<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 June 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.
-----------------------
(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 Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (610) 775-5199
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1995
- ---------------------------- ----------------------------
Common Stock - $1 par value 3,104,053 Shares
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets:
June 30, 1995 (Unaudited) and December 31, 1994........................ 2
Unaudited Consolidated Statements of Operations:
Six Months Ended June 30, 1995 and 1994................................ 3
Three Months Ended June 30, 1995 and 1994.............................. 4
Unaudited Consolidated Statements of Cash Flows
Six Months Ended June 30, 1995 and 1994................................ 5
Notes to Unaudited Consolidated Financial Statements..................... 6
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 8
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K................................ 17
Signatures............................................................... 18
<PAGE>
PART I - FINANCIAL INFORMATION
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
June 30, December 31,
1995 1994
(In thousands) (Unaudited)
- -------------- ----------- ------------
<S> <C> <C>
Cash $ 2,335 $ 1,947
Debt and equity securities 1,016 2,335
Net investment in finance receivables.......................................... 164,900 148,073
Equity investments in real estate
partnerships................................................................. 529 121
Property under operating leases, net........................................... 32,113 35,022
Property and equipment, net.................................................... 1,475 2,560
Other assets................................................................... 3,383 4,272
-------- --------
$205,751 $194,330
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term borrowings.......................................................... $ 24,614 $ 23,393
Accounts payable and accrued expenses.......................................... 8,249 6,468
Customer deposits.............................................................. 2,024 2,316
Long-term debt:
Recourse..................................................................... 120,618 110,636
Nonrecourse.................................................................. 17,953 20,577
-------- -------
Total Liabilities.......................................................... 173,458 163,390
-------- -------
Minority interest.............................................................. 196 494
-------- -------
Stockholders' equity:
Common stock, $1 par value; authorized
10,000,000 shares; issued 3,105,170 shares
in 1995 and 3,128,262 shares in 1994;
outstanding 3,104,053 shares in
1995 and 3,126,762 shares in 1994.......................................... 3,105 3,128
Capital in excess of par value............................................... -- 106
Net unrealized holding gains for available-for-
sale securities, net of tax................................................ 476 752
Retained earnings............................................................ 28,527 26,474
Less treasury stock, at cost; 1,117 shares in
1995 and 1,500 shares in 1994.............................................. (11) (14)
-------- --------
Total Stockholders' Equity.............................................. 32,097 30,446
-------- --------
$205,751 $194,330
======== ========
</TABLE>
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1995 1994
- ---------------------------------------- ---- ----
<S> <C> <C>
Finance revenues:
Commercial leasing and financing revenues.................................... $10,327 $ 8,882
Interest expense............................................................. 4,511 3,062
------- -------
Finance revenue margin................................................... 5,816 5,820
Provision for possible lease and loan losses................................. 268 559
------- -------
Finance revenues after provision for possible
lease and loan losses.................................................. 5,548 5,261
------- -------
Operating lease revenues:
Rents on real estate operating leases........................................ 2,786 2,683
Rents on equipment operating leases.......................................... 125 85
------- -------
Total operating lease revenues........................................... 2,911 2,768
Interest expense............................................................. 1,355 1,376
Depreciation................................................................. 619 578
------- -------
Net operating lease revenues............................................. 937 814
------- -------
Other operating revenues:
Customer service fees........................................................ 555 566
Management and broker income................................................. 97 182
Furniture and equipment sales, net of cost
of goods sold.............................................................. 148 409
Equity income in real estate partnerships.................................... 676 747
Provision for write-down of real estate...................................... (228) --
Gain on sale of debt and equity securities. ................................. 925 30
Other income................................................................. 726 260
------- -------
Total other operating revenues........................................... 2,899 2,194
------- -------
Operating expenses:
Salaries and employee benefits............................................... 2,491 2,481
Depreciation and amortization................................................ 196 209
Other taxes.................................................................. 421 369
Credit and collection........................................................ 91 129
Other expenses............................................................... 1,604 1,392
------- -------
Total operating expenses................................................. 4,803 4,580
------- -------
Earnings before income taxes and
