<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 4, 1999
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
AMERICAN EXPRESS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<S> <C> <C>
NEW YORK 6141 13-4922250
(STATE OR OTHER JURISDICTION
OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
WORLD FINANCIAL CENTER
200 VESEY STREET
NEW YORK, NEW YORK 10285
(212) 640-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICER)
---------------
LOUISE M. PARENT, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
AMERICAN EXPRESS COMPANY
WORLD FINANCIAL CENTER
200 VESEY STREET
NEW YORK, NEW YORK 10285
(212) 640-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
BRUCE N. HAWTHORNE, ESQ. RICHARD A. BOEHMER, ESQ.
KING & SPALDING O'MELVENY & MYERS LLP
191 PEACHTREE STREET 400 SOUTH HOPE STREET
ATLANTA, GEORGIA 30303-1763 LOS ANGELES, CALIFORNIA 90071-2898
(404) 572-4600 (213) 430-6643
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable following the effectiveness of this Registration Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<CAPTION>
PROPOSED MAXIMUM
AGGREGATE
TITLE OF EACH CLASS OF SECURITIES TO BE OFFERING AMOUNT OF
REGISTERED PRICE(1)(2) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------
<S> <C> <C>
Common Shares, $.60 par value per
share.................................. $56,253,069 $3,348.03
- ------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee and
computed pursuant to Rule 457(f)(1) under the Securities Act of 1933, as
amended, based on the market value as of December 29, 1998 of the
securities to be received by the Registrant in exchange for the securities
registered hereby.
(2) In accordance with Rule 457(o) under the Securities Act of 1933, as
amended, the number of Shares being registered and the Proposed Maximum
Offering Price Per Share are not included in this table.
(3) In accordance with Rule 457(b) under the Securities Act of 1933, as
amended, the amount of the Registration Fee has been reduced by
$12,290.33, the amount of the fee paid under Section 14(g) of the
Securities Exchange Act of 1934, as amended, by Rockford Industries, Inc.
with respect to the transaction described herein.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[LOGO OF ROCKFORD INDUSTRIES]
MERGER PROPOSED--YOUR VOTE IS VERY IMPORTANT
The Board of Directors of Rockford Industries, Inc. has agreed to merge our
company with a subsidiary of American Express Company. Before we can complete
this merger, the agreement must be approved by Rockford's shareholders. We are
sending you this Proxy Statement-Prospectus to ask you to vote in favor
of the merger.
Upon completion of the merger, Rockford shareholders will receive for each
share of Rockford common stock they own just before the merger such fraction of
a share of American Express Common Shares that could be purchased for $11.88
based on the average closing price of American Express stock for a specified
period of time prior to the merger and American Express will own all the
outstanding common stock of Rockford.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend the
shareholder meeting, please take the time to vote by completing and mailing the
enclosed proxy card. If you sign, date and mail your proxy card without
indicating how you want to vote, we will vote your proxy in favor of the
merger. If you do not return your card, the effect will be a vote against the
merger.
The date, time and place of the shareholder meeting is:
February 12, 1999
10:00 a.m. Local Time
1851 East First Street, Suite 600
Santa Ana, California 92705
This Proxy Statement-Prospectus provides you with detailed information about
the proposed merger. You can also get information about Rockford and American
Express from documents that have been filed with the Securities and Exchange
Commission. We encourage you to read this entire document carefully.
AFTER CAREFUL CONSIDERATION, A SPECIAL COMMITTEE OF YOUR BOARD OF DIRECTORS
AND YOUR BOARD OF DIRECTORS AS A WHOLE HAVE UNANIMOUSLY DETERMINED THAT THE
MERGER IS IN THE BEST INTERESTS OF ROCKFORD AND ITS SHAREHOLDERS. YOUR BOARD OF
DIRECTORS HAS UNANIMOUSLY APPROVED AND ADOPTED THE PLAN AND AGREEMENT OF MERGER
AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL AND ADOPTION OF THE PLAN
AND AGREEMENT OF MERGER AT THE SPECIAL SHAREHOLDER MEETING.
/s/ Gerry Ricco
Gerry Ricco
President and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT-PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This Proxy Statement-Prospectus is dated January 6, 1999
and was first mailed to shareholders on or about January 11, 1999.
<PAGE>
WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ABOUT THE MERGER OR ROCKFORD OR AMERICAN EXPRESS THAT DIFFERS
FROM OR ADDS TO THE INFORMATION IN THIS PROXY STATEMENT-PROSPECTUS OR IN OUR
DOCUMENTS OR THE DOCUMENTS OF AMERICAN EXPRESS THAT ARE PUBLICLY FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THEREFORE, IF ANYONE DOES GIVE YOU
DIFFERENT OR ADDITIONAL INFORMATION, YOU SHOULD NOT RELY ON IT.
IF YOU ARE IN A JURISDICTION WHERE IT IS UNLAWFUL TO OFFER TO EXCHANGE OR
SELL, OR TO ASK FOR OFFERS TO EXCHANGE OR BUY, THE SECURITIES OFFERED BY THIS
PROXY STATEMENT-PROSPECTUS OR TO ASK FOR PROXIES, OR IF YOU ARE A PERSON TO
WHOM IT IS UNLAWFUL TO DIRECT SUCH ACTIVITIES, THEN THE OFFER PRESENTED BY THIS
PROXY STATEMENT-PROSPECTUS DOES NOT EXTEND TO YOU.
THE INFORMATION CONTAINED IN THIS PROXY STATEMENT-PROSPECTUS SPEAKS ONLY AS
OF ITS DATE UNLESS THE INFORMATION SPECIFICALLY INDICATES THAT ANOTHER DATE
APPLIES.
INFORMATION IN THIS PROXY STATEMENT-PROSPECTUS ABOUT ROCKFORD HAS BEEN
SUPPLIED BY ROCKFORD, AND INFORMATION ABOUT AMERICAN EXPRESS HAS BEEN SUPPLIED
BY AMERICAN EXPRESS.
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
Rockford and American Express make forward-looking statements in this
document, and in the public documents to which we refer you. These forward-
looking statements are subject to risks and uncertainties, and there can be no
assurance that such statements will prove to be correct. Forward-looking
statements include statements set forth under "The Merger--Reasons for the
Merger; Recommendations of the Rockford Board of Directors" and "The Merger--
Fairness Opinion of Financial Advisor." Also, when we use any of the words
"believes," "expects," "anticipates," "intends," "optimistic," "aim," "will" or
similar expressions, we are making forward-looking statements. Many possible
events or factors could affect the future financial results and performance of
American Express after the merger. This could cause results or performance to
differ materially from those expressed in our forward-looking statements. You
should consider these risks when you vote on the merger. These possible events
or factors include, in addition to those discussed elsewhere in this document,
those discussed in the documents to which we referred you.
<PAGE>
ROCKFORD INDUSTRIES, INC.
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 12, 1999
----------------
Rockford Industries, Inc. will hold a special meeting of shareholders at its
executive offices, 1851 East First Street, Suite 600, in Santa Ana, California,
at 10:00 a.m. local time on February 12, 1999, to vote on:
. The Plan and Agreement of Merger, dated as of November 9, 1998, by and
among Rockford Industries, Inc., American Express Company and RXP
Acquisition Corporation (the subsidiary of American Express with which
Rockford will actually merge), and the transactions contemplated by that
agreement. These transactions include the merger of Rockford and a
subsidiary of American Express.
. Any other matters that properly come before the special meeting, or any
adjournments or postponements of the special meeting.
Record holders of Rockford common stock at the close of business on January
4, 1999, will receive notice of and may vote at the special meeting, including
any adjournments or postponements. The principal terms of the Plan and
Agreement of Merger require approval by the holders of a majority of the
outstanding shares of Rockford Common Stock and 66 2/3% of the Rockford Series
A Preferred Stock, voting as separate classes.
/s/ Brian A. Seigel
Executive Vice President and Secretary
January 6, 1999
PLEASE MARK, SIGN, DATE AND RETURN YOUR PROXY PROMPTLY, WHETHER OR NOT
YOU PLAN TO ATTEND THE SPECIAL MEETING.
YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE
PLAN AND AGREEMENT OF MERGER.
<PAGE>
To find any one of the principal sections identified below, simply bend the
document slightly to expose the black tabs and open the document to the tab
which corresponds to the title of the section you wish to read.
TABLE OF CONTENTS ---------
SUMMARY ---------
ROCKFORD SPECIAL MEETING ---------
INFORMATION ABOUT ROCKFORD AND ---------
INFORMATION ABOUT AMERICAN EXPRESS
THE MERGER ---------
THE MERGER AGREEMENT ---------
THE SHAREHOLDERS OPTION AGREEMENT ---------
COMPARISON OF THE RIGHTS OF HOLDERS OF AMERICAN EXPRESS ---------
COMMON SHARES AND ROCKFORD COMMON STOCK
WHERE YOU CAN FIND MORE INFORMATION ---------
APPENDICES ---------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 3
The Companies........................................................... 3
The Merger ............................................................. 4
What You Will Receive .................................................. 4
Treatment of Outstanding Options ....................................... 4
The Special Meeting .................................................... 4
Opinion of Financial Advisor ........................................... 5
Our Reasons for the Merger; Recommendations to Shareholders ............ 5
Interests of Persons Involved in the Merger That are Different from
Yours ................................................................. 6
Shareholders Option Agreement .......................................... 7
Conditions to Completion of Merger ..................................... 7
Termination Fees ....................................................... 7
Termination of Merger Agreement ........................................ 8
Exchange of Certificates ............................................... 8
Material Federal Income Tax Consequences ............................... 8
Accounting Treatment ................................................... 9
Dissenter's Rights...................................................... 9
Regulatory Approvals ................................................... 9
Comparison of Rights of Rockford Shareholders and American Express
Shareholders .......................................................... 9
Market Price Data....................................................... 10
Comparative Historical and Pro Forma Per Share Data..................... 11
American Express Selected Consolidated Financial Data................... 12
Rockford Selected Consolidated Financial Data........................... 14
ROCKFORD SPECIAL MEETING.................................................. 16
General................................................................. 16
Matters to be Considered................................................ 16
Proxies................................................................. 16
Solicitation of Proxies................................................. 16
Record Date and Voting Rights........................................... 17
Recommendation of the Rockford Board.................................... 18
INFORMATION ABOUT ROCKFORD................................................ 18
General................................................................. 18
Management and Additional Information................................... 19
Security Ownership of Certain Beneficial Owners and Management.......... 19
INFORMATION ABOUT AMERICAN EXPRESS........................................ 20
General................................................................. 20
Management and Additional Information................................... 21
THE MERGER................................................................ 22
Form of the Merger...................................................... 22
Merger Consideration.................................................... 22
Effective Time.......................................................... 22
Procedures for Exchange of Rockford Common Stock Certificates........... 23
Background of the Merger................................................ 23
Reasons for the Merger; Recommendation of the Rockford Board of
Directors.............................................................. 26
Fairness Opinion of Financial Advisor................................... 27
Interests of Certain Persons in the Merger; Conflicts of Interest....... 31
Material Federal Income Tax Consequences................................ 32
Accounting Treatment.................................................... 33
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Resale of American Express Common Shares................................ 33
Governmental and Regulatory Approval.................................... 33
Dissenters' Rights of Appraisal......................................... 34
THE MERGER AGREEMENT...................................................... 37
General................................................................. 37
Conversion of Shares.................................................... 37
Stock Options and Warrants.............................................. 37
Certain Representations and Warranties.................................. 38
Certain Covenants and Agreements........................................ 39
Conditions Precedent to the Merger...................................... 41
Termination; Fees and Expenses.......................................... 42
Amendment and Waiver.................................................... 43
THE SHAREHOLDERS OPTION AGREEMENT......................................... 44
Option to Purchase the Shares of Rockford Common Stock Owned by the
Identified Shareholders; Proxy and Agreement to Vote................... 44
Certain Covenants of the Identified Shareholders........................ 45
Irrevocable Proxy and Release; Agreement to Vote Shares................. 45
Termination............................................................. 45
COMPARISON OF THE RIGHTS OF HOLDERS OF AMERICAN EXPRESS COMMON SHARES AND
HOLDERS OF ROCKFORD COMMON STOCK......................................... 46
Dividends............................................................... 46
Special Meetings of Shareholders; Quorum; Shareholder Action by Written
Consent................................................................ 46
Certain Voting Rights................................................... 47
Size and Classification of the Board of Directors....................... 48
Election of Directors................................................... 48
Removal of Directors; Filling Vacancies on the Board of Directors....... 49
Amendment of Charter and Bylaws......................................... 49
Dissenters'/Appraisal Rights............................................ 50
Certain Business Combinations and Reorganizations....................... 50
Limitation on Directors' Liability...................................... 51
Indemnification of Officers and Directors; Insurance.................... 52
WHERE YOU CAN FIND MORE INFORMATION....................................... 54
Rockford................................................................ 54
American Express........................................................ 54
DESCRIPTION OF AMERICAN EXPRESS' CAPITAL STOCK............................ 56
LEGAL OPINION............................................................. 56
EXPERTS................................................................... 56
SHAREHOLDER PROPOSALS..................................................... 57
OTHER MATTERS............................................................. 57
APPENDICES................................................................ 58
</TABLE>
ii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: We believe that the acquisition of Rockford by American Express will provide
benefits to Rockford's shareholders, employees and customers. Our
shareholders will receive shares in what we believe is a premier financial
services company. We expect that our employees and sales associates will have
the opportunity to grow with a recognized brand name and our customers will
be offered a broader range of products and services to meet their needs.
Q: WHAT WILL ROCKFORD SHAREHOLDERS RECEIVE FOR THEIR ROCKFORD SHARES?
A: For each share of Rockford common stock owned just before the merger, a
Rockford shareholder who has not exercised his/her dissenter's rights will be
entitled to receive such fraction of a share of American Express Common
Shares that could be purchased for $11.88 based on the average closing price
per share for a specific period prior to the closing. Accordingly, the number
of American Express Common Shares that you will receive will change based
upon increases or decreases in the market price of American Express Common
Shares between now and the date that the merger is completed. Fluctuations in
the market price of Rockford common stock will not effect the number of
American Express Common Shares that you will receive. Furthermore, you should
expect to receive cash instead of fractional shares.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your completed, signed and dated proxy card in the enclosed return
envelope as soon as possible so that your shares can be voted at the February
12, 1999 Rockford special shareholder meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will not be able to vote your shares without instructions from
you. You should instruct your broker to vote your shares, following the
procedure provided by your broker.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy card is voted at
the Rockford special shareholder meeting. You can do this in one of three
ways. First, you can send a written notice stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy card.
Third, you can attend the Rockford special meeting and vote in person. Your
attendance alone will not, however, revoke your proxy. If you have instructed
a broker to vote your shares, you must follow the procedure provided by your
broker to change those instructions.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Rockford shareholders will receive written
instructions for exchanging their stock certificate(s) representing shares of
Rockford common stock for stock certificate(s) representing American Express
Common Shares.
Q: WHAT ARE THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER TO SHAREHOLDERS?
A: The exchange of shares of Rockford common stock for American Express Common
Shares in connection with the merger is intended to be tax-free to Rockford
shareholders for federal income tax purposes. You will, however, recognize
gain or loss with respect to any cash received for any fractional share of
American Express Common Shares. Your tax basis in the American Express Common
Shares that you will receive in connection with the merger will equal your
current tax basis in your Rockford common stock, decreased by the amount
allocable to any fractional share of American Express Common Shares. The
merger will not have any effect on American Express shareholders for federal
income tax purposes.
<PAGE>
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger in the first quarter of 1999. We are working
toward completing the merger as quickly as possible.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANIES?
A: Both Rockford and American Express file periodic reports and other
information with the Securities and Exchange Commission. You may read and
copy this information at the Commission's public reference facilities. Please
call the Commission at 1-800-SEC-0330 for information about these facilities.
This information is also available at the Internet site maintained by the
Commission at http://www.sec.gov and at the offices of the New York Stock
Exchange Inc. and the National Association of Securities Dealers, Inc. For a
more detailed description of the information available, please see page 54.
2
<PAGE>
SUMMARY
This Summary highlights selected information from this Proxy Statement-
Prospectus and does not contain all of the information that is important to
you. To understand the merger fully and for a more complete description of the
legal terms of the merger, you should read carefully this entire document and
the documents to which we refer you. For more information about the two
companies, see "Where You Can Find More Information" (Page 54). We have
included page references parenthetically to direct you to more complete
descriptions of the topics presented in this Summary.
THE COMPANIES
ROCKFORD INDUSTRIES, INC. (PAGE 18)
1851 East First Street, Suite 600
Santa Ana, California 92705
(714) 547-7166
Rockford is a specialty finance company that originates or acquires, sells
and services equipment leases. The underlying leases financed by Rockford
relate to a wide range of equipment, including medical, dental and diagnostic
equipment, computers and peripherals, computer software, telecommunications,
office and other equipment. The equipment generally has a purchase price of
less than $250,000. Such leases are commonly referred to as "small ticket
leases." Rockford initially funds the origination of its leases through its
line of credit facilities or from working capital and, upon achieving a
sufficient portfolio size, sells those leases principally through its
securitization programs and non-recourse sales. Rockford focuses on maximizing
the spread between the yield on its leases and its cost of funds by obtaining
favorable terms on its line of credit facilities and securitizations.
