SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------- --------------
Commission file number 2-82551
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HORRIGAN AMERICAN, INC.
-----------------------
(Exact name of registrant as specified in its Charter)
Pennsylvania 23-2224614
- - ------------------------ ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
6 Commerce Drive
Shillington, Pennsylvania 19607-9704 19612-3428
- - ------------------------------------ ----------
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (610) 775-5199
--------------
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 issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1994
- - ---------------------------- ----------------------------
Common Stock - $1 par value 3,111,766 Shares
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets:
June 30, 1994 (Unaudited) and December 31, 1993. . . . 2
Unaudited Consolidated Statements of Operations:
Six Months Ended June 30, 1994 and 1993. . . . . . . . 3
Three Months Ended June 30, 1994 and 1993. . . . . . . 4
Unaudited Consolidated Statements of Cash Flows
Three Months Ended June 30, 1994 and 1993. . . . . . . 5
Notes to Unaudited Consolidated Financial Statements . . 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 9
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . 18
Signatures . . . . . . . . . . . . . . . . . . . . . . . 19
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
1994 1993
(In thousands) (Unaudited) (Audited)
------------ ----------- ---------
Cash. .. . . . . . . . . . . . . . . . . . . . . . . $ 2,037 $ 2,160
Debt and equity securities . . . . . . . . . . . . . 2,361 2,697
Net investment in finance receivables. . . . . . . . 141,752 122,144
Equity investments in real estate
partnerships . . . . . . . . . . . . . . . . . . . 131 (8)
Property under operating leases, net. . . . . . . . . 31,376 31,631
Property and equipment, net . . . . . . . . . . . . . 2,301 2,301
Other assets . . . . . . . . . . . . . . . . . . . . 4,243 4,028
-------- --------
$184,201 $164,953
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . . . . . . $ 23,109 $ 16,305
Accounts payable and accrued expenses. . . . . . . . . 5,572 4,244
Customer deposits. . . . . . . . . . . . . . . . . . . 2,536 2,188
Long-term debt:
Recourse . . . . . . . . . . . . . . . . . . . . . . 104,558 94,880
Nonrecourse. . . . . . . . . . . . . . . . . . . . . 18,179 18,435
-------- -------
Total Liabilities. . . . . . . . . . . . . . . . . 153,954 136,052
-------- -------
Minority interest. . . . . . . . . . . . . . . . . . . 239 244
-------- -------
Stockholders' equity:
Preferred stock, $100 par value: 8% noncumulative,
nonvoting: authorized 20,000 shares; issued
and outstanding 1,952 shares in 1993 . . . . . . . -- 195
Common stock, $1 par value; authorized
10,000,000 shares; issued and
outstanding 3,111,766 shares
in 1994 and 1993. . . . . . . . . . . . . . . . . 3,112 3,112
Net unrealized holding gains for available-for-
sale securities . . . . . . . . . . . . . . . . . 1,221 1,374
Retained earnings. . . . . . . . . . . . . . . . . . 25,675 23,976
-------- --------
Total Stockholders' Equity. . . . . . . . . . . 30,008 28,657
-------- --------
$184,201 $164,953
======== ========
2
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(UNAUDITED)
(In thousands, except per share amounts) 1994 1993
- - ---------------------------------------- ---- ----
Finance revenues:
Commercial leasing and financing revenues . . . . .$ 8,882 $ 8,099
Interest expense. . . . . . . . . . . . . . . . . . 3,062 3,230
------- -------
Finance revenue margin. . . . . . . . . . . . . 5,820 4,869
Provision for possible lease and loan losses. . . . 559 833
------- -------
Finance revenues after provision for possible
lease and loan losses . . . . . . . . . . . . 5,261 4,036
------- -------
Operating lease revenues:
Rents on real estate operating leases . . . . . . . 2,683 2,816
Rents on equipment operating leases . . . . . . . . 85 54
------- -------
Total operating lease revenues. . . . . . . . . 2,768 2,870
Interest expense. . . . . . . . . . . . . . . . . . 1,376 1,270
Depreciation. . . . . . . . . . . . . . . . . . . . 578 560
------- -------
Net operating lease revenues. . . . . . . . . . 814 1,040
------- -------
Other operating revenues:
Customer service fees . . . . . . . . . . . . . . . 566 607
Management and broker income. . . . . . . . . . . . 182 103
Furniture and equipment sales, net of cost
of goods sold . . . . . . . . . . . . . . . . . . 409 318
Equity income (loss) in real estate partnerships. . 747 (153)
Gain on sale of debt and equity securities. . . . . 30 413
Other income. . . . . . . . . . . . . . . . . . . . 260 285
------- -------
Total other operating revenues. . . . . . . . . 2,194 1,573
------- -------
Operating expenses:
Salaries and employee benefits. . . . . . . . . . . 2,481 2,237
Depreciation and amortization . . . . . . . . . . . 209 307
Other taxes . . . . . . . . . . . . . . . . . . . . 369 329
Credit and collection . . . . . . . . . . . . . . . 129 169
Other expenses. . . . . . . . . . . . . . . . . . . 1,392 1,356
------- -------
Total operating expenses. . . . . . . . . . . . 4,580 4,398
------- -------
Earnings before income taxes and
minority interest. . . . . . . . . . . . . . . . . . 3,689 2,251
Income tax provision. . . . . . . . . . . . . . . . 1,412 816
------- -------
Earnings before minority interest. . . . . . . . . . . 2,277 1,435
Minority interest income. . . . . . . . . . . . . . (73) (45)
------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . .$ 2,204 $ 1,390
======= =======