minority interest............................................................... 4,581 3,689
Income tax provision......................................................... 1,754 1,412
------- -------
Earnings before minority interest................................................. 2,827 2,277
Minority interest income..................................................... (74) (73)
------- -------
Net earnings ..................................................................... $ 2,753 $ 2,204
======= =======
Net earnings per common share..................................................... $ 0.88 $ 0.71
======= ======
</TABLE>
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands, except per share amounts) 1995 1994
- ---------------------------------------- ---- ----
<S> <C> <C>
Finance revenues:
Commercial leasing and financing revenues.................................. $ 5,339 $ 4,656
Interest expense........................................................... 2,343 1,615
------- -------
Finance revenue margin................................................. 2,996 3,041
Provision for possible lease and loan losses............................... 130 371
------- -------
Finance revenues after provision for possible
lease and loan losses................................................ 2,866 2,670
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Operating lease revenues:
Rents on real estate operating leases...................................... 1,328 1,401
Rents on equipment operating leases........................................ 56 48
------- -------
Total operating lease revenues......................................... 1,384 1,449
Interest expense........................................................... 669 686
Depreciation............................................................... 301 295
------- -------
Net operating lease revenues........................................... 414 468
------- -------
Other operating revenues:
Customer service fees...................................................... 282 297
Management and broker income............................................... 64 131
Furniture and equipment sales, net of cost
of goods sold............................................................ -- 237
Equity income in real estate partnerships.................................. 773 818
Provision for write-down of real estate.................................... (228) --
Gain on sale of debt and equity securities. ............................... 840 30
Other income............................................................... 151 109
------- -------
Total other operating revenues......................................... 1,882 1,622
------- -------
Operating expenses:
Salaries and employee benefits............................................. 1,165 1,279
Depreciation and amortization.............................................. 95 106
Other taxes................................................................ 259 178
Credit and collection...................................................... 34 67
Other expenses............................................................. 727 735
------- -------
Total operating expenses............................................... 2,280 2,365
------- -------
Earnings before income taxes and
minority interest............................................................. 2,882 2,395
Income tax provision....................................................... 1,083 927
------- -------
Earnings before minority interest............................................... 1,799 1,468
Minority interest income................................................... (38) (44)
------- -------
Net earnings ................................................................... $ 1,761 $ 1,424
======= =======
Net earnings per common share................................................... $ 0.56 $ 0.46
======= =======
</TABLE>
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX M0NTHS ENDED JUNE 30, 1995 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) 1995 1994
- -------------- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Finance revenues received.................................................... $ 9,335 $ 7,771
Rentals and other cash received.............................................. 4,782 4,814
Lease purchase options received.............................................. 1,149 1,489
Dividends received........................................................... 19 10
Interest paid................................................................ (6,522) (4,435)
Cash paid to suppliers and employees......................................... (4,438) (5,792)
Income taxes paid............................................................ (272) (464)
-------- -------
Net cash provided by operating activities
(Note 4)................................................................ 4,053 3,393
------- -------
Cash flows from investing activities:
Originations and purchases of finance receivables.......................... (62,707) (47,278)
Principal collections of finance receivables............................... 46,884 39,462
Acquisitions (net of cash received)........................................ -- (4,053)
Acquisition of debt and equity securities.................................. -- (40)
Proceeds from sale of debt and equity securities........................... 1,458 175
Acquisition of property under operating leases............................. (251) (338)
Proceeds from sale of property under
operating leases....................................................... 200 5
Acquisition of property and equipment...................................... (38) (92)
Proceeds from sale of property and equipment............................... -- 1
Acquisition of equity, partnership and long-term
investments.............................................................. (34) (40)
Proceeds from sale of equity, partnership and
long-term investments.................................................... 1,154 678
Insurance premium paid increasing cash value............................... (11) (10)
------- -------
Net cash used by investing activities.................................. (13,345) (11,530)
------- -------
Cash flows from financing activities:
Issuance of common stock................................................... 3 --