AMERICAN EXPRESS COMPANY (PAGE 20)
World Financial Center
200 Vesey Street
New York, New York 10285
(212) 640-2000
Through its subsidiaries, American Express is primarily engaged in the
business of providing travel related services, financial advisory services and
international banking services throughout the world. Travel related services
are offered principally through American Express Travel Related Services
Company, Inc. and its subsidiaries and include a variety of products and
services, including the American Express(R) Card, the Optima(R) Card and other
consumer and corporate lending products, the American Express(R) Travelers
Cheque and other stored value products, business expense management products
and services, tax preparation and bookkeeping services, corporate and consumer
travel products and services, magazine publishing, and management and merchant
transaction processing, point of sale and back office products and services.
U.S. consumer lending operations are conducted by American Express Centurion
Bank, whose deposits are insured by the Federal Deposit Insurance Corporation.
American Express Financial Corporation and its subsidiaries are engaged in
providing a variety of financial products and services to help individuals,
businesses and institutions establish and achieve their financial goals.
Products and services include financial planning and advice, insurance and
annuities, a variety of investment products, including investment certificates,
mutual funds and limited partnerships, investment advisory services, trust and
employee plan administration services, personal auto and homeowner's insurance
and retail securities brokerage services. American Express Bank Ltd., together
with its subsidiaries, offers products that meet the financial service needs of
four client groups: corporations, financial institutions, affluent individuals
and retail customers. Primary business lines are corporate banking and finance,
correspondent banking, private banking, personal financial services and global
trading. American Express Bank Ltd. does not do business in the United States
except as an incident to its activities outside the United States.
RXP ACQUISITION CORPORATION
World Financial Center
200 Vesey Street
New York, New York 10285
(212) 640-2000
RXP Acquisition Corporation is a corporation formed by American Express on
October 28, 1998 solely for use in the merger.
3
<PAGE>
THE MERGER (PAGE 22)
The Plan and Agreement of Merger is attached as Appendix A to this Proxy
Statement-Prospectus. We encourage you to read the Plan and Agreement of Merger
as it is the legal document that governs the merger.
If holders of the required percentages of Rockford common stock and Rockford
Series A Preferred Stock, voting as separate classes, approve and adopt the
Plan and Agreement of Merger and all other conditions to the merger are
satisfied or waived, where permissible, RXP Acquisition Corporation will be
merged with and into Rockford. Rockford will be the surviving corporation and
will become a wholly owned subsidiary of American Express. American Express and
Rockford anticipate that the merger will occur as promptly as practicable after
the Rockford special shareholder meeting.
WHAT YOU WILL RECEIVE (PAGE 22)
If the Plan and Agreement of Merger is approved and adopted and the merger
occurs, you will receive, for each share of Rockford common stock you own
immediately prior to the merger, $11.88 worth of American Express Common
Shares. You will also be entitled to receive cash instead of fractional shares
of American Express Common Shares. The number of American Express Common Shares
you will be entitled to receive will be determined by dividing $11.88 by the
average of the closing price per share of American Express Common Shares on the
New York Stock Exchange during the 10 consecutive trading days ending on the
trading day which is three full trading days prior to the date on which the
merger occurs. The closing price of American Express Common Shares at the time
of completion of the merger may be higher or lower than the "average of the
closing price per share" and, as a result the number of American Express Common
Shares you will be entitled to receive when the Merger is actually consummated
may be lower or higher than the number of American Express Common Shares that
could be purchased for $11.88 on such date.
TREATMENT OF OUTSTANDING OPTIONS (PAGE 37)
When we complete the merger, each outstanding option to purchase Rockford
common stock will be exercisable for American Express Common Shares pursuant to
the vesting schedule applicable to the option prior to the merger except that
(i) the exercise date of options held by certain officers will accelerate, and
(ii) the number of shares subject to each option and the option exercise price
will be adjusted to reflect the applicable terms of the merger. Such options
will continue to be subject to the same terms and conditions as set forth in
the Rockford Stock Option Plans and other applicable agreements in effect
immediately prior to the merger.
THE SPECIAL MEETING (PAGE 16)
At the special shareholder meeting, the holders of Rockford common stock and
Series A Preferred Stock, voting as separate classes, will be asked to approve
and adopt the principal terms of the Plan and Agreement of Merger. You may vote
at the special shareholder meeting if you were the record owner of Rockford
common stock or Series A Preferred Stock at the close of business on January 4,
1999. You will have one vote for each share of common stock and one vote for
each share of Series A Preferred Stock you own. At that date, there were
4,108,875 shares of common stock and 70,000 shares of Series A Preferred Stock
outstanding. The vote of a majority of the outstanding shares of common stock
and 66 2/3% of the outstanding shares of Series A Preferred Stock entitled to
vote is required to approve and adopt the Plan and Agreement of Merger. On the
record date, directors and executive officers of Rockford owned and had the
right to vote 2,204,000 shares of Rockford common stock (approximately 54% of
the shares of Rockford common stock then outstanding). We expect that they will
vote all of their shares in favor of the matters to be voted on at the Rockford
special meeting. Furthermore, Gerry Ricco--Rockford's President, Chief
Executive Officer and a member of the Board of Directors, Larry Hartmann--
Rockford's Executive Vice President--Sales and a member of the Board of
Directors and Brian Seigel--Rockford's Executive Vice President--Marketing,
Secretary and a member of the Board of Directors have entered into an agreement
with American Express, pursuant to which each has granted to American Express
an option to purchase all shares of Rockford common stock owned of record by
him upon the occurrence of certain events,
4
<PAGE>
granted to American Express an irrevocable proxy with respect to the shares of
Rockford common stock owned of record by him and, in the event American Express
does not exercise its rights with respect to the irrevocable proxy or option,
each of Messrs. Ricco, Hartmann and Seigel has agreed to vote the shares of
Rockford common stock owned by him in favor of the merger and as otherwise
directed by American Express. The agreement with American Express covers
2,204,000 shares of Rockford common stock (or approximately 54% of the shares
outstanding as of the record date) owned by Messrs. Ricco, Hartmann and Seigel
in the aggregate. Also, the holder of 100% of Rockford's Series A Preferred
Stock has entered into an agreement with Rockford and American Express which
provides that it will vote its shares in favor of the merger.
OPINION OF FINANCIAL ADVISOR (PAGE 27)
In deciding to approve the merger, your Board of Directors considered the
opinion of its financial advisor, Piper Jaffray Inc., that, as of the date of
the opinion, the consideration proposed to be received by the common
shareholders of Rockford in the merger was fair, from a financial point of
view, to the common shareholders of Rockford. We have attached as Appendix B
the written opinion of Piper Jaffray dated November 9, 1998. You should read it
carefully to understand the assumptions made, matters considered and
limitations of the review undertaken by Piper Jaffray in providing its opinion.
OUR REASONS FOR THE MERGER; RECOMMENDATIONS TO SHAREHOLDERS (PAGE 26)
A Special Committee of the Rockford Board and the Rockford Board as a whole
unanimously approved and adopted the Plan and Agreement of Merger and the
merger, believe that the merger is in the best interests of Rockford and its
shareholders and unanimously recommend that you vote to approve and adopt the
principal terms of the Plan and Agreement of Merger at the Rockford special
shareholders meeting.
In reaching its decision, the Special Committee and the Rockford Board
considered a number of factors, including the following:
(1) the fact that the Plan and Agreement of Merger resulted from a
process that the Rockford Board believes was conducted in such a manner as
to result in the most attractive alternative available to the shareholders
of Rockford (see "The Merger-- Background of the Merger");
(2) the information presented by Piper Jaffray at the November 6, 1998
meeting of the Rockford Board and the opinion of Piper Jaffray;
(3) the Rockford Board's belief that the analyses of Piper Jaffray
supported the Rockford Board's conclusion that the merger consideration is
fair from a financial point of view to, and is in the best interests of,
Rockford shareholders;
(4) the terms and structure of the merger and the terms and conditions of
the Plan and Agreement of Merger;
(5) information concerning the business, assets, capital structure,
financial performance and condition and prospects of Rockford and American
Express;
(6) current and historical market prices and trading information with
respect to each company's common stock;
(7) the fact that the American Express Common Shares to be exchanged for
Rockford common stock represent ownership interests in a significantly
larger company with a significantly broader, more active trading market;
(8) the fact that, under the Plan and Agreement of Merger, the merger is
expected to be treated as a tax-free reorganization under the Internal
Revenue Code;
(9) the history of Rockford's contacts with other prospective acquirors;
5
<PAGE>
(10) the Board's belief in the financial strength of American Express and
the strength of American Express' management;
(11) the fact that, under the Plan and Agreement of Merger, the Rockford
Board is permitted, under certain circumstances and subject to certain
notices and other requirements specified in the Plan and Agreement of
Merger, to provide information to or enter into discussions or negotiations
with any person or entity that makes an unsolicited, materially superior
acquisition proposal, as defined in the Plan and Agreement of Merger (see
"The Merger Agreement--Certain Covenants--No Solicitation");
(12) the strength of American Express' Common Shares and its historical
price stability when compared with broad market indices, in contrast to the
greater volatility and risk to holders of Rockford's common stock; and
(13) the anticipated benefits, such as access to a broader range of
products and services, to Rockford's employees and customers of the
association of Rockford's business with American Express.
INTERESTS OF PERSONS INVOLVED IN THE MERGER
THAT ARE DIFFERENT FROM YOURS (PAGE 31)
In considering the recommendation of the Rockford Board regarding the merger,
you should be aware of the interests which certain executive officers and
directors of Rockford have in the merger that are different from your and their
interests as shareholders.
Gerry Ricco--Rockford's President, Chief Executive Officer and a member of
the Board of Directors and Larry Hartmann--Rockford's Executive Vice
President--Sales and a member of the Board of Directors have entered into
amendments to their existing employment agreements with Rockford. These
amendments will be effective only if the merger occurs and provide for salary
and bonus arrangements that will apply after the merger. In addition, each of
Messrs. Ricco and Hartmann will receive a bonus of $60,000 within 30 days after
the merger is completed and a bonus of $63,000 if they are employed by Rockford
90 days after the merger is completed.
Brian Seigel--Rockford's Executive Vice President--Marketing, Secretary and a
member of the Board of Directors has entered into an agreement with Rockford
that provides that, upon consummation of the merger, Mr. Seigel's employment
agreement with Rockford will be terminated and Mr. Seigel will receive a
payment of $541,429, less applicable taxes, as payment in full and complete
settlement of any claims Mr. Seigel may have under his employment agreement or
any other claims he may have against Rockford.
We have agreed to pay certain employees bonuses if they remain employed by us
until the merger is completed. The total amount of that bonus pool is $237,000,
excluding the bonuses payable to Messrs. Ricco and Hartmann described above.
Bonuses totaling $130,000 of the bonus pool have been allocated to executive
officers of Rockford.
Under the terms of existing option agreements, if the merger is completed,
stock options to purchase an aggregate of 228,425 shares of Rockford common
stock will become exercisable, including stock options to purchase 189,000
shares of Rockford common stock held by executive officers of Rockford.
American Express has agreed to continue in effect the indemnification
provisions, or indemnification provisions substantially similar to those,
currently in effect for Rockford's directors and officers and to maintain
directors' and officers' liability insurance covering Rockford's directors and
officers for a period of six years.
Messrs. Ricco, Hartmann and Seigel have also entered into a Shareholders
Option Agreement with American Express that is described under the caption "The
Shareholders Option Agreement." In addition, American Express has agreed to
indemnify Messrs. Ricco, Hartmann and Seigel in certain events following an
exercise by American Express of the option granted pursuant to the Shareholders
Option Agreement.
6
<PAGE>
SHAREHOLDERS OPTION AGREEMENT (PAGE 44)
As an inducement to American Express to enter into the Plan and Agreement of
Merger, Gerry Ricco, Larry Hartmann and Brian Seigel entered into a
Shareholders Option Agreement with American Express pursuant to which Messrs.
Ricco, Hartmann and Seigel have (1) granted to American Express an option to
purchase the shares of Rockford common stock owned by them of record upon the
occurrence of certain events, (2) granted to American Express an irrevocable
proxy with respect to all of the shares of Rockford common stock owned by them
of record, and (3) agreed, in the event American Express does not exercise its
rights with respect to the option or irrevocable proxy, to vote their shares of
Rockford common stock in favor of the merger and otherwise as directed by
American Express.
If American Express elects to purchase the stock of Messrs. Ricco, Hartmann
and Seigel and subsequently sells the stock to a third party within one year
after such purchase, American Express has agreed to pay Messrs. Ricco, Hartmann
and Seigel one-half of the excess of the sale price over $13.38.
As of the record date, Messrs. Ricco, Hartmann and Seigel owned and had the
right to vote a total of 2,204,000 shares of Rockford common stock,
approximately 54% of the total shares outstanding on the record date.
CONDITIONS TO COMPLETION OF MERGER (PAGE 41)
The completion of the merger depends on the satisfaction of a number of
conditions, including, without limitation, the following:
1. Rockford shareholders must approve the principal terms of the merger
agreement;
2. we must receive all required regulatory consents and approvals and any
waiting periods required by law must have passed;
3. there must be no governmental order blocking completion of the merger,
no proceedings by a government body trying to block the merger and no
significant litigation with respect to the merger;
4. the New York Stock Exchange must approve for listing the shares that
American Express will issue in the merger;
5. Rockford must have at least $21 million in cash or cash equivalents
including cash and cash equivalents designated as restricted cash on its
balance sheet;
6. Rockford must have retained all cash proceeds obtained in connection
with the exercise of common stock options;
7. from the date of the merger agreement to the time the merger occurs,
Rockford must not have suffered any Material Adverse Change (as defined in
the Plan and Agreement of Merger);
8. the representations and warranties made by Rockford at the signing of
the Plan and Agreement of Merger must be true and correct in all material
respects and, in certain cases, in all respects at the closing date;
9. we must receive a legal opinion confirming the tax-free nature of the
merger; and
10. confirmation of certain other legal and factual matters.
Unless prohibited by law, either American Express or Rockford could elect to
waive a condition that has not been satisfied and complete the merger anyway.
We cannot be certain whether or when any of these conditions will be satisfied,
or waived where permissible, or that we will complete the merger.
TERMINATION FEES (PAGE 42)
Rockford has agreed to pay American Express a $2 million fee if:
1. the Rockford Board causes Rockford to enter into an agreement for an
acquisition proposal with a third party;
2. Rockford terminates the Plan and Agreement of Merger because the
Rockford Board has withdrawn or materially modified in a manner adverse to
American Express the Rockford Board's recommendation of the merger or has
approved or recommended another acquisition proposal;
3. the Plan and Agreement of Merger is terminated by American Express due
to the
7
<PAGE>
withdrawal or modification by the Rockford Board of its recommendation of
the merger or due to the approval or recommendation of an acquisition
proposal of a third party by the Rockford Board; or
4. either Rockford or American Express terminates the Plan and Agreement
of Merger due to the failure to receive the required vote from the Rockford
shareholders if, at the time of the shareholders' vote, an acquisition
proposal of a third party had been announced.
In addition, if Rockford enters into an agreement or consummates an
Acquisition Proposal with another person within one year of having made the
above payment, Rockford has agreed to pay American Express an additional fee
equal to 25% of the difference between the aggregate value of the third party
transaction to the Rockford shareholders and the aggregate value of the merger
to the Rockford shareholders.
TERMINATION OF MERGER AGREEMENT (PAGE 42)
The two companies can agree at any time to terminate the Plan and Agreement
of Merger before completing the merger, even if the Rockford shareholders have
already voted to approve it.
Either company can also terminate the merger agreement, among other reasons:
1. if we do not complete the merger by June 30, 1999, unless extended
according to the terms of the Plan and Agreement of Merger;
2. if any government body issues an injunction or order enjoining the
performance by the other party of its obligations under the Plan and
Agreement of Merger that is not withdrawn by June 30, 1999 (subject to any
applicable extension according to the terms of the Plan and Agreement of
Merger);
3. if the Rockford shareholders do not approve the Plan and Agreement of
Merger;
4. if the Rockford Board of Directors withdraws or modifies its approval
of the merger or approves or recommends another acquisition proposal;
5. if the other company violates, in a material way, any of its
representations, warranties or obligations under the Plan and Agreement of
Merger; or
6. if events occur which render impossible the satisfaction of one or
more of the conditions to closing by the other party.
In addition, American Express can terminate the Plan and Agreement of Merger
if holders of 5% or more of the outstanding shares of Rockford common stock
have exercised their dissenters rights.
EXCHANGE OF CERTIFICATES (PAGE 23)
When the merger occurs, American Express will deposit with an unrelated third
party, for the benefit of holders of shares of Rockford common stock,
certificates representing the American Express Common Shares which holders of
shares of Rockford common stock are entitled to receive as a result of
consummation of the merger. As soon as practicable after the merger, American
Express will instruct the third party to mail to holders of Rockford common
stock so entitled (a) a letter of transmittal and (b) instructions specifying
how to exchange shares of Rockford common stock for American Express Common
Shares. Upon properly returning their shares of Rockford common stock, the
signed letter of transmittal and other reasonably required documents, former
holders of Rockford common stock will be entitled to receive American Express
Common Shares and cash instead of fractional shares. SHAREHOLDERS SHOULD NOT
SEND THEIR CERTIFICATES WITH THEIR PROXY CARD.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES (PAGE 32)
The merger is intended to be tax-free to Rockford shareholders, except with
respect to cash received instead of fractional shares of American Express
Common Shares. The merger is conditioned upon the receipt of a legal opinion to
that effect.
Tax matters can be complicated and the tax consequences of the merger to you
will depend on the facts of your own situation. You should consult your own tax
advisors to understand fully the tax consequences of the merger to you.
