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 March 31, 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 April 30, 1994
--------------------------- -----------------------------
Common Stock - $1 par value 3,111,766 Shares
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets:
March 31, 1994 (Unaudited) and December 31, 1993 . . . 2
Unaudited Consolidated Statements of Operations:
Three Months Ended March 31, 1994 and 1993 . . . . . . 3
Unaudited Consolidated Statements of Cash Flows
Three Months Ended March 31, 1994 and 1993 . . . . . . 4
Notes to Unaudited Consolidated Financial Statements . . 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 7
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K. . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . . . 16
<PAGE>
PART I - FINANCIAL INFORMATION
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
1994 1993
(Unaudited) (Audited)
(In thousands) ----------- ---------
Cash . . . . . . . . . . . . . . . . . . . . . . . $ 1,685 $ 2,160
Debt and equity securities . . . . . . . . . . . . 2,312 2,697
Net investment in finance receivables. . . . . . . 121,076 122,144
Equity investments in real estate
partnerships . . . . . . . . . . . . . . . . . . (62) (8)
Property under operating leases, net . . . . . . . 31,377 31,631
Property and equipment, net. . . . . . . . . . . . 2,265 2,301
Other assets . . . . . . . . . . . . . . . . . . . 4,135 4,028
-------- --------
$162,788 $164,953
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings. . . . . . . . . . . . . . . $ 16,535 $ 16,305
Accounts payable and accrued expenses. . . . . . . 4,295 4,244
Customer deposits. . . . . . . . . . . . . . . . . 2,084 2,188
Long-term debt:
Recourse . . . . . . . . . . . . . . . . . . . . 92,468 94,880
Nonrecourse. . . . . . . . . . . . . . . . . . . 18,303 18,435
. . . . . . . . . . . . . . . . . . . . . . . . -------- --------
Total Liabilities . . . . . . . . . . . . . . 133,685 136,052
-------- --------
Minority interest. . . . . . . . . . . . . . . . . 236 244
-------- --------
Stockholders' equity:
Preferred stock, $100 par value: 8% noncumu-
lative, nonvoting: authorized 20,000 shares;
issued and outstanding 1,952 shares . . . . . 195 195
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 . . . . . . . . . . . . . . . 1,119 1,374
Retained earnings. . . . . . . . . . . . . . . . 24,441 23,976
-------- --------
Total Stockholders' Equity. . . . . . . . . 28,867 28,657
-------- --------
$162,788 $164,953
======== ========
2
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
(In thousands, except per share amounts) 1994 1993
- - ---------------------------------------- ---- ----
Finance revenues:
Commercial leasing and financing revenue . . . . . . $ 4,226 $ 3,878
Interest expense . . . . . . . . . . . . . . . . . . 1,447 1,652
------- -------
Finance revenue margin . . . . . . . . . . . . . 2,779 2,226
Provision for possible lease and loan losses . . . . 188 450
------- -------
Finance revenues after provision for possible
lease and loan losses . . . . . . . . . . . . 2,591 1,776
------- -------
Operating lease revenues:
Rents on real estate operating leases . . . . . . . 1,282 1,478
Rents on equipment operating leases. . . . . . . . . 37 12
------- -------
Total operating lease revenues . . . . . . . . . 1,319 1,490
Interest expense . . . . . . . . . . . . . . . . . . 690 634
Depreciation . . . . . . . . . . . . . . . . . . . . 283 273
------- -------
Net operating lease revenues . . . . . . . . . . 346 583
------- -------
Other operating revenues:
Customer service fees. . . . . . . . . . . . . . . . 269 284
Management and broker income. . . . . . . . . . . . 51 48
Furniture and equipment sales, net of cost
of goods sold . . . . . . . . . . . . . . . . . . 172 144
Equity loss in real estate partnerships . . . . . . (71) (134)