Minority capital paid...................................................... (573) --
Dividends paid and partnership distributions............................... (597) (583)
Acquisition of preferred stock............................................. -- (195)
Short-term debt borrowings................................................. 90,500 78,100
Short-term debt repayment.................................................. (89,250) (79,100)
Long-term debt borrowings.................................................. 36,500 35,980
Long-term debt repayment................................................... (28,077) (26,797)
Certificate borrowings..................................................... 4,534 3,410
Certificate repayment...................................................... (3,073) (2,519)
Net change in customer deposits............................................ (287) (282)
------- -------
Net cash provided by financing activities................................ 9,680 8,014
------- -------
Net increase (decrease) in cash................................................. 388 (123)
Cash at beginning of year.................................................. 1,947 2,160
------- -------
Cash at end of quarter..................................................... $ 2,335 $ 2,037
======= =======
</TABLE>
<PAGE>
HORRIGAN AMERICAN, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. UNAUDITED STATEMENTS
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of Horrigan American, Inc. as of June 30, 1995, and the
results of its operations and cash flows for the three month and six month
periods ended June 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-nine 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>
Six Months Ended Three Months Ended
June 30, June 30,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings ............................................. $2,753,000 $2,204,000 $1,761,000 $1,424,000
Dividends on preferred shares............................. -- (8,000) -- (4,000)
---------- ---------- ---------- ----------
Net earnings applicable to common
shares................................................. $2,753,000 $2,196,000 $1,761,000 $1,420,000
========== ========== ========== ==========
..........................................................
Weighted average common shares and
dilutive stock options................................. 3,113,346 3,113,814 3,103,911 3,113,814
========= ========= ========= =========
..........................................................
Net earnings per common share............................. $ 0.88 $0.71 $ 0.56 $0.46
====== ===== ====== =====
</TABLE>
NOTE 3. DIVIDENDS PER SHARE
Following are details on dividends declared and paid:
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30, June 30,
----------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Dividends per preferred share............................. $ -- $4.00 $ -- $2.00
Dividends per common share................................ $0.16 $0.16 $0.08 $0.06
</TABLE>
<PAGE>
NOTE 4. CASH FLOW INFORMATION
The following is the reconciliation of net earnings to net cash provided by
operating activities for the six months ended June 30:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
- -------------- ---- ----
<S> <C> <C>
Net earnings.................................................................... $2,753 $2,204
Noncash expenses, revenues, losses and gains
included in net earnings:
Depreciation and amortization.............................................. 815 787
Excess of provision for income taxes
over income taxes paid ................................................. 1,482 948
Net change in prepaid expenses and payables................................ (136) (664)
Decrease (increase) in income receivable................................... 368 (113)
Lease purchase options: cash received in
excess of earned........................................................ 433 980
Increase in interest payable............................................... 63 3
Gain on sale of marketable securities, finance and
operating leases, property and equipment,
and investments......................................................... (1,620) (651)
Provision for possible lease and loan losses............................... 268 559
Equity income (loss) in real estate partnerships
and associated companies................................................ (675) (733)
Provision for write-down of real estate.................................... 228 --
Minority interest income .................................................. 74 73
------ ----
Net cash provided by operating activities.................................. $4,053 $3,393
====== ======
</TABLE>
The following is a schedule of noncash investing and financing activities for
the six months ended June 30:
<TABLE>
<CAPTION>
(In thousands) 1995 1994
- -------------- ---- ----
<S> <C> <C>
Change in carrying value of available-for-sale securities:
Debt and equity securities................................................. $ (418) $ (232)
Deferred tax benefit....................................................... $ 142 $ 79
Net decrease in unrealized holding gains for
available-for-sale securities............................................ $ 276 $ 153
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 $ --
Acquisition:
Net investment in finance receivables...................................... $ -- $ 9,638
Other assets............................................................... $ -- $ 67
Short-term debt assumed.................................................... $ -- $ (7,000)
Security deposits assumed.................................................. $ -- $ (630)
Other liabilities assumed.................................................. $ -- $ (1,365)
Deferred income taxes assumed.............................................. $ -- $ (710)
Goodwill................................................................... $ -- $ 152
Long-term debt obligation.................................................. $ -- $ (152)
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Earnings
The Company generated net earnings of $2,753,000 for the first six months
of 1995 compared to net earnings of $2,204,000 for the same period a year ago.