8
<PAGE>
ACCOUNTING TREATMENT (PAGE 33)
The merger will be accounted for by American Express under the "purchase"
method of accounting. Once the merger occurs, the assets and liabilities and
results of operations of Rockford will be consolidated into the assets and
liabilities and results of operations of American Express.
DISSENTER'S RIGHTS (PAGE 34)
California law permits holders of Rockford common stock and preferred stock
to dissent from the merger and to have the fair value of their stock appraised
and paid to them in cash. To do this, the holders of theses shares must follow
certain procedures, including filing notices with us and, if they are entitled
to vote, voting against the merger. If you hold shares of Rockford common stock
and you dissent from the merger and follow the required formalities, your
shares will not become shares of American Express Common Shares. Instead, your
only right will be to receive the appraised value of your shares in cash.
REGULATORY APPROVALS (PAGE 33)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 prohibits Rockford
and American Express from completing the merger until they have furnished
certain information and materials to the Antitrust Division of the Department
of Justice and the Federal Trade Commission and the required waiting period has
ended.
COMPARISON OF RIGHTS OF ROCKFORD SHAREHOLDERS AND AMERICAN EXPRESS SHAREHOLDERS
(PAGE 46)
The rights of Rockford shareholders are governed by California law and
Rockford's Restated Articles of Incorporation and Amended and Restated Bylaws
whereas the rights of American Express' shareholders are governed by New York
law and American Express' Restated Certificate of Incorporation and Bylaws.
Upon the completion of the merger, Rockford shareholders will become
shareholders of American Express, and therefore their rights will be governed
by New York law and by American Express' Restated Certificate of Incorporation
and Bylaws. As a result of these different governing laws and organizational
documents, Rockford shareholders will have different rights as holders of
American Express Common Shares than they currently have as holders of Rockford
common stock or Rockford Series A Preferred Stock.
9
<PAGE>
MARKET PRICE DATA
Shares of Rockford common stock are traded on the Nasdaq National Market
under the symbol "ROCF." American Express Common Shares are traded on the New
York Stock Exchange under the symbol "AXP." The table below sets forth, for the
fiscal quarters indicated, the high and low closing prices of shares of
Rockford common stock and American Express Common Shares as reported by the
Nasdaq National Market and the New York Stock Exchange, respectively.
<TABLE>
<CAPTION>
AMERICAN
ROCKFORD EXPRESS
------------- --------------
HIGH LOW HIGH LOW
------ ------ ------- ------
<S> <C> <C> <C> <C>
1996
First Quarter................................... $16.25 $ 8.75 $ 49.50 $38.75
Second Quarter.................................. 19.88 16.00 50.63 43.38
Third Quarter................................... 19.50 13.63 46.25 40.88
Fourth Quarter.................................. 22.38 10.50 59.63 45.75
1997
First Quarter................................... 12.50 7.00 69.75 54.50
Second Quarter.................................. 9.63 6.13 78.63 58.13
Third Quarter................................... 11.75 7.75 84.38 75.50
Fourth Quarter.................................. 11.50 7.50 89.56 74.75
1998
First Quarter................................... 9.25 6.94 97.38 79.06
Second Quarter.................................. 10.75 7.13 113.75 92.38
Third Quarter................................... 12.63 7.50 117.88 69.50
Fourth Quarter.................................. 11.81 5.00 108.94 69.50
</TABLE>
On November 9, 1998, the last full trading day prior to the public
announcement of the proposed merger, the reported closing price of Rockford
common stock on the Nasdaq National Market was $10 7/8 per share, and the
reported closing price of American Express Common Shares on the New York Stock
Exchange was $94 7/8 per share.
On January 5, 1999, the most recent practicable date prior to the printing of
this Proxy Statement-Prospectus, the reported closing price of Rockford common
stock on the Nasdaq National Market was $[ ] per share, and the reported
closing price of American Express Common Shares on the New York Stock Exchange
was $[ ] per share.
Because the market price of American Express Common Shares is subject to
fluctuation, the market value of the shares of American Express Common Shares
that holders of Rockford common stock will be entitled to receive in the merger
may increase or decrease following consummation of the merger. YOU ARE URGED TO
OBTAIN A CURRENT MARKET QUOTATION FOR AMERICAN EXPRESS COMMON SHARES.
10
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The table below sets forth historical earnings per share, cash dividends paid
per share and book value per share data of American Express and Rockford for
the nine months ended September 30, 1998 and the year ended December 31, 1997,
and unaudited pro forma combined per share data of American Express and
unaudited pro forma equivalent per share data of Rockford for the nine months
ended September 30, 1998 and for the year ended December 31, 1997. The data
should be read in conjunction with the historical financial statements and
notes thereto incorporated by reference in this Proxy Statement-Prospectus and
the selected historical financial data elsewhere in this Proxy Statement-
Prospectus. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
AMERICAN EXPRESS ROCKFORD
-------------------------- --------------------------
NINE MONTHS NINE MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1998 1997 1998 1997
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
HISTORICAL:
Earnings per share
(diluted).............. $ 3.47 $ 4.15 $ .38 $ .48
Cash dividends paid per
share.................. $ .675 $ .90 -- --
Book value per share.... $19.28(1) $19.29(1) $5.33 $4.95
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
PRO FORMA COMBINED:
Earnings per share................................... $ 3.46 $ 4.15
Cash dividends paid per share........................ $ .675 $ .90
Book value per share................................. $19.38 $19.38
ROCKFORD PRO FORMA EQUIVALENTS(2):
Earnings per share .................................. $ .04 $ .06
Cash dividends per share............................. $ 0 $ 0
Book value per share................................. $ .62 $ .57
</TABLE>
- --------
(1) Excludes the effect of SFAS No. 115.
(2) We have assumed Rockford shareholders will receive .1159 shares of American
Express Common Shares for each share of Rockford common stock. This assumed
conversion rate is based on the average closing price per share of American
Express Common Shares on the New York Stock Exchange during the
10 consecutive trading days ending November 30, 1998.
11
<PAGE>
AMERICAN EXPRESS SELECTED CONSOLIDATED FINANCIAL DATA
We base the selected consolidated financial data in the following table on
the historical financial information that American Express has presented in its
prior filings with the Securities and Exchange Commission. You should read the
selected consolidated financial data which follows in conjunction with the
audited consolidated financial statements and accompanying notes and the
unaudited condensed consolidated financial statements and accompanying notes of
American Express in the documents which are incorporated by reference in this
Proxy Statement-Prospectus. The condensed consolidated financial statements of
American Express as of September 30, 1998 and 1997 and for the periods then
ended are unaudited; however, in American Express' opinion, they reflect all
adjustments, consisting only of normal recurring items, necessary for a fair
presentation of the financial position and results of operations for such
periods. See "Where You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------ -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net revenues............ $ 14,069 $ 13,086 $ 17,760 $ 16,380 $ 15,921 $14,342 $13,301
Percent increase
(decrease)............. 8% 8% 8% 3% 11% 8% (7)%
Expenses................ 11,857 11,026 15,010 13,716 13,738 12,451 10,975
Income from continuing
operations before
accounting changes:
As reported........... 1,611 1,498 1,991 1,901 1,564 1,380 1,605
Adjusted*............. 1,611 1,498 1,991 1,739 1,564 1,380 1,172
Net income.............. 1,611 1,498 1,991 1,901 1,564 1,413 1,478
Return on average
shareholder's
equity**............... 23.9% 23.3% 23.5% 22.8% 22.0% 20.3% 20.9%
BALANCE SHEET:
Cash and cash
equivalents............ $ 6,594 $ 4,614 $ 4,179 $ 2,677 $ 3,200 $ 3,433 $ 3,312
Accounts receivable and
accrued interest, net.. 20,841 20,503 21,774 20,491 19,914 17,147 16,142
Investments............. 40,365 39,182 39,648 38,339 42,561 40,108 39,308
Loans, net.............. 19,966 19,294 20,109 18,518 16,091 14,722 14,796
Total assets............ 120,914 117,642 120,003 108,512 107,405 97,006 94,132
Customer's deposits..... 10,032 9,724 9,444 9,555 9,889 10,013 11,131
Travelers Cheques
outstanding............ 6,160 6,134 5,634 5,838 5,697 5,271 4,800
Insurance and annuity
reserves............... 25,499 26,210 26,165 25,674 25,157 24,849 23,406
Short-term debt......... 21,047 18,511 20,570 18,402 17,654 14,810 12,489
Long-term debt.......... 7,324 8,080 7,873 6,552 7,570 7,162 8,561
Shareholders' equity.... 9,403 9,118 9,574 8,528 8,220 6,433 8,734
COMMON SHARE STATISTICS:
Earnings per share from
continuing operations:
Basic................. $ 3.53 $ 3.22 $ 4.29 $ 4.02 $ 3.19 $ 2.74 $ 3.25
Basic adjusted*....... $ 3.53 $ 3.22 $ 4.29 $ 3.67 $ 3.19 $ 2.74 $ 2.35
Diluted............... $ 3.47 $ 3.12 $ 4.15 $ 3.89 $ 3.10 $ 2.69 $ 3.18
Diluted adjusted*..... $ 3.47 $ 3.12 $ 4.15 $ 3.56 $ 3.10 $ 2.69 $ 2.32
Percent increase
(decrease):
Basic................. 10% 17% 7% 26% 16% (16%) 246%
Basic adjusted*....... 10% 17% 17% 15% 16% 17% 68%
Diluted............... 11% 17% 7% 25% 15% (15%) 238%
Diluted adjusted*..... 11% 17% 17% 15% 15% 16% 66%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------- ----------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings per share:
Basic...................... $ 3.53 $ 3.22 $ 4.29 $ 4.02 $ 3.19 $ 2.81 $ 2.99
Diluted.................... $ 3.47 $ 3.12 $ 4.15 $ 3.89 $ 3.10 $ 2.75 $ 2.93
Cash dividends declared per
share:
Actual..................... $ .675 $ .675 $ .90 $ .90 $ .90 $ .925 $ 1.00
Pro forma.................. $ .675 $ .675 $ .90 $ .90 $ .90 $ .90 $ .90
Book value per share:
Actual..................... $ 20.79 $19.57 $20.53 $18.04 $16.60 $12.57 $16.81
Pro forma**................ $ 19.28 $18.41 $19.29 $17.22 $14.79 $13.35 $11.81
Market price per share:
High....................... $118.63 $85.25 $91.50 $60.38 $45.13 $32.00 $32.32
Low........................ $ 68.00 $53.63 $53.63 $38.63 $29.00 $23.17 $19.75
Close...................... $ 77.63 $81.88 $89.25 $56.50 $41.38 $29.50 $27.25
Average common shares
outstanding for earnings per
share:
Basic...................... 456 465 464 472 485 492 481
Diluted.................... 465 480 479 488 499 512 501
Shares outstanding at year
end......................... N/A N/A 466 473 483 496 490
Number of shareholders of
record...................... N/A N/A 53,576 55,803 57,010 60,520 58,179
OTHER STATISTICS:
Number of employees at year
end:
United States.............. N/A N/A 44,691 43,688 41,700 43,421 40,342
Outside United States...... N/A N/A 28,929 28,611 28,647 28,991 24,151
------- ------ ------ ------ ------ ------ ------
Total..................... N/A N/A 73,620 72,299 70,347 72,412 64,493
======= ====== ====== ====== ====== ====== ======
</TABLE>
- --------
Note: Historical Common Share prices have been adjusted to reflect the Lehman
Brothers Holdings Inc. ("Lehman") spin-off at a ratio based on the trading
prices of American Express' Common Shares and shares of Lehman common stock on
May 31, 1994. Pro forma cash dividends declared and book value per share have
also been adjusted to reflect the Lehman spin-off. For purposes of the pro
forma book value per share calculation, it is assumed that the spin-off
includes the book value of American Express' investment in Lehman at the
balance sheet date plus the capital infusion of approximately $904 million that
was made immediately prior to the spin-off.
* Adjusted to exclude: in 1996--a $300 million gain on the exchange of
American Express' Debt Exchangeable for Common Stock ("DECS") and a $138
million restructuring charge; 1993--a $433 million gain on the sale of First
Data Corporation shares.
** Return on average shareholders' equity is based on adjusted income from
continuing operations before accounting changes and excludes the effect of
SFAS No. 115 beginning in 1994. In addition, book value per share excludes
the effect of SFAS No. 115 beginning in 1994.
13
<PAGE>
ROCKFORD SELECTED CONSOLIDATED FINANCIAL DATA
We base the selected consolidated financial data in the following table on
the historical financial information that Rockford has presented in its prior
filings with the Securities and Exchange Commission. You should read the
selected consolidated financial data which follows in conjunction with the
audited consolidated financial statements and accompanying notes and the
unaudited condensed consolidated financial statements and accompany notes of
Rockford in the documents which are incorporated by reference in this Proxy
Statement-Prospectus. The condensed consolidated financial statements of
Rockford as of September 30, 1998 and 1997 and for the periods then ended are
unaudited; however, in Rockford's opinion, they reflect all adjustments,
consisting only of normal recurring items, necessary for a fair presentation of
the financial position and results of operations for such periods. See "Where
You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.............. $ 15,772 $ 14,512 $ 19,108 $104,539 $ 74,330 $ 54,351 $40,702
Costs................. 1,281 1,568 2,032 85,380 61,206 46,745 35,377
Gross profit.......... 14,991 12,944 17,076 19,159 13,124 7,606 5,325
Selling, general and
administrative
expenses............. 11,735 9,079 13,613 15,296 9,637 6,056 4,229
Income before income
taxes................ 2,756 3,865 3,463 3,863 3,487 1,550 1,096
Income taxes(1)....... 1,077 1,500 1,343 1,545 1,395 1,845 28
Net income (loss)..... 1,679 2,365 2,120 2,318 2,092 (295) 1,068
Basic net income per
share(2)............. 0.38 0.55 0.49 0.54 0.64 -- --
Diluted net income per
share(2)............. 0.38 0.53 0.48 0.52 0.60 -- --
PRO FORMA STATEMENT OF
OPERATIONS DATA(3):
Historical income
before income taxes.. $ 1,550 $ 1,096
Pro forma provision
for income taxes..... 620 438
Pro forma net income.. 930 658
Pro forma net income
per share(2)......... .38 .27
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:
Basic................. 4,108 4,106 4,106 4,103 3,219 2,454 2,454
Diluted............... 4,471 4,422 4,441 4,452 3,504 2,454 2,454
OTHER DATA:
Cost of equipment
financed............. $167,828 $122,241 $166,748 $131,267 $ 87,881 $ 63,579 $48,798
Number of financed
contracts............ 6,656 5,162 7,040 5,587 3,426 3,122 2,208
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.......... $116,834 $119,588 $125,067 $157,698 $184,658 $129,542 $98,041
Total liabilities(4).. 93,355 97,428 103,176 137,814 167,014 126,732 94,516
-------- -------- -------- -------- -------- -------- -------
Total shareholders'
equity............... $ 23,479 $ 22,159 $ 21,891 $ 19,884 $ 17,644 $ 2,810 $ 3,525
======== ======== ======== ======== ======== ======== =======
</TABLE>
14
<PAGE>
- --------
(1) Effective December 31, 1994, Rockford revoked its election to be taxed as
an S Corporation for federal and certain state income tax purposes. In
connection with this election, Rockford reclassified its retained earnings
at December 31, 1994 of $2,807,622 to Common Stock. As a result of
Rockford's conversion to a C Corporation, Rockford recorded a one-time
charge against earnings for deferred income tax liabilities of
approximately $1,825,000 (reflecting the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes)
at December 31, 1994.
(2) Historical net income per share has not been shown prior to Rockford's
election to be taxed as a C Corporation on December 31, 1994, because it is
not indicative of Rockford's ongoing operations. Pro forma net income per
share is shown for prior periods.
(3) Represents adjustments for federal and certain state income taxes as if
Rockford had been taxed as a C Corporation rather than an S Corporation for
all periods presented.
(4) Consists primarily of nonrecourse debt. The release of SFAS No. 125 caused
Rockford to reassess its balance sheet presentation of certain assets and
liabilities in light of current accounting literature and this new
standard. This reassessment resulted in the determination that the assets
and liabilities, previously recorded on Rockford's balance sheet as
discounted lease rentals assigned to lenders and nonrecourse debt, should
be offset for associated finance transactions in which Rockford has no
continuing economic interest and in which Rockford is legally relieved of
all obligations as a result of the sale. Consequently, Rockford has
recorded a reclassification of $39,939,044 resulting in a decrease of
discounted lease rentals assigned to lenders and nonrecourse debt at
December 31, 1995, in order to conform the December 31, 1995 balance sheet
to the December 31, 1996 presentation. This reclassification had no impact
on Rockford's statements of income, cash flows, or shareholders' equity.
15
<PAGE>
ROCKFORD SPECIAL MEETING
GENERAL
This Proxy Statement-Prospectus is being mailed on or about January 11, 1999
to the holders of record at the close of business on the Rockford Record Date
(as defined below) (the "Rockford Shareholders") of Rockford's common stock, no
par value per share ("Rockford Common Stock") and Rockford's Series A Preferred
Stock ("Rockford Preferred Stock") and is accompanied by the Notice of Special
Meeting and a form of proxy that is solicited by the Rockford Board of
Directors for use at the Special Meeting of Rockford Shareholders (the "Special
Meeting") to be held on February 12, 1999, at 10:00 a.m., local time, at 1851
East First Street, Suite 600, Santa Ana, California and at any adjournments or
postponements thereof.
