<PAGE>
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, 1995
------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 2-82551
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HORRIGAN AMERICAN, INC.
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(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
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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, 1995
- --------------------------- -------------------------------
Common Stock - $1 par value 3,117,964 Shares
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets:
September 30, 1995 (Unaudited) and December 31, 1994.............. 2
Unaudited Consolidated Statements of Operations:
Six Months Ended September 30, 1995 and 1994...................... 3
Three Months Ended September 30, 1995 and 1994.................... 4
Unaudited Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1995 and 1994..................... 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
September 30, December 31,
1995 1994
(In thousands) (Unaudited)
--------- ---------
Cash ................................................ $ 2,482 $ 1,947
Debt and equity securities .......................... -- 2,335
Net investment in finance receivables ............... 165,825 148,073
Equity investments in real estate
partnerships ...................................... 314 121
Equity investment in a leasing company .............. 316 --
Property under operating leases, net ................ 30,989 35,022
Property and equipment, net ......................... 1,449 2,560
Other assets ........................................ 2,713 4,175
Deferred income taxes ............................... 1,269 97
--------- ---------
$ 205,357 $ 194,330
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings ............................... $ 28,791 $ 23,393
Accounts payable and accrued expenses ............... 7,269 6,468
Customer deposits ................................... 1,946 2,316
Long-term debt:
Recourse, ......................................... 116,470 110,636
Nonrecourse ....................................... 17,515 20,577
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Total Liabilities ............................... 171,991 163,390
--------- ---------
Minority interest ................................... 303 494
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Stockholders' equity:
Common stock, $1 par value; authorized
10,000,000 shares; issued 3,118,970 shares
in 1995 and 3,128,262 shares in 1994;
outstanding 3,117,964 shares in
1995 and 3,126,762 shares in 1994 ............... 3,119 3,128
Capital in excess of par value .................... 94 106
Net unrealized holding gains for available-for-
sale securities, net of tax ..................... -- 752
Retained earnings ................................. 29,859 26,474
Less treasury stock, at cost; 1,006 shares in
1995 and 1,500 shares in 1994 ................... (9) (14)
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Total Stockholders' Equity ................... 33,063 30,446
--------- ---------
$ 205,357 $ 194,330
========= =========
2
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HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
(In thousands, except per share amounts) 1995 1994
- ---------------------------------------- ---- ----
Finance revenues:
Commercial leasing and financing revenues.... $15,919 $13,706
Interest expense............................. 6,963 4,960
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Finance revenue margin................... 8,956 8,746
Provision for possible lease and loan losses. 429 901
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Finance revenues after provision for possible
lease and loan losses.................. 8,527 7,845
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Operating lease revenues:
Rents on real estate operating leases........ 4,089 4,093
Rents on equipment operating leases.......... 174 160
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Total operating lease revenues........... 4,263 4,253
Interest expense............................. 1,991 2,096
Depreciation................................. 905 898
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Net operating lease revenues............. 1,367 1,259
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Other operating revenues:
Customer service fees........................ 775 842
Management and broker income................. 124 228
Furniture and equipment sales, net of cost
of goods sold.............................. 148 738
Equity income in real estate partnerships.... 671 784
Provision for write-down of real estate...... (228) --
Gain on sale of debt and equity securities. . 1,692 30
Other income................................. 1,127 413
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Total other operating revenues........... 4,309 3,035
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Operating expenses:
Salaries and employee benefits............... 3,701 3,886
Depreciation and amortization................ 290 311
Other taxes.................................. 530 512
Credit and collection........................ 142 190
Other expenses............................... 2,363 2,260
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Total operating expenses................. 7,026 7,159
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Earnings before income taxes and
minority interest............................... 7,177 4,980
Income tax provision......................... 2,733 1,938
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Earnings before minority interest................. 4,444 3,042
Minority interest income..................... (110) (122)
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Net earnings ..................................... $ 4,334 $ 2,920
======= =======
Net earnings per common share..................... $ 1.39 $ 0.93
======= =======
3
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HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
(In thousands, except per share amounts) 1995 1994