Net earnings of $1,761,000 were reported for the second quarter of 1995 compared
to net earnings of $1,424,000 for the second quarter of 1994. The components of
these changes are discussed in the following sections.
Total Finance Revenues
Commercial leasing and financing revenues were $10,327,000 for the first
six months of 1995 compared to $8,882,000 for the first six months of 1994,
resulting in a 16.3% increase. Commercial leasing and financing revenues
increased 14.7% to $5,339,000 for the second quarter of 1995 compared to
$4,656,000 for the second 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 $164,900,000 as of June 30, 1995, compared to
$141,752,000 as of June 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 $5,816,000 for the first six months of 1995 and $5,820,000
for the first six months of 1994.
The Company's finance revenue margin decreased $4,000 (0.1%) for the first
six months of 1995 compared to the same period a year ago. Total finance
revenues increased 16.3% in 1995 from 1994 and interest expense increased 47.3%
for the same period. The average interest rate earned on the Company's average
outstanding finance receivables decreased 74 basis points to 12.88% in 1995 from
13.62% for the first six months of 1994. The average interest rate on the
Company's average outstanding borrowings increased 93 basis points to 7.32% in
1995 from 6.39% for the first six months of 1994.
The Company's finance revenue margin decreased $45,000 (1.5%) for the
second quarter of 1995 compared to the same period of 1994. The average interest
rate earned on the Company's average outstanding finance receivables decreased
80 basis points to 12.94% in 1995 from 13.74% for the second quarter of 1994.
The average interest rate on the Company's average outstanding borrowings
increased 98 basis points to 7.42% in 1995 from 6.44% for the second quarter of
1994.
The net decrease in finance revenue margin was due to lower implicit yields
on outstanding earning assets and higher cost of borrowings for the first six
months of 1995 compared to the same period a year ago. Average outstanding
earning assets increased $29,886,000 and average outstanding debt increased
$26,627,000 for the same period, resulting in higher leverage. The Company
<PAGE>
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 $291,000 (52.1%)
to $268,000 for the first six months of 1995 compared to the same period a year
ago. The provision for possible lease and loan losses for the second quarter of
1995 decreased $241,000 (65.0%) compared to the same period a year ago. The
following table details the components of the provision for possible lease and
loan losses as of and for the six months ended June 30, 1995 and 1994.
<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 (A) Losses Receivables Receivables
------ ----------- ---------- ---------- ------------ ------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30
- ------------------------
1995 $268 (426) 318 (108) -- $6,215 $195,788 3.17
1994 $559 (800) 388 (412) 214(A) $5,800 $166,311 3.49
QUARTER ENDED JUNE 30
- ---------------------
1995 $130 (243) 167 (76) -- $6,215
1994 $371 (442) 218 (224) 214(A) $5,800
</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 June 30, 1995, the Company allocated $100,000 of the allowance for
possible lease and loan losses in anticipation of losses on certain individually
significant accounts. This allocated allowance decreased $35,000 from December
31, 1994.
The recorded investment in the loans for which impairment has been
recognized approximated $106,000 as of June 30, 1995. The total allowance for
possible loan losses related to these impaired loans is $106,000 as of June 30,
1995.
The Company's net losses of commercial leasing and financing receivables
decreased $304,000 (73.8%), for the first six months of 1995 compared to the
<PAGE>
same period a year ago. The Company's net charge-offs of commercial leasing and
financing receivables decreased $148,000 (66.1%), for the second 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 $123,000 (15.1%) for the first six months of
1995 compared to the same period a year ago. Total operating lease revenues
increased $143,000 (5.2%) to $2,911,000. The increase is due primarily to the
acquisition of one property in December, 1994 and a $66,700 recovery of rents
charged off in the prior year. Interest expense attributable to net operating
lease revenues decreased $21,000 (1.5%). Depreciation expense attributable to
net operating leases increased $41,000 (7.1%) primarily the result of an
increase in equipment operating leases and the acquisition of one real estate
property in December 1994, offset by a decrease in depreciation on real estate
operating leases due to the sale of properties in 1994.
