<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 September 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
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(State or other jurisdiction (I.R.S Employer
of incorporation) Identification Number)
350 PARK AVENUE, NEW YORK, NEW YORK 10022
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(Address of principal executive offices) (Zip Code)
(212) 750-7755
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(Registrant's telephone number, including area code)
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(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 November 9, 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 -
September 30, 1998 and December 31, 1997 3
Consolidated statements of operations -
three months ended September 30, 1998 and 1997 4
Consolidated statements of operations -
nine months ended September 30, 1998 and 1997 5
Consolidated statements of cash flows -
nine months ended September 30, 1998 and 1997 6
Notes to consolidated financial statements 7-8
Management's discussion and analysis of
financial condition and results of operations 9-11
Signatures 12
Page 2 of 12 Pages
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 81 $ 710
Accounts receivable - net 3,914 2,353
Costs in excess of billings 881 600
Assets held for sale 780 1,350
Other current assets 166 142
-------- --------
Total current assets 5,822 5,155
Property and equipment, net 1,296 718
Goodwill 2,966 3,125
Other assets 42 57
-------- --------
$ 10,126 $ 9,055
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 657 $ 1,015
Notes payable 750 0
Accounts payable 1,561 1,153
Billings in excess of costs 36 238
Accrued expenses 618 752
Deposit on asset held for sale 0 152
Income taxes payable 208 376
-------- --------
Total current liabilities 3,830 3,686
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Long-term debt, net of current portion 594 180
-------- --------
Other long-term liabilities 5 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 (5,325) (5,883)
Common stock held in treasury, at cost
(2,812,252 shares) (17,008) (17,008)
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Total stockholders' equity 5,697 5,139
-------- --------
$ 10,126 $ 9,055
======== ========
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
September 30,
1998 1997
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Revenues $ 3,285 $ 13
Cost of services 2,116 0
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Gross profit 1,169 13
General and administrative expenses 987 176
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Income (loss) from operations 182 (163)
Other income:
Interest (expense) income, net (38) 41
Other income 16 0
------- -------
Income (loss) before provision
for taxes 160 (122)
Provision for taxes 11 3
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Net income (loss) $ 149 ($ 125)
======= =======
Per share data:
Basic $ .06 ($ .06)
Diluted $ .06 ($ .06)
Weighted average shares outstanding:
Basic 2,468 2,058
Diluted 2,500 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)
Nine months ended
September 30,
1998 1997
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Revenues $ 10,859 $ 38
Cost of services 7,280 0
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Gross profit 3,579 38
General and administrative expenses 2,939 522
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Income (loss) from operations 640 (484)
Other income:
Interest (expense) income, net (69) 143
Other income 41 0
-------- --------
Income (loss) before provision
for taxes 612 (341)
Provision for taxes 54 12
-------- --------
Net income (loss) $ 558 ($ 353)
======== ========
Per share data:
Basic $ .23 ($ .17)
Diluted $ .22 ($ .17)
Weighted average shares outstanding:
Basic 2,468 2,058
Diluted 2,517 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)
Nine Months Ended
September 30,
1998 1997
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Cash flows used in operating activities:
Net income (loss) $ 558 ($ 353)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 279 0
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837 (353)
Changes in assets and liabilities (1,992) (1,055)
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Net cash used in operating
activities (1,155) (1,408)
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Cash flows from investing activities:
Capital expenditures (698) 0
Net proceeds on disposal of disc. operations 0 594
Decrease in assets held for sale 570 0
Deposit on asset held for sale (152) 0
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Net cash (used in) provided by
investing activities (280) 594
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Cash flows from financing activities:
Net short-term borrowings 750 0
Principal increase in long-term debt-net 56 0
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Net cash provided by financing activities 806 0
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Net decrease in cash (629) (814)
Cash at beginning of period 710 5,314
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Cash at end of period $ 81 $ 4,500
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Supplemental disclosures of cash flow information:
Changes in assets and liabilities:
Accounts receivable ($1,561) $ 33
Costs in excess of billings (281) 0
Other current assets (24) (9)
Other assets 15 0
Billings in excess of costs (202) 0
Accounts payable and accrued expenses 274 (726)
Income taxes payable (168) (353)
Other liabilities (45) 0
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($1,992) ($1,055)
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Cash paid - net during the period for:
Interest $ 78 $ 19
Income taxes (including interest thereon) $ 216 $ 564
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)
Nine months ended
September 30, 1997
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Revenues $ 7,775
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Income from operations 941
Other income 61
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Income before income taxes 1,002
Income taxes 116
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Net income $ 886
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Pro forma net income per share $ .36
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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 third quarter
ended September 30, 1998 were 2,467,576 and 2,500,232, respectively, and for the
third 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 nine
months ended September 30, 1998 were 2,467,576 and 2,517,432, respectively, and
for the first nine months of 1997 were 2,057,576 for both computations.
Options to purchase 254,000 shares at prices ranging from $2.00 to $5.00
per share were outstanding at September 30, 1998. The dilutive impact of such
options is the addition of 32,656 shares to weighted average diluted shares
outstanding for the third quarter of 1998 and less than $0.01 decrease in
earnings per share. For the nine months ended September 30, 1998, the dilutive
impact of such options is the addition of 49,856 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 September 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 September 30, 1998 amounted to $1,992,000 compared to
$1,469,000 at December 31, 1997, an increase of $523,000 primarily due to the
net income for the period.
