<PAGE> 1
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 September 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
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 October 31, 1994
- - --------------------------- -------------------------------
Common Stock - $1 par value 3,112,316 Shares
<PAGE> 2
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets:
September 30, 1994 (Unaudited) and December 31, 1993 ........ 2
Unaudited Consolidated Statements of Operations:
Nine Months Ended September 30, 1994 and 1993 ............... 3
Three Months Ended September 30, 1994 and 1993............... 4
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 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...................... 19
Signatures..................................................... 20
<PAGE> 3
PART I - FINANCIAL INFORMATION
------------------------------
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1994 1993
(In thousands) (Unaudited) (Audited)
- - -------------- ------------- ------------
<S> <C> <C>
Cash ................................................... $ 2,187 $ 2,160
Debt and equity securities ............................. 2,673 2,697
Net investment in finance receivables .................. 145,969 122,144
Equity investments in real estate
partnerships ......................................... 191 (8)
Property under operating leases, net ................... 33,782 31,631
Property and equipment, net ............................ 2,261 2,301
Other assets ........................................... 4,343 4,028
--------- ---------
$191,406 $164,953
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings .................................. $ 23,620 $ 16,305
Accounts payable and accrued expenses .................. 7,459 4,244
Customer deposits ...................................... 2,393 2,188
Long-term debt:
Recourse ............................................. 106,997 94,880
Nonrecourse .......................................... 20,348 18,435
--------- ---------
Total Liabilities .................................. 160,817 136,052
--------- ---------
Minority interest ...................................... 496 244
--------- ---------
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 3,112,316 shares in
1994 and 3,111,766 shares in 1993 .................. 3,112 3,112
Capital in excess of par value ....................... 3 --
Net unrealized holding gains for available-for-
sale securities .................................... 1,085 1,374
Retained earnings .................................... 25,893 23,976
--------- ---------
Total Stockholders' Equity ...................... 30,093 28,657
--------- ---------
$191,406 $164,953
========= =========
</TABLE>
<PAGE> 4
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1994 1993
- - --------------------------------------- ---- ----
<S> <C> <C>
Finance revenues:
Commercial leasing and financing revenues ........... $ 13,706 $ 12,561
Interest expense .................................... 4,960 4,895
-------- --------
Finance revenue margin .......................... 8,746 7,666
Provision for possible lease and loan losses ........ 901 1,059
-------- --------
Finance revenues after provision for possible
lease and loan losses ......................... 7,845 6,607
-------- --------
Operating lease revenues:
Rents on real estate operating leases ............... 4,093 4,194
Rents on equipment operating leases ................. 160 91
-------- --------
Total operating lease revenues .................. 4,253 4,285
Interest expense .................................... 2,096 1,898
Depreciation ........................................ 898 858
-------- --------
Net operating lease revenues .................... 1,259 1,529
-------- --------
Other operating revenues:
Customer service fees ............................... 842 907
Management and broker income ........................ 228 167
Furniture and equipment sales, net of cost
of goods sold ..................................... 738 503
Equity income (loss) in real estate
partnerships ..................................... 784 (51)
Gain on sale of debt and equity
securities ....................................... 30 413
Other income ........................................ 413 366
-------- --------
Total other operating revenues .................. 3,035 2,305
-------- --------
Operating expenses:
Salaries and employee benefits ...................... 3,886 3,364
Depreciation and amortization ....................... 311 434
Other taxes ......................................... 512 448
Credit and collection ............................... 190 251
Other expenses ...................................... 2,260 2,053
-------- --------
Total operating expenses ........................ 7,159 6,550
-------- --------
Earnings before income taxes and
minority interest .................................... 4,980 3,891
Income tax provision ................................ 1,938 1,420
-------- --------
Earnings before minority interest ...................... 3,042 2,471
Minority interest income ............................ (122) (101)
-------- --------
Net earnings ........................................... $ 2,920 $ 2,370
======== ========
Net earnings per common share .......................... $ 0.93 $ 0.72
======== ========
</TABLE>
<PAGE> 5