Net operating lease revenues decreased $54,000 (11.5%), for the second
quarter of 1995 compared to the same period a year ago. Total operating lease
revenues decreased $65,000 (4.5%), primarily due to the placement of one tenant
on a non-accrual basis in 1995. In addition, revenues in the second quarter 1994
included a lump sum payment of past due rent under a settlement agreement with
one tenant. Interest expense decreased $17,000 (2.5%), and depreciation expense
increased $6,000 (2.0%) due to the same factors that impacted the six 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, (2) hold most assets for long-term
investment, (3) consider the selective sale of individual properties or groups
of properties, and (4) 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.
<PAGE>
The commercial real estate business is subject to several risks which
management reviews on a regular basis. These risks are identified below with the
status of each as of June 30, 1995:
1. Credit risks.
There are various levels of credit risks inherent in the Company's
rent receivables. No rents 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 41 real estate properties with an original cost of
$55,330,000 in the following states, with the percentage of
concentration indicated in parenthesis: Florida (31%),
Pennsylvania (17%), New Jersey (16%), Michigan (11%) and other
(25%).
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.
4. Vacancies.
Total vacancy (excluding the hotels), based on the portfolio's
total square footage, approximated 19%. The vacancy percentage
included partial vacancies (5%) in seven real estate projects and
full vacancies (14%) in two real estate projects (with a recorded
book value of $1,308,000). Some of of these properties may require
additional cash from the Company until they are substantially
leased. Management is actively pursuing new tenants for 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
<PAGE>
will not be material relative to the aggregate cost of the
properties.
It is estimated that, not including potential ADA requirements, up
to approximately $725,000 of improvements may be made within the
next twelve months. Approximately 30% 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 $5,095,000 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
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.
<PAGE>
Future changes to any property valuation may be necessary if any
condition differs substantially from the assumptions used in
developing current valuations.
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 $705,000 (32.1%) to $2,899,000 for the
first six months of 1995 compared to the same period a year ago. Customer
service fees decreased $11,000 (1.9%) due to a continued reduction in insurance
premiums and late charges earned offset by an increase in recording fees earned.
Management income decreased $85,000 (46.7%) due to the hotel sale in June, 1994.
Furniture and equipment sales, net of cost of goods sold, decreased $261,000
(63.8%) due to two months activity reported in 1995, which included an inventory
write-down. The Company's share of equity income in unconsolidated real estate
partnerships decreased $71,000 (9.5%) 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
$895,000 due to increased sales activity. Other income increased $466,000
(380.8%) due primarily to a gain on the sale of a partnership interest
($183,000) and recovery income from charged-off accounts purchased through
previous acquisitions ($175,000).
Other operating revenues increased $260,000 (16.0%) for the second quarter
of 1995 compared to the same period a year ago primarily resulting from an
increase in gain of $810,000 from the sale of equity securities. Furniture and
equipment sales decreased $237,000 and customer service fees decreased $15,000
due to the same factors that impacted the six-month period. A provision for
write-down of real estate decreased total other operating revenues by $228,000.
Other income increased $42,000 for the second quarter of 1995.
Operating Expenses
Operating expenses increased $223,000 (4.9%) to $4,803,000 for the first
six months of 1995 compared to the same period a year ago. Salaries, related
taxes, and employee benefits increased $10,000 (0.4%) due to the addition of
several employees through the 1994 acquisitions, offset by a reduction of
$183,000 due to the subsidiary spin-off. Depreciation and amortization decreased
$13,000 (6.2%). Other taxes increased $52,000 (14.1%) due to an increase in real
estate tax expense. All remaining expenses increased $174,000 (11.4%) due
primarily to additional advertising expense ($38,000), professional fees
relating to the spin-off ($34,000), and additional operating expenses as the
result of the 1994 acquisitions ($88,000), offset by a reduction of $62,000 due
to the subsidiary spin-off.