MATTERS TO BE CONSIDERED
At the Special Meeting, Rockford Shareholders will be asked to consider and
vote upon a proposal to approve the principal terms of a Plan and Agreement of
Merger, dated November 9, 1998 (the "Merger Agreement"), among Rockford,
American Express and RXP Acquisition Corporation and the transactions
contemplated thereby, including the merger (the "Merger") of RXP Acquisition
Corporation with and into Rockford. The Rockford Shareholders may also be asked
to vote upon a proposal to adjourn or postpone the Rockford Special Meeting,
which adjournment or postponement could be used for the purpose, among others,
of allowing additional time for the soliciting of additional votes to approve
the Merger Agreement.
PROXIES
If you are a Rockford Shareholder, you may use the accompanying proxy if you
are unable to attend the Special Meeting in person or wish to have your shares
voted by proxy even if you do attend the Special Meeting. You may revoke any
proxy given by you pursuant to this solicitation by delivering to the Corporate
Secretary of Rockford, prior to or at the Special Meeting, a written notice
revoking the proxy or a duly executed proxy relating to the same shares bearing
a later date or by attending the Special Meeting and electing to vote in
person; however, your attendance at the Special Meeting will not in and of
itself constitute a revocation of a proxy. You should address any written
notice of revocation and other communications with respect to the revocation of
Rockford proxies to the Corporate Secretary of Rockford at 1851 East First
Street, Suite 600, Santa Ana, California 92705. In all cases, the latest dated
proxy revokes an earlier dated proxy, regardless of which method is used to
give or revoke a proxy, or if different methods are used to give and revoke a
proxy. For such notice of revocation or later proxy to be valid, however, it
must actually be received by Rockford prior to the vote of the Rockford
Shareholders at the Special Meeting.
All shares represented by valid proxies received pursuant to this
solicitation, and not revoked before they are exercised, will be voted in the
manner specified therein. If you do not specify how your proxy is to be voted,
it will be voted in favor of adoption of the principal terms of the Merger
Agreement and the transactions contemplated thereby. The Rockford Board is
unaware of any other matters that may be presented for action at the Special
Meeting. If other matters do properly come before the Special Meeting, however,
it is intended that shares represented by proxies in the accompanying form will
be voted or not voted by the persons named in the proxies, in their discretion.
SOLICITATION OF PROXIES
The cost of soliciting the proxies from the Rockford Shareholders will be
borne by Rockford, except that American Express has agreed to pay one-half of
the printing and mailing costs. In addition to the solicitation of the proxies
by mail, Rockford will request banks, brokers and other record holders to send
proxies and proxy material to the beneficial owners of the stock and secure
their voting instructions, if necessary. Rockford will reimburse such record
holders for their reasonable expenses in so doing.
16
<PAGE>
RECORD DATE AND VOTING RIGHTS
Record Date. The Rockford Board has fixed January 4, 1999 as the record date
for the determination of the Rockford Shareholders entitled to receive notice
of and to vote at the Special Meeting (the "Record Date"). Accordingly, only
Rockford Shareholders of record at the close of business on the Record Date
will be entitled to notice of and to vote at the Special Meeting. At the close
of business on the Record Date, there were 4,108,875 and 70,000 shares,
respectively, of Rockford Common Stock and Rockford Preferred Stock entitled to
vote at the Special Meeting.
Quorum Requirement. The presence, in person or by proxy, of shares of
Rockford Common Stock and Rockford Preferred Stock representing a majority of
the total voting power of each of such class of shares entitled to vote on the
Record Date is necessary to constitute a quorum at the Special Meeting.
Voting Rights. Each share of Rockford Common Stock and Rockford Preferred
Stock outstanding on the Record Date entitles its holder to one vote as to (i)
the proposal to adopt the principal terms of the Merger Agreement and the
transactions contemplated thereby and (ii) any other proposal that may properly
come before the Special Meeting.
Vote Required. Under the California General Corporation Law (the "CGCL") and
the Restated Articles of Incorporation of Rockford, approval of the Merger
Agreement requires the affirmative vote of the holders of a majority of the
outstanding shares of Rockford Common Stock and 66 2/3% of the outstanding
shares of Rockford Preferred Stock, voting as separate classes.
Abstentions and Broker Non-Votes. Rockford intends to count shares of
Rockford Common Stock and Rockford Preferred Stock present in person at the
Special Meeting but not voting, and shares of Rockford Common Stock and
Rockford Preferred Stock for which it has received proxies but with respect to
which holders of such shares have abstained, as present at the Rockford Special
Meeting for purposes of determining the presence or absence of a quorum for the
transaction of business. Brokers who hold shares of Rockford Common Stock in
"street" name for customers who are the beneficial owners of such shares are
prohibited from giving a proxy to vote shares held for such customers with
respect to the matters to be considered and voted at the Special Meeting
without specific instructions from such customers. Shares of Rockford Common
Stock represented by proxies returned by a broker holding such shares in
nominee or "street" name will be counted for purposes of determining whether a
quorum exists, even if such shares are broker non-votes. Abstentions from
voting and broker non-votes will have the same effect as votes against the
Merger Agreement and the merger.
Because adoption of the Merger Agreement requires the affirmative vote of a
majority of outstanding shares of Rockford Common Stock and 66 2/3% of
outstanding shares of Rockford Preferred Stock, abstentions and broker non-
votes will have the same effect as negative votes. Accordingly, the Rockford
Board urges Rockford shareholders to complete, date and sign the accompanying
proxy and return it promptly in the enclosed, postage-paid envelope.
As of the Record Date, approximately 2,204,000 shares of Rockford Common
Stock, or approximately 54% of the shares entitled to vote at the Special
Meeting, were owned by directors and executive officers of Rockford. It is
currently expected that each such director and executive officer of Rockford
will vote the shares of Rockford Common Stock beneficially owned by him or her
for approval of the Merger Agreement and the transactions contemplated thereby.
Furthermore, Gerry Ricco--Rockford's President, Chief Executive Officer and a
member of the Board of Directors, Larry Hartmann--Rockford's Executive Vice
President--Sales and a member of the Board of Directors and Brian Seigel--
Rockford's Executive Vice President--Marketing, Secretary and a member of the
Board of Directors have entered into an agreement with American Express
pursuant to which each has granted to American Express, an option to purchase
all shares of Rockford Common Stock owned of record by him upon the occurrence
of certain events, an irrevocable proxy to vote all shares of Rockford Common
Stock owned of record by him and, in the event American Express does not
exercise its rights with respect to the irrevocable proxy or option, each of
Messrs. Ricco, Hartmann and Seigel
17
<PAGE>
has agreed to vote the shares of Rockford Common Stock owned by him in favor of
the Merger and as otherwise directed by American Express. As of the Record
Date, Messrs. Ricco, Hartmann and Seigel were entitled to vote approximately
54% of the shares of Rockford Common Stock. If the proposal to be voted upon is
the approval of the principal terms of the Merger Agreement, in the event
American Express has exercised its rights under the irrevocable proxy American
Express has agreed to vote for the approval of that proposal. See "The
Shareholders Option Agreement." Also, the holder of 100% of Rockford's
Preferred Stock has entered into an agreement with Rockford and American
Express which provides that it will vote its shares in favor of the Merger.
RECOMMENDATION OF THE ROCKFORD BOARD
The Rockford Board has, by the unanimous vote of all directors present,
approved the Merger Agreement and the transactions contemplated thereby. The
Rockford Board believes that the Merger Agreement and the transactions
contemplated thereby are in the best interests of Rockford and the Rockford
Shareholders, and unanimously recommends that the Rockford Shareholders vote
"FOR" approval of the principal terms of the Merger Agreement and the
transactions contemplated thereby. See "The Merger--Reasons of Rockford for the
Merger."
INFORMATION ABOUT ROCKFORD
GENERAL
Rockford is a specialty finance company that originates or acquires, sells
and services equipment leases. The underlying leases financed by Rockford
relate to a wide range of equipment, including medical, dental and diagnostic
equipment, computers and peripherals, computer software, telecommunications,
office and other equipment. The equipment generally has a purchase price of
less than $250,000, and such leases are commonly referred to as "small ticket
leases". Rockford initially funds the origination of its leases through its
line of credit facilities or from working capital and, upon achieving a
sufficient portfolio size, sells such leases principally through its
securitization programs and non-recourse sales. Rockford focuses on maximizing
the spread between the yield on its leases and its cost of funds by obtaining
favorable terms on its line of credit facilities and securitizations.
Since its inception in 1984, Rockford's strategy has been to focus its
business development efforts on establishing marketing relationships with
vendors and other sources of small ticket equipment, in order to establish
itself as the recommended provider of financing for potential equipment
purchasers. Rockford customizes lease financing products to meet the specific
equipment financing needs of it vendors and, in many cases, provides them with
servicing and technological support. By providing vendors and their customers
with timely, convenient and competitive equipment financing, Rockford seeks to
promote both equipment sales by the vendor and the utilization of Rockford as a
financing source.
Rockford's principal executive offices are located at 1851 East First Street,
Suite 600, Santa Ana, California 92705 (telephone (714) 547-7166).
18
<PAGE>
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to executive compensation, various benefits
plans (including Rockford stock option plans), certain relationships and
related transactions and other related matters as to Rockford is set forth in
the Rockford Annual Report on Form 10-K for the year ended December 31, 1997, a
copy of which accompanies this Proxy Statement-Prospectus and is incorporated
herein by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of January 4, 1999 with respect
to the beneficial ownership of voting securities of Rockford by each person who
is known by Rockford to beneficially own more than 5% of the Rockford Common
Stock, each director of Rockford, certain executive officers and all directors
and officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF BENEFICIAL PERCENT OF
NAME OWNERSHIP(1) CLASS
---- ------------- ----------
<S> <C> <C>
Gerry J. Ricco(2)(3)(7)............................. 774,666 16.4%
Brian A. Seigel(2)(3)(7)............................ 774,667 16.4%
Larry Hartmann(2)(3)(7)............................. 774,667 16.4%
U.S. Bancorp(4)..................................... 371,840 7.9%
SunAmerica, Inc(5).................................. 400,373 8.5%
Kevin McDonnell(2)(6)............................... 25,000 *
Kenneth Vancini(6).................................. 11,800 *
Floyd S. Robinson(6)................................ 28,300 *
Robert S. Vaters(6)................................. 28,300 *
All directors and executive officers as a
group (9 persons)(3)(6)(7)......................... 2,440,067 51.2%
</TABLE>
- --------
* Less than 1%
(1) A person is deemed to be the beneficial owner of securities that can be
acquired by such person within 60 days from the date of this table upon the
exercise of options, warrants and convertible securities. Unless otherwise
noted, Rockford believes that all persons named in the table have sole
voting and investment power with respect to all shares of Rockford Common
Stock beneficially owned by them.
(2) The address of each of Messrs. Ricco, Seigel and McDonnell is c/o Rockford
Industries, Inc., 1851 East First Street, Suite 600, Santa Ana, California
92705. The address for Mr. Hartmann is c/o Rockford Industries, Inc., 10
Mountain View Road, Suite 103, Upper Saddle River, New Jersey 07458.
(3) Includes, for each of Messrs. Ricco, Seigel and Hartmann, 40,000 shares of
Rockford Common Stock which may be acquired upon exercise of stock options
which are presently exercisable or become exercisable on or before 60 days
from the date of this table.
(4) According to a Schedule 13G, dated February 9, 1998, filed with the
Securities and Exchange Commission, U.S. Bancorp (the "Bank") reports that
of the shares attributed to the Bank, it has sole voting power as to
371,340 shares, sole dispositive power as to 368,640 shares and shared
dispositive power as to 700 shares. The address of the Bank is 601 2nd
Avenue South, Minneapolis, Minnesota 55403-4302.
(5) According to a Schedule 13G, dated February 14, 1997, filed with the
Securities and Exchange Commission, includes 275,373 shares of Rockford
Common Stock issuable upon conversion of 70,000 shares of the Company's
outstanding Series A Preferred Stock. SunAmerica, Inc. reports that shares
of Rockford Common Stock and Series A Preferred Stock are owned of record
by Anchor National Life Insurance Company, a wholly-owned subsidiary of
SunAmerica, Inc. SunAmerica, Inc. reports sole voting power and dispositive
power as to all shares. The mailing address of SunAmerica, Inc. is 1
SunAmerica Center, Century City, Los Angeles, California 90067.
19
<PAGE>
(6) Constitutes shares of Rockford Common Stock which may be acquired upon
exercise of stock options which are presently exercisable or will become
exercisable on or before 60 days from the date of this table.
(7) According to Schedule 13Ds filed with the Securities and Exchange
Commission by Gerry L. Ricco, Brian A. Seigel and Larry Hartmann, as a
result of the execution of the Shareholders Option Agreement described
under the caption "The Shareholders Option Agreement", Messrs. Ricco,
Seigel and Hartmann may be deemed to be a group and therefore, each may be
deemed to be the beneficial owner of all the shares of Rockford Common
Stock subject to the Shareholders Option Agreement. Each of Messrs. Ricco,
Seigel and Hartmann disclaim beneficial ownership of the shares of Rockford
Common Stock owned by the other two individuals and subject to the
Shareholders Option Agreement. According to a Schedule 13D, dated November
18, 1998, filed with the Securities and Exchange Commission by American
Express, as a result of the execution of the Shareholders Option Agreement,
American Express may be deemed the beneficial owner of the aggregate of
2,204,000 shares of Rockford Common Stock owned by Messrs. Ricco, Seigel
and Hartmann and subject to the Shareholders Option Agreement. American
Express disclaims beneficial ownership of such shares.
INFORMATION ABOUT AMERICAN EXPRESS
GENERAL
Through its subsidiaries, American Express is primarily engaged in the
business of providing travel related services, financial advisory services and
international banking services throughout the world.
Travel related services are offered principally through American Express
Travel Related Services Company, Inc. ("TRS") and its subsidiaries and include
a variety of products and services, including the American Express(R) Card, the
Optima(R) Card and other consumer and corporate lending products, the American
Express(R) Travelers Cheque (the "Travelers Cheque") and other stored value
products, business expense management products and services, tax preparation
and bookkeeping services, corporate and consumer travel products and services,
magazine publishing, and management and merchant transaction processing, point
of sale and back office products and services. At December 31, 1997, there were
42.7 million Cards in force worldwide, and worldwide Card billed business for
the year ended December 31, 1997 was $209.2 billion. U.S. consumer lending
operations are conducted by American Express Centurion Bank, a wholly owned
subsidiary of TRS whose deposits are insured by the Federal Deposit Insurance
Corporation. Travelers Cheque sales for the year ended December 31, 1997 were
$25 billion.
American Express Financial Corporation ("AEFC") and its subsidiaries are
engaged in providing a variety of financial products and services to help
individuals, businesses and institutions establish and achieve their financial
goals. AEFC's products and services include financial planning and advice,
insurance and annuities, a variety of investment products, including investment
certificates, mutual funds and limited partnerships, investment advisory
services, trust and employee plan administration services, personal auto and
homeowner's insurance and retail securities brokerage services. At December 31,
1997, American Express Financial Advisors Inc. ("AEFA"), AEFC's principal
marketing subsidiary, maintained a nationwide financial planning field force of
8,776 persons. At December 31, 1997, AEFA's assets owned and/or managed totaled
approximately $173.4 billion.
20
<PAGE>
American Express Bank Ltd. ("AEBL"), together with its subsidiaries, offers
products that meet the financial service needs of four client groups:
corporations, financial institutions, affluent individuals and retail
customers. AEBL's five primary business lines are corporate banking and
finance, correspondent banking, private banking, personal financial services
and global trading. AEBL does not do business in the United States except as an
incident to its activities outside the United States.
The principal executive offices of American Express are located at World
Financial Center, 200 Vesey Street, New York, New York 10285 (telephone (212)
640-2000).
MANAGEMENT AND ADDITIONAL INFORMATION
Certain information relating to security ownership by certain beneficial
owners and management, executive compensation, various benefit plans (including
stock option plans), certain relationships and related transactions and other
related matters to American Express is incorporated by reference or set forth
in the American Express Annual Report on Form 10-K for the year ended December
31, 1997, and is incorporated herein by reference. Rockford Shareholders
desiring copies of such documents may contact American Express at its address
or telephone number indicated under "Where You Can Find More Information."
21
<PAGE>
THE MERGER
The following summary of the material terms and provisions of the Merger
Agreement is qualified in its entirety by reference to the Merger Agreement,
which is incorporated herein by reference and, with the exception of certain
exhibits to the Merger Agreement, is attached as Appendix A to this Proxy
Statement-Prospectus.
FORM OF THE MERGER
If the holders of Rockford Common Stock and Rockford Preferred Stock approve
the principal terms of the Merger Agreement and all other conditions to the
Merger are satisfied or waived, RXP Acquisition Corporation ("RXP") will merge
with and into Rockford, with Rockford being the surviving corporation after the
Merger (the "Surviving Corporation") and becoming a wholly owned subsidiary of
American Express. The date on which the closing of the Merger occurs is
referred to herein as the "Closing Date." American Express and Rockford
anticipate that the Closing Date will occur as promptly as practicable after
the Special Meeting. The term "Effective Time" means the date and time of the
filing of the Certificate of Merger relating to the Merger with the Secretary
of State of California and the Secretary of State of Delaware, or such time
thereafter as is provided in the Certificate of Merger.
MERGER CONSIDERATION
The Merger Agreement provides that at the Effective Time, each share of
Rockford Common Stock that is issued and outstanding immediately prior to the
Effective Time (other than shares owned by American Express which shall be
cancelled and retired) will be converted into a right to receive that number of
American Express Common Shares that could be purchased for $11.88 based on the
average (the "Average Share Price") of the closing price per share of American
Express Common Shares on the New York Stock Exchange ("NYSE") during the ten
(10) consecutive trading days ending on the third full trading day immediately
preceding the Effective Time (the "Exchange Ratio"). Shareholders will receive
cash instead of fractional shares of American Express Common Shares.
