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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 March 31, 1999 Commission File Number 0-5613
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REXX ENVIRONMENTAL CORPORATION
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(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 May 13, 1999, the registrant had 2,467,576 shares of common stock
outstanding.
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REXX ENVIRONMENTAL CORPORATION
INDEX
PART I - Financial Information PAGE
Unaudited financial statements:
Consolidated balance sheets -
March 31, 1999 and December 31, 1998 3
Consolidated statements of operations -
three months ended March 31, 1999 and 1998 4
Consolidated statements of cash flows -
three months ended March 31, 1999 and 1998 5
Notes to consolidated financial statements 6
Management's discussion and analysis of
financial condition and results of operations 7-11
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
(Unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 227 $ 68
Accounts receivable - net 3,882 4,749
Costs in excess of billings 495 223
Assets held for sale 780 780
Other current assets 251 164
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Total current assets 5,635 5,984
Property and equipment, net 1,432 1,487
Goodwill 2,861 2,914
Other assets 32 37
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$ 9,960 $ 10,422
======== ========
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt $ 675 $ 668
Notes payable-bank 1,581 1,681
Accounts payable 2,029 1,872
Billings in excess of costs 531 409
Accrued expenses 357 311
Income taxes payable 98 100
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Total current liabilities 5,271 5,041
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Long-term debt, net of current portion 662 738
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Stockholders' equity:
Preferred stock, $1.00 par value, authorized
1,000,000 shares; -0- shares issued
Common stock, $.02 par value, authorized
12,000,000 shares; 5,279,828 shares issued 105 105
Capital in excess of par value 27,925 27,925
Accumulated deficit (6,995) (6,379)
Common stock held in treasury, at cost
(2,812,252 shares) (17,008) (17,008)
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Total stockholders' equity 4,027 4,643
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$ 9,960 $ 10,422
======== ========
</TABLE>
See notes to consolidated financial statements.
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
(Unaudited)
Three months ended
March 31,
1999 1998
Revenues $ 3,500 $ 4,203
Cost of services 3,086 2,953
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Gross profit 414 1,250
General and administrative expenses 960 1,026
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(Loss) income from operations (546) 224
Other income:
Interest expense, net (54) (8)
Other (expense) income (13) 9
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(Loss) income before provision
for taxes (613) 225
Provision for taxes 3 22
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Net (loss) income ($ 616) $ 203
======= =======
Per share data:
Basic ($.25) $.08
Diluted ($.25) $.08
Weighted average shares outstanding:
Basic 2,468 2,468
Diluted 2,468 2,533
See notes to consolidated financial statements.
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REXX ENVIRONMENTAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Cash flows used in operating activities:
Net (loss) income ($616) $ 203
Adjustments to reconcile net (loss) income
to net cash used in operating activities:
Depreciation and amortization 114 88
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( 502) 291
Changes in assets and liabilities 836 ( 507)
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Net cash provided by (used in)
operating activities 334 ( 216)
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Cash flows from investing activities:
Capital expenditures ( 37) ( 36)
Net proceeds on disposal of assets 31 0
Decrease in assets held for sale 0 570
Deposit on asset held for sale 0 ( 152)
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Net cash (used in) provided by
investing activities ( 6) 382
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Cash flows from financing activities:
Net short-term borrowings ( 100) 230
Principal payment of long-term debt ( 69) ( 446)
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Net cash used in financing activities ( 169) ( 216)
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Net increase (decrease) in cash 159 ( 50)
Cash at beginning of period 68 710
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Cash at end of period $ 227 $ 660
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Supplemental disclosures of cash flow information:
Changes in assets and liabilities:
Accounts receivable $ 867 ($643)
Costs in excess of billings ( 272) ( 172)
Other current assets ( 87) ( 8)
Other assets 5 5
Billings in excess of costs 122 ( 127)
Accounts payable and accrued expenses 203 448
Income taxes payable ( 2) 5
Other liabilities 0 ( 15)
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$ 836 ($507)
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Cash paid - net during the period for:
Interest $ 64 $ 16
Income taxes (including interest thereon) $ 12 $ 18
</TABLE>
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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. The accompanying financial statements have been
prepared without audit and do not include all footnotes and disclosures required
under generally accepted accounting principles. Management believes that the
results herein reflect all 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. All such adjustments reflected herein are of
a normal, recurring nature. These financial statements should be read in
conjunction with the Company's financial statements contained in its Annual
Report on Form 10-K for its year ended December 31, 1998.