- ---------------------------------------- ---- ----
Finance revenues:
Commercial leasing and financing revenues........ $ 5,592 $ 4,824
Interest expense................................. 2,452 1,898
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Finance revenue margin....................... 3,140 2,926
Provision for possible lease and loan losses..... 161 342
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Finance revenues after provision for possible
lease and loan losses...................... 2,979 2,584
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Operating lease revenues:
Rents on real estate operating leases............ 1,303 1,410
Rents on equipment operating leases.............. 49 75
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Total operating lease revenues............... 1,352 1,485
Interest expense................................. 636 720
Depreciation..................................... 286 320
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Net operating lease revenues................. 430 445
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Other operating revenues:
Customer service fees............................ 220 276
Management and broker income..................... 27 46
Furniture and equipment sales, net of cost
of goods sold.................................. -- 329
Equity income in real estate partnerships........ (5) 37
Provision for write-down of real estate.......... -- --
Gain on sale of debt and equity securities. ..... 767 --
Other income..................................... 401 153
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Total other operating revenues............... 1,410 841
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Operating expenses:
Salaries and employee benefits................... 1,210 1,405
Depreciation and amortization.................... 94 102
Other taxes...................................... 109 143
Credit and collection............................ 51 61
Other expenses................................... 759 868
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Total operating expenses..................... 2,223 2,579
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Earnings before income taxes and
minority interest................................... 2,596 1,291
Income tax provision............................. 979 526
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Earnings before minority interest..................... 1,617 765
Minority interest income......................... (36) (49)
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Net earnings ......................................... $ 1,581 $ 716
======= =======
Net earnings per common share......................... $ 0.51 $ 0.22
======= =======
4
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HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE M0NTHS ENDED SEPTEMBER 30, 1995 AND 1994
(UNAUDITED)
(In thousands) 1995 1994
- -------------- ---- ----
Cash flows from operating activities:
Finance revenues received ....................... $ 14,403 $ 12,401
Rentals and other cash received ................. 6,424 7,489
Lease purchase options received ................. 1,817 2,022
Dividends received .............................. 19 15
Interest paid ................................... (9,787) (6,853)
Cash paid to suppliers and employees ............ (6,148) (9,046)
Income taxes paid ............................... (2,071) (1,573)
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Net cash provided by operating activities
(Note 4) ..................................... 4,657 4,455
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Cash flows from investing activities:
Originations and purchases of finance receivables (92,102) (72,438)
Principal collections of finance receivables .... 73,830 62,371
Acquisitions (net of cash received) ............. -- (3,986)
Acquisition of debt and equity securities ....... -- (559)
Proceeds from sale of debt and equity securities 2,771 175
Acquisition of property under operating leases .. (1,042) (3,769)
Proceeds from sale of property under
operating leases ............................ 2,098 609
Acquisition of property and equipment ........... (78) (101)
Proceeds from sale of property and equipment .... -- 2
Acquisition of equity, partnership and long-term
investments ................................... (351) (55)
Proceeds from sale of equity, partnership and
long-term investments ......................... 1,667 688
Insurance premium paid increasing cash value .... (15) (15)
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Net cash used by investing activities ....... (13,222) (17,079)
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Cash flows from financing activities:
Issuance of common stock ........................ 113 3
Minority capital (paid) received ................ (453) 256
Dividends paid and partnership distributions .... (896) (1,130)
Acquisition of preferred stock .................. -- (195)
Short-term debt borrowings ...................... 136,990 137,100
Short-term debt repayment ....................... (131,250) (137,600)
Long-term debt borrowings ....................... 46,867 55,146
Long-term debt repayment ........................ (43,300) (41,229)
Certificate borrowings .......................... 5,889 4,510
Certificate repayment ........................... (4,496) (3,785)
Net change in customer deposits ................. (364) (425)
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Net cash provided by financing activities ..... 9,100 12,651
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Net increase in cash ................................. 535 27
Cash at beginning of year ....................... 1,947 2,160
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Cash at end of quarter .......................... $ 2,482 $ 2,187
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5
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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, 1995, and the
results of its operations and cash flows for the three month and nine month
periods ended September 30, 1995 and 1994.