The Merger Agreement provides that the period for determining the Exchange
Ratio will end on the trading day that is three full trading days prior to the
Effective Time, and therefore the number of American Express Common Shares
constituting the Exchange Ratio will be fixed at that time. The market price of
American Express Common Shares could fluctuate with the performance of American
Express and general market conditions during the period between the Special
Meeting and the Effective Time and during the three day period between the end
of the determination of the Exchange Ratio and the Effective Time. Accordingly,
the last sale price of American Express Common Shares on the Effective Date may
be higher or lower than the Exchange Ratio and, as a result, the number of
American Express Common Shares to be received by a Rockford shareholder at the
Effective Time may be lower or higher than the number of American Express
Common Shares that could be purchased for $11.88 on such date.
Instead of fractional shares of American Express Common Shares, American
Express shall pay to each holder who would otherwise be entitled to receive a
fractional share an amount in cash equal to the product of (i) the fractional
share interest to which such holder would otherwise be entitled and (ii) the
Average Share Price.
EFFECTIVE TIME
The Merger will become effective upon the filing of the Certificate of Merger
with the Secretary of State of the State of California and the Secretary of
State of Delaware, in accordance with applicable law, or at such time
thereafter as is provided in the Certificate of Merger. Such filing will be
made as promptly as practicable after satisfaction or, if permissible, waiver
of the conditions to the Merger.
22
<PAGE>
PROCEDURES FOR EXCHANGE OF ROCKFORD COMMON STOCK CERTIFICATES
As of the Effective Time, American Express will deposit with a bank or trust
company (the "Exchange Agent"), for the benefit of holders of shares of
Rockford Common Stock, certificates representing the American Express Common
Shares issuable pursuant to the Merger in accordance with the Merger Agreement.
As soon as practicable after the Effective Time, American Express and the
Surviving Corporation will cause to be mailed to holders of record of Rockford
Common Stock on the Record Date (a) a letter of transmittal and (b)
instructions for effecting the exchange of certificates representing Rockford
Common Stock for certificates representing American Express Common Shares. Upon
surrender of certificates representing Rockford Common Stock, the executed
letter of transmittal and other reasonably required documents, former holders
of Rockford Common Stock will be entitled to receive shares of American Express
Common Shares and cash in lieu of fractional shares. Shareholders should NOT
send their certificates with their proxy card.
No dividends or other distributions that are declared or made after the
Effective Time with respect to American Express Common Shares will be paid to a
Rockford shareholder entitled to receive certificates representing American
Express Common Shares until that shareholder has properly surrendered
certificates representing Rockford Common Stock. Upon such surrender, there
will be paid to the shareholder in whose name the certificates representing the
American Express Common Shares is issued any dividends which have become
payable with respect to such American Express Common Shares between the
Effective Time and the time of such surrender, without interest. After such
surrender, there will also be paid to the shareholder in whose name the
certificates representing such American Express Common Shares are issued any
dividend on such American Express Common Shares that have a record date
subsequent to the Effective Time and prior to such surrender and a payment date
after such surrender; provided that such dividend payments will be made on such
payment dates. In no event will the shareholders entitled to receive such
dividends be entitled to receive interest on such dividends. Any American
Express Common Shares which remain undistributed to the shareholders of
Rockford for one year after the Effective Time will be returned by the Exchange
Agent to American Express which will thereafter act as Exchange Agent.
At the Effective Time, the stock transfer books of Rockford will be closed
and no transfer of Rockford Common Stock will thereafter be made.
BACKGROUND OF THE MERGER
At a Rockford Board meeting on February 20, 1998, the Board discussed the
then market conditions for finance companies and recent acquisition
transactions that had occurred. As a result of the perceived favorable market
conditions, the Rockford Board asked Piper Jaffray to undertake an evaluation
of Rockford's value as a potential acquisition target. A special meeting of the
Rockford Board occurred on March 16, 1998 at which representatives of Piper
Jaffray gave their evaluation of Rockford as a possible acquisition candidate.
After discussion, the Rockford Board authorized management to retain Piper
Jaffray to consider a possible sale of Rockford. On March 23, 1998, Piper
Jaffray was engaged by Rockford.
Piper Jaffray identified and approached eight potential purchasers, including
finance companies, banks, insurance companies and a technology company. A
confidential memorandum describing Rockford (the "Confidential Memorandum") was
prepared. Seven of the potential purchasers expressed an interest, signed a
confidentiality agreement and received a copy of the Confidential Memorandum.
On May 27, 1998, Piper Jaffray gave a status report to the Rockford Board
regarding its efforts. After discussion, the Rockford Board asked Piper Jaffray
to expand the scope of the companies contacted. As a result, Piper Jaffray
contacted an additional 12 potential purchasers, nine of whom requested a copy
of the Confidential Memorandum. In July 1998, Rockford discussed with Credit
Suisse First Boston Corporation ("CSFB") the possibility of CSFB acting as co-
agent for Rockford in connection with the potential sale of Rockford. An
agreement between Rockford and CSFB was entered into on July 7, 1998. After its
engagement, CSFB contacted 32 potential purchasers and provided copies of the
Confidential Memorandum to 20 of those contacts. Each entity receiving a copy
of the Confidential Memorandum executed a confidentiality agreement.
23
<PAGE>
At a meeting of the Rockford Board on July 24, 1998, Piper Jaffray and CSFB
informed the Board that they had received non-binding initial expressions of
interest from seven potential purchasers. Piper Jaffray and CSFB described in
detail each of the proposals. After discussion, the Rockford Board authorized
Piper Jaffray and CSFB to contact four of the potential purchasers and
authorized the potential purchasers to continue with due diligence, with the
ultimate objective of providing a definitive offer. Two of the four potential
purchasers elected to continue due diligence efforts.
Between August 27, 1998 and late October 1998, the stock market in general
and the stock price of Rockford Common Stock decreased significantly. The last
sale price of the Rockford Common Stock on August 27, 1998 was $9.875 per share
and reached its low of $5.00 per share on October 6, 1998.
On July 31, 1998, American Express contacted Rockford directly regarding the
possibility of a transaction. American Express had not been previously
contacted by Piper Jaffray or CSFB. American Express executed a confidentiality
agreement and was provided the Confidential Memorandum. American Express then
commenced due diligence.
On September 28, 1998, one of the potential purchasers, other than American
Express, proposed a letter of intent which contemplated a purchase price of
$10.00 per share, payable in stock of the potential purchaser. The potential
purchaser subsequently withdrew its proposal.
On October 9, 1998, American Express proposed a non-binding letter of intent
to acquire Rockford for a total consideration of $50 million, payable in
American Express stock. On a fully diluted basis, the initial purchase price
suggested by American Express amounted to approximately $11.00 per share. In
connection with the letter of intent, negotiated issues included whether
Messrs. Ricco, Hartmann and Seigel would be required, as a condition to
American Express entering into the non-binding letter of intent, to provide
American Express with an option to acquire their stock in Rockford.
On October 12, 1998, the Rockford Board met to discuss the proposal from
American Express. Counsel for Rockford and representatives of Piper Jaffray and
CSFB discussed in detail the terms of the proposal, including the proposed
price, American Express' request for an option on the stock of Messrs. Ricco,
Hartmann and Seigel as a condition to entering into the non-binding letter of
intent and American Express' condition that the employment agreements of
Messrs. Ricco and Hartmann be amended, effective after consummation of the
transaction. The Rockford Board concluded that the price proposed by American
Express was not acceptable and that in no event would they agree to any letter
of intent that contemplated the grant of an option to American Express prior to
the execution of a definitive agreement. The Rockford Board then appointed a
Special Committee of the Board consisting of Floyd S. Robinson and Robert S.
Vaters, the outside directors of Rockford, to consider the proposed transaction
with American Express and make a recommendation to the whole Board. The
Rockford Board also authorized management to continue negotiations with
American Express and instructed Piper Jaffray to contact the potential
purchaser that had previously submitted and subsequently withdrawn a proposal
to determine whether that entity was interested in making a proposal.
Representatives of Rockford then contacted American Express and informed them
that neither Rockford nor Messrs. Ricco, Hartmann or Seigel would agree to any
option agreement prior the execution of a definitive agreement with American
Express. Representatives of the Company continued to negotiate with
representatives of American Express regarding a potential transaction. As a
result of those negotiations, American Express proposed a purchase price per
share for the Rockford Common Stock which would be payable in shares of
American Express Common Shares valued at $11.88 per share of Rockford Common
Stock. American Express also withdrew its request for an option as a condition
to entering into a non-binding letter of intent.
On October 14, 1998, the Rockford Board met and discussed the proposed terms
of the letter of intent. Representatives of Piper Jaffray and CSFB discussed
the terms of the proposal from an economic standpoint. Representatives of Piper
Jaffray also informed the Rockford Board that they had contacted the other
potential purchaser and confirmed that it had no interest in making any
proposal for Rockford. Counsel for Rockford
24
<PAGE>
described in detail the negotiations with respect to the proposed non-binding
letter of intent and answered questions from the directors. After significant
discussion, the Rockford Board authorized management to complete negotiations
of and execute a non-binding letter of intent with American Express and to
proceed to negotiate a definitive agreement with American Express. A non-
binding letter of intent was executed on October 16, 1998.
Representatives of Rockford and American Express met on October 21, 1998
through October 23, 1998 to negotiate the terms of a definitive agreement.
Messrs Ricco and Hartmann met separately with representatives of American
Express to negotiate revisions to their employment agreements to be effective
only if the Merger was consummated. On October 23, 1998, a special meeting of
the Rockford Board occurred. At that meeting, counsel for the Company described
in detail the negotiations between the parties, the proposed provisions of the
definitive agreement and the issues remaining to be negotiated. Messrs Ricco
and Hartmann also described the proposed terms of their employment agreements.
In addition, representatives of Piper Jaffray gave a preliminary analysis of
the transaction, including a discussion regarding the various methods of
valuing Rockford and the consideration being offered by American Express. After
discussion with their representatives and among themselves, the Rockford Board
authorized management to continue negotiations with American Express.
As a condition to the execution of a definitive agreement, Rockford and
American Express agreed that the holder of Rockford's Series A Preferred Stock
would be requested to agree to vote for the proposed transaction and convert
its shares to Rockford Common Stock prior to the effective date of the proposed
transaction. Representatives of Rockford contacted the holder of the Series A
Preferred Stock and secured its agreement as requested by American Express.
During the period from October 26, 1998 through November 9, 1998,
representatives of American Express continued performing due diligence with
respect to Rockford and representatives of American Express and Rockford
continued to negotiate the terms of a definitive agreement.
A special meeting of the Rockford Board occurred on October 30, 1998. At that
meeting, counsel for Rockford discussed in detail the terms of the proposed
definitive agreement and answered questions from the Board regarding the terms
and the items still subject to negotiation.
A special meeting of the Rockford Board occurred on November 6, 1998. Counsel
for Rockford described the present status of the negotiations and the changes
to the proposed definitive agreement since the last meeting. Counsel also
described additional due diligence being conducted by American Express. Messrs.
Ricco and Hartmann described the proposed terms of their employment agreements
and Mr. Seigel described the proposed terms of the settlement of his employment
agreement, in each case to be effective only if the Merger is consummated.
Representatives of Piper Jaffray then provided their formal analysis regarding
the proposed transaction. Representatives of Piper Jaffray described the
various methods of analysis applied to valuation of the transaction. After
discussion, Piper Jaffray gave its oral opinion that the consideration to be
received by the shareholders of Rockford in the proposed transaction was fair,
from a financial point of view, to those shareholders. Counsel for Rockford
then informed the Board that because of the additional due diligence items
requested by American Express, the agreement would not be executed until late
in the day on November 9, 1998. Piper Jaffray then indicated that it would
deliver its formal written opinion on that date. After further discussion, the
Special Committee unanimously recommended approval of the Merger Agreement. The
entire Rockford Board then unanimously determined that the proposed transaction
with American Express was in the best interests of Rockford and its
shareholders and approved the Merger Agreement and authorized its execution and
delivery. The Rockford Board also unanimously determined to recommend the
approval of the principal terms of the Merger Agreement by the Rockford
Shareholders.
On November 9, 1998, the Merger Agreement and the Shareholders Option
Agreement were executed and delivered. In addition, the agreement with the
holder of the Series A Preferred Stock was executed and delivered.
25
<PAGE>
REASONS FOR THE MERGER; RECOMMENDATION OF THE ROCKFORD BOARD OF DIRECTORS
A Special Committee of the Rockford Board and the Rockford Board as a whole
have unanimously approved and adopted the Merger Agreement, believe that the
Merger is in the best interests of Rockford and its shareholders and
unanimously recommend adoption of the principal terms of the Merger Agreement
by the holders of Rockford Common Stock and Rockford Preferred Stock at the
Special Meeting.
In reaching its conclusion to approve the Merger and to recommend the
adoption of the principal terms of the Merger Agreement, the Special Committee
and the Rockford Board considered a number of factors, including the following:
(i) the fact that the Merger Agreement resulted from a process that the
Rockford Board believes was conducted in such a manner as to result in the
most attractive alternative available to the shareholders of Rockford (see
"Background of the Merger" above);
(ii) the information presented by Piper Jaffray at the November 6, 1998
meeting of the Rockford Board and the written opinion of Piper Jaffray (see
"Fairness Opinion of Financial Advisor" below);
(iii) the Rockford Board's belief that the analyses of Piper Jaffray
supported the Rockford Board's conclusion that the merger consideration is
fair from a financial point of view to, and is in the best interests of,
Rockford shareholders;
(iv) the terms and structure of the Merger and the terms and conditions
of the Merger Agreement;
(v) information concerning the business, assets, capital structure,
financial performance and condition and prospects of Rockford and American
Express;
(vi) current and historical market prices and trading information with
respect to the Rockford Common Stock and American Express Common Shares;
(vii) the fact that the American Express Common Shares to be exchanged
for Rockford Common Stock represents ownership interests in a significantly
larger company with a significantly broader, more active trading market;
(viii) the fact that, under the Merger Agreement, the merger is expected
to be treated as a tax-free reorganization under the Internal Revenue Code
of 1986, as amended (the "Code");
(ix) the history of Rockford's contacts with other prospective acquirors;
(x) the Board's belief in the financial strength of American Express and
the strength of American Express' management;
(xi) the fact that, under the Plan and Agreement of Merger, the Rockford
Board is permitted, under certain circumstances and subject to certain
notices and other requirements specified in the Plan and Agreement of
Merger, to provide information to or enter into discussions or negotiations
with any person or entity that makes an unsolicited, materially superior
acquisition proposal, as defined in the Plan and Agreement of Merger (see
"The Merger Agreement--Certain Covenants--No Solicitation");
(xii) the strength of the American Express Common Shares and its
historical price stability when compared with broad market indices, in
contrast to the greater volatility and risk to holders of the Rockford
Common Stock; and
(xiii) the anticipated benefits, such as access to a broader range of
products and services, to Rockford's employees and customers of the
association of Rockford's business with American Express.
The foregoing discussion of the information and factors considered by the
Rockford Board is not intended to be exhaustive. The information and factors
were considered by the Rockford Board in connection with its review of the
Merger Agreement and the proposed Merger. In view of the variety of factors
considered in
26
<PAGE>
connection with its evaluation of the Merger, the Rockford Board did not find
it practicable to, and did not, quantify or otherwise assign relative weights
to the specific factors considered in its determination. In addition,
individual members of the Rockford Board may have given different weights to
different factors. Based upon this analysis, the Rockford Board determined that
the Merger was in the best interests of the shareholders of Rockford.
FAIRNESS OPINION OF FINANCIAL ADVISOR
Rockford retained Piper Jaffray on March 23, 1998 to act as Rockford's
financial advisor in connection with the Merger. Rockford requested Piper
Jaffray, in its role as financial advisor, to render its opinion to the
Rockford Board regarding the fairness, from a financial point of view, to
Rockford common shareholders of the consideration proposed to be paid by
American Express to Rockford common shareholders in the Merger and to assist
Rockford's management and Board in analyzing the proposed Merger.
Piper Jaffray delivered to the Rockford Board on November 6, 1998 its oral
opinion (subsequently confirmed by written opinion dated November 9, 1998) to
the effect that, as of the date of the written opinion (the "Piper Opinion")
and based on and subject to the assumptions, factors and limitations set forth
in the opinion and described below, the consideration proposed to be paid by
American Express pursuant to the Merger Agreement was fair, from a financial
point of view, to the common shareholders of Rockford. A copy of the Piper
Opinion is attached to this Proxy Statement-Prospectus as Appendix B and is
incorporated into this Proxy Statement-Prospectus by reference.
While Piper Jaffray rendered its opinion and provided certain analyses to the
Rockford Board, Piper Jaffray was not requested to and did not make any
recommendation to the Rockford Board as to the specific form or amount of the
consideration to be received by Rockford common shareholders in the Merger,
which was determined through negotiations between American Express and
Rockford. The Piper Opinion, which was delivered for use and considered by the
Rockford Board, is directed only to the fairness to Rockford common
shareholders, from a financial point of view, of the proposed consideration to
be paid by American Express in connection with the Merger, does not address the
value of a share of Rockford Common Stock, does not address Rockford's
underlying business decision to participate in the Merger and does not
constitute a recommendation to any Rockford common shareholder as to how such
shareholder should vote with respect to the Merger.