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1994 1993
- - ---------------------------------------- ---- ----
<S> <C> <C>
Finance revenues:
Commercial leasing and financing revenues ........... $ 4,824 $ 4,462
Interest expense .................................... 1,898 1,665
-------- --------
Finance revenue margin .......................... 2,926 2,797
Provision for possible lease and loan losses ........ 342 226
-------- --------
Finance revenues after provision for possible
lease and loan losses ......................... 2,584 2,571
-------- --------
Operating lease revenues:
Rents on real estate operating leases ............... 1,410 1,378
Rents on equipment operating leases ................. 75 37
-------- --------
Total operating lease revenues .................. 1,485 1,415
Interest expense .................................... 720 628
Depreciation ........................................ 320 298
-------- --------
Net operating lease revenues .................... 445 489
-------- --------
Other operating revenues:
Customer service fees ............................... 276 300
Management and broker income ........................ 46 64
Furniture and equipment sales, net of cost
of goods sold ..................................... 329 185
Equity income in real estate partnerships ........... 37 102
Other income ........................................ 153 81
-------- --------
Total other operating revenues .................. 841 732
-------- --------
Operating expenses:
Salaries and employee benefits ...................... 1,405 1,127
Depreciation and amortization ....................... 102 127
Other taxes ......................................... 143 119
Credit and collection ............................... 61 82
Other expenses ...................................... 868 697
-------- --------
Total operating expenses ........................ 2,579 2,152
-------- --------
Earnings before income taxes and
minority interest .................................... 1,291 1,640
Income tax provision ................................ 526 604
-------- --------
Earnings before minority interest ...................... 765 1,036
Minority interest income ............................ (49) (56)
-------- --------
Net earnings ........................................... $ 716 $ 980
======== ========
Net earnings per common share .......................... $ 0.22 $ 0.30
======== ========
</TABLE>
<PAGE> 6
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE M0NTHS ENDED SEPTEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) 1994 1993
- - -------------- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Finance revenues received . . . . . . . . $12,401 $11,149
Rentals and other cash received . . . . . 7,489 7,196
Lease purchase options received . . . . . 2,022 1,833
Dividends received. . . . . . . . . . . . 15 21
Interest paid . . . . . . . . . . . . . . (6,853) (6,744)
Cash paid to suppliers and employees. . . (9,046) (6,904)
Income taxes paid . . . . . . . . . . . . (1,573) (1,503)
------- --------
Net cash provided by operating activities
(Note 4). . . . . . . . . . . . . . 4,455 5,048
------- --------
Cash flows from investing activities:
Originations and purchases of finance receivables. (72,438) (56,318)
Principal collections of finance receivables. . 62,371 54,569
Acquisitions (net of cash received). . . . . . . (3,986) (4,138)
Acquisition of debt and equity securities . . . (559) --
Proceeds from sale of debt and equity securities. 175 606
Acquisition of property under operating leases. . . (3,769) (310)
Proceeds from sale of property under
operating leases . . . . . . . . . . . . . . . 608 1,475
Acquisition of property and equipment . . . . . . . (101) (153)
Proceeds from sale of property and equipment. . 2 5
Acquisition of equity, partnership and long-term
investments . . . . . . . . . . . . . . (55) (40)
Proceeds from sale of equity, partnership and
long-term investments . . . . . . . . . 688 99
Insurance premium paid increasing cash value. . (15) (10)
------- --------
Net cash used by
investing activities. . . . . . . . (17,079) (4,215)
------- --------
Cash flows from financing activities:
Issuance of common stock . . . . . . . . 3 3
Minority capital received. . . . . . . . 256 --
Dividends paid and partnership distributions. . (1,130) (592)
Acquisition of treasury stock. . . . . . -- (179)
Acquisition of preferred stock . . . . . (195) --
Short-term debt borrowings. . . . . . . . 137,100 56,250
Short-term debt repayments. . . . . . . . (137,600) (54,485)
Long-term debt borrowings . . . . . . . . 55,146 43,696
Long-term debt repayments . . . . . . . . (41,229) (45,839)
Certificate borrowings. . . . . . . . . . 4,510 4,527
Certificate repayments. . . . . . . . . . (3,785) (4,617)
Net change in customer deposits. . . . . (425) (25)
------- --------
Net cash provided by (used by)
financing activities . . . . . . . . 12,651 (1,261)
------- --------
Net increase (decrease) in cash. . . . . . . 27 (428)
Cash at beginning of year. . . . . . . . 2,160 2,202
------- --------
Cash at end of quarter . . . . . . . . . $ 2,187 $ 1,774
======= ========
</TABLE>
<PAGE> 7
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 September 30, 1994, and the
results of its operations and cash flows for the three month and nine month
periods ended September 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.