Net accounts receivable were $3,914,000 at September 30, 1998 as compared to
$2,353,000 at December 31, 1997, an increase of $1,561,000. The increase was due
to higher revenues in the third quarter and first nine months of 1998 compared
to the fourth quarter of 1997.
Management believes that the Company's cash and cash equivalents at
September 30, 1998, in addition to WCI's working capital line of credit and
equipment line of credit 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
September 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. On October 8, 1998, the Company announced that it
had signed a non-binding letter of intent to acquire the business and certain
assets of a hazardous materials remediation contractor headquartered in the Los
Angeles, California area. On November 13, the Company announced that it had
terminated the letter of intent. No material expense was incurred as a result of
the signing, due diligence review or termination.
Year 2000 Compliance:
Internal
The Company uses a number of computer software programs, operating systems
and equipment with computer processing chips in its internal operations,
including in its financial business systems and administrative functions. To the
extent that the programs, operating systems and equipment contain source code or
computer chips that are unable to interpret appropriately the upcoming calendar
year 2000, some level of modification or replacement will be necessary.
The Company is in the process of evaluating critical software, operating
systems and equipment for year 2000 compliance. Currently, the Company is in the
inventory/assessment phase of its evaluation, which is expected to continue into
the first half of 1999, with some remediation taking place. The Company has been
notified by the vendor of its financial and payroll software that such software
is year 2000 compliant. Nevertheless, this software will be analyzed for
compliance.
From fiscal 1995 through the present, the Company, in its normal course of
business, replaced substantially all of its business systems hardware and
software. To date, expenses associated with year 2000 compliance have been
Page 9 of 12 Pages
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minimal. The Company believes that periodic, scheduled upgrades of hardware and
software will satisfy its needs for year 2000 compliance and that the related
costs will differ nominally from expenditures which would have been made in its
normal course of business. The costs necessary to modify or replace the items
mentioned above, or the interruption of administrative or service processes
resulting from compliance failure, are not expected to have a material adverse
effect on the Company's business and financial condition or its results of
operations.
External
There can be no assurance that the Company's customers and suppliers are, or
will be, year 2000 compliant. The Company believes the most reasonably likely
worst case 2000 scenario would be the failure of key customers to achieve year
2000 compliance, resulting in the delay of projects and the delay in the
collection of accounts receivable from such customers for an indeterminate
period of time. Currently, the Company is not aware of any customers that are
not year 2000 compliant. In order to address the potential non-compliance with
the year 2000 by the Company's customers and suppliers, the Company is in the
process of preparing questionnaires to be sent to its customers and vendors
asking them to respond with their year 2000 plans. Until this process is
substantially complete, the Company will not be in a position to fully assess
its year 2000 risks. The Company expects to complete this process in the first
half of 1999 and is developing a response program for the possible worst-case
scenario, which may include the possible replacement of non-compliant customers
or vendors.
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 nine months ended September 30, 1998 were $3,285,000 and $10,859,000,
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
September 30, 1997 and $38,000 in the nine months ended September 30, 1997. The
consulting agreement expired on December 31, 1997 and was not renewed.
Gross profit in the third quarter of 1998 amounted to $1,169,000 as compared
to $13,000 in 1997, an increase of $1,156,000. Gross profit in the nine months
ended September 30, 1998 amounted to $3,579,000 as compared to $38,000 in the
comparable period of 1997, an increase of $3,541,000. The increases are
attributable to the addition of WCI's gross profit.
General and administrative expenses rose in the quarter and nine months
ended September 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.
Interest (expense) income - net changed to an expense of $38,000 in the
third quarter of 1998 and $69,000 in the first nine months of 1998 from income
of $41,000 in the third quarter of 1997 and $143,000 in the first nine months of
1997, a reduction of $79,000 and $212,000, 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.
Page 10 of 12 Pages
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Amortization of goodwill and other income did not exist in the third quarter
or first nine months 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 $11,000 and $54,000 in the quarter and
nine months ended September 30, 1998 from $3,000 and $12,000 in the comparable
periods of 1997, an increase of $8,000 and $42,000, 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, year 2000 compliance and similar
matters. Such statements may be characterized by phrases such as "believes,"
"intends," "expects," "plans," and "estimates," amongst others. 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, unanticipated year 2000 compliance related
difficulties (such as widespread non-compliance amongst the Company's customer
and vendor base) and other items described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997.
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: November 13, 1998 By: /s/ Arthur L. Asch
--------------------------------------------
Arthur L. Asch, Chairman of the Board
Date: November 13, 1998 By: /s/ Michael A. Asch
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Michael A. Asch, President and Treasurer
Page 12 of 12 Pages
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 3,914
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,822
<PP&E> 1,296
<DEPRECIATION> 0
<TOTAL-ASSETS> 10,126
<CURRENT-LIABILITIES> 3,830
<BONDS> 594
5,697
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,126
<SALES> 10,859
<TOTAL-REVENUES> 10,859
<CGS> 7,280
<TOTAL-COSTS> 10,219
<OTHER-EXPENSES> (41)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 69
<INCOME-PRETAX> 612
<INCOME-TAX> 54
<INCOME-CONTINUING> 558
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 558
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
</TABLE>