Gain on sale of debt and equity securities. . . . . -- 413
Other income. . . . . . . . . . . . . . . . . . . . 151 223
------- -------
Total other operating revenues. . . . . . . . . 572 978
------- -------
Operating expenses:
Salaries and employee benefits. . . . . . . . . . . 1,202 1,139
Depreciation and amortization . . . . . . . . . . . 103 170
Other taxes . . . . . . . . . . . . . . . . . . . . 191 170
Credit and collection . . . . . . . . . . . . . . . 62 92
Other expenses. . . . . . . . . . . . . . . . . . . 657 651
------- -------
Total operating expenses. . . . . . . . . . . . 2,215 2,222
------- -------
Earnings before income taxes and
minority interest. . . . . . . . . . . . . . . . . . 1,294 1,115
Income tax provision. . . . . . . . . . . . . . . . 485 392
------- -------
Earnings before minority interest. . . . . . . . . . . 809 723
Minority interest income. . . . . . . . . . . . . . (29) (26)
------- -------
Net earnings . . . . . . . . . . . . . . . . . . . . . $ 780 $ 697
======= =======
Net earnings per common share. . . . . . . . . . . . . $ 0.25 $ 0.21
======= =======
3
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(UNAUDITED)
(In thousands) 1994 1993
- - -------------- ---- ----
Cash flows from operating activities:
Finance revenues received . . . . . . . . . . . . .$ 3,800 $ 3,375
Rentals and other cash received . . . . . . . . . . 2,245 2,446
Lease purchase options received . . . . . . . . . . 568 512
Dividends received. . . . . . . . . . . . . . . . . 5 11
Interest paid . . . . . . . . . . . . . . . . . . . (2,048) (2,180)
Cash paid to suppliers and employees. . . . . . . . (2,818) (2,416)
Income taxes refunded (paid). . . . . . . . . . . . 202 (67)
------- -------
Net cash provided by operating activities
(Note 4). . . . . . . . . . . . . . . . . . . 1,954 1,681
------- -------
Cash flows from investing activities:
Originations and purchases of finance receivables. (17,173) (16,970)
Principal collections of finance receivables . . . 17,606 19,391
Proceeds from sale of debt and equity securities. . -- 606
Acquisition of property under operating leases. . . (37) (10)
Proceeds from sale of property under
operating leases . . . . . . . . . . . . . . . 4 1,255
Acquisition of property and equipment . . . . . . . (35) (43)
Proceeds from sale of property and equipment . . . -- 3
Acquisition of equity, partnership and long-term
investments . . . . . . . . . . . . . . . . . . . (34) (29)
Proceeds from sale of equity, partnership and
long-term investments . . . . . . . . . . . . . . 14 29
Insurance premium paid increasing cash value . . . (4) (2)
------- -------
Net cash provided by
investing activities. . . . . . . . . . . . . 341 4,230
------- -------
Cash flows from financing activities:
Dividends paid and partnership distributions. . . . (352) (222)
Short-term debt borrowings. . . . . . . . . . . . . 33,000 6,750
Short-term debt repayments. . . . . . . . . . . . .(33,500) (8,750)
Long-term debt borrowings . . . . . . . . . . . . . 10,489 9,516
Long-term debt repayments . . . . . . . . . . . . .(12,953) (14,486)
Certificate borrowings. . . . . . . . . . . . . . . 1,826 1,796
Certificate repayments. . . . . . . . . . . . . . . (1,176) (1,458)
Net change in customer deposits. . . . . . . . . (104) 7
------- -------
Net cash used by financing activities. . . . . . (2,770) (6,847)
------- -------
Net decrease in cash . . . . . . . . . . . . . . . . . (475) (936)
Cash at beginning of year. . . . . . . . . . . . . 2,160 2,202
------- -------
Cash at end of quarter . . . . . . . . . . . . . . $ 1,685 $ 1,266
======= =======
4
<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 March 31, 1994, and the
results of its operations and cash flows for the three month periods ended
March 31, 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.