Note 2 - 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 for basic and diluted net income per share for the first quarter
ended March 31, 1999 were 2,467,576 for both computations and for the first
quarter ended March 31, 1998 were 2,467,576 and 2,533,151, respectively.
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 304,000 shares at prices ranging from $2.00 to $5.00
per share were outstanding at March 31, 1999, but were not included in the
computation of diluted net loss per share because the effect of their inclusion
would have been antidilutive. Options to purchase 254,000 shares at prices
ranging from $2.00 to $5.00 per share were outstanding at March 31, 1998. The
dilutive impact of such options is the addition of 65,575 shares to weighted
average diluted shares outstanding for the first quarter of 1998 and less than
$0.01 decrease in earnings per share.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and capital resources:
Working capital at March 31, 1999 was $366,000 as compared to $943,000
at December 31, 1998. The decrease of $577,000 was primarily due to the net loss
for the period.
Net accounts receivable were $3,882,000 at March 31, 1999 as compared to
$4,749,000 at December 31, 1998, a decrease of $867,000. The reduction in
accounts receivable was due to aggressive collection efforts in the first
quarter of 1999, including enlisting additional staff personnel in the
collection process and granting discounts in certain circumstances to accelerate
the timing of the actual receipt of cash from customers.
WCI executed, effective November 10, 1998, a revolving credit agreement with
Wells Fargo Bank, N.A. The credit agreement, which expires November 9, 1999,
calls for interest payable at Wells Fargo's prime rate, as in effect from time
to time, and borrowings up to 75% of eligible accounts receivable subject to a
maximum of $2,000,000 (reduced by approximately $100,000 of equipment loans made
to WCI by Wells Fargo). At March 31, 1999, WCI had $1,581,000 borrowed under the
credit agreement, in addition to approximately $92,000 of equipment loans made
by Wells Fargo to WCI. The Company has guaranteed WCI's borrowings under the
credit agreement, which is also secured by WCI's accounts receivable and all
other assets (with the exception of vehicles and equipment subject to purchase
contract lending agreements with third party lenders.) In addition, the credit
agreement provides for certain financial covenants based upon the Company's
consolidated financial condition, including its current ratio and tangible net
worth. As of March 31, 1999, WCI and the Company were not in compliance with the
covenants in the credit agreement. On May 11, 1999, Wells Fargo Bank issued a
waiver of such quarter-end noncompliance. As of May 13, 1999, WCI, the Company
and Wells Fargo Bank are negotiating the resetting of the financial covenants
and potential changes to WCI's borrowing limits and interest rates payable under
the credit agreement.
The Company has taken actions to improve its gross margins at WCI going
forward and to reduce expenses both at WCI and the corporate level in an attempt
to achieve profitable results from operations.
Because of its working capital constraints and in order to concentrate more
fully on the necessary actions to improve existing operations, the Company has
suspended its activity related to external growth of the Company's environmental
and demolition business through acquisitions or the opening of additional
regional offices.
As of May 13, 1999, the Company is close to completing negotiations to sell
WCI. It is expected that, if a sale is consummated, the Company will incur a
loss on the transaction.