Net earnings per common share. . . . . . . . . . . . .$ 0.71 $ 0.42
======= =======
3
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1994 AND 1993
(UNAUDITED)
(In thousands, except per share amounts) 1994 1993
- - ---------------------------------------- ---- ----
Finance revenues:
Commercial leasing and financing revenues . . . . .$ 4,656 $ 4,221
Interest expense. . . . . . . . . . . . . . . . . . 1,615 1,578
------- -------
Finance revenue margin. . . . . . . . . . . . . 3,041 2,643
Provision for possible lease and loan losses. . . . 371 383
------- -------
Finance revenues after provision for possible
lease and loan losses . . . . . . . . . . . . 2,670 2,260
------- -------
Operating lease revenues:
Rents on real estate operating leases . . . . . . . 1,401 1,338
Rents on equipment operating leases . . . . . . . . 48 42
------- -------
Total operating lease revenues. . . . . . . . . 1,449 1,380
Interest expense. . . . . . . . . . . . . . . . . . 686 636
Depreciation. . . . . . . . . . . . . . . . . . . . 295 287
------- -------
Net operating lease revenues. . . . . . . . . . 468 457
------- -------
Other operating revenues:
Customer service fees . . . . . . . . . . . . . . . 297 323
Management and broker income. . . . . . . . . . . . 131 55
Furniture and equipment sales, net of cost
of goods sold . . . . . . . . . . . . . . . . . . 237 174
Equity income (loss) in real estate partnerships. . 818 (19)
Gain on sale of debt and equity securities. . . . . 30 --
Other income. . . . . . . . . . . . . . . . . . . . 109 62
------- -------
Total other operating revenues. . . . . . . . . 1,622 595
------- -------
Operating expenses:
Salaries and employee benefits. . . . . . . . . . . 1,279 1,098
Depreciation and amortization . . . . . . . . . . . 106 137
Other taxes . . . . . . . . . . . . . . . . . . . . 178 159
Credit and collection . . . . . . . . . . . . . . . 67 77
Other expenses. . . . . . . . . . . . . . . . . . . 735 705
------- -------
Total operating expenses. . . . . . . . . . . . 2,365 2,176
------- -------
Earnings before income taxes and
minority interest. . . . . . . . . . . . . . . . . . 2,395 1,136
Income tax provision. . . . . . . . . . . . . . . . 927 424
------- -------
Earnings before minority interest. . . . . . . . . . . 1,468 712
Minority interest income. . . . . . . . . . . . . . (44) (19)
------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . .$ 1,424 $ 693
======= =======
Net earnings per common share. . . . . . . . . . . . .$ 0.46 $ 0.21
======= =======
4
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX M0NTHS ENDED JUNE 30, 1994 AND 1993
(UNAUDITED)
(In thousands) 1994 1993
- - -------------- ---- ----
Cash flows from operating activities:
Finance revenues received . . . . . . . . . . . . .$ 7,771 $ 7,117
Rentals and other cash received . . . . . . . . . . 4,814 4,828
Lease purchase options received . . . . . . . . . . 1,489 1,181
Dividends received. . . . . . . . . . . . . . . . . 10 16
Interest paid . . . . . . . . . . . . . . . . . . . (4,435) (4,550)
Cash paid to suppliers and employees. . . . . . . . (5,792) (4,629)
Income taxes paid . . . . . . . . . . . . . . . . . (464) (736)
------- -------
Net cash provided by operating activities
(Note 4) . . . . . . . . . . . . . . . . . . . 3,393 3,227
------- -------
Cash flows from investing activities:
Originations and purchases of finance receivables .(47,278) (34,826)
Principal collections of finance receivables. . . . 39,462 35,376
Acquisitions (net of cash received) . . . . . . . . (4,053) (3,786)
Acquisition of debt and equity securities . . . . . (40) --
Proceeds from sale of debt and equity securities. . 175 606
Acquisition of property under operating leases. . . (338) (300)
Proceeds from sale of property under
operating leases. . . . . . . . . . . . . . . . 5 1,258
Acquisition of property and equipment . . . . . . . (92) (65)
Proceeds from sale of property and equipment. . . . 1 3
Acquisition of equity, partnership and long-term
investments . . . . . . . . . . . . . . . . . . . (40) (50)
Proceeds from sale of equity, partnership and
long-term investments . . . . . . . . . . . . . . 678 50
Insurance premium paid increasing cash value. . . . (10) (8)
------- -------
Net cash provided by (used by)
investing activities . . . . . . . . . . . . .(11,530) (1,742)
------- -------
Cash flows from financing activities:
Issuance of common stock. . . . . . . . . . . . . . -- 2
Dividends paid and partnership distributions. . . . (583) (278)
Acquisition of treasury stock . . . . . . . . . . . -- (179)
Acquisition of preferred stock. . . . . . . . . . . (195) --
Short-term debt borrowings. . . . . . . . . . . . . 78,100 25,250
Short-term debt repayments. . . . . . . . . . . . .(79,100) (23,985)
Long-term debt borrowings . . . . . . . . . . . . . 35,980 29,659
Long-term debt repayments . . . . . . . . . . . . .(26,797) (32,165)
Certificate borrowings. . . . . . . . . . . . . . . 3,410 3,310
Certificate repayments. . . . . . . . . . . . . . . (2,519) (3,182)
Net change in customer deposits . . . . . . . . . . (282) (140)
------- -------
Net cash used by financing activities . . . . . . 8,014 (1,708)
------- -------
Net decrease in cash . . . . . . . . . . . . . . . . . (123) (223)
Cash at beginning of year . . . . . . . . . . . . . 2,160 2,202
------- -------
Cash at end of quarter. . . . . . . . . . . . . . .$ 2,037 $ 1,979
======= =======
5
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. UNAUDITED STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Horrigan American, Inc. as of June 30, 1994, and the
results of its operations and cash flows for the three month and six month
periods ended June 30, 1994 and 1993.