5
<PAGE>
Following are details on the net earnings and number of shares used in the
computation:
Three Months Ended
March 31,
--------------------
1994 1993
---- ----
Net earnings . . . . . . . . . . . . . . $780,000 $697,000
Dividends on preferred shares. . . . . . (4,000) (4,000)
-------- --------
Net earnings applicable to common
shares. . . . . . . . . . . . . . . . $776,000 $693,000
======== ========
Weighted average common shares and
dilutive stock options. . . . . . . . 3,113,814 3,301,124
========= =========
Net earnings per common share. . . . . . $ 0.25 $0.21
========= =========
NOTE 3. DIVIDENDS PER SHARE
- - ----------------------------
Following are details on dividends declared and paid:
Three months ended
March 31,
------------------
1994 1993
---- ----
Dividends per preferred share. . . . . . . $2.00 $2.00
Dividends per common share (1994 -
3,111,766 and 1993 - 3,300,298
shares outstanding on the
declaration date). . . . . . . . . . . . $ .10 $ .0575
NOTE 4. CASH FLOW INFORMATION
- - ------------------------------
The following is the reconciliation of net earnings to net cash provided by
operating activities for the three months ended:
March 31, March 31,
(In thousands) 1994 1993
- - -------------- ---- ----
Net earnings . . . . . . . . . . . . . . . . . . . $ 780 $ 697
Noncash expenses, revenues, losses and gains
included in net earnings:
Depreciation and amortization . . . . . . . . 386 443
Excess of provision for income taxes
over (under) income taxes paid . . . . . . 687 325
Net change in prepaid expenses and payables . (427) (135)
Decrease in income receivable . . . . . . . . 3 127
Lease purchase options: cash received in
excess of earned . . . . . . . . . . . . . 319 224
Increase in interest payable. . . . . . . . . 90 104
Gain on sale of marketable securities, finance and
operating leases, property and equipment,
and investments. . . . . . . . . . . . . . (181) (724)
Provision for possible lease and loan losses. 188 450
Equity loss in real estate partnerships
and associated companies . . . . . . . . . 80 144
Minority interest income . . . . . . . . . . 29 26
------ ------
Net cash provided by operating activities . . $1,954 $1,681
====== ======
There were no noncash investing or financing activities for the three months
ended March 31, 1994 and 1993.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
The Company generated net earnings of $780,000 for the first three months
of 1994 compared to net earnings of $697,000 for the same period a year ago.
The components of these changes are discussed in the following sections.
Total Finance Revenues
Commercial leasing and financing revenue was $4,226,000 for the first three
months of 1994 compared to $3,878,000 for the first three months 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 two portfolios of finance
receivables during the second and third quarters of 1993. Net direct finance
lease receivables and commercial finance receivables totalled $121,076,000 as
of March 31, 1994, compared to $105,791,000 as of March 31, 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 $2,779,000 for the first three months of 1994 and
$2,226,000 for the first three months of 1993.
The Company's finance revenue margin increased $553,000, or 24.8% for the
first three months of 1994 compared to the same period a year ago. Total
finance revenues increased 9.0% in 1994 from 1993 and interest expense
decreased 12.4% for the same period. The average interest rate at which the
Company prices its products decreased 60 basis points to 13.48% in 1994 from
14.08% for the first three months of 1993. The average interest rate on the
Company's borrowings decreased 125 basis points to 6.33% in 1994 from 7.58%
for the first three months of 1993.
The net increase in finance revenue margin was due to the purchase of two
portfolios of finance receivables, during the second and third quarters of
1993, 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.
7
<PAGE>
Provision For Possible Lease and Loan Losses
The provision for possible lease and loan losses decreased $262,000 (58.2%)
to $188,000 for the first three months of 1994 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 three months ended March 31,
1994 and 1993.
<TABLE>
<CAPTION>
(In thousands)
- - --------------
Provision Allowance
for Possible for Possible Gross Allowance
Qtr. Lease and Net Loss Experience Lease Investment as a
Ended Loan ----------------------------------- and Loan in % of Gross
3/31 Losses Charge-offs Recoveries Net Losses Losses Receivables Receivables
- - ----- ------------ ----------- ---------- ---------- ------ ----------- -----------
<C> <C> <C> <C> <C> <C> <C> <C>
1994 $ 188 (358) 170 (188) $5,438 $141,883 3.83
1993 $ 450 (596) 221 (375) $4,688 $124,518 3.76
</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.
As of March 31, 1994, the Company allocated $290,000 of the allowance for
possible lease and loan losses in anticipation of losses on certain
individually significant accounts. No change was made to this allocated
allowance from December 31, 1993.