Piper Jaffray was not advised by Rockford, American Express or their
respective legal counsel, and undertook no independent analysis concerning the
probable outcome of, or estimated damages which might arise from any pending or
threatened litigation, possible unasserted claims or other contingent
liabilities, to which Rockford or American Express or their affiliates was a
party or may be subject. Accordingly, the Piper Opinion made no assumption
concerning, and therefore did not consider, the possible assertion of claims,
outcomes or damages arising out of any such matters.
THE SUMMARY OF THE PIPER OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO THE FULL TEXT OF THE PIPER OPINION ATTACHED TO THIS PROXY
STATEMENT-PROSPECTUS AS APPENDIX B AND INCORPORATED BY REFERENCE HEREIN.
ROCKFORD COMMON SHAREHOLDERS ARE URGED TO READ THE PIPER OPINION IN ITS
ENTIRETY FOR A COMPLETE DESCRIPTION OF THE ASSUMPTIONS MADE, MATTERS CONSIDERED
AND LIMITS OF THE REVIEW UNDERTAKEN. PIPER JAFFRAY CONSENTS TO THE SUMMARY
ABOVE OF ITS OPINION IN, AND ATTACHMENT OF ITS OPINION TO, THIS PROXY
STATEMENT-PROSPECTUS.
In arriving at the Piper Opinion, Piper Jaffray reviewed, analyzed and relied
upon material bearing upon the financial and operating condition and prospects
of Rockford and American Express and material prepared in connection with the
Merger, and considered such financial and other factors as it deemed
appropriate under the circumstances, including, among other things, (i) the
Merger Agreement; (ii) information relative to the business, financial
condition and operations of Rockford and American Express; (iii) certain
internal financial planning information of Rockford furnished by management of
Rockford and published analysts' estimates for
27
<PAGE>
Rockford's and American Express' earnings per share; (iv) selected market
information for Rockford Common Stock and American Express Common Shares; (v)
to the extent publicly available, the financial terms of certain merger and
acquisition transactions deemed relevant; (vi) publicly available information
relative to Rockford and American Express; and (vii) certain financial and
securities data of Rockford and American Express and companies deemed
reasonably similar or comparable to Rockford and American Express. In addition,
Piper Jaffray engaged in discussions with members of management of Rockford
concerning the respective financial condition, current operating results and
business outlook of Rockford including the prospects for Rockford and American
Express on a combined basis and any potential operating efficiencies and
synergies which may arise from the Merger.
For purposes of the Piper Opinion, Piper Jaffray relied upon and assumed the
accuracy and completeness of the financial and other information made available
to it and did not assume responsibility to independently verify the
information. Piper Jaffray relied upon the assurances of Rockford management
that the information provided by Rockford and American Express had a reasonable
basis and, with respect to financial planning data and other business outlook
information, reflected the best available estimates, and that they were not
aware of any information or fact that would make the information provided to
Piper Jaffray incomplete or misleading. Piper Jaffray relied, without
independent verification, on the assessments by management of Rockford and
American Express. In connection with rendering its opinion, Piper Jaffray
assumed that the Merger would be accounted for as a purchase under generally
accepted accounting principles. Piper Jaffray did not take into account any
nonrecurring acquisition costs or potential cost savings or synergies that may
be realizable as a result of the Merger. In arriving at the Piper Opinion,
Piper Jaffray did not perform, nor was it furnished, any appraisal or valuation
of specific assets or liabilities of Rockford or American Express and expressed
no opinion regarding the liquidation value of any entity. No limitations were
imposed by Rockford on the scope of Piper Jaffray's investigation or the
procedures to be followed in rendering its opinion. Piper Jaffray expressed no
opinion as to the price at which shares of Rockford Common Stock or American
Express Common Shares have traded or may trade at any future time. The Piper
Opinion is based upon information available to Piper Jaffray, and the facts and
circumstances as they existed and were subject to evaluation on the respective
dates of the Piper Opinion. Events occurring after such dates could materially
affect the assumptions used in preparing the Piper Opinion.
Piper Jaffray performed certain financial and comparative analyses,
summarized below, which it discussed with the Rockford Board on November 6,
1998.
Implied Consideration. At the time and for the purpose of the Piper Opinion,
the Exchange Ratio as set forth in the Merger Agreement represented an implied
purchase price of $11.88 for each share of Rockford Common Stock. Based on
Rockford Common Stock and Common Stock equivalents outstanding, Piper Jaffray
calculated an implied equity value for Rockford of $54.719 million. For this
purpose, Piper Jaffray assumed that the outstanding shares of Rockford
Preferred Stock would be converted to shares of Rockford Common Stock prior to
the consummation of the Merger.
Selected Market Information. Piper Jaffray reviewed certain stock trading
characteristics of Rockford Common Stock and American Express Common Shares,
including stock price and volume comparisons for periods ended November 5,
1998.
Pro Forma Analysis. Piper Jaffray analyzed the hypothetical pro forma effects
of the Merger on Rockford's estimated implied equivalent earnings for the
fiscal years ended December 31, 1999 and December 31, 2000. Rockford's
projected stand-alone earnings per share were compared to projected post-Merger
earnings per share attributable to Rockford's interest in the pro forma
combined entity. This analysis was based on published analysts' estimates of
Rockford's and American Express' earnings per share in 1999 and extrapolated
earnings per share for 2000 based on estimated long term growth rates for
Rockford and American Express. The projected implied per share equivalent for
Rockford was then compared to Rockford's projected earnings per share over the
same periods on a stand-alone basis. This analysis indicated that the Merger
would be dilutive to Rockford's projected earnings per share by 9.18% in 1999
and 16.86% in 2000.
28
<PAGE>
The analysis did not include the benefit of the annual dividend paid to
American Express stockholders which would equate to an implied dividend per
share for Rockford common shareholders of $0.113 as of the date of Piper
Jaffray's analysis.
Contribution Analysis. Piper Jaffray analyzed the hypothetical pro forma
contribution of each of Rockford and American Express to the combined company
for the years ending December 31, 1999 through 2000. For these periods, Piper
Jaffray analyzed Rockford's expected contribution to the pro forma pretax
income, net income, and book values contributed to the combined entity compared
with the post-Merger equity interest to be held by Rockford's common
shareholders. This analysis indicated that Rockford would contribute 0.16%,
0.14% and 0.22% to combined pretax income, net income, and book value,
respectively, in fiscal 1999. In fiscal 2000, the Rockford contribution is
projected to be 0.18%, 0.15%, and 0.22% of combined pretax income, net income,
and book value, respectively. Based on Piper Jaffray's analysis, Rockford
shareholders would account for approximately 0.13% of the combined companies'
equity on a fully diluted basis as of the date of Piper Jaffray's analysis.
Comparable Merger and Acquisition Analysis. Piper Jaffray reviewed selected
transactions involving acquired companies deemed comparable to Rockford that
have been completed from March 31, 1994 to November 5, 1998 involving target
companies operating in the commercial finance sector in which the target was
100% acquired. This analysis was based on publicly available information
obtained from Securities and Exchange Commission filings, public company
disclosures, press releases, industry and popular press reports, data bases and
other sources, This search yielded 20 transactions deemed comparable and for
which valuation data was available. Based on its analysis of the comparable
transactions, Piper Jaffray derived the mean, median and ranges of latest
twelve months net income and book value multiples for the comparable
transaction group and compared such multiples to Rockford's multiples. The
comparable transaction group's mean and median equity value to latest twelve
month net income multiples of 17.3x and 17.1x and range of 3.5x to 46.1x, were
compared with Rockford's multiple of 33.0x; and the mean and median equity
value to book value multiple of 2.8x and 2.7x, and range of 1.3x to 4.2x, were
compared with Rockford's multiples of 2.4x.
Premium Analysis. Piper Jaffray reviewed publicly available information for
selected completed merger and acquisition transactions from 1995 to present
involving target companies operating in the commercial finance sector. This
review yielded 20 completed transactions which were deemed comparable and eight
for which premium data was available. Based on its review of the eight
comparable transactions, Piper Jaffray derived the mean, median and range of
premiums paid in the comparable transactions and compared them to the premium
to be paid to Rockford's common shareholders. The comparable transaction
group's mean and median premiums of 26.8% and 22.8% and a range of -3.0% to
58.1% above the trading price one day prior to the announcement were compared
to a 23.4% premium to be paid to Rockford's common shareholders; the mean and
median premiums of 31.3% and 24.9% above the trading price one month prior to
the announcement, and a range of 10.0% to 63.1%, were compared to a 102.2%
premium to be paid to Rockford's common shareholders.
Comparable Public Company Analysis. Piper Jaffray reviewed information
relating to six publicly traded companies involved in commercial finance deemed
comparable to Rockford (DVI Inc., Financial Federal Corp., LINC Capital Inc.,
Leasing Solutions, Inc., First Sierra Financial Inc. and T&W Financial Corp.).
Share pricing for publicly traded companies in the public market reflects the
value of a minority interest and does not reflect a control premium. Based on
its review, Piper Jaffray derived mean and median historical earnings per share
growth percentages of 22.9% and 22.0% and a range of 17.6% to 29.1% (compared
to a -10.6% growth percentage for Rockford); mean and median projected five
year earnings per share growth of 21.2% and 21.5% and a range of 18.5% to 23.3%
(compared to projected earnings per share growth of 24.2% for Rockford); and
mean and median total debt to capital ratios of 53.2% and 61.2%, and a range of
1.2% to 82.6% (compared to a total debt to capital ratio of 14.5% for
Rockford). Piper Jaffray also derived mean and median price to latest twelve
month earnings multiples of 11.6x and 8.3x, and a range of 5.5x to 23.4x
(compared to a multiple of 26.7x for Rockford); mean and median price to
calendar 1997 earnings multiples of 13.8x and 10.3x, and a range of 6.3x to
26.5x (compared to a multiple of 20.1x for Rockford); mean and median price to
estimated
29
<PAGE>
calendar 1998 earnings multiple of 10.7x and 6.5x, and a range of 5.7x and
21.2x (compared to a multiples of 16.0x for Rockford); and mean and median
equity value to tangible book value multiples of 1.7x to 1.3x, and a range of
0.9x to 3.1x (compared to a multiple of 1.7x for Rockford). The foregoing
multiples for Rockford were based on current market capitalization.
Piper Jaffray also reviewed information relating to eight publicly traded
large capitalization diversified finance companies deemed comparable to
American Express (Associated First Capital Corporation, Capital One Financial
Group, CIT Group, Inc., Citigroup, Inc., Household International, Inc., MBNA
Corporation, Providian Financial Corp., and Transamerica Corporation). Based on
its review, Piper Jaffray derived mean and median historical earnings per share
growth percentages of 23.8% and 23.7% and a range of 11.1% to 32.4% (comparable
to a 17.4% growth percentage for American Express); mean and median projected
earnings per share growth of 16.6% and 16.6% and a range of 11.3% to 21.3%
(compared to projected earnings per share growth of 13.7% for American
Express); and mean and median total debt to capital ratios of 71.2% and 78.0%,
and a range of 36.6% to 89.1% (compared to a total debt to capital ratio of
73.5% for American Express). Piper Jaffray also derived mean and median price
to latest twelve month earnings multiples of 21.4x and 19.6x, and a range of
14.2x to 33.0 x (compared to a multiple of 21.1x for American Express); mean
and median price to estimated calendar 1998 earnings multiples of 20.1x and
18.5x, and a range of 13.8x to 29.1x (compared to a multiple of 20.0x for
American Express); and mean and median equity value to tangible book value
multiples of 5.4x to 4.5x, and a range of 1.4 to 12.0x (compared to a multiple
of 4.7x for American Express).
In reaching its conclusions as to the fairness to the Rockford common
shareholders of the consideration to be paid by American Express in the Merger
pursuant to the Merger Agreement and in its presentation to the Rockford Board,
Piper Jaffray did not rely on any single analysis or factor described above,
assign relative weights to the analyses or factors considered by it, or make
any conclusions as to how the results of a given analysis, taken alone,
supported its opinion. The preparation of a fairness opinion is a complex
process and not necessarily susceptible to partial analyses or summary
description. Piper Jaffray believes that its analyses must be considered as a
whole and that selecting portions of its analyses and of the factors considered
by it, without considering all factors and analyses, would create a misleading
view of the process underlying its opinion. The analyses of Piper Jaffray are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses. Analyses
relating to the value of companies do not purport to be appraisals or
valuations or necessarily reflect the price at which companies may actually be
sold. No company or transaction used in any comparable analysis as a comparison
is identical to Rockford, American Express or the Merger. Accordingly, an
analysis of the results is not mathematical; rather it involves complex
considerations and judgments concerning, among other things, differences in
financial and operating characteristics of the comparable companies and other
factors that could affect the public trading value of the companies.
Piper Jaffray was selected based on its experience and expertise in the
financial services sector and in transactions similar to the Merger, its
familiarity with Rockford and its business, and its reputation in the
investment banking industry. Piper Jaffray is an investment banking firm
engaged, among other things, in the valuation of businesses and their
securities in connection with mergers and acquisitions, underwriting and
secondary distributions of securities, private placements and valuations for
estate, corporate and other purposes. In the ordinary course of its business,
Piper Jaffray and its affiliates may actively trade Rockford Common Stock and
American Express Common Shares for their own account and for the accounts of
their customers, and, therefore, may at any time hold a long or short position
in such securities. Piper Jaffray initiated research coverage for Rockford on
April 16, 1998.
For acting as financial advisor to Rockford in connection with the Merger,
Rockford has agreed to pay Piper Jaffray fees as follows: (a) $200,000, all of
which has been paid in connection with Piper Jaffray rendering the Piper
Opinion and (b) 1.5% of the aggregate total Merger Consideration, which is
contingent upon, and due upon, consummation of the Merger. The contingent
nature of a portion of these fees may have created a potential conflict of
interest in that Rockford would be unlikely to consummate the Merger unless it
had received the Piper Opinion. Whether or not the Merger is consummated,
Rockford has also agreed to pay the reasonable out-of-pocket expenses of Piper
Jaffray, not to exceed $25,000 without Rockford's approval, and
30
<PAGE>
to indemnify Piper Jaffray against certain liabilities incurred (including
liabilities under the federal securities laws) in connection with the
engagement of Piper Jaffray by Rockford.
INTERESTS OF CERTAIN PERSONS IN THE MERGER; CONFLICTS OF INTEREST
In considering the recommendation of the Rockford Board regarding the Merger,
you should be aware of the interests which certain executive officers and
directors of Rockford have in the Merger that are different from your and their
interests as shareholders. In this regard, you should consider, among other
things, the following:
As of the Record Date, directors and executive officers of Rockford owned an
aggregate of approximately 2,204,000 shares of Rockford Common Stock and
options to purchase an aggregate of approximately 420,600 shares of Rockford
Common Stock. Pursuant to the Merger Agreement, Rockford directors and
executive officers will receive the same consideration for their shares of
Rockford Common Stock as the other Rockford shareholders, and all outstanding
options to purchase Rockford Common Stock will be assumed by American Express,
other than options held by Messrs. Ricco, Hartmann and Seigel, which options
may be exercised prior to the consummation of the Merger and will be terminated
at the Effective Time to the extent not exercised.
Gerry Ricco--Rockford's President, Chief Executive Officer and a member of
the Board of Directors and Larry Hartmann--Rockford's Executive Vice
President--Sales and a member of the Board of Directors have entered into
amendments to their existing employment agreements with Rockford. These
amendments will be effective only if the merger occurs and provide for salary
and bonus arrangements that will apply after the merger. In addition, each of
Messrs. Ricco and Hartmann will receive a bonus of $60,000 within 30 days after
the merger is completed and a bonus of $63,000 if they are employed by Rockford
90 days after the merger is completed.
Brian Seigel--Rockford's Executive Vice President--Marketing, Secretary and a
member of the Board of Directors has entered into an agreement with Rockford
that provides, among other things, that upon consummation of the Merger, Mr.
Seigel's employment agreement with Rockford will be terminated and Mr. Seigel
will receive a payment of $541,429, less applicable taxes, as payment in full
and complete settlement of any claims Mr. Seigel may have under his employment
agreement or any other claims he may have against Rockford.
Rockford has established a stay-on bonus pool aggregating $237,000, excluding
the bonuses payable to Messrs. Ricco and Hartmann described above, for certain
employees who remain through the consummation of the Merger. The following
executive officers of Rockford are entitled to receive bonuses: Kevin
McDonnell, Executive Vice President and Chief Financial Officer--$30,000;
Kenneth Vancini, Senior Vice President--Sales--$50,000; Michael Sheehan, Senior
Vice President--Sales--Health Care--$25,000; and Thomas Ware, Senior Vice
President--Credit and Operations--$25,000.
Under the terms of existing option agreements, upon consummation of the
Merger, stock options to purchase an aggregate of 228,425 shares of Rockford
Common Stock will become immediately exercisable, including stock options held
by the following executive officers: Kevin McDonnell--75,000 shares; Kenneth
Vancini--32,000 shares; Michael Sheehan--32,000 shares; and Thomas Ware--50,000
shares.
American Express has agreed to continue in effect the indemnification
provisions, or indemnification provisions substantially similar to those,
currently in effect for Rockford's directors and officers and to maintain
directors' and officers' liability insurance covering Rockford's directors and
officers for a period of six years. See "The Merger Agreement--Certain
Covenants and Agreements--Indemnification; Directors' and Officers' Insurance."