<PAGE> 8
Following are details on the net earnings and number of shares used in the
computation:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- -----------------------
<S> <C> <C> <C> <C>
1994 1993 1994 1993
---- ---- ---- ----
Net earnings . . . . . . . . . $2,920,000 $2,370,000 $716,000 $980,000
Dividends on preferred shares . (8,000) (12,000) -- (4,000)
---------- ---------- ---------- -----------
Net earnings applicable to common
shares . . . . . . . . . . . $2,912,000 $2,358,000 $716,000 $976,000
========== ========== ========== ===========
Weighted average common shares and
dilutive stock options . . . 3,118,060 3,298,234 $3,121,941 $3,274,682
========== ========== ========== ===========
Net earnings per common share . $ 0.93 $0.72 $0.22 $0.30
========== ========== ========== ===========
NOTE 3. DIVIDENDS PER SHARE
Following are details on dividends declared and paid:
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
-------------------------- -----------------------
<S> <C> <C> <C> <C>
1994 1993 1994 1993
---- ---- ---- ----
Dividends per preferred share. . $4.00 $6.00 $ -- $2.00
Dividends per common share . . . $0.32 $0.14 $0.16 $0.0825
</TABLE>
NOTE 4. CASH FLOW INFORMATION
The following is the reconciliation of net earnings to net cash provided by
operating activities for the nine months ended September 30:
<TABLE>
<CAPTION>
(In thousands) 1994 1993
- - -------------- ---- ----
<S> <C> <C>
Net earnings . . . . . . . . . . . . . . . . $2,920 $2,370
Noncash expenses, revenues, losses and gains
included in net earnings:
Depreciation and amortization . . . . . . 1,209 1,292
Excess of provision for income taxes
over (under) income taxes paid . . . . 365 (83)
Net change in prepaid expenses and payables. . . (1,034) 122
Decrease in income receivable . . . . . . 153 188
Lease purchase options: cash received in
excess of earned . . . . . . . . . . . 1,263 1,081
Increase in interest payable. . . . . . . 203 50
Gain on sale of marketable securities, finance and
operating leases, property and equipment,
and investments. . . . . . . . . . . . (882) (1,211)
Provision for possible lease and loan losses. . 901 1,059
Equity (income) loss in real estate partnerships
and associated companies . . . . . . . (765) 79
Minority interest income . . . . . . . . 122 101
------ ------
Net cash provided by operating activities. . . . $4,455 $5,048
====== ======
<PAGE> 9
The following is a schedule of noncash investing and financing activities for
the nine months ended September 30:
(In thousands) 1994 1993
- - -------------- ---- ----
Acquisitions:
Net investment in finance receivables . . $9,542 $12,186
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) (240)
Deferred income taxes assumed . . . . . . (614) --
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, for $3,869,000 in cash.
The purchase price was 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 nine months ended
September 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. . . . . . $14,332,000
Net earnings . . . . . . . . . . . . . . . . . . . . $2,937,000
Earnings per share . . . . . . . . . . . . . . . . . $0.94
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.
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
The Company generated net earnings of $2,920,000 for the first nine months of
1994 compared to net earnings of $2,370,000 for the same period a year ago. Net
earnings of $716,000 were reported for the third quarter of 1994 compared to net
earnings of $980,000 for the third quarter of 1993. The components of these
changes are discussed in the following sections.