The recorded investment in the loans for which impairment has been
recognized approximated $277,000 as of March 31, 1994. The total allowance
for possible loan losses related to these impaired loans is $14,000 as of
March 31, 1994.
The Company's net charge-offs of commercial leasing and financing
receivables decreased by $187,000, or 49.9%, for the first three months 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
8
<PAGE>
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 $237,000 or 40.7% for the first three
months of 1994 compared to the same period a year ago. Total operating lease
revenues decreased $171,000 or 11.5% to $1,319,000. The decrease is due
primarily to the sale of two properties in 1993, an increase in vacancies, and
a reduction in lease arrearages collected on certain properties. Interest
expense attributable to net operating lease revenues increased $56,000, or
8.8%. 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 $10,000 primarily the
result of an increase in equipment operating leases generated in the second
quarter of 1993, 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.
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 until commercial real estate market conditions
improve at which time(s) the Company may (4) consider the selective sale of
individual properties or groups of properties, and (5) deliberately increase
investment in real estate through selected acquisitions of income producing
properties.
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 March 31, 1994:
1. Credit risks.
There are various levels of credit risks inherent in the
Company's rent receivables. A total of $39,000 of rents were
thirty or more days past due of which $34,100 represents
amounts due from two tenants in two properties.
9
<PAGE>
2. General market conditions nationally or within specific
geographic areas.
The Company is maintaining an ownership interest, ranging from
10% to 100%, in 41 real estate properties with an original cost
of $63,878,000 in the following states, with the percentage of
concentration indicated in parenthesis: Pennsylvania (30%),
Florida (27%), New Jersey (14%), Ohio (10%) and other (19%).
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
three limited service hotels.
4. Vacancies.
There were partial vacancies in eight real estate projects and
full vacancy in one real estate project 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 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. It is estimated that, not including potential
American Disabilities Act ("ADA") requirements as discussed
below, up to approximately $881,000 of improvements may be made
within the next twelve months.
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 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.
The Company has not finalized its plans in light of these
requirements but estimates that improvements will not be
material relative to the cost of the property.
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
10
<PAGE>
frequently at lower loan amounts. During the next twelve
months, approximately $1,918,000 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 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 three 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 decreased $406,000, or 41.5% to $572,000
for the first three months of 1994 compared to the same period a year ago.
Customer service fees decreased $15,000 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 $3,000. Furniture and equipment sales increased $28,000 due to
increased volume in the modular furniture business. The Company's share of
losses in unconsolidated real estate partnerships decreased $63,000 primarily
due to an increase in revenues generated by three partnerships. Gain on sale
of debt and equity securities decreased $413,000. The Company had no sales of
securities in the first three months of 1994. Other income decreased $72,000.
Other income for the first three months of 1993 included a gain of $140,000
from the sale of a building.
11
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Operating Expenses
Operating expenses decreased $7,000 (0.3%) to $2,215,000 for the
first three months of 1994 compared to the same period a year ago. Salaries,
related taxes, and employee benefits increased $63,000 (5.5%) due to an
increase in incentive compensation. Depreciation and amortization decreased
$67,000 (39.4%) 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 decreased $3,000 (.3%).
Provision for Income Taxes
Income taxes for the first three months of 1994 were $485,000
compared to $392,000 for the comparable period a year ago. The effective
income tax rates for the first three months of 1994 and 1993 were 37.5% and
35.2%, respectively. Income taxes for 1994 increased due to higher pre-tax
income.
Net Investment in Finance Receivables and Property under Operating Leases
Net direct finance lease receivables and commercial finance
receivables totalled $121,076,000 as of March 31, 1994 compared to
$122,144,000 as of December 31, 1993, a net decrease of $1,068,000 for the
three months. Property under operating leases, net of accumulated
depreciation, decreased $254,000, resulting from normal depreciation.
The decrease in finance receivables was not 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. However, the
increase in volume did not offset the decline in finance receivables from
payoffs and the collection of receivables and rents. 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 will provide
leasing and lending services to the country club and golf course industry.
Also, on May 6, 1994, the Company signed a letter of intent to purchase, at a
premium of approximately $484,000, all of the outstanding shares of a leasing
company with total assets of $15,734,000 as of March 31, 1994. The Company
continues to look for opportunities to acquire portfolios of leases and loans
which will compliment the Company's existing finance receivables.
