<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1998 Commission File Number 0-5613
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REXX ENVIRONMENTAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEW YORK 13-2625545
- --------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S Employer
of incorporation) Identification Number)
350 PARK AVENUE, NEW YORK, NEW YORK 10022
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 750-7755
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by checkmark 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
--- ---
As of August 7, 1998, the registrant had 2,467,576 shares of common stock
outstanding.
Page 1 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
INDEX
PART I - Financial Information PAGE
Unaudited financial statements:
Consolidated balance sheets -
June 30, 1998 and December 31, 1997 3
Consolidated statements of operations -
three months ended June 30, 1998 and 1997 4
Consolidated statements of operations -
six months ended June 30, 1998 and 1997 5
Consolidated statements of cash flows -
six months ended June 30, 1998 and 1997 6
Notes to consolidated financial statements 7-8
Management's discussion and analysis of
financial condition and results of operations 9-10
PART II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders 11
Signatures 12
Page 2 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 179 $ 710
Accounts receivable - net 3,773 2,353
Costs in excess of billings 578 600
Assets held for sale 780 1,350
Other current assets 76 142
------- -------
Total current assets 5,386 5,155
Property and equipment, net 1,173 718
Goodwill 3,019 3,125
Other assets 47 57
------- -------
$ 9,625 $ 9,055
======= =======
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 649 $ 1,015
Accounts payable 1,579 1,153
Billings in excess of costs 93 238
Accrued expenses 835 752
Deposit on asset held for sale 0 152
Income taxes payable 396 376
------- -------
Total current liabilities 3,552 3,686
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Long-term debt, net of current portion 505 180
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Other long-term liabilities 20 50
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Stockholders' equity:
Preferred stock, $1.00 par value, authorized
1,000,000 shares; -0- shares issued
Common stock, $.02 par value, authorized
12,000,000 shares; 5,279,828 shares issued 105 105
Capital in excess of par value 27,925 27,925
Accumulated deficit (5,474) (5,883)
Common stock held in treasury, at cost
(2,812,252 shares) (17,008) (17,008)
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Total stockholders' equity 5,548 5,139
------- -------
$ 9,625 $ 9,055
======= =======
</TABLE>
See notes to consolidated financial statements.
Page 3 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three months ended
June 30,
1998 1997
Revenues $ 3,371 $ 13
Cost of services 2,211 0
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Gross profit 1,160 13
General and administrative expenses 926 176
------- -------
Income (loss) from operations 234 (163)
Other income:
Interest (expense) income, net (23) 46
Other income 16 0
------- -------
Income (loss) before provision
for taxes 227 (117)
Provision for taxes 21 4
------- -------
Net income (loss) $ 206 ($ 121)
======= =======
Per share data:
Basic $.08 ($.06)
Diluted $.08 ($.06)
Weighted average shares outstanding:
Basic 2,468 2,058
Diluted 2,525 2,058
See notes to consolidated financial statements.
Page 4 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Six months ended
June 30,
1998 1997
Revenues $ 7,574 $ 25
Cost of services 5,164 0
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Gross profit 2,410 25
General and administrative expenses 1,952 346
------- -------
Income (loss) from operations 458 (321)
Other income:
Interest (expense) income, net (31) 102
Other income 25 0
------- -------
Income (loss) before provision
for taxes 452 (219)
Provision for taxes 43 9
------- -------
Net income (loss) $ 409 ($ 228)
======= =======
Per share data:
Basic $.17 ($.11)
Diluted $.16 ($.11)
Weighted average shares outstanding:
Basic 2,468 2,058
Diluted 2,529 2,058
See notes to consolidated financial statements.
Page 5 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six Months Ended
June 30,
1998 1997
Cash flows used in operating activities:
Net income (loss) $ 409 ($ 228)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 182 0
------- -------
591 (228)
Changes in assets and liabilities (968) (984)
------- -------
Net cash used in operating
activities (377) (1,212)
------- -------
Cash flows from investing activities:
Capital expenditures (531) 0
Net proceeds on disposal of disc. operations 0 543
Decrease in assets held for sale 570 0
Deposit on asset held for sale (152) 0
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Net cash provided by
investing activities (113) 543
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Cash flows from financing activities:
Net short-term borrowings 0 0
Principal payment of long-term debt-net (41) 0
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Net cash used in financing activities (41) 0
------- -------
Net decrease in cash (531) (669)
Cash at beginning of period 710 5,314
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Cash at end of period $ 179 $ 4,645
======= =======
Supplemental disclosures of cash flow information:
Changes in assets and liabilities:
Accounts receivable ($1,420) $ 30
Costs in excess of billings 22 0
Other current assets 66 23
Other assets 10 0
Billings in excess of costs (145) 0
Accounts payable and accrued expenses 509 (684)
Income taxes payable 20 (353)
Other liabilities (30) 0
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($ 968) ($ 984)
======= =======
Cash paid - net during the period for:
Interest $ 40 $ 13
Income taxes (including interest thereon) $ 23 $ 561
Page 6 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Consolidation and General
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries, Watkins Contracting, Inc. ("WCI") (since its
acquisition by the Company on October 21, 1997) and Oak Hill Sportswear Holding
Corporation, which was inactive. Certain previously reported amounts have been
reclassified to conform to the 1998 presentation. The results herein reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary to fairly state the results and current
financial condition of the Company for the respective periods. The accompanying
financial statements have been prepared without audit and do not include all
footnotes and disclosures required under generally accepted accounting
principles and should be read in conjunction with the Company's audited
financial statements contained in its Annual Report on Form 10-K for its year
ended December 31, 1997.