The accounting policies followed by the Company are set forth in note A
to the Company's 1994 consolidated financial statements included in its 1994
Form 10-K.
The consolidated financial statements include the accounts of Horrigan
American, Inc., eight wholly-owned subsidiaries, one wholly-owned subsidiary for
two months (see "Subsidiary Spin-off"), and twenty-seven real estate partnership
investments (see "Other Operating Revenues").
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.
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,
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1995 1994 1995 1994
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<S> <C> <C> <C> <C>
Net earnings ..................... $ 4,334,000 $ 2,920,000 $ 1,581,000 $ 716,000
Dividends on preferred shares .... -- (8,000) -- --
----------- ----------- ----------- -----------
Net earnings applicable to common
shares ........................ $ 4,334,000 $ 2,912,000 $ 1,581,000 $ 716,000
=========== =========== =========== ===========
Weighted average common shares and
dilutive stock options ........ 3,121,713 3,118,060 3,118,664 3,121,941
=========== =========== =========== ===========
Net earnings per common share .... $ 1.39 $ 0.93 $ 0.51 $ 0.22
=========== =========== =========== ===========
</TABLE>
NOTE 3. DIVIDENDS PER SHARE
Following are details on dividends declared and paid:
Nine months ended Three months ended
September 30, September 30,
-------------- --------------
1995 1994 1995 1994
----- ----- ----- ----
Dividends per preferred share .......... $ -- $4.00 $ -- $ --
Dividends per common share ............. $0.24 $0.32 $0.08 $0.16
6
<PAGE>
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:
(In thousands) 1995 1994
- -------------- ---- ----
Net earnings ............................................. $ 4,334 $ 2,920
Noncash expenses, revenues, losses and gains
included in net earnings:
Depreciation and amortization ....................... 1,195 1,209
Excess of provision for income taxes
over income taxes paid ........................... 662 365
Net change in prepaid expenses and payables ......... (159) (1,034)
Decrease (increase) in income receivable ............ 363 153
Lease purchase options: cash received in
excess of earned ................................. 733 1,263
Increase in interest payable ........................ 319 203
Gain on sale of marketable securities, finance and
operating leases, property and equipment,
and investments .................................. (2,889) (882)
Provision for possible lease and loan losses ........ 429 901
Equity income (loss) in real estate partnerships
and associated companies ......................... (668) (765)
Provision for write-down of real estate ............. 228 --
Minority interest income ............................ 110 122
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Net cash provided by operating activities ........... $ 4,657 $ 4,455
======= =======
The following is a schedule of noncash investing and financing activities for
the nine months ended September 30:
(In thousands) 1995 1994
- -------------- ---- ----
Change in carrying value of available-for-sale securities:
Debt and equity securities .......................... $(1,140) $ 504
Deferred tax benefit ................................ $ 388 $ (171)
Net decrease in unrealized holding gains for
available-for-sale securities ..................... $ 752 $ 333
Sales of ownership interest in real estate partnerships,
previously included in
the consolidated financial statements:
Operating lease assets and other assets ............. $(3,060) $ --
Long-term debt and other liabilities ................ $ 2,498 $ --
Partnership capital ................................. $ 562 $ --
Exchange of stock by shareholders for ownership interest
in subsidiary company previously included in the
consolidated financial statements:
Common stock ........................................ $ 23 $ --
Paid in capital ..................................... $ 106 $ --
Retained earnings ................................... $ 202 $ --
Equity investment in subsidiary company ............. $ (331) $ --
Subsidiary's assets ................................. $(1,270) $ --
Subsidiary's long-term debt and other liabilities ... $ 915 $ --
Stockholder's equity of subsidiary .................. $ 355 $ --
7
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NOTE 4. CASH FLOW INFORMATION (Continued)
Acquisition:
Net investment in finance receivables ......... $ -- $ 9,542
Other assets .................................. $ -- $ 67
Short-term debt assumed ....................... $ -- $(7,000)
Security deposits assumed ..................... $ -- $ (630)
Other liabilities assumed ..................... $ -- $(1,365)
Deferred income taxes assumed ................. $ -- $ (614)
Goodwill ...................................... $ -- $ 152
Long-term debt obligation ..................... $ -- $ (152)
Distribution from an equity investment
in a real estate partnership
Net investment in finance receivables ......... $ 450 $ --
Long-term debt ................................ $ (450) $ --
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
The Company generated net earnings of $4,334,000 for the first nine months
of 1995 compared to net earnings of $2,920,000 for the same period a year ago.