Total Finance Revenues
Commercial leasing and financing revenues were $13,706,000 for the first nine
months of 1994 compared to $12,561,000 for the first nine months of 1993,
resulting in a 9.1% increase. Commercial leasing and financing revenues
increased 8.1% to $4,824,000 for the third quarter of 1994 compared to
$4,462,000 for the third 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
$145,969,000 as of September 30, 1994, compared to $125,472,000 as of September
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 $8,746,000 for the first nine months of 1994 and $7,666,000
for the first nine months of 1993.
The Company's finance revenue margin increased $1,080,000 (14.1%) for the
first nine months of 1994 compared to the same period a year ago. Total finance
revenues increased 9.1% in 1994 from 1993 and interest expense increased 1.3%
for the same period. The average interest rate at which the Company prices its
products decreased 86 basis points to 13.34% in 1994 from 14.20% for the first
nine months of 1993. The average interest rate on the Company's borrowings
decreased 54 basis points to 6.45% in 1994 from 6.99% for the first nine months
of 1993.
The Company's finance revenue margin increased $129,000 (4.6%) for the third
quarter of 1994 compared to the same period of 1993. The average interest rate
at which the Company prices its products decreased 114 basis points to 12.86% in
<PAGE> 11
1994 from 14.0% for the third quarter of 1993. The average interest rate on the
Company's borrowings increased 5 basis points to 6.60% in 1994 from 6.55% for
the third quarter of 1993.
The net increase in finance revenue margin was due principally to the
purchase of three portfolios of finance receivables, at a higher interest rate
spread. 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. 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 $158,000 (14.9%)
to $901,000 for the first nine months of 1994 compared to the same period a year
ago. The provision for possible lease and loan losses for the third quarter of
1994 increased $116,000 (51.3%) 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 nine months and quarters ended September 30, 1994
and 1993.
</TABLE>
<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
------ ----------- ---------- ---------- --------- ------------ ----------- ------------
NINE MONTHS ENDED SEPTEMBER 30
- - ------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1994 $ 901 (1,205) 581 (624) 214(A) $5,929 $171,915 3.45
1993 $1,059 (1,961) 1,127 (834) 852(A) $5,689 $147,923 3.84
QUARTER ENDED SEPTEMBER 30
- - --------------------------
1994 $ 342 (405) 193 (212) -- $5,929
1993 $ 226 (722) 571 (151) 150(A) $5,689
</TABLE>
(A) The balance of the allowance for possible lease and loan losses increased
as a result of the acquisition of portfolios of finance receivables.
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.
<PAGE> 12
As of September 30, 1994, the Company allocated $195,000 of the
allowance for possible lease and loan losses in anticipation of losses on
certain individually significant accounts. This allocated allowance decreased
$95,000 from December 31, 1993.
The recorded investment in the loans for which impairment has been
recognized approximated $232,000 as of September 30, 1994. The total allowance
for possible loan losses related to these impaired loans is $8,000 as of
September 30, 1994.
The Company's net losses of commercial leasing and financing receivables
decreased $210,000 (25.2%), for the first nine 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's net
losses of commercial leasing and financing receivables increased $61,000
(40.4%), for the third quarter of 1994 compared to the same period a year ago
due to fewer recoveries ($193,000 in the third quarter of 1994 compared to
$571,000 of recoveries in the comparable 1993 quarter).
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 $270,000 (17.7%) for the first nine
months of 1994 compared to the same period a year ago. Total operating lease
revenues decreased $32,000 (0.7%) to $4,253,000. The decrease is due primarily
to the sale of one property in July, 1994 and two properties in 1993. Interest
expense attributable to net operating lease revenues increased $198,000 (10.4%).
On December 31, 1993, loans from the Company to several partnerships were
converted to 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 $40,000 (4.7%) primarily the result of an increase in
equipment operating leases and the acquisition of one real estate property in
the third quarter of 1994, offset by a decrease in depreciation on real estate
operating leases due to the sale of properties in 1994 and 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 decreased $44,000 (9.0%), for the third
quarter of 1994 compared to the same period a year ago. Total operating lease
revenues increased $70,000 (4.9%), primarily due to the acquisition of one real
estate property in the third quarter of 1994. Interest expense increased $92,000
<PAGE> 13
(14.6%), and depreciation expense increased $22,000 (7.4%) due to the same
factors that impacted the nine month period.