Note 2 - Acquisition and Consolidated Condensed Pro Forma Financial
Information
On October 21, 1997, the Company completed the acquisition of 100% of the
outstanding shares of WCI, a privately-owned, San Diego-based environmental
remediation contractor. Founded in 1991, WCI provides asbestos abatement,
hazardous materials and soil remediation, and demolition services, primarily in
California, to commercial and governmental clients. The total consideration
consisted of (a) $3,600,000 in cash, using cash on hand, (b) 400,000 shares of
restricted REXX Environmental Corporation common stock and (c) rights entitling
the former owners of WCI to sell up to 50,000 shares per quarter of the common
stock back to the Company starting in April, 1999, at $5.00 per share if WCI
earns in excess of $2,700,000 pretax income during 1998, and to sell up to an
additional 50,000 shares per quarter back to the Company starting in April,
2000, at $5.00 per share if WCI earns in excess of $2,700,000 pretax income
during 1999. The acquisition was accounted for using the purchase method of
accounting. Acquisition costs in excess of the fair value of net tangible assets
acquired amounted to approximately $3,166,000, representing goodwill.
The purchase price has been allocated to the assets purchased and
liabilities assumed based upon the fair values on the date of acquisition, as
follows:
Working capital $ 685,000
Property and equipment 1,204,000
Other assets 61,000
Goodwill 3,166,000
Other liabilities ( 683,000)
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Purchase price $4,433,000
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Page 7 of 12 Pages
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The following condensed unaudited pro forma statement reflects the results
of operations of the Company as if the acquisition had been consummated at the
beginning of 1997. The unaudited pro forma financial information presented
herein does not necessarily reflect the results of operations and financial
position of the Company had the acquisition actually taken place at such time.
Consolidated Condensed Pro Forma
Statement of Operations
(unaudited)
Six months ended
June 30, 1997
----------------
Revenues $ 5,180
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Income from operations 657
Other income 29
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Income before income taxes 686
Income taxes 79
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Net income $ 607
==========
Pro forma net income per share $ .25
=====
Note 3 - Net income (loss) per share:
In 1997, The Company adopted Statement of Financial Accounting Standards
No. 128 ("FAS 128"), Earnings per Share. FAS 128 prescribes that companies
present basic and diluted earnings per share amounts, as defined, on the face of
the statement of operations. Net income (loss) per share is based on the
weighted average number of shares outstanding. The number of shares used in the
computations of basic and diluted net income per share for the second quarter
ended June 30, 1998 were 2,467,576 and 2,524,516, respectively, and for the
second quarter of 1997 were 2,057,576 for both computations. The number of
shares used in the computations of basic and diluted net income per share for
the six months ended June 30, 1998 were 2,467,576 and 2,528,977, respectively,
and for the first six months of 1997 were 2,057,576 for both computations.
Net income (loss) used in the computation of basic and diluted net income
(loss) per share is not affected by the assumed issuance of stock under the
Company's stock option plan and is therefore the same for both calculations.
Options to purchase 254,000 shares at prices ranging from $2.00 to $5.00
per share were outstanding at June 30, 1998. The dilutive impact of such options
is the addition of 56,940 shares to weighted average diluted shares outstanding
for the second quarter of 1998 and less than $0.01 decrease in earnings per
share. For the six months ended June 30, 1998, the dilutive impact of such
options is the addition of 61,401 shares outstanding and less than $.01 decrease
in earnings per share. Options to purchase 184,000 shares at prices ranging from
$2.00 to $4.25 per share were outstanding at June 30, 1997, but were not
included in the computation of diluted net income per share because the assumed
exercise of the options would be anti-dilutive.
Page 8 of 12 Pages
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and capital resources:
Working capital at June 30, 1998 amounted to $1,834,000 compared to
$1,469,000 at December 31, 1997, an increase of $365,000 primarily due to the
net income for the period.
Net accounts receivable were $3,773,000 at June 30, 1998 as compared to
$2,353,000 at December 31, 1997, an increase of $1,420,000. The increase was due
to higher revenues in the second quarter and first six months of 1998 compared
to the fourth quarter of 1997.