In addition, management has reached a preliminary understanding to acquire
a company which will operate a health, fitness, and nutritional products and
services discount card membership program and several health, fitness and
nutrition related e-commerce sites, one of which is currently
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functional. The target company has been in the development stage and is
currently preparing to commence membership operations and the marketing of its
functional e-commerce site. The preliminary understanding, which is not binding
on either party, is subject to further discussions, negotiations, documentation,
due diligence, board review and approval, and additional matters. If the
transaction is consummated, management anticipates that the Company will secure
additional financing through a sale of common stock at the time of closing. It
is further expected that the series of transactions described above will result
in substantial dilution to the Company's current shareholders. Certain
provisions of the preliminary understanding would require shareholder approval
and the Company would prepare a proxy statement regarding these provisions after
closing the transaction.
There is no assurance that profitable operations in the future will
materialize, that the Company will reach a satisfactory agreement with its bank
to reset its financial covenants and other matters or that the sale of Watkins
Contracting, Inc. will take place. Further, there is no assurance that the
Company and the other entity described above will agree to or will consummate a
business combination, or that the Company's shareholders will not incur
substantial dilution as a result of the Company's issuance of a significant
amount of its common stock as consideration.
In the event the Company does not sell WCI, it will face certain
constraints based upon its working capital requirements and WCI's credit
agreement with Wells Fargo. These constraints will result in continuing the
suspension of the Company's external growth efforts in its environmental and
demolition business, as well as a further reevaluation of the mix of projects
WCI bids, contracts for and performs in the future. In order to exercise greater
control over field expenses and projects, particularly those involving
demolition, management anticipates that WCI will continue to seek less work
outside of its primary San Diego County geographic area. In addition, projects
which utilize equipment owned by WCI rather than third party rentals will be
more attractive to WCI in the bidding process. However, even if the Company and
WCI are successful in negotiating a resetting of the financial covenants in the
credit agreement and acceptable borrowing limits and interest rates payable, it
is likely that WCI will not be able to increase its revenues significantly in
1999, and may, in fact, shrink its revenues, as a result of working capital
constraints.
If the negotiations to sell WCI which are underway at May 13, 1999 fail to
produce a sale of WCI, the Company may seek additional parties interested in
purchasing WCI. Whether or not it contracts to sell WCI, the Company intends to
pursue the acquisition of the company with which it has a preliminary
understanding and, if such pursuit is unsuccessful, to seek other opportunities
to effect a business combination. There is no assurance that the Company will be
successful in consummating the acquisition of the company with which it has a
preliminary understanding, in finding any other acceptable opportunities for
business combinations or in finding other potential purchasers for WCI.
Year 2000 Compliance:
Internal
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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
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contain source code or computer chips that are unable to interpret appropriately
the upcoming calendar year 2000, some level of modifications 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 second quarter 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
and tested 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
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
relating 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
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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
result of the failure of key customers to achieve year 2000 compliance would be
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 second or third quarter 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, which consisted of WCI's contract revenues, were $3,500,000 in
the first quarter ended March 31, 1999 compared to $4,203,000 in the comparable
period of 1998. The decrease was mainly due to the achievement of a more normal
level of revenues in 1999 compared to an unusually high level of revenues in the
first quarter of 1998.
Gross profit in the first quarter of 1999 amounted to $414,000 compared to
$1,250,000 in the same period of 1998. The decrease in the 1999 period compared
to the prior year was the result of (i) lower revenues, (ii) a larger percentage
of revenue from lower margin demolition activities compared to revenues from
abatement activities, and (iii) the continued work on several low margin
demolition projects.
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General and administrative expenses declined in the first quarter ended
March 31, 1999 to $960,000 from $1,026,000 in the comparable quarter in 1998.
The decrease was achieved primarily at the corporate level as a result of lower
compensation expense.
Interest expense-net increased to $54,000 in the quarter ended March 31,
1999 from $8,000 in the comparable period of 1998. The increase was due to WCI's
significantly higher borrowing levels from its bank and equipment finance
companies during the first quarter of 1999 compared to 1998.
Amortization of goodwill remained constant in the first quarter of 1999
compared to 1998 as the Company is utilizing straight line amortization.