The accounting policies followed by the Company are set forth in note
A to the Company's 1993 consolidated financial statements included in its 1993
Form 10-K, except for a new accounting policy with respect to loan impairment
which is disclosed below.
Loan Impairment
In May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan. SFAS No. 114 requires that certain impaired loans be
measured based on the present value of expected future cash flows discounted
at the loan's effective interest rate. This statement excludes leases as
defined in SFAS No. 13, Accounting for Leases.
Effective January 1, 1994, the Company adopted SFAS No. 114. The
cumulative effect of this change in the method of accounting for loan
impairment is $0 to the 1994 consolidated statement of operations. The
Company will recognize the change in present value by reporting the entire
charge as bad-debt expense in the same manner in which impairment initially
was recognized.
In accordance with this statement, the Company's disclosures of the
recorded investment in the loans for which impairment has been recognized, the
total allowance for possible loan losses related to those impaired loans, and
the allowance for possible lease and loan losses are recorded in the Company's
Management Discussion of the Provision for Possible Lease and Loan Losses.
Pursuant to the method under SFAS No. 5, which was applied in 1993 and
prior years, payments were generally applied to the principal balance only
when the loan was impaired. The Company would also record partial write-downs
of impaired loans if a reasonable doubt existed as to the collectibility of
the principal balance.
NOTE 2. EARNINGS PER COMMON SHARE
- - ---------------------------------
Earnings per common share were computed using weighted average shares
and dilutive stock options outstanding during each year and deducting
preferred dividend requirements from net earnings. Earnings per common share
assuming full dilution were not reported because dilution arising from the
stock options is less than three percent.
6
<PAGE>
Following are details on the net earnings and number of shares used in
the computation:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
---------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . $2,204,000 $1,390,000 $1,424,000 $693,000
Dividends on preferred shares . . . . . . . . . . . . . . . . . . (8,000) (8,000) (4,000) (4,000)
---------- ---------- ---------- --------
Net earnings applicable to common
shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,196,000 $1,382,000 $1,420,000 $689,000
========== ========== ========== ========
Weighted average common shares and
dilutive stock options . . . . . . . . . . . . . . . . . . . . $3,113,814 $3,310,205 $3,113,814 $3,318,595
========== ========== ========== ==========
Net earnings per common share . . . . . . . . . . . . . . . . . . $ 0.71 $0.42 $0.46 $0.21
====== ===== ===== =====
</TABLE>
NOTE 3. DIVIDENDS PER SHARE
- - ----------------------------
Following are details on dividends declared and paid:
Six months ended Three Months Ended
June 30, June 30,
---------------- ------------------
1994 1993 1994 1993
---- ---- ---- ----
Dividends per preferred share . . . . $4.00 $4.00 $2.00 $2.00
Dividends per common share. . . . . . $0.16 $0.0575 $0.06 $ --
NOTE 4. CASH FLOW INFORMATION
- - ------------------------------
The following is the reconciliation of net earnings to net cash provided by
operating activities for the six months ended:
June 30, June 30,
(In thousands) 1994 1993
- - -------------- ---- ----
Net earnings . . . . . . . . . . . . . . . . . . $2,204 $1,390
Noncash expenses, revenues, losses and gains
included in net earnings:
Depreciation and amortization. . . . . . . . . 787 867
Excess of provision for income taxes
over (under) income taxes paid . . . . . . 948 80
Net change in prepaid expenses and payables. . (664) 32
Decrease in income receivable. . . . . . . . . (113) 170
Lease purchase options: cash received in
excess of earned. . . . . . . . . . . . . . 980 691
Increase in interest payable . . . . . . . . . 3 (50)
Gain on sale of marketable securities, finance and
operating leases, property and equipment,
and investments . . . . . . . . . . . . . . (651) (1,004)
Provision for possible lease and loan losses . 559 833
Equity (income) loss in real estate partnerships
and associated companies. . . . . . . . . . (733) 173
Minority interest income . . . . . . . . . . . 73 45
------ ------
Net cash provided by operating activities. . . $3,393 $3,227
====== ======
7
<PAGE>
The following is a schedule of noncash investing and financing activities for
the six months ended:
June 30, June 30,
(In thousands) 1994 1993
- - -------------- ---- ----
Acquisitions:
Net investment in finance receivables . . . . . . . $9,638 $12,307
Other assets. . . . . . . . . . . . . . . . . . . . 67 87
Short-term debt assumed . . . . . . . . . . . . . . (7,000) (4,985)
Long-term debt assumed. . . . . . . . . . . . . . . -- (5,656)
Security deposits assumed . . . . . . . . . . . . . (630) (1,392)
Other liabilities assumed . . . . . . . . . . . . . (1,365) (361)
Deferred income taxes assumed . . . . . . . . . . . (710) --
Goodwill. . . . . . . . . . . . . . . . . . . . . . 152 --
Long-term debt obligation . . . . . . . . . . . . . (152) --
Investment interest in real estate partnership
received from minority interest in payment
of commercial loan receivables . . . . . . . . . . . $ -- $ 397
NOTE 5. ACQUISITION
- - --------------------
On June 1, 1994, the Company purchased all of the capital stock of
American Capital Leasing Corporation ("ACL"), whose principal business
consists of financing and leasing equipment.