Management believes that the Company's cash and cash equivalents at June 30,
1998, in addition to WCI's working capital line of credit and equipment line of
credit, obtained in February 1998 and increased in June 1998, and the Company's
cash flow from operations will provide it with sufficient funds necessary for
its working capital and capital expenditures.
The Company intends to pursue potential acquisitions in its industry. As of
June 30, 1998, no commitments had been made and no material expenditures had
been incurred in connection with any such potential acquisition. There is no
assurance that the Company will complete any such potential acquisition. In the
event the Company completes an acquisition, it may require additional capital
for the consummation of the acquisition and/or the additional working capital
needs of an acquired business.
The Company has performed an assessment of its Year 2000 issues. Management
believes that the Company's material operating systems, including hardware and
software, are Year 2000 compliant. Management believes that the Company will not
incur material expenses or face material adverse consequences associated with
Year 2000 issues.
Results of operations:
Revenues in 1998 consisted principally of WCI's contract revenues.
Revenues in 1997 consisted solely of consulting income. Revenues in the quarter
and six months ended June 30, 1998 were $3,371,000 and $7,574,000, respectively.
Consulting income, which arose from the Company's agreement with a purchaser of
its former Sportswear Division, was $13,000 in the quarter ended June 30, 1997
and $25,000 in the six months ended June 30, 1997. The consulting agreement
expired on December 31, 1997 and was not renewed.
Gross profit in the second quarter of 1998 amounted to $1,160,000 as
compared to $13,000 in 1997, an increase of $1,147,000. Gross profit in the six
months ended June 30, 1998 amounted to $2,410,000 as compared to $25,000 in the
comparable period of 1997, an increase of $2,385,000. The increases are
attributable to the addition of WCI's gross profit.
General and administrative expenses rose in the quarter and six months ended
June 30, 1998 compared to the comparable periods of 1997 principally as a result
of the addition of WCI's general and administrative expenses and the growth in
expenses in connection with the Company's administrative and corporate overhead.
Page 9 of 12 Pages
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Interest (expense) income - net changed to an expense of $23,000 in the
second quarter of 1998 and $31,000 in the first half of 1998 from income of
$46,000 in the second quarter of 1997 and $102,000 in the first half of 1997, a
reduction of $69,000 and $133,000, respectively. The decreases were attributable
to the Company's net borrowing position in 1998 due to WCI's working capital and
equipment lines of credit, compared to the Company's net cash position in 1997.
Amortization of goodwill and other income did not exist in the second
quarter or first half of 1997. In 1998, they were attributable to the
acquisition of WCI, which was accounted for as a purchase.
Provision for income taxes grew to $21,000 and $43,000 in the quarter and
six months ended June 30, 1998 from $4,000 and $9,000 in the comparable periods
of 1997, an increase of $17,000 and $34,000, respectively. The increase was due
to the Company's new status as a taxpayer in California. In both periods, the
Company recorded no provision for federal income taxes as the Company has a net
operating loss carryforward. State income taxes for states other than California
represents franchise taxes in both years.
Forward looking information:
The statements contained herein may contain forward looking statements
relating to such matters as anticipated financial performance, business
prospects, acquisition strategy, growth and similar matters. The Private
Securities Reform Act of 1995 provides a safe harbor for forward looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the actual outcome or results to
differ materially from the anticipated outcome or results expressed in the
Company's forward looking statements such as intensified competition and its
impact on revenues and profit margins, the availability of capital for growth
and potential acquisitions, the availability of suitable acquisitions on terms
management deems acceptable and other items described in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.
Page 10 of 12 Pages
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
(a) The Annual Meeting of the shareholders of the Company was held
on June 25, 1998.
(b) At said Annual Meeting, the following persons were elected
directors, with the following number of shares voted for and
withheld:
For Withheld
--------- --------
Arthur L. Asch 2,352,189 3,760
Michael A. Asch 2,352,304 3,645
Joseph Greenberger 2,352,297 3,652
James L. Hochfelder 2,352,304 3,645
Brian A. Wasserman 2,352,304 3,645
Page 11 of 12 Pages
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
REXX ENVIRONMENTAL CORPORATION
(Registrant)
Date: August 12, 1998 By: /s/ Arthur L. Asch
----------------------------------------
Arthur L. Asch, Chairman of the Board
Date: August 12, 1998 By: /s/ Michael A. Asch
----------------------------------------
Michael A. Asch, President and Treasurer
Page 12 of 12 Pages
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 179
<SECURITIES> 0
<RECEIVABLES> 3,773
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,386
<PP&E> 1,173
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,625
<CURRENT-LIABILITIES> 3,552
<BONDS> 505
0
0
<COMMON> 5,548
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,625
<SALES> 7,574
<TOTAL-REVENUES> 7,574
<CGS> 5,164
<TOTAL-COSTS> 7,116
<OTHER-EXPENSES> (25)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 452
<INCOME-TAX> 43
<INCOME-CONTINUING> 409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 409
<EPS-PRIMARY> .17
<EPS-DILUTED> .16
</TABLE>