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 September 30, 1994:
1. Credit risks.
There are various levels of credit risks inherent in the Company's
rent receivables. A total of $27,100 of rents were thirty-one or
more days past due of which $24,500 represents amounts due from
one tenant.
2. General market conditions nationally or within specific geographic
areas.
The Company is maintaining an ownership interest, ranging from 10%
to 100%, in 38 real estate properties with an original cost of
$61,865,000 in the following states, with the percentage of
concentration indicated in parenthesis: Florida (28%),
Pennsylvania (23%), New Jersey (14%), Ohio (10%) and other (25%).
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.
Total vacancy, based on the portfolio's total square footage,
approximated 12%. The vacancy percentage included partial
vacancies in ten 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.
<PAGE> 14
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.
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 $818,000 of improvements may be made within the
next twelve months. Approximately 31% of the cost of these
improvements will be funded through operating cash generated by
the partnerships, and the balance through additional debt.
6. Mortgage loan rollover.
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 $3,540,000
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. As
interest rates have been increasing, however, any such extensions
or new loans may be at higher interest rates than in the recent
past. This has the potential to decrease the Company's operating
margin, as several factors can tend to reduce the ability to
achieve higher revenues to offset such increases. Such factors
include the timing of rent adjustments and market limitations.
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
<PAGE> 15
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 nine 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 $730,000 (31.7%) to $3,035,000 for
the first nine months of 1994 compared to the same period a year ago. Customer
service fees decreased $65,000 (7.2%) 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 earned due to lower overall
delinquency. Management income increased $61,000 (36.5%) due to a fee received
in connection with the sale of one real estate property. Furniture and equipment
sales, net of cost of goods sold, increased $235,000 (46.7%) due to increased
volume in the modular and systems 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 and has opened an additional office in the Pittsburgh area. The
Company's share of income in unconsolidated real estate partnerships increased
$835,000 primarily due to a pre-tax 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 equity securities decreased $383,000
due to less sales activity in the first nine months of 1994. Other income
increased $47,000 (12.8%).
Other operating revenues increased $109,000 (14.9%) for the third
quarter of 1994 compared to the same period a year ago primarily resulting from
an increase of $144,000 (77.8%) in income from furniture and equipment sales.
Customer service fees decreased $24,000 (8.0%) due to the same factors that
impacted the nine-month period. Management and broker income decreased $18,000
(28.1%) due to fewer services performed for certain partnerships. The Company's
share of income in unconsolidated real estate partnerships decreased $65,000
(63.7%). In the third quarter of 1993, gains from the sales of two real estate
properties were recognized. Other income increased $72,000 (88.9%) for the third
quarter of 1994.
<PAGE> 16
Operating Expenses
Operating expenses increased $609,000 (9.3%) to $7,159,000 for the
first nine months of 1994 compared to the same period a year ago. Salaries,
related taxes, and employee benefits increased $522,000 (15.5%) due to an
increase in incentive compensation, the addition of several marketing employees,
and the addition of employees through the acquisition of American Capital
Leasing Corporation. Depreciation and amortization decreased $123,000 (28.3%)
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 $210,000 (7.6%).
Operating expenses increased $427,000 (19.8%) for the third quarter of
1994 compared to the same period a year ago. Salaries, related taxes, and
employee benefits increased $278,000 (24.7%) and depreciation and amortization
decreased $25,000 (19.7%) due to the same factors that impacted the nine month
period. All remaining expenses increased $174,000 (14.4%) primarily from
operating expenses incurred from the expansion of the Company's operations and
the acquisition of American Capital Leasing Corporation.
Provision for Income Taxes
Provision for income taxes for the first nine months of 1994 were
$1,938,000 compared to $1,420,000 for the comparable period a year ago. The
effective income tax rates for the first nine months of 1994 and 1993 were 38.9%
and 36.5%, respectively.