The Company paid the estimated purchase price of $3,936,000 in cash on
June 1, 1994. The final purchase price is to be determined by a post-closing
audit within ninety days, based principally on the book value of the common
stock multiplied by a factor of 109.5%, less a credit on account of ACL's
deferred tax liability.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of ACL have been included in the Company's consolidated
financial statements since the acquisition date.
The following unaudited pro forma financial information for six months
ended June 30, 1994 presents the combined results of operations of the
Company and ACL as if the acquisition had occurred as of the beginning of
1994. The pro forma financial information does not necessarily reflect the
results of operations that would have occurred had the Company and ACL
constituted a single entity during this period.
Commercial leasing and financing revenues . . . . . $9,484,000
Net earnings. . . . . . . . . . . . . . . . . . . . $2,205,000
Earnings per share. . . . . . . . . . . . . . . . . $0.71
In conjunction with the Company's acquisition of ACL, ACL recorded a
total pre-tax loss of $96,000 for the five months ended May 31, 1994
(consisting of a non-recurring pre-tax charge of $400,000 and normal
pre-tax operating earnings of $304,000). The non-recurring pre-tax
charge recorded by ACL was for an expense accrual in conjunction with
this transaction. This adjustment is not reflected in the above pro-
formas because it is considered to be non-recurring. Also, the pro
forma adjustments for five months records premium expense and
additional interest expense, and a provision for income taxes for the
conversion of ACL from an S corporation to a C corporation.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
The Company generated net earnings of $2,204,000 for the first six months
of 1994 compared to net earnings of $1,390,000 for the same period a year ago.
Net earnings of $1,424,000 were reported for the second quarter of 1994
compared to net earnings of $693,000 for the second quarter of 1993. The
components of these changes are discussed in the following sections.
Total Finance Revenues
Commercial leasing and financing revenues were $8,882,000 for the first
six months of 1994 compared to $8,099,000 for the first six months of 1993,
resulting in a 9.7% increase. Commercial leasing and financing revenues
increased 10.3% to $4,656,000 for the second quarter of 1994 compared to
$4,221,000 for the second quarter of 1993.
This increase in total finance revenues is primarily due to a higher
average outstanding balance of finance receivables, principally the result of
an increase in total volume of new leases and loans generated through the
Company's sales efforts and the acquisition of three portfolios of finance
receivables (during the second and third quarters of 1993 and the second
quarter of 1994). Net direct finance lease receivables and commercial finance
receivables totalled $141,752,000 as of June 30, 1994, compared to
$123,652,000 as of June 30, 1993.
This increase in volume has reduced the negative impact of lower yields on
the lease and loan portfolio. Lower yields result from both relatively lower
interest rates which tend to depress the Company's lease and loan rates, and
to the mix of the Company's newly acquired leases and loans, which has moved
to higher transaction sizes where credit quality and rate sensitivity are
believed to be higher.
Finance Revenue Margin
Finance revenue margin represents the difference between total finance
revenues and the amount the Company pays as interest on short-term borrowings
and long-term debt allocated to finance receivables. The Company's finance
revenue margin was $5,820,000 for the first six months of 1994 and $4,869,000
for the first six months of 1993.
The Company's finance revenue margin increased $951,000 (19.5%) for the
first six months of 1994 compared to the same period a year ago. Total
finance revenues increased 9.7% in 1994 from 1993 and interest expense
decreased 5.2% for the same period. The average interest rate at which the
Company prices its products decreased 69 basis points to 13.62% in 1994 from
14.31% for the first six months of 1993. The average interest rate on the
Company's borrowings decreased 85 basis points to 6.39% in 1994 from 7.24% for
the first six months of 1993.
The Company's finance revenue margin increased $398,000 (15.1%) for the
second quarter of 1994 compared to the same period of 1993. The average
interest rate at which the Company prices its products decreased 78 basis
9
<PAGE>
points to 13.74% in 1994 from 14.53% for the second quarter of 1993. The
average interest rate on the Company's borrowings decreased 49 basis points to
6.44% in 1994 from 6.93% for the second quarter of 1993.
The net increase in finance revenue margin was due to the purchase of
three portfolios of finance receivables, at a higher interest rate spread.
However, the Company continues to market higher average balance commercial
leasing and financing contracts, with lower yields to achieve improved asset
quality and economies of operations which reduces its finance revenue margin.
The Company's Asset and Liability Committee reviews this risk regularly and
manages the matching of debt with these finance receivables.
Provision For Possible Lease and Loan Losses
The provision for possible lease and loan losses decreased $274,000
(32.9%) to $559,000 for the first six months of 1994 compared to the same
period a year ago. The provision for possible lease and loan losses for the
second quarter of 1994 decreased $12,000 (3.1%) compared to the same period a
year ago. The following table details the components of the provision for
possible lease and loan losses as of and for the six months and quarters ended
June 30, 1994 and 1993.