Net earnings of $1,581,000 were reported for the third quarter of 1995 compared
to net earnings of $716,000 for the third quarter of 1994. The components of
these changes are discussed in the following sections.
Total Finance Revenues
Commercial leasing and financing revenues were $15,919,000 for the first
nine months of 1995 compared to $13,706,000 for the first nine months of 1994,
resulting in a 16.2% increase. Commercial leasing and financing revenues
increased 15.9% to $5,592,000 for the third quarter of 1995 compared to
$4,824,000 for the third quarter of 1994.
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 a portfolio of finance receivables during
the second quarter of 1994. Net direct finance lease receivables and commercial
finance receivables totalled $165,825,000 as of September 30, 1995, compared to
$145,969,000 as of September 30, 1994.
This increase in volume has reduced the negative impact of lower yields on
the lease and loan portfolio. Lower yields resulted from the mix of the
Company's newly acquired leases and loans, which consists of higher transaction
sizes with lower implicit yields since the lessees are more rate sensitive.
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 $8,956,000 for the first nine months of 1995 and $8,746,000
for the first nine months of 1994.
The Company's finance revenue margin increased $210,000 (2.4%) for the
first nine months of 1995 compared to the same period a year ago. Total finance
revenues increased 16.2% in 1995 from 1994 and interest expense increased 40.4%
for the same period. The average interest rate earned on the Company's average
outstanding finance receivables decreased 40 basis points to 12.94% in 1995 from
13.34% for the first nine months of 1994. The average interest rate on the
Company's average outstanding borrowings increased 90 basis points to 7.35% in
1995 from 6.45% for the first nine months of 1994.
The Company's finance revenue margin increased $214,000 (2.4%) for the
third quarter of 1995 compared to the same period of 1994. The average interest
rate earned on the Company's average outstanding finance receivables increased
19 basis points to 13.05% in 1995 from 12.86% for the third quarter of 1994. The
average interest rate on the Company's average outstanding borrowings increased
82 basis points to 7.42% in 1995 from 6.60% for the third quarter of 1994.
The net increase in finance revenue margin was due to an increase in volume
of new leases and loans offset by lower implicit yields on outstanding earning
assets and higher cost of borrowings for the first nine months of 1995 compared
9
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to the same period a year ago. Average outstanding earning assets increased
$27,028,000 and average outstanding debt increased $23,470,000 for the same
period, resulting in higher leverage. The Company continues to market higher
average balance commercial leasing and financing contracts, with lower implicit
yields to achieve improved asset quality and economies of operations. The
Company's Asset and Liability Committee reviews the interest rate spread
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 $472,000 (52.4%)
to $429,000 for the first nine months of 1995 compared to the same period a year
ago. The provision for possible lease and loan losses for the third quarter of
1995 decreased $181,000 (52.9%) 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 ended September 30, 1995 and 1994.
(In thousands)
- --------------
<TABLE>
<CAPTION>
Provision Allowance
for Possible for Possible Gross Allowance
Lease and Net Loss Experience Lease Ivestment as a
Loan ----------------------------------- Acquired and Loan in % of Gross
Losses Charge-offs Recoveries Net Losses Allowance (A) Losses Receivables Receivables
------ ----------- ---------- ---------- ------------- ------ ----------- -----------
NINE MONTHS ENDED SEPTEMBER 30
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $429 (616) 432 (184) -- $6,300 $196,060 3.22
1994 $901 (1,205) 581 (624) 214 $5,929 $171,915 3.45
QUARTER ENDED SEPTEMBER 30
1995 $161 (190) 114 (76) -- $6,300
1994 $342 (405) 193 (212) -- $5,929
</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.