Messrs. Ricco, Hartmann and Seigel have also entered into a Shareholders
Option Agreement with American Express that is described under the caption "The
Shareholders Option Agreement." In addition,
31
<PAGE>
American Express has agreed to indemnify Messrs. Ricco, Hartmann and Seigel in
certain events following an exercise by American Express of the option granted
pursuant to the Shareholders Option Agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following general discussion summarizes the material federal income tax
consequences of the Merger and is based on the Code, the regulations
promulgated thereunder, existing administrative interpretations and court
decisions. Future legislation, regulations, administrative interpretations or
court decisions could significantly change such consequences either
prospectively or retroactively. The discussion does not address all aspects of
federal income taxation that may be important to particular shareholders such
as banks, tax-exempt organizations, insurance companies, dealers in securities
or foreign currency, and may not be applicable to shareholders who are not
citizens or residents of the United States or who acquired their Rockford
shares pursuant to the exercise of employee stock options or otherwise as
compensation. This discussion assumes that Rockford Shareholders hold their
shares of stock as capital assets within the meaning of the Code.
Neither Rockford, American Express nor RXP intends to secure a ruling from
the Internal Revenue Service (the "IRS") with respect to the tax consequences
of the Merger; however, consummation of the Merger is conditioned upon the
receipt by American Express and Rockford of the opinion of King & Spalding,
counsel to American Express, dated as of the Effective Time, substantially to
the effect that, on the basis of facts, representations and assumptions set
forth or referred to in such opinion, the Merger will be treated as a tax-free
"reorganization" within the meaning of Section 368(a) of the Code (the "Tax
Opinion"). The Tax Opinion will not bind the IRS and the IRS is, therefore, not
precluded from successfully asserting a contrary opinion. The Tax Opinion will
also be subject to certain assumptions and certain representations made by
Rockford and American Express.
Federal Income Tax Implications to Rockford Shareholders
Assuming the accuracy of the Tax Opinion, no gain or loss will be recognized
by holders of Rockford Common Stock who exchange their Rockford Common Stock
for American Express Common Shares pursuant to the Merger, except with respect
to cash received in lieu of fractional shares. The aggregate tax basis of the
American Express Common Shares received by a Rockford Shareholder in the Merger
will be the same as the shareholder's aggregate tax basis in the Rockford
Common Stock surrendered in the exchange (reduced by any amount allocable to a
fractional share of American Express Common Shares as discussed below). The
holding period of the American Express Common Shares to be received by a
Rockford Shareholder as a result of the Merger will include the period during
which such shareholder held the Rockford Common Stock exchanged. Gain or loss
realized by a shareholder with respect to the receipt of cash in lieu of a
fractional share of American Express Common Shares should be capital gain or
loss. Such gain or loss will be short-term capital gain or loss if the Rockford
Shareholder held such shares of Rockford Common Stock for one year or less at
the time of the Merger and otherwise will be long-term capital gain or loss. To
determine the amount of such gain or loss, a portion of the tax basis in the
shares of Rockford Common Stock surrendered will be allocated to the fractional
share of American Express Common Shares. The amount of such gain or loss will
be the difference between the amount of cash received for such fractional share
and the amount of such tax basis.
Federal Income Tax Implications of the Merger to Rockford, American Express
and RXP
No gain or loss will be recognized for federal income tax purposes by
Rockford, American Express or RXP as a result of the Merger.
Federal Income Tax Implications of the Merger to Dissenting Shareholders
Holders of Rockford Common Stock who exercise their dissenters' rights with
respect to their shares will generally be treated as if such shares were
exchanged for the amount of cash received. Accordingly, dissenting shareholders
will recognize gain or loss as a result of the Merger. The nature and amount of
such gain or loss
32
<PAGE>
will depend on a number of factors, and shareholders considering dissenting are
strongly urged to consult their tax advisors as to the particular tax
consequences of doing so.
The federal income tax discussion set forth above is intended to provide only
a general summary, and does not address tax consequences which may vary with,
or are contingent on, individual circumstances. Moreover, this discussion does
not address any tax consequences of the disposition of stock in Rockford before
the Merger or the disposition of American Express stock after the Merger. This
discussion is directed principally to investors who are United States citizens
or residents or domestic corporations. Apart from the federal income tax
consequences discussed herein, no attempt has been made to determine any tax
that may be imposed on a shareholder by the country, state or jurisdiction in
which the holder resides or is a citizen. Accordingly, each Rockford
Shareholder is strongly urged to consult with such shareholder's tax advisor to
determine the particular tax consequences to such shareholder of the Merger,
including the applicability and effect of foreign, state, local and other tax
laws.
ACCOUNTING TREATMENT
The Merger will be accounted for by American Express under the "purchase"
method of accounting in accordance with generally accepted accounting
principles. Therefore, the aggregate Merger consideration paid by American
Express in connection with the Merger, together with the direct costs of
acquisition, will be allocated to Rockford's assets and liabilities based on
their fair market values with any excess being treated as goodwill. The assets
and liabilities and results of operations of Rockford will be consolidated into
the assets and liabilities and results of operations of American Express
subsequent to the Effective Time.
RESALE OF AMERICAN EXPRESS COMMON SHARES
The issuance of all shares of American Express Common Shares to be received
by Rockford Shareholders in the Merger has been registered under the Securities
Act of 1933, as amended (the "Securities Act"), and such shares will be freely
transferable by those persons who are not deemed to be "affiliates" (as such
term is defined under the Securities Act) of Rockford at the time of the
Rockford Special Meeting. American Express Common Shares received by those
Rockford Shareholders who are deemed to be affiliates of Rockford may be resold
by them only in transactions permitted by the resale provisions of Rule 145
under the Securities Act (or Rule 144 under the Securities Act in the case of
such persons who become affiliates of American Express) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be
"affiliates" of Rockford or American Express generally include individuals or
entities that control, are controlled by, or are under common control with,
such party and may include certain executive officers and directors of such
party as well as principal shareholders of such party. Rockford has agreed to
cause each person who is an "affiliate" of Rockford at the time of the Rockford
Special Meeting to deliver to American Express a written agreement intended to
ensure compliance by the affiliate with Rule 144 and Rule 145 promulgated under
the Securities Act.
GOVERNMENTAL AND REGULATORY APPROVAL
Under the Hart-Scott-Rodino Improvements Act of 1996 (the "HSR Act") and the
rules promulgated thereunder by the Federal Trade Commission (the "FTC"), the
Merger may not be completed until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice and specified waiting period requirements have been
satisfied. American Express and Rockford filed notification and report forms
under the HSR Act with the FTC and the Antitrust Division on November 25, 1998
and November 27, 1998 respectively. At any time before or after consummation of
the Merger, the Antitrust Division, the FTC or state attorneys' general could
take such action under the antitrust laws as they deem necessary or desirable
in the public interest, including seeking to enjoin the consummation of the
Merger. Private parties may also seek to take legal action under the antitrust
laws under certain circumstances.
33
<PAGE>
Based on the information available to them, American Express and Rockford
believe that the Merger can be effected in compliance with federal and state
antitrust laws. However, there can be no assurance that a challenge to the
consummation of the Merger on antitrust grounds will not be made or that, if
such challenge were made, American Express and Rockford would prevail or would
not be required to accept certain conditions, including the divestitures of
certain assets, in order to consummate the Merger.
DISSENTERS' RIGHTS OF APPRAISAL
The rights of shareholders of Rockford to dissent from approval of the Merger
and demand payment for their shares are governed by Chapter 13 of the CGCL, the
full text of which is reprinted as Appendix C to this Proxy Statement-
Prospectus. The summary of these rights set forth below is not intended to be
complete and is qualified in its entirety by reference to Appendix C.
Under the CGCL, shareholders of Rockford will not have any dissenters' rights
with respect to the Merger unless demands for payment are duly filed with
respect to five percent (5%) or more of the outstanding shares of Rockford
Common Stock. If the holders of five percent (5%) or more of the outstanding
shares of Rockford Common Stock duly file demands for payment and fully comply
with Chapter 13 of the CGCL, they will have dissenters' rights to be paid in
cash the fair market value of their shares.
Under the CGCL, "fair market value" is determined as of the day before the
first announcement of the terms of the Merger Agreement, excluding any
appreciation or depreciation as a consequence of the Merger. If the parties are
unable to agree on a fair market value, the dissenting shareholder may request
the Superior Court for the County of Orange to determine the fair market value
of the shares. The court's decision would be subject to appellate review.
The terms of the Merger Agreement were publicly announced on November 10,
1998. On November 9, 1998, the last trading day prior to the public
announcement of the terms of the Merger, the high and low sales prices for
Rockford Common Stock were $11 1/2 and $10 1/2, respectively.
Dissenters' rights cannot be validly exercised by persons other than
shareholders of record regardless of the beneficial ownership of the shares.
Persons who are beneficial owners of shares held of record by another person,
such as a broker, a bank or a nominee, should instruct the record holder to
follow the procedures outlined below if such beneficial owners wish to dissent
from the approval of the Merger.
As described more fully below, in order to perfect their dissenters' rights,
shareholders of record must: (i) make written demand for the purchase of their
dissenting shares to Rockford or its transfer agent on or before the date of
the Special Meeting; (ii) vote their dissenting shares against approval of the
Merger; and (iii) within 30 days after the mailing to shareholders by Rockford
of notice of approval of the Merger, submit the certificates representing their
dissenting shares to Rockford or its transfer agent, for notation thereon that
they represent dissenting shares. Failure to follow any of these procedures may
result in the loss of statutory dissenters' rights.
Demand for Purchase
Dissenting shareholders of Rockford must submit to Rockford at its principal
office, 1851 East First Street, Suite 600, Santa Ana, California 92705, or to
its transfer agent, American Stock Transfer and Trust Company, 40 Wall Street,
46th Floor, New York, New York 10005, a written demand that Rockford purchase
for cash those shares with respect to which they wish to act as dissenting
shareholders.
The notice must state the number and class of shares held of record which the
shareholder demands to be purchased and the amount claimed to be the "fair
market value" of those shares on November 9, 1998. That statement of fair
market value will constitute an offer by the dissenting shareholder to sell
such shares at that price. Such demand will not be effective unless it is
received by not later than the date of the Special Meeting.
34
<PAGE>
Dissenting shareholders may not withdraw their demand for payment without the
consent of the Rockford Board. The rights of dissenting shareholders to demand
payment terminate (i) if the Merger is abandoned (although dissenting
shareholders are entitled upon demand to reimbursement of expenses incurred in
a good faith assertion of their dissenters' rights), (ii) if the shares are
transferred prior to submission for endorsement as dissenting shares, or (iii)
if Rockford and the dissenting shareholders do not agree upon the status of the
shares as dissenting shares or upon the purchase price, and neither files a
complaint or intervenes in a pending action within six months after the date on
which notice of approval of the Merger was mailed to the shareholders.
No shareholder who has a right to demand payment of cash for such
shareholder's shares will have any right to attack the validity of the Merger
or have the Merger set aside or rescinded, except in an action to test whether
Rockford has received the number of shares required to approve the Merger.
Vote Against Approval of the Merger
Dissenting shareholders must vote their dissenting shares against approval of
the Merger. Record shareholders may vote part of the shares that they are
entitled to vote in favor of the Merger or abstain from voting a part of such
shares without jeopardizing their dissenters' rights as to other shares;
however, if record shareholders vote part of the shares they are entitled to
vote in favor of the Merger and fail to specify the number of shares they are
so voting, it is conclusively presumed under California law that their
approving vote is with respect to all shares that they are entitled to vote.
Voting against the Merger will not of itself, absent compliance with the
provisions of Chapter 13 of the CGCL summarized herein, satisfy the requirement
of the CGCL for exercise and perfection of dissenters' rights. However, any
shareholder desiring to exercise dissenters' rights must vote against approval
of the Merger.
Notice of Approval
If shareholders have a right to require Rockford to purchase their shares for
cash under the dissenters' rights provisions of the CGCL, Rockford will mail to
each such shareholder a notice of approval of the Merger within ten days after
the date of shareholder approval, stating the price determined by it to
represent the "fair market value" of the dissenting shares. The statement of
price will constitute an offer to purchase any dissenting shares at that price.
Submission of Stock Certificates
Within 30 days after the mailing of the notice of approval of the Merger,
dissenting shareholders must submit to Rockford or its transfer agent, at the
address set forth above, certificates representing the dissenting shares to be
purchased, to be stamped or endorsed with a statement that the shares are
dissenting shares or are to be exchanged for certificates of appropriate
denomination so stamped or endorsed. The notice of approval of the Merger will
specify the date by which the submission of certificates for endorsement must
be made and a submission made after that date will not be effective for any
purpose.
Purchase of Dissenting Shares
If a dissenting shareholder and Rockford agree that the shares are dissenting
shares and agree upon the price of the shares, Rockford will, upon surrender of
the certificates, make payment of that amount (plus interest thereon at the
legal rate on judgments from the date of such agreement) within 30 days after
the agreement on price. Any agreement between dissenting shareholders and
Rockford fixing the "fair market value" of any dissenting shares must be filed
with the Secretary of Rockford.
If Rockford denies that the shares are dissenting shares, or Rockford and a
dissenting shareholder fail to agree upon the "fair market value" of the
shares, the dissenting shareholder may, within six months after the date on
which notice of approval of the Merger was mailed to the shareholder, but not
thereafter, file a
35
<PAGE>
complaint (or intervene in a pending action, if any) in the Superior Court for
Orange County, State of California, requesting that the Superior Court
determine whether the shares are dissenting shares and the "fair market value"
of such dissenting shares. The Superior Court may determine, or appoint one or
more impartial appraisers to determine the "fair market value" per share of the
dissenting shares. The costs of the action, including reasonable compensation
to the appraisers to be fixed by the court, will be assessed or apportioned as
the Superior Court considers equitable, but if the "fair market value" is
determined to exceed the price offered to the shareholder by Rockford, then
Rockford will be required to pay such costs (including, in the discretion of
the Superior Court, attorneys' fees, fees of expert witnesses and interest at
the legal rate on judgments, if such "fair market value" is determined to
exceed 125% of the price offered by Rockford). A dissenting shareholder must
bring this action within six months after the date on which notice of approval
of the Merger was mailed to the shareholder whether or not the corporation
responds within such time to the shareholder's written demand that Rockford
purchase for cash shares voted against the approval of the Merger.
The Merger Agreement entitles American Express to terminate the Merger
Agreement if holders of five percent (5%) or more of the outstanding shares of
the Rockford Common Stock have exercised their dissenters rights in accordance
with the CGCL.
36
<PAGE>
THE MERGER AGREEMENT
The following is a summary of certain provisions of the Merger Agreement.
This summary is qualified in its entirety by reference to the Merger Agreement,
which is incorporated herein by reference in its entirety and attached to this
Proxy Statement-Prospectus as Appendix A. Shareholders of Rockford are urged to
read the Merger Agreement in its entirety for a more complete description of
the Merger.
GENERAL
The Merger Agreement provides that, upon the satisfaction or waiver of
specified conditions, RXP will merge with and into Rockford, with Rockford as
the Surviving Corporation. Upon the effectiveness of the Merger, the separate
existence of RXP will cease and American Express will own directly 100% of the
outstanding capital stock of Rockford. The closing of the Merger is expected to
take place as soon as practicable after the satisfaction or waiver of the
conditions set forth in the Merger Agreement, including approval of the Merger
Agreement by Rockford shareholders.
Upon and immediately following the Merger, the Rockford Articles of
Incorporation will be the Articles of Incorporation of the Surviving
Corporation and the Bylaws of Rockford will be the Bylaws of the Surviving
Corporation. The initial officers and directors of the Surviving Corporation
will be the officers and directors of RXP immediately prior to the Merger.
CONVERSION OF SHARES
The Merger Agreement provides that, at the Effective Time, each share of
Common Stock outstanding immediately prior to the Effective Time will be
converted into a right to receive that number of shares of American Express
Common Shares that could be purchased for $11.88 based on the average of the
closing price per share of American Express Common Shares on the NYSE during
the ten (10) consecutive trading days ending on the third full trading day
immediately preceding the Effective Time. Rockford Shareholders will receive
cash in lieu of fractional shares of American Express Common Shares.
STOCK OPTIONS AND WARRANTS
Pursuant to the Merger Agreement, at the Effective Time, Rockford's
obligations with respect to each outstanding Rockford stock option shall be
assumed by American Express. The Rockford stock options so assumed by American
Express shall continue to have, and be subject to, the same terms and
conditions as set forth in the stock option plans and agreements pursuant to
which such Rockford Stock Options were issued as in effect immediately prior to
the Effective Time, except that each such Rockford Stock Option shall be
exercisable (subject to applicable vesting schedules) for that number of whole
shares of American Express Common Shares equal to the product of the number of
shares of Rockford Common Stock covered by such Rockford Stock Option
immediately prior to the Effective Time multiplied by the Exchange Ratio and
rounded up to the nearest whole number of shares of American Express Common
Shares. In addition, the per share exercise price of each Rockford Stock Option
will be appropriately adjusted. Each Identified Shareholder (as defined under
"The Shareholders Option Agreement") agrees (i) to exercise or cause to be
exercised all Rockford Stock Options directly or indirectly beneficially owned
by him (the "Identified Shareholder Options") prior to the Effective Time and
(ii) that to the extent not exercised, all Identified Shareholder Options owned
by such Identified Shareholder will automatically terminate at the Effective
Time.
Each Rockford warrant shall be converted into an American Express warrant on
the same terms and conditions except that each such warrant shall be
exercisable for that number of whole shares of American Express Common Shares
equal to the product of the number of shares of Rockford Common Stock covered
by such warrant immediately prior to the Effective Time multiplied by the
Exchange Ratio and rounded up to the nearest whole number of shares of American
Express Common Shares. In addition, the per share exercise price of each
Rockford warrant will be appropriately adjusted.