<TABLE>
<CAPTION>
(In thousands)
- - --------------
Provision Allowance
for Possible for Possible Gross Allowance
Lease and Net Loss Experience Lease Investment as a
Loan ----------------------------------- Acquired and Loan in % of Gross
Losses Charge-offs Recoveries Net Losses Allowance Losses Receivables Receivables
------ ----------- ---------- ---------- --------- ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30
- - ------------------------
1994 $ 559 (800) 388 (412) 214(A) $5,800 $166,311 3.49
1993 $ 833 (1,239) 556 (683) 702(A) $5,464 $145,152 3.76
QUARTER ENDED JUNE 30
- - ---------------------
1994 $ 371 (442) 218 (224) 214(A) $5,800
1993 $ 383 (643) 335 (308) 702(A) $5,464
<FN>
(A) The balance of the allowance for possible lease and loan losses increased as a result of the acquisition of
portfolios of finance receivables.
</TABLE>
The Company maintains an allowance for possible lease and loan losses
based on a periodic evaluation of the finance receivable portfolio. Management
considers current economic conditions, diversification of the loan portfolio,
historical loss experience, results of loan reviews, borrower's financial and
managerial strengths, the adequacy of underlying collateral and other relevant
factors in its evaluation. While management uses the best available
information to make such evaluations, future adjustments to the allowance may
be necessary if conditions differ substantially from the assumptions used in
making the evaluation. This allowance reflects an amount that in management's
opinion is adequate to absorb known and inherent losses in the portfolio.
Receivables which are determined to be uncollectible are charged off against
the allowance for possible lease and loan losses, and recoveries on accounts
previously charged off are credited to it.
10
<PAGE>
As of June 30, 1994, the Company allocated $40,000 of the allowance for
possible lease and loan losses in anticipation of losses on certain
individually significant accounts. This allocated allowance decreased
$250,000 from December 31, 1993.
The recorded investment in the loans for which impairment has been
recognized approximated $217,000 as of June 30, 1994. The total allowance for
possible loan losses related to these impaired loans is $11,000 as of June 30,
1994.
The Company's net charge-offs of commercial leasing and financing
receivables decreased $271,000 (39.7%), for the first six months of 1994
compared to the same period a year ago. The Company's net charge-offs of
commercial leasing and financing receivables decreased $84,000 (27.3%), for
the second quarter of 1994 compared to the same period a year ago. This
decrease in net losses was the result of improved underwriting standards,
improved adjusting procedures, aggressive use of legal remedies, strong
remarketing efforts and a healthier economy.
The Company continues to improve its asset quality and control the
delinquency of receivables. The Company's tighter credit standards and more
focused efforts within several market niches, have enhanced asset quality. In
certain situations, larger down payments, additional security deposits, and/or
shorter terms are now required. An asset review committee monitors the quality
of the Company's assets. The Company's improved collection and adjusting
procedures have resulted in effective control of delinquent receivables.
Management believes the allowance for possible lease and loan losses is
adequate to cover inherent credit losses.
Net Operating Lease Revenues
Net operating lease revenues represent rents on real estate and equipment
operating leases offset by related interest and depreciation expenses. Net
operating lease revenues decreased $226,000 (21.7%) for the first six months
of 1994 compared to the same period a year ago. Total operating lease revenues
decreased $102,000 (3.6%) to $2,768,000. The decrease is due primarily to the
sale of two properties in 1993. Interest expense attributable to net
operating lease revenues increased $106,000 (8.3%). On December 31, 1993,
loans from the Company to several partnerships were rolled into capital
contributions to these partnerships. The corresponding interest incurred on
this debt in 1994 is reflected as interest to fund real estate operating
leases. In 1993, this interest was appropriately included in the Company's
finance revenue margin. Depreciation expense attributable to net operating
leases increased $18,000 (3.2%) primarily the result of an increase in
equipment operating leases, offset by a decrease in depreciation on real
estate operating leases due to the sale of two properties in 1993, and a lower
basis for certain real estate properties due to a $488,000 write-down to fair
value on December 31, 1993.
Net operating lease revenues increased $11,000 (2.4%), for the second
quarter of 1994 compared to the same period a year ago. Total operating lease
revenues increased $69,000 (5.0%), primarily due to a lump sum payment of past
due rent under a settlement agreement with one tenant. Interest expense
increased $50,000 (7.9%), and depreciation expense increased $8,000 (2.8%) due
to the same factors that impacted the six month period.
11
<PAGE>
The Company's principal objectives for its real estate business are to
(1) manage its properties aggressively, maintaining asset integrity through
appropriate capital expenditures, (2) accelerate paydown of the debt
associated with those properties as available cash flow permits, (3) hold most
assets for long-term investment, (4) consider the selective sale of individual
properties or groups of properties, and (5) selectively invest in additional
real estate.
The Company's aggregate investment in real estate is not expected to
significantly appreciate in value over the next several years. In addition,
net operating lease revenues from some existing investments may decline in the
short to intermediate term, as rents under many existing leases are expected
to remain flat or decrease as leases expire over the next several years. While
this will tend to depress the Company's profitability in its real estate
operations for a period of time, it is expected that the Company's real estate
investments (after third party mortgage debt service obligations and overhead
expenses) will continue to provide positive cash flow to the Company.
The commercial real estate business is subject to several risks which
management reviews on a regular basis. These risks are identified below with
the status of each as of June 30, 1994:
1. Credit risks.
There are various levels of credit risks inherent in the Company's
rent receivables. A total of $56,200 of rents were thirty or more
days past due of which $45,800 represents amounts due from two
tenants in two properties.