As of September 30, 1995, the Company allocated $75,000 of the allowance
for possible lease and loan losses in anticipation of losses on certain
individually significant accounts. This allocated allowance decreased $60,000
from December 31, 1994.
The recorded investment in the loans for which impairment has been
recognized approximated $75,000 as of September, 1995. The total allowance for
possible loan losses related to these impaired loans is $75,000 as of September
30, 1995.
10
<PAGE>
The Company's net losses of commercial leasing and financing receivables
decreased $440,000 (70.5%), for the first nine months of 1995 compared to the
same period a year ago. The Company's net charge-offs of commercial leasing and
financing receivables decreased $136,000 (64.2%), for the third quarter of 1995
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 to 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 increased $108,000 (8.6%) for the first nine months of
1995 compared to the same period a year ago. Total operating lease revenues
increased $10,000 (0.2%) to $4,263,000. The increase is due primarily to the
acquisition of one property in December, 1994 and a $63,900 recovery of rents
charged off in the prior year offset by a decrease due to the sale of properties
in July, 1995 and December, 1994, and the placement of two tenants on a
non-accrual basis in 1995. Interest expense attributable to net operating lease
revenues decreased $105,000 (5.0%). Depreciation expense attributable to net
operating leases increased $7,000 (0.8%) primarily the result of the acquisition
and sale of real estate properties as noted above.
Net operating lease revenues decreased $15,000 (3.4%), for the third
quarter of 1995 compared to the same period a year ago. Total operating lease
revenues decreased $133,000 (9.0%), primarily due to the placement of two
tenants on a non-accrual basis in 1995. Interest expense decreased $84,000
(11.7%), and depreciation expense decreased $34,000 (10.6%) 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 the integrity of the assets
through appropriate capital expenditures, and (2) actively consider the
selective sale of individual properties or groups of properties.
The Company's aggregate investment in real estate is not expected to
significantly appreciate in value over the next several years. 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, 1995:
11
<PAGE>
1. Credit risks.
There are various levels of credit risks inherent in the Company's
rent receivables. Rents totalling $8,800 were thirty-one or more
days past due.
2. General market conditions nationally or within specific geographic
areas.
The Company is maintaining an ownership interest, ranging from 10%
to 100%, in 35 real estate properties with an original cost of
$54,182,000 in the following states, with the percentage of
concentration indicated in parenthesis: Florida (32%),
Pennsylvania (17%), New Jersey (16%), Michigan (11%) and other
(24%).
3. Greater difficulty in releasing or selling special purpose
buildings.
The Company's special purpose buildings include three day-care
facilities. None are presently for sale and all are fully
occupied. The Company also owns and manages one limited service
hotel, which may be sold in the fourth quarter.
4. Vacancies.
At September 30, 1995, total vacancy (excluding the hotels), based
on the portfolio's total square footage, approximated 28%. The
vacancy percentage included partial vacancies (7.3%) in seven real
estate projects and full vacancies (20.7%) in three real estate
projects (with a recorded book value of $2,335,000). Some of of
these properties may require additional cash from the Company
until they are substantially leased. Management is actively
pursuing new tenants for, or sales of, 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.
The timing and amount of repairs or improvements is determined by
the operating history and present 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 Americans With 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. The Company estimates that the cost of such improvements
will not be material relative to the aggregate cost of the
properties.
12
<PAGE>
It is estimated that, not including potential ADA requirements, up
to approximately $1,245,000 of improvements may be made within the
next twelve months. Approximately 15% 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 future. Such loans, when
available, are frequently at lower loan amounts. During the next
twelve months, approximately $6,863,000 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.