Provision for income taxes fell to $3,000 in the quarter ended March 31,
1999 from $22,000 in the prior year period. The 1999 and 1998 provisions
represent state and local franchise taxes. The 1998 provision also includes
California state taxes with respect to income in the first quarter of 1998. In
both periods, the Company recorded no provision for federal income taxes as the
Company utilized a net operating loss carryforward in 1998 and recorded an
operating loss in the first quarter of 1999.
Forward looking information:
From time to time, the Company or its representatives may have made or may
make forward-looking statements, orally or in writing. Such forward- looking
statements may be included in, but not limited to, press releases, oral
statements made by or with the approval of an authorized executive officer, or
in this report or other filings made by the Company with the Securities and
Exchange Commission. The words or phrases "trend," "expectation," "plans to,"
"preparing to," "will be," "will require," "may," "likely result," "expected,"
"anticipated," "estimated," "projected," "potential," "opportunity," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to ensure that such statements are accompanied by meaningful cautionary
statements, so as to maximize to the fullest extent possible the protections of
the safe harbor established in the said Act. Accordingly, such statements are
qualified in their entirety by reference to and are accompanied by the following
discussion of certain important factors that could cause actual results to
differ materially from such forward-looking statements.
Investors should also be aware of factors that could have an impact on the
Company's business or financial position or performance. These include
intensified competition and its impact on revenues and profit margins, changes
in competitors business strategies, availability of qualified labor to meet the
Company's needs, ability to retain current labor, adverse changes in national
and local economic conditions, adjustments in fiscal funding levels for
government entities, timing of large contracts, increasingly stringent
requirements for compliance with government regulations, the availability of
capital under WCI's credit agreement, the Company's ability to negotiate the
resetting of the financial covenants, future borrowing limits and interest rates
under the credit agreement, WCI and the Company's continued reliance upon
waivers of noncompliance from Wells Fargo, success of actions taken to improve
gross margins and reduce operating expenses, risks associated with the potential
sale of WCI, the Company's potential inability to sell WCI, risks associated
with potential business combinations, the Company's potential inability to
complete a business combination, the impact of shareholder dilution, potentially
lower revenues in 1999, failure of the
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Company to become fully year 2000 compliant, failure of key customers to become
fully year 2000 compliant and the effect it might have on the Company's ability
to collect its accounts receivable in a timely fashion or obtain supplies from
its vendors, and other factors detailed from time to time in the Company's
Securities and Exchange Commission filings or other readily available or
generally disseminated writings. The risks identified here are not all
inclusive. Reference is also made to other parts of this report and to the
Company's Form 10-K for its year ended December 31, 1998 that include additional
information concerning factors that could adversely impact the Company's
business or financial position or performance. Moreover, the Company operates in
a changing and very competitive business environment. New risks may emerge from
time to time, and it is not possible for management to predict all risk factors,
nor can it necessarily identify or assess the impact of all such factors on the
Company or the extent to which any factor or combination of factors may cause
actual results to differ materially from those contained in any forward-looking
statement. Accordingly, forward-looking statements should not be relied upon as
a prediction of actual results.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
No report on Form 8-K was filed during the first quarter ended
March 31, 1999.
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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: May 13, 1999 By: /s/ Arthur L. Asch
----------------------------------------
Arthur L. Asch, Chairman of the Board
Date: May 13, 1999 By: /s/ Michael A. Asch
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Michael A. Asch, President and Treasurer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 227
<SECURITIES> 0
<RECEIVABLES> 3,882
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,635
<PP&E> 1,432
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,960
<CURRENT-LIABILITIES> 5,271
<BONDS> 662
0
0
<COMMON> 4,027
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 9,960
<SALES> 3,500
<TOTAL-REVENUES> 3,500
<CGS> 3,086
<TOTAL-COSTS> 4,046
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 54
<INCOME-PRETAX> (613)
<INCOME-TAX> 3
<INCOME-CONTINUING> (616)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (616)
<EPS-PRIMARY> (.25)
<EPS-DILUTED> (.25)
</TABLE>