2. General market conditions nationally or within specific geographic
areas.
The Company is maintaining an ownership interest, ranging from 10% to
100%, in 40 real estate properties with an original cost of
$59,671,000 in the following states, with the percentage of
concentration indicated in parenthesis: Pennsylvania (25%), Florida
(29%), New Jersey (15%), Ohio (10%) and other (21%).
3. Greater difficulty in releasing or selling special purpose buildings.
The Company's special purpose buildings include three day-care
facilities and one nursing home. None are presently for sale and all
are fully occupied. The Company also owns and manages two limited
service hotels.
4. Vacancies.
There were partial vacancies in eleven real estate projects, some of
which may require additional cash from the Company until the
properties are substantially leased. Management is actively pursuing
new tenants for these properties.
5. Property repairs and improvements.
Preservation of the quality and value of commercial real estate
properties requires that repairs and improvements occur regularly.
In a majority of the Company's properties, the obligation to
12
<PAGE>
incur such expenditures has been passed to the tenants. Provided
the tenants have the financial resources to comply, the Company is
able to avoid or defer this responsibility. In other cases, the
responsibility is retained by the Company, and repairs and
improvements are funded out of current operating lease cash flows or
through cash reserves; and if necessary through increased
investments or additional borrowings.
The timing and amount of repairs or improvements is determined by the
operating history and present level of operating lease revenue levels
of the property, by the Company's plans for a property (such as a
sale, lease, or renovation), and in some cases by regulatory
directives. In 1992, the American Disabilities Act ("ADA") was
passed, requiring the improvement of many properties under certain
conditions in order to accommodate the needs of the physically
disabled. In certain of the Company's properties, meeting ADA
requirements will necessitate improvements at various times. It is
expected that such improvements will not be material relative to the
aggregate cost of the property.
It is estimated that, not including potential ADA requirements, up to
approximately $593,000 of improvements may be made within the next
twelve months. Approximately 35% of the cost of these improvements
will be funded through operating cash generated by the partnerships,
and the balance through additional debt.
6. Inability to obtain the extension or replacement of existing mortgage
loans as they mature.
The extensions or replacement of existing mortgage loans as they come
due continue to involve a higher degree of risk in the current and
reasonably foreseeable environment than was previously the case.
Such loans, when available, are frequently at lower loan amounts.
During the next twelve months, approximately $1,893,000 of third
party mortgage debt will come due and will require negotiation or
replacement financing. It is expected that a substantial portion of
this debt will be renegotiated for extended terms with existing
lenders. To the extent any such debt is not extended in maturity,
the Company expects to seek funding from other lenders or provide
funding internally, if necessary.
7. Valuation of real estate properties.
A decline in the market value of the Company's investment in real
estate can provide risk to the Company in several ways. To the
extent the declines indicate a reduction in the rentals expected on a
property, the Company will experience a decline in operating lease
revenues. Also, lower values can reduce the amount of available loan
borrowings or equity capital available from third parties to the
Company to fund its continued ownership of the properties, and can
reduce eventual sale proceeds if properties are sold and values have
not recovered.
In general, condition's affecting the value of individual properties
can change from period to period. Conditions include an extremely
wide variety of factors outside the control of the Company. In the
case of many of the Company's real estate operating leases, a change
in conditions can also include the early termination of a favorable
lease caused by a tenant's financial difficulties or the modification
13
<PAGE>
of such a lease arising out of the negotiation of a new lease with a
tenant. The Company is presently in negotiations involving several
of its properties, any of which may result in lower operating lease
revenues in future periods.
During the first six months of 1994, there were no additional
properties believed to have an estimated current fair value
materially below book value. Future changes to the property
valuations may be necessary if any condition differs substantially
from the assumptions used in developing current valuations.
Other Operating Revenues
Other operating revenues increased $621,000 (39.5%) to $2,194,000 for the
first six months of 1994 compared to the same period a year ago. Customer
service fees decreased $41,000 primarily due to a continued reduction in
insurance premiums earned as a result of the discontinuance of the lease
insurance program and fewer late charges were earned. Management income
increased $79,000 due to a fee received in connection with the sale of one
real estate property. Furniture and equipment sales increased $91,000 due to
increased volume in the modular furniture business. On May 31, 1994, the
Company expanded its furniture and equipment operations through the purchase
of inventory and trade name from an office products retailer located in the
Baltimore area. The Company's share of income in unconsolidated real estate
partnerships increased $900,000 primarily due to: a gain of approximately
$813,000 from the sale of one real estate property in June, 1994, and an
increase in revenues generated by certain partnerships. Gain on sale of debt
and equity securities decreased $383,000 due to less sales activity in the
first six months of 1994. Other income decreased $25,000. Other income for
the first six months of 1993 included a gain of $140,000 from the sale of a
building in March, 1993.
Other operating revenues increased $1,027,000 (172.6%) for the second
quarter of 1994 compared to the same period a year ago primarily resulting
from an increase of $837,000 in income from unconsolidated real estate
partnerships and an increase of $76,000 in management fees. Both increases
were due primarily to the gain from the sale of real estate property.
Furniture and equipment sales increased $63,000 and customer service fees
decreased $26,000 due to the same factors that impacted the six-month period.