As of June 30, 1995, there was one property believed to have an
estimated current fair value materially below book value.
Accordingly, this property was written down as of the date of the
determination. The Company incurred an additional charge to
earnings, net of deferred taxes, of $140,000, and reduced its
share of reported book value in real estate assets by $228,000.
Future changes to any property valuation may be necessary if any
condition differs substantially from the assumptions used in
developing current valuations. During the third quarter of 1995,
there were no additional properties believed to have an estimated
current fair value materially below book value.
13
<PAGE>
Subsidiary Spin-off
On March 1, 1995 the Company split off to certain electing shareholders its
wholly-owned subsidiary, The Business Outlet, Inc. ("BOI"). The spin-off of BOI
was accomplished with certain Company shareholders electing to exchange 23,092
shares of the Company, resulting in the spin-off of 95.3% of BOI. The Company
retained a 4.7% interest, which was reduced to 2.4% after the infusion of new
capital from the other BOI shareholders. As a result of this exchange, the
Company reported a gain of $17,529. The major business activity of BOI was
reported as the Furniture and Equipment Segment in note M to the Company's 1994
Consolidated Financial Statements.
Other Operating Revenues
Other operating revenues increased $1,274,000 (42.0%) to $4,309,000 for the
first nine months of 1995 compared to the same period a year ago. Customer
service fees decreased $67,000 (8.0%) due to a continued reduction in insurance
premiums and late charges earned offset by an increase in recording fees earned.
Management income decreased $104,000 (45.6%) due to the sale of two hotels in
June, 1995 and June, 1994. Furniture and equipment sales, net of cost of goods
sold, decreased $590,000 (80.0%) due to only two months of activity reported in
1995, compared to nine months in 1994. The Company's share of equity income in
unconsolidated real estate partnerships decreased $113,000 (14.4%) primarily due
to increased partnership expenses. A provision for write-down of real estate
decreased total other operating revenues by $228,000. Gain on sale of equity
securities increased $1,662,000 due to increased sales activity. Other income
increased $714,000 (172.9%) due primarily to a gain on the sale of a partnership
interest ($183,000), gains on the sale of real estate properties ($271,000), and
recovery income from charged-off accounts purchased through previous
acquisitions ($150,000).
Other operating revenues increased $569,000 (67.7%) for the third quarter
of 1995 compared to the same period a year ago primarily resulting from an
increase in gain of $767,000 from the sale of equity securities. Furniture and
equipment sales decreased $329,000 and customer service fees decreased $56,000
due to the same factors that impacted the nine-month period. Other income
increased $248,000 for the third quarter of 1995 primarily due to gains on the
sale of real estate properties ($245,000).
Operating Expenses
Operating expenses decreased $133,000 (1.9%) to $7,026,000 for the first
nine months of 1995 compared to the same period a year ago. Salaries, related
taxes, and employee benefits decreased $185,000 (4.8%) resulting from a
reduction of $395,000 due to the subsidiary spin-off offset by the addition of
several employees through the 1994 acquisitions. Depreciation and amortization
decreased $21,000 (6.8%). Other taxes increased $18,000 (3.5%) due to an
increase in real estate tax expense. All remaining expenses increased $55,000
(2.3%) due primarily to additional advertising and marketing expense ($88,000),
professional fees relating to the spin-off ($34,000), and additional operating
expenses as the result of the 1994 acquisitions ($91,000), offset by a reduction
of $159,000 due to the subsidiary spin-off.
Operating expenses decreased $356,000 (13.8%) for the third quarter of 1995
compared to the same period a year ago. Salaries, related taxes, and employee
benefits decreased $195,000 (13.9%), depreciation and amortization decreased
$8,000 (7.8%) and other taxes decreased $34,000 (23.8%) due to the same factors
14
<PAGE>
that impacted the nine month period. All remaining expenses decreased $119,000
(12.8%).
Provision for Income Taxes
Provision for income taxes for the first nine months of 1995 were
$2,733,000 compared to $1,938,000 for the comparable period a year ago. The
effective income tax rates for the first nine months of 1995 and 1994, were
38.1% and 38.9%, respectively.