<PAGE>
Operating expenses decreased $86,000 for the second quarter of 1995
compared to the same period a year ago. Salaries, related taxes, and employee
benefits decreased $114,000 (8.9%), depreciation and amortization decreased
$11,000 (10.4%) and other taxes increased $81,000 (45.5) due to the same factors
that impacted the six month period. All remaining expenses increased $41,000
(5.1%).
Provision for Income Taxes
Provision for income taxes for the first six months of 1995 were $1,754,000
compared to $1,412,000 for the comparable period a year ago. The effective
income tax rate for the first six months of 1995 and 1994, was 38.3%.
For the second quarter of 1995, provision for income taxes totalled
$1,083,000 compared to $927,000 in the second quarter of 1994. The effective tax
rates for the second quarters of 1995 and 1994 were 37.6% and 38.7%.
Net Investment in Finance Receivables and Property under Operating Leases
Net direct finance lease receivables and commercial finance receivables
totalled $164,900,000 as of June 30, 1995 compared to $148,073,000 as of
December 31, 1994, a net increase of $16,827,000 for the six months.
The increase in finance receivables was in accordance with the Company's
growth plans. The Company's sales efforts have generated a larger volume of new
leases and loans in 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
$2,909,000 primarily due to 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, and to sell real estate.
Net cash provided by operating activities was $4,053,000 for the six months
ended June 30, 1995 compared to $3,393,000 for the same period a year ago.
<PAGE>
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 $51,587,000 as of June 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.
<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 June 30, 1995, 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.................... $ -- $ 3,114 $ --
Fixed Rate................................ 35,500 21,500 14,000
Floating Rate............................. 5,000 -- 5,000
-------- -------- --------
Sub-Total.............................. 40,500 24,614 19,000
-------- -------- --------
Long-Term Debt:
Recourse
Investment Certificate.................... -- 27,355 --
Junior Subordinated Debt.................. -- 103 --
Unsecured Funding Program................. 75,768 53,801 21,967
Fixed Rate................................ 43,340 32,720 10,620
Real Estate Mortgages..................... -- 4,639 --
Term Loan................................. -- 2,000 --
Nonrecourse
Real Estate Mortgages..................... -- 17,953 --
-------- -------- --------
Sub-Total.............................. 119,108 138,571 32,587
-------- -------- --------
TOTAL DEBT.................................. $163,185
========
TOTAL AVAILABILITY.......................... $159,608 $ 51,587
======== ========
</TABLE>
The notional principal amounts of outstanding swap contracts decreased by
$237,000 from December 31, 1994 for an outstanding balance of $7,356,000 as
of June 30, 1995. The swap contracts are "plain vanilla" swaps matched with
outstanding short-term borrowings.
Total stockholders' equity increased $1,651,000 from December 31, 1994
to June 30, 1995 due to the retention of earnings ($2,753,000), issuance of
common stock ($3,000), offset by a decrease in net unrealized holding gains for
available-for-sale securities ($276,000), payment of dividends ($498,000) 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.
<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 six months ended June 30,
1995.
<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: August 11, 1995 (Principal Executive Officer)
/s/ Robert Ordway
---------------------------
Robert Ordway
Senior Vice President
Date: August 11, 1995 (Principal Financial and
Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<EXCHANGE-RATE> 1
<CASH> 2,335,000
<SECURITIES> 1,016,000
<RECEIVABLES> 171,115,000
<ALLOWANCES> 6,215,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 42,044,000
<DEPRECIATION> 8,456,000
<TOTAL-ASSETS> 205,886,000
<CURRENT-LIABILITIES> 0
<BONDS> 163,185,000
<COMMON> 3,105,000
0
0
<OTHER-SE> 28,992,000
<TOTAL-LIABILITY-AND-EQUITY> 205,886,000
<SALES> 148,000
<TOTAL-REVENUES> 15,989,000
<CGS> 0
<TOTAL-COSTS> 5,422,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 268,000
<INTEREST-EXPENSE> 5,866,000
<INCOME-PRETAX> 4,581,000
<INCOME-TAX> 1,754,000
<INCOME-CONTINUING> 2,753,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,753,000
<EPS-PRIMARY> 0.88
<EPS-DILUTED> 0.88
</TABLE>