The sale of equity securities resulted in a gain of $30,000 during the second
quarter of 1994. There were no sales of securities during the second quarter
of 1993. Other income increased $47,000 for the second quarter of 1994.
Operating Expenses
Operating expenses increased $182,000 (4.1%) to $4,580,000 for the first
six months of 1994 compared to the same period a year ago. Salaries, related
taxes, and employee benefits increased $244,000 (10.9%) due to an increase in
incentive compensation and the addition of several marketing employees.
Depreciation and amortization decreased $98,000 (31.9%) primarily due to a
continued reduction in lease insurance expense due to the discontinuance of
this program in 1992. In 1993, depreciation and amortization included the
write-off of deferred costs of approximately $24,000 associated with a
mortgage which was subsequently refinanced. All remaining expenses increased
$36,000 (1.9%).
14
<PAGE>
Operating expenses increased $189,000 for the second quarter of 1994
compared to the same period a year ago. Salaries, related taxes, and employee
benefits increased $181,000 (16.5%) and depreciation and amortization
decreased $31,000 (22.6%) due to the same factors that impacted the six month
period. All remaining expenses increased $39,000 (4.1%).
Provision for Income Taxes
Provision for income taxes for the first six months of 1994 were
$1,412,000 compared to $816,000 for the comparable period a year ago. The
effective income tax rates for the first six months of 1994 and 1993 were
38.3% and 36.3%, respectively.
For the second quarter of 1994, provision for income taxes totalled
$927,000 compared to $424,000 in the second quarter of 1993. The effective
tax rates for the second quarters of 1994 and 1993 were 38.7% and 37.3%.
Income tax expense for 1994 increased due to higher pre-tax income and a
higher effective income tax rate.
Acquisition
On June 1, 1994, the Company, through a wholly-owned subsidiary,
purchased all of the capital stock of American Capital Leasing Corporation
("ACL"), whose principal business consists of financing and leasing equipment.
The Company intends to operate the acquired business as a separate
subsidiary. The Company has retained all five employees of ACL.
The Company paid the estimated purchase price of $3,936,000 in cash on
June 1, 1994. The final purchase price is to be determined by a post-closing
audit within 90 days, based principally on the book value of the common stock
multiplied by a factor of 109.5%, less a credit on account of ACL's deferred
tax liability. The Company funded the purchase price and refinanced all
outstanding debt of ACL ($7,000,000) by borrowing under one of its existing
long-term credit lines. ACL's two shareholders have agreed not to compete
with the Company in the business of equipment leasing and equipment financing
for a period of two years.
Net Investment in Finance Receivables and Property under Operating Leases
Net direct finance lease receivables and commercial finance receivables
totalled $141,752,000 as of June 30, 1994 compared to $122,144,000 as of
December 31, 1993, a net increase of $19,608,000 for the six months.
The increase in finance receivables was in accordance with the Company's
growth plans. The Company's sales efforts have generated a larger volume of
new leases and loans in 1994 due to increased penetration into focus markets,
while maintaining its policy of tight credit standards. Future originations
will be dependent to a large extent upon economic conditions and the Company's
ability to sell services in a continuing competitive market environment. The
Company has expanded its marketing divisions through the acquisition of Golf
Capital Corporation ("GCC") for $541,000 on March 31, 1994. GCC provides
leasing and lending services to the country club and golf course industry. On
June 1, 1994, the Company acquired approximately $13,691,000 of net investment
15
<PAGE>
in finance receivables through the purchase of all of the outstanding shares
of American Capital Leasing Corporation (see "Acquisitions"). The Company
continues to look for opportunities to acquire portfolios of leases and loans
which will compliment the Company's existing finance receivables.
Property under operating leases, net of accumulated depreciation,
decreased $255,000, resulting from normal depreciation offset by capital
improvements to real estate properties and an increase in equipment operating
leases.
The change in property under operating leases is in accordance with
management strategy (see "Net Operating Lease Revenues").
Liquidity
Liquidity represents the Company's ability to meet ongoing financial
obligations. The Company's ongoing liquidity is dependent upon continued
profitability and collection of its receivables and rentals, the ability to
sell equipment or collect purchase option payments at the conclusion of
maturing equipment leases, the sale of Subordinated Investment Certificates,
the ability to secure new senior debt (loans from banks and other financial
institutions), the ability to secure real estate mortgage financing, to sell
real estate, and to sell equity interests in real estate partnerships, and
other financing, and the ability to expand furniture and equipment sales
activities.
Net cash provided by operating activities was $3,393,000 for the six
months ended June 30, 1994 compared to $3,227,000 for the same period a year
ago.
The Company's direct finance lease receivables and equipment operating
leases are funded primarily with unsecured senior debt. The Company generally
attempts to match new leases with borrowings of like maturity and amount in
which the interest rate is fixed at the time of the borrowing. Additionally,
the Company borrows term debt with varying maturities and short-term floating
interest rate debt, and uses Subordinated Investment Certificate debt. The
Company's commercial finance receivables are similarly match funded by various
forms of unsecured senior debt and Subordinated Investment Certificate debt.
The Company has unused lines of credit totalling $48,277,000 as of June 30,
1994. (See "Capital Resources").
The Company's investment in real estate (property under operating leases)
is leveraged substantially with borrowings by the Company. Much of the debt
is comprised of mortgage loans securing individual properties. Of the
mortgage debt, a substantial amount is nonrecourse to the Company, with the
balance being recourse through guarantees by Horrigan American, Inc. or its
real estate subsidiary. Of the investment in real estate not funded with
mortgage debt, a substantial amount is funded indirectly by the Company with
Subordinated Investment Certificate debt.