For the third quarter of 1995, provision for income taxes totalled $979,000
compared to $526,000 in the third quarter of 1994. The effective tax rates for
the third quarters of 1995 and 1994 were 37.7% and 40.7%.
Net Investment in Finance Receivables and Property under Operating Leases
Net direct finance lease receivables and commercial finance receivables
totalled $165,825,000 as of September 30, 1995 compared to $148,073,000 as of
December 31, 1994, a net increase of $17,752,000 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 1995 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, on March 31, 1994, of
Golf Capital Corporation which provides leasing and lending services to the
country club and golf course marketplace. On June 1, 1994, the Company purchased
all of the outstanding shares of American Capital Leasing Corporation which
provides leasing services to several specialized markets, principally refuse
equipment and machine tools. 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
$4,033,000 primarily due to the sale of real estate properties and normal
depreciation. The change in property under operating leases is in accordance
with management strategy (see "Net Operating Lease Revenues").
Possible Sale of the Company
On September 22, 1995, the Company and a prospective purchaser finalized a
term sheet describing the proposed acquisition by the purchaser of all the
outstanding stock of the Company. Terms of the proposed acquisition would
require (1) the purchaser to cause the Company to redeem all of the Company's
outstanding Subordinated Investment Certificates, at or shortly after the
closing of the proposed acquisition, and (2) the Company to spin off the real
estate subsidiary corporation to the shareholders of the Company. It is the
Company's present expectation that the closing of the proposed acquisition, if
consummated, would occur in early January, 1996.
The Company has not entered into any legally binding agreement to complete
the proposed acquisition. Completion of the proposed acquisition would be
subject to further negotiations, the execution of a definitive agreement, and a
15
<PAGE>
number of other conditions, including regulatory approval and the approval of
the board of directors and shareholders of the Company.
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, and to sell real estate.
Net cash provided by operating activities was $4,657,000 for the nine
months ended September 30, 1995 compared to $4,455,000 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 $54,456,000 as of September 30,
1995. (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.
16
<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 the Company's
ownership interests in real estate partnerships and continued profitability. As
of September 30, 1995, 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 ............. $ -- $ 2,801 $ --
Fixed Rate ......................... 39,000 24,500 14,500
Floating Rate ...................... 5,000 1,490 3,510
-------- -------- -------
Sub-Total ....................... 44,000 28,791 18,010
-------- -------- -------
Long-Term Debt:
Recourse
Investment Certificate ............. -- 27,599 --
Unsecured Funding Program .......... 80,366 58,360 22,006
Fixed Rate ......................... 38,852 24,412 14,440
Real Estate Mortgages .............. -- 4,099 --
Term Loan .......................... -- 2,000 --
Nonrecourse
Real Estate Mortgages .............. -- 17,515 --
-------- -------- -------
Sub-Total ....................... 119,218 133,985 36,446
-------- -------- -------
TOTAL DEBT ........................... $162,776
========
TOTAL AVAILABILITY ................... $163,218 $54,456
======== =======
The notional principal amounts of outstanding swap contracts increased
by $4,136,000 from December 31, 1994 for an outstanding balance of $11,724,000
as of September 30, 1995. The swap contracts are "plain vanilla" swaps matched
with outstanding short-term borrowings.
Total stockholders' equity increased $2,617,000 from December 31, 1994
to September 30, 1995 due to the retention of earnings ($4,334,000), issuance of
common stock ($113,000), offset by a decrease in net unrealized holding gains
for available-for-sale securities ($752,000), payment of dividends ($747,000)
and the retirement of common stock ($331,000), resulting from the subsidiary
spin-off.
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. There were no reports on Form 8-K filed for the nine months ended
September 30, 1995.
18
<PAGE>
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 13, 1995 (Principal Executive Officer)
/s/ Robert Ordway
-------------------------
Robert Ordway
Senior Vice President
Date: November 13, 1995 (Principal Financial and
Accounting Officer
19
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