EXPRESSED OR
IMPLIED BY THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE SUCH
DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE IDENTIFIED ON PAGE 13 OF THE
COMPANY'S ANNUAL REPORT.
-more-
<PAGE>
Echelon International
Second-Quarter 1998 Earnings Release
Page 6
<TABLE>
<CAPTION>
ECHELON INTERNATIONAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
---- ---- ---- ----
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales and revenues $ 9.1 $ 9.4 $ 22.3 $ 24.5
====== ===== ====== ======
Income before extraordinary item $ 2.9 $ 1.4 $ 6.3 $ 6.1
Extraordinary item, net of tax -- -- -- (.8)
------ ----- ------ ------
Net income $ 2.9 $ 1.4 $ 6.3 $ 5.3
====== ===== ====== ======
Diluted earnings per common share:
Income before extraordinary item $ 0.41 $ 0.21 $ 0.91 $ 0.90
Extraordinary item, net of tax -- -- -- (.12)
------ ------ ------ ------
Net income $ 0.41 $ 0.21 $ 0.91 $ 0.78
====== ====== ====== ======
Diluted weighted average common shares outstanding 6.9 6.8 6.9 6.8
====== ====== ====== ======
</TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
JUNE 30, DECEMBER 31,
1998 1997
---- ----
(unaudited)
Cash and marketable securities $ 34.2 $ 49.8
Total current assets 75.7 93.6
Real estate, leases, loans and other investments 384.4 362.7
Total assets 464.8 460.5
Total current liabilities 36.3 37.5
Long-term debt 72.0 64.9
Deferred income taxes 138.0 145.8
Stockholders' equity 215.6 209.1
Total liabilities and stockholders' equity 464.8 460.5
# # #
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ECHELON INTERNATIONAL FOR THE PERIOD ENDED JUNE 30,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 11,100
<SECURITIES> 23,100
<RECEIVABLES> 39,500
<ALLOWANCES> 0
<INVENTORY> 900
<CURRENT-ASSETS> 75,700
<PP&E> 182,800
<DEPRECIATION> 27,400
<TOTAL-ASSETS> 464,800
<CURRENT-LIABILITIES> 36,300
<BONDS> 72,000
0
0
<COMMON> 100
<OTHER-SE> 215,500
<TOTAL-LIABILITY-AND-EQUITY> 464,800
<SALES> 0
<TOTAL-REVENUES> 22,300
<CGS> 0
<TOTAL-COSTS> 9,600
<OTHER-EXPENSES> 5,100
<LOSS-PROVISION> (1,600)
<INTEREST-EXPENSE> 2,600
<INCOME-PRETAX> 6,600
<INCOME-TAX> 300
<INCOME-CONTINUING> 6,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,300
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.91
</TABLE>