In the opinion of management, the Company's liquidity position is
sufficient under present circumstances.
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<PAGE>
Capital Resources
Future growth of the Company will depend in significant measure on its
ability to obtain additional lines of credit and other financing, the
continued sale of Subordinated Investment Certificates, the sale of equity
interests in real estate partnerships and continued profitability. As of June
30, 1994, the Company had the following debt structure:
Debt Outstanding and
Availability/Lines of Credit
----------------------------
Total
(In thousands) Availability In Use Unused
- - -------------- ------------ ------ ------
Short-Term Borrowings:
Investment Certificate . . . . . $ -- $ 3,609 $ --
Fixed Rate . . . . . . . . . . . 29,089 19,000 10,089
Floating Rate. . . . . . . . . . 5,000 500 4,500
-------- -------- -------
Sub-Total . . . . . . . . . . 34,089 23,109 14,589
-------- -------- -------
Long-Term Debt:
Recourse
Investment Certificate . . . . . -- 26,051 --
Junior Subordinated Debt . . . . -- 103 --
Unsecured Funding Program. . . . 86,629 52,941 33,688
Fixed Rate . . . . . . . . . . . 20,160 20,160 --
Term Loan. . . . . . . . . . . . -- 140 --
Real Estate Mortgages. . . . . . -- 5,014 --
Other. . . . . . . . . . . . . . -- 149 --
Nonrecourse
Real Estate Mortgages. . . . . . -- 18,122 --
Other . . . . . . . .. . . . . . -- 57 --
-------- -------- -------
Sub-Total . . . . . . . . . . 106,789 122,737 33,688
-------- -------- -------
TOTAL DEBT . . . . . . . . . . . . $145,846
========
TOTAL AVAILABILITY . . . . . . . . $140,878 $48,277
======== =======
The notional principal amounts of outstanding swap contracts increased by
$4,316,000 from December 31, 1993 for an outstanding balance of $6,316,000 as
of June 30, 1994.
Total stockholders' equity increased $1,351,000 from December 31, 1993 to
June 30, 1994 due primarily to the retention of earnings ($2,204,000) offset
by the payment of dividends ($505,000), the redemption of preferred stock
($195,000), and a decrease in net unrealized holding gains for available-for-
sale securities ($153,000).
In the opinion of management, the Company's capital resources are
sufficient under present circumstances to satisfy its capital requirements
based upon present asset growth projections, current leverage, continued
profitability and historic ability to secure new sources of borrowings.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
- - -----------------------------------------
A. Exhibit 27 - Financial Data Schedule.
B. One report on Form 8-K was filed for the six months ended June 30, 1994.
Items Reported Date of Report
-------------- --------------
Acquisition of the capital stock June 15, 1994
of American Capital Leasing
Corporation for a purchase price
of $3,936,000
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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.
HORRIGAN AMERICAN, INC.
-----------------------
(Registrant)
/s/ Arthur A. Haberberger
-------------------------
Arthur A. Haberberger
President and
Chief Executive Officer
Date: August 10, 1994 (Principal Executive Officer)
/s/ Robert Ordway
------------------------
Robert Ordway
Senior Vice President
Date: August 10, 1994 (Principal Financial and
Accounting Officer
19
<PAGE>
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from
Horrigan American, Inc. and Subsidiaries and is qualified in its entirety by
reference to such financial statements.
Appendix A to Item 601(c) of Regulation S-K
Commercial and Industrial Companies
Article S of Regulation S-X
Item Number Item Description Amounts
- - ----------- ---------------- -------
5-02(1) cash and cash items $2,037,000
5-02(2) marketable securities 2,361,000
5-02(3)(a)(1) notes and accounts receivable trade 147,552,000
5-02(4) allowances for doubtful accounts 5,800,000
5-02(6) inventory N/A
5-02(9) total current assets N/A
5-02(13) property, plant and equipment 41,280,000
5-02(14) accumulated depreciation 7,603,000
5-02(18) total assets 184,201,000
5-02(21) total current liabilities N/A
5-02(22) bonds, mortgages and similar debt 145,846,000
5-02(28) preferred stock - mandatory redemption N/A
5-02(29) preferred stock - no mandatory redemption N/A
5-02(30) common stock 3,112,000
5-02(31) other stockholders' equity 26,896,000
5-02(32) total liabilities and stockholders' equity 184,201,000
5-03(b)1(a) net sales of tangible products 409,000
5-03(b)1 total revenues 13,435,000
5-03(b)2(a) cost of tangible goods sold N/A
5-03(b)2 total costs and expenses applicable to sales
and revenues 5,158,000
5-03(b)3 other costs and expenses N/A
5-03(b)5 provision for doubtful accounts and notes 559,000
5-03(b)(8) interest and amortization of debt discount 4,438,000
5-03(b)(10) income before taxes and other items 3,689,000
5-03(b)(11) income tax expense 1,412,000
5-03(b)(14) income/loss continuing operations 2,204,000
5-03(b)(15) discontinued operations N/A
5-03(b)(17) extraordinary items N/A
5-03(b)(18) cumulative effect - changes in accounting
principles 0
5-03(b)(19) net income or loss 2,204,000
5-03(b)(20) earnings per share - primary 0.71
5-03(b)(20) earnings per share - fully diluted 0.71
20