The change in property under operating leases is in accordance with
management strategy. Due principally to the reduced availability of mortgage
debt financing and the illiquidity in most commercial real estate markets
(including those in which the Company owns properties), the Company, at the
present time, is primarily holding its assets for investment purposes, except
in limited circumstances, since the Company ceased acquiring properties in
1991. Purchases of real estate assets are being considered since certain
market conditions have improved. Sales are considered at various times
depending on such factors as pricing, capital needs, and tenant interests.
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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 $1,954,000 for the
three months ended March 31, 1994 compared to $1,681,000 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
$61,251,000 as of March 31, 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.
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 March
31, 1994, the Company had the following debt structure:
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Debt Outstanding and
Availability/Lines of Credit
--------------------------------------
Total
(In thousands) Availability In Use Unused
- - -------------- ------------ ------ ------
Short-Term Borrowings:
Investment Certificate . . . . . $ -- $ 3,535 $ --
Fixed Rate . . . . . . . . . . . 29,799 12,000 17,799
Floating Rate. . . . . . . . . . 5,000 1,000 4,000
-------- -------- -------
Sub-Total . . . . . . . . . . 34,799 16,535 21,799
-------- -------- -------
Long-Term Debt:
Recourse
Investment Certificate . . . . . -- 25,884 --
Junior Subordinated Debt . . . . -- 103 --
Unsecured Funding Program. . . . 86,909 47,457 39,452
Fixed Rate . . . . . . . . . . . 13,701 13,701 --
Term Loan. . . . . . . . . . . . -- 277 --
Real Estate Mortgages. . . . . . -- 5,046 --
Nonrecourse
Real Estate Mortgages. . . . . . -- 18,237 --
Other . . . . . . . .. . . . . . -- 66 --
-------- -------- -------
Sub-Total . . . . . . . . . . 100,610 110,771 39,452
-------- -------- -------
TOTAL DEBT . . . . . . . . . . . . $127,306
TOTAL AVAILABILITY . . . . . . . . $135,409 ======== $61,251
======== =======
Total stockholders' equity increased by $210,000 from December 31, 1993
to March 31, 1994 due primarily to the retention of earnings ($780,000) offset
by the payment of dividends ($315,000) and a decrease in net unrealized
holding gains for available-for-sale securities ($255,000).
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.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibit 27 - Financial Data Schedule.
B. There were no reports on Form 8-K was filed for the three months ended
March 31, 1994.
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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: May 11, 1994 (Principal Executive Officer)
s/ Robert Ordway
------------------------
Robert Ordway
Senior Vice President
Date: May 11, 1994 (Principal Financial and
Accounting Officer
16
<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 $1,685,000
5-02(2) marketable securities 2,312,000
5-02(3)(a)(1) notes and accounts receivable trade 126,514,000
5-02(4) allowances for doubtful accounts 5,438,000
5-02(6) inventory N/A
5-02(9) total current assets N/A
5-02(13) property, plant and equipment 41,751,000
5-02(14) accumulated depreciation 8,109,000
5-02(18) total assets 162,788,000
5-02(21) total current liabilities N/A
5-02(22) bonds, mortgages and similar debt 127,306,000
5-02(28) preferred stock - mandatory redemption N/A
5-02(29) preferred stock - no mandatory redemption 195,000
5-02(30) common stock 3,112,000
5-02(31) other stockholders' equity 25,560,000
5-02(32) total liabilities and stockholders' equity 162,788,000
5-03(b)1(a) net sales of tangible products 172,000
5-03(b)1 total revenues 5,945,000
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 2,498,000
5-03(b)3 other costs and expenses N/A
5-03(b)5 provision for doubtful accounts and notes 188,000
5-03(b)(8) interest and amortization of debt discount 2,137,000
5-03(b)(10) income before taxes and other items 1,294,000
5-03(b)(11) income tax expense 485,000
5-03(b)(14) income/loss continuing operations 780,000
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 780,000
5-03(b)(20) earnings per share - primary 0.25
5-03(b)(20) earnings per share - fully diluted 0.25
17