For the third quarter of 1994, provision for income taxes totalled
$927,000 compared to $604,000 in the third quarter of 1993. The effective tax
rates for the third quarters of 1994 and 1993 were 40.7% and 36.8%.
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,
for $3,869,000 in cash.
The Company intends to operate the acquired business as a separate
subsidiary. The Company has retained all five employees of ACL.
The purchase price was 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.
<PAGE> 17
Net Investment in Finance Receivables and Property under Operating Leases
Net direct finance lease receivables and commercial finance receivables
totalled $145,969,000 as of September 30, 1994 compared to $122,144,000 as of
December 31, 1993, a net increase of $23,825,000 for the nine 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 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,
increased $2,151,000 primarily due to the acquisition of one real estate
property, capital improvements to real estate properties and an increase in
equipment operating leases offset by the sale of one real estate property and
normal depreciation.
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 $4,522,000 for the nine
months ended September 30, 1994 compared to $5,048,000 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 $47,860,000 as of September 30,
1994. (See "Capital Resources").
<PAGE> 18
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 September 30, 1994,
the Company had the following debt structure:
<TABLE>
<CAPTION>
Debt Outstanding and
Availability/Lines of Credit
----------------------------
Total
(In thousands) Availability In Use Unused
- - -------------- ------------ ------ ------
<S> <C> <C> <C>
Short-Term Borrowings:
Investment Certificate ................ $ -- $ 3,620 $ --
Fixed Rate ............................ 29,104 20,000 9,104
Floating Rate ......................... 5,000 -- 5,000
------- -------- -------
Sub-Total .......................... 34,104 23,620 14,104
------- -------- -------
Long-Term Debt:
Recourse
Investment Certificate ................ -- 25,873 --
Junior Subordinated Debt .............. -- 103 --
Unsecured Funding Program ............. 85,024 51,268 33,756
Fixed Rate ............................ 25,147 25,147 --
Real Estate Mortgages ................. -- 4,469 --
Other ................................. -- 137 --
Nonrecourse
Real Estate Mortgages ................. -- 20,297 --
Other ................................. -- 51 --
------- -------- -------
Sub-Total .......................... 110,171 127,345 33,756
------- -------- -------
TOTAL DEBT .............................. $150,965
========
TOTAL AVAILABILITY ...................... $144,275 $ 47,860
======== ========
</TABLE>
The notional principal amounts of outstanding swap contracts increased by
$4,054,000 from December 31, 1993 for an outstanding balance of $6,054,000 as of
September 30, 1994. The swap contracts are "plain vanilla" swaps matched with
outstanding short-term borrowings.
<PAGE> 19
Total stockholders' equity increased $1,436,000 from December 31, 1993 to
September 30, 1994 due primarily to the retention of earnings ($2,920,000)
offset by the payment of dividends ($1,004,000), the redemption of preferred
stock ($195,000), and a decrease in net unrealized holding gains for
available-for-sale securities ($289,000).
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.
<PAGE> 20
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 nine months ended September 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 $3,869,000
<PAGE> 21
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: November 10, 1994 (Principal Executive Officer)
/s/ Robert Ordway
--------------------------
Robert Ordway
Senior Vice President
Date: November 10, 1994 (Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> QTR-3
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<CASH> 2,187,000
<SECURITIES> 2,673,000
<RECEIVABLES> 151,898,000
<ALLOWANCES> 5,929,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 43,773,000
<DEPRECIATION> 7,730,000
<TOTAL-ASSETS> 191,406,000
<CURRENT-LIABILITIES> 0
<BONDS> 150,965,000
<COMMON> 3,112,000
0
0
<OTHER-SE> 26,981,000
<TOTAL-LIABILITY-AND-EQUITY> 191,406,000
<SALES> 738,000
<TOTAL-REVENUES> 20,256,000
<CGS> 0
<TOTAL-COSTS> 8,057,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 901,000
<INTEREST-EXPENSE> 7,056,000
<INCOME-PRETAX> 4,980,000
<INCOME-TAX> 1,938,000
<INCOME-CONTINUING> 2,920,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,920,000
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