37
<PAGE>
CERTAIN REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain representations and warranties by
Rockford relating to a number of matters, including, among others, (i) its due
incorporation, good standing and power to conduct its business; (ii) its
capital structure; (iii) the ownership, due incorporation, good standing and
power to conduct the businesses of its subsidiaries; (iv) its authority to
enter into the Merger Agreement; (v) the absence of legal and contractual
conflicts in connection with the consummation of the Merger; (vi) its timely
filing since January 1, 1996 of all required Securities and Exchange Commission
(the "SEC") documents and its delivery to American Express of unaudited
consolidated financial statements at September 30, 1998; (vii) the absence
since October 1, 1998 to the date of the Merger Agreement of any action which
would require the consent of American Express if Section 5.2(b) and (c) of the
Merger Agreement (regarding the conduct of the business pending the Merger) had
been in effect during such period; (viii) the absence since January 1, 1998 of
certain changes in Rockford's business, operations, affairs, prospects,
properties, assets, profits or condition (financial or otherwise) and material
liabilities and the origination of a specified amount of new leases and loans
from January 1, 1998 through October 31, 1998; (ix) its proper filing and
timely payment of all taxes, and other tax matters; (x) the absence of pending
or, to Rockford's knowledge, threatened material litigation against Rockford
(other than as disclosed); (xi) an accurate list of all Material Contracts (as
defined in the Merger Agreement) and the absence of any material defaults
thereunder; (xii) its compliance with obligations and eligibility of leases
with respect to the securitization facilities of Rockford, confirming the
accuracy of the representations and warranties contained therein and the
absence of the occurrence of certain events thereunder; (xiii) the absence of
any untrue statements or omissions made by Rockford in connection with the
registration statement and proxy materials for the Merger; (xiv) the status of
Rockford's employee benefit plans and its compliance with applicable law with
respect to such plans; (xv) title to its properties; (xvi) Rockford's
intellectual property rights and Year 2000 compliance; (xvii) the status of
Rockford's labor relations, Rockford's compliance with applicable labor laws
and the absence of workers' compensation or retaliation claims in excess of
certain amounts; (xviii) Rockford's compliance with applicable laws with
respect to the operation of its business; (xix) Rockford's compliance with
applicable environmental laws and the absence of any notice of violation or
liability under such laws; (xx) Rockford's insurance policies; (xxi) the
absence of any agreement restricting Rockford's business practices; (xxii) the
validity of Rockford's accounts receivable and net investment in direct finance
leases; (xxiii) affiliate transactions; (xxiv) the receipt by Rockford of a
fairness opinion from Piper Jaffray; (xxv) action taken by Rockford to exempt
the Merger Agreement and the Shareholders Option Agreement from any
antitakeover laws; (xxvi) the absence of the use of brokers and finders in
connection with the Merger, except Rockford's financial advisors Credit Suisse
First Boston Incorporated and Piper Jaffray; (xxvii) the absence of any action
by Rockford that would jeopardize the Merger as a reorganization within the
meaning of Section 368(a) of the Code; and (xxviii) Rockford's termination of
any discussions with any other party with respect to an Acquisition Proposal.
Such representations and warranties are subject to various qualifications and
limitations.
In addition, the Merger Agreement contains certain representations and
warranties made by the Identified Shareholders, including, among others, that,
to their knowledge, the representations and warranties of Rockford are accurate
and correct in all material respects, and confirmation that the representations
and warranties of such Identified Shareholders as set forth in the
Shareholders' Option Agreement are accurate and correct.
The Merger Agreement also contains certain representations and warranties by
American Express relating to certain matters, including, among others, (i) due
incorporation, good standing and power to conduct its business; (ii) authority
to enter into the Merger Agreement; (iii) its capital structure; (iv) filings
made by American Express with the SEC; (v) absence of untrue statements of
material facts in disclosures made by American Express in this Proxy Statement-
Prospectus; (vi) absence of certain material litigation; (vii) American
Express' compliance with applicable law with respect to the operations of its
business; (viii) absence of conflicts in entering into the Merger Agreement;
and (ix) not having taken any actions that would jeopardize the Merger as a
reorganization within the meaning of Section 368(a) of the Code.
38
<PAGE>
None of the representations and warranties of Rockford or American Express
will survive the consummation of the Merger. However, as discussed above, the
Identified Shareholders have made a representation and warranty to the effect
that, to their knowledge, the representations and warranties of Rockford
contained in the Merger Agreement are accurate and correct in all material
respects. That representation and warranty will survive the consummation of the
Merger and the Identified Shareholders will have liability with respect to any
breach of the representation and warranty on a several basis based on their pro
rata ownership of the Rockford Common Stock prior to the Merger, but only in
the event that in making that representation and warranty they are determined
to have acted with actual and intentional fraud.
CERTAIN COVENANTS AND AGREEMENTS
Conduct of Business of Rockford
Rockford has agreed, for itself and its subsidiaries, that, during the period
from the date of the Merger Agreement to the Effective Time, except as
contemplated by the Merger Agreement or to the extent that American Express
otherwise consents in writing, among other things, it will operate its business
only in the ordinary course in the same manner as previously conducted and will
not engage in any new line of business or enter into any agreement, transaction
or activity or make any commitment except in the ordinary course of business;
and, consistent with such operation, will use all commercially reasonable
efforts consistent with past practices to preserve its business organizations
intact, to keep available to it the goodwill of its customers, vendors,
business partners and others with whom business relationships exist to the end
that its goodwill and ongoing business shall not be impaired at the Effective
Time, and will further exercise all commercially reasonable efforts to maintain
its existing relationships with its employees in general. Without limiting the
foregoing, Rockford has agreed that, except to the extent consented to by
American Express in writing, it will not and it will not permit any of its
subsidiaries to, among other things, (i) amend its articles of incorporation or
bylaws or other similar governing documentation; (ii) make, declare or pay any
dividends or other distribution; (iii) distribute, sell, issue, redeem,
purchase or otherwise acquire any shares of capital stock, change the number of
shares of its authorized or issued capital stock, grant any option, warrant or
other right to purchase capital stock (other than in connection with exercise
of outstanding options and warrants); (iv) increase its long or short-term
debt, loans or obligations for others, except in ordinary course and in no
event to grant loans to any person in amounts greater than $500,000, unless
committed to be purchased by a third-party on a non-recourse basis; (v) incur
capital expenditures individually greater than $100,000 or $300,000 in
aggregate; (vi) sell, transfer, assign, mortgage or pledge its properties or
assets in amounts individually greater than $100,000 or $250,000 in aggregate,
except in the ordinary course of business consistent with past practices; (vii)
approve any new or increased compensation arrangements in excess of $30,000 in
aggregate or amend or terminate any Rockford Benefit Plan; (viii) amend or
terminate any Material Contract or enter into a new Material Contract; (ix)
negotiate any collective bargaining agreement; (x) change accounting methods or
materially change control systems; (xi) make payments, loans or advances (other
than in ordinary course) or enter into any agreement or arrangement with any
officer, director, affiliate or associate; (xii) acquire any interest in any
company or other organization; (xiii) settle any Tax liability that Rockford
has contested; (xiv) make payments in excess of $100,000 individually or
$250,000 in aggregate with respect to any claims, litigation or liabilities,
other than when due and either reflected or reserved in the financials
statements or incurred since June 30, 1998 in ordinary course consistent with
past practice; (xv) modify Rockford's credit approval/declination criteria in
any material respect; (xvi) fail to perform in any material respect all
obligations under Material Contracts; (xvii) maintain insurance policies;
(xviii) fail to service the lease portfolios under the securitization
facilities of Rockford or fail to continue to collect accounts payable and
lease payments due thereunder; (xix) fail to file all required tax returns;
(xx) fail to maintain licenses required to conduct business; (xxi) hire
additional employees with aggregate annual compensation greater than
$300,000 or business partners, unless they enter into a business partner
agreement in the form agreed to by Rockford and American Express; (xxii) fail
to communicate on a regular and reasonably frequent basis with representatives
of American Express regarding ongoing operations of Rockford; and (xxiii) take
any action that would affect the American Express' ability to perform under the
Merger Agreement.
39
<PAGE>
No Solicitation
Pursuant to the Merger Agreement, Rockford has agreed that it will not, will
not permit any of its subsidiaries to, and will not authorize or permit any
officer, director or employee of, or any investment banker, attorney or other
advisor or representative or agent of, Rockford or any of its subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage the submission of
any Acquisition Proposal (as defined below) or (ii) participate in or encourage
any discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to encourage or
facilitate any inquiries or the making of any proposal that constitutes, or may
reasonably be expected to lead to, any Acquisition Proposal; provided, however,
that, prior to the approval of the Merger by the Rockford Shareholders, the
Board may furnish information to, or enter into discussions or negotiations
with, any person or entity that makes an unsolicited Acquisition Proposal if,
and only to the extent that (A) the Board, after consultation with and based on
the written advice of outside counsel, determines in good faith that in order
for the Board to comply with its fiduciary duties to shareholders under
applicable law it is required to take such action, (B) prior to providing
information in any form (whether orally or in writing) to any person or entity,
Rockford receives from such person or entity an executed agreement in
reasonably customary form relating to the confidentiality of information to be
provided to such person or entity, and (C) the Acquisition Proposal contains an
offer of consideration that is materially superior to the consideration set
forth in the Merger Agreement.
The Merger Agreement provides that Rockford will (i) promptly advise American
Express orally and in writing of (A) the receipt by it (or any of the other
entities or persons referred to above) of any Acquisition Proposal, or any
inquiry which could reasonably be expected to lead to any Acquisition Proposal,
(B) the material terms and conditions of such Acquisition Proposal or inquiry,
and (C) the identity of the person making any such Acquisition Proposal or
inquiry, (ii) keep American Express reasonably informed of the status and
details of any such Acquisition Proposal or inquiry and (iii) negotiate with
American Express to make such adjustments in the terms and conditions of the
Merger Agreement as would enable Rockford to proceed with the transactions
contemplated by the Merger Agreement.
For purposes of the Merger Agreement, "Acquisition Proposal" means any bona
fide proposal with respect to a merger, consolidation, share exchange, joint
venture, business combination, reorganization or similar transaction involving
Rockford or any of its subsidiaries, or any purchase of all or any significant
portion of the assets of Rockford or any of its subsidiaries. The term
"materially superior" means consideration which, if the transaction subject to
such Acquisition Proposal were consummated, would result in a value of the
transaction which is the subject of such Acquisition Proposal exceeding the
Merger transaction value by 5% or more.
Actions by Rockford Board
The Merger Agreement prohibits the Rockford Board from (i) withdrawing or
modifying in any manner adverse to American Express its approval or
recommendation of the Merger Agreement or (ii) approving, recommending or
causing Rockford to enter into an agreement with respect to any Acquisition
Proposal; unless, if prior to the approval of the principal terms of the Merger
Agreement by the Rockford Shareholders, Rockford receives an unsolicited
Acquisition Proposal and the Board determines in good faith, following
consultation with and based upon the written advice of outside counsel, that it
is required to do so in order to comply with its fiduciary duties to Rockford
shareholders under applicable law. See "Termination; Fees and Expenses" below
regarding certain payments which may be required to be made by Rockford to
American Express if the Board take the actions described in this paragraph.
The Merger Agreement also provides that if any "fair price," "moratorium,"
"control share," "business combination," "fair price," "shareholder protection"
or similar or other antitakeover statute or regulation is enacted and becomes
applicable to the proposed Merger, the Shareholders Option Agreement or the
transactions contemplated thereby or by the Merger Agreement, Rockford and the
Rockford Board shall grant such approval and will take such actions within
their authority so that the Shareholders Option Agreement will
40
<PAGE>
remain in full force and effect and so that the Merger and the other
transactions contemplated by the Merger Agreement and the Shareholders Option
Agreement may be consummated as promptly as practicable on the terms
contemplated thereby and otherwise will use all commercially reasonable efforts
to eliminate or minimize the effects of any such statute or regulation on the
Merger, the Shareholders Option Agreement and the transactions contemplated
thereby and by the Merger Agreement. During the term of the Merger Agreement
and the Shareholders Option Agreement, Rockford has agreed not to adopt, effect
or implement any "shareholders' rights plan," "poison pill" or similar
arrangement.
Indemnification; Directors' and Officers' Insurance
The Merger Agreement provides that the articles of incorporation and bylaws
of the Surviving Corporation will contain the provisions or substantially
similar provisions for indemnification of Rockford directors and officers that
are currently contained in Rockford's articles of incorporation and bylaws and
that the provisions will not be amended, repealed or otherwise modified for a
period of six years after the Effective Time in a manner that would adversely
affect the rights thereunder of individuals who at any time prior to the
Effective Time were directors or officers of Rockford in respect of actions or
omissions occurring at or prior to the Effective Time (including, without
limitation, the transactions contemplated by the Merger Agreement), unless such
modification is required by law.
In addition to the foregoing, for six years from the Effective Time, the
Surviving Corporation will maintain in effect directors' and officers'
liability insurance covering those persons who as of the date of the Merger
Agreement were covered by Rockford's directors' and officers' liability
insurance; provided, however, that (i) in lieu of purchasing new coverage, the
Surviving Corporation, with American Express' consent, may purchase an
extension under its existing policy and (ii) in the event that the cost of the
insurance in any year exceeds 150% of the premium cost for such policy during
the year ended December 31, 1998, American Express will cause the Surviving
Corporation to provide coverage affording the same protection as maintained by
American Express as of such date for its officers and directors.
American Express has also agreed to indemnify Messrs. Ricco, Hartmann and
Seigel in certain circumstances following the exercise of the option granted
and American Express pursuant to the Shareholders Option Agreement.
CONDITIONS PRECEDENT TO THE MERGER
Conditions to Each Party's Obligations to Effect the Merger
The respective obligations of each party to effect the Merger are subject to
the satisfaction of certain conditions, including the following: (i) obtaining
the requisite approval of the Rockford Shareholders; (ii) all material consents
and approvals of governmental entities having been obtained; (iii) the
applicable waiting period under the Hart-Scott-Rodino Act having expired; (iv)
there being no law, rule, regulation, order, decree or injunction in effect
that would make illegal, materially restrict or in any way prevent or prohibit
the Merger or the transactions contemplated by the Merger Agreement; (v) the
Registration Statement having been declared effective by the SEC with no stop
order in effect, pending or threatened; (vi) the American Express Common Shares
to be issued having been authorized for listing on the NYSE and qualified under
applicable state securities laws; and (vii) the receipt of a tax opinion from
King & Spalding, counsel to American Express.
Conditions to Obligation of Rockford to Effect the Merger
The obligations of Rockford to effect the Merger are subject to the
satisfaction of certain additional conditions, including the following: (i)
American Express' representations and warranties being true as of the Closing
Date (subject to certain qualifications); (ii) American Express and RXP having
performed in all material respects all of their covenants and agreements under
the Merger Agreement; (iii) American Express' delivery of an officers
certificate as to compliance with (i) and (ii) above; (iv) Rockford having
received letters from Ernst & Young LLP regarding certain financial information
of American Express included in this Proxy Statement-Prospectus; (v) Rockford
having received a written opinion from the General Counsel of American
41
<PAGE>
Express covering certain customary matters; and (vi) there being no pending
litigation that would have a Material Adverse Effect on American Express.
Conditions to Obligation of American Express to Effect the Merger
The obligations of American Express to effect the Merger are subject to the
satisfaction of certain additional conditions, including the following: (i)
Rockford's representations and warranties being true as of the Closing Date;
(ii) Rockford having performed in all material respects all of its covenants
and agreements under the Merger Agreement; (iii) Rockford's and the Identified
Shareholders' delivery of certificates as to compliance with (i) and (ii)
above; (iv) American Express having received letters from Deloitte & Touche LLP
regarding certain financial information of Rockford included in this Proxy
Statement-Prospectus and with respect to certain other financial information of
Rockford; (v) American Express having received certain letters from affiliates
of Rockford; (vi) American Express having received a written opinion from
O'Melveny & Myers LLP covering certain customary matters; (vii) the absence of
certain specified pending or threatened litigation; (viii) receipt of requested
director resignation letters; (ix) Rockford having at least $21 million in cash
and cash equivalents and such amount exceeding the amount required to be
reserved by Rockford pursuant to its securitization facilities; (x) Rockford
having retained all cash proceeds obtained in connection with the exercise of
Common Stock Options; (xi) there having not occurred from the date of the
Merger Agreement to the Effective Time any change that would constitute a
Material Adverse Change, which is defined as (a) Rockford having originated, in
the ordinary course of business consistent with past practice, leases for the
year ended December 31, 1998 having an aggregate value of not less than $215
million, (b) the leases and loans in the portfolio of Rockford and its
subsidiaries ("Leases and Loans"), the scheduled payments of which are thirty
days past due at the end of the month preceding the Closing Date, exceeding in
aggregate dollar value more than 10% of the aggregate dollar value of all
outstanding Leases and Loans as of that date, or (c) at the end of the calendar
month immediately preceding the Closing Date, there shall have been at least a
100 basis point increase, if the Closing occurs on or before March 31, 1999, or
at least a 125 basis point increase, if the Closing occurs on or after April 1,
1999, in the ratio of Leases and Loans accounts delinquent 180 days or more to
gross unpaid contract balances for Leases and Loans as compared to the same
ratio at September 30, 1998, and (xii) all material third party consents having
been obtained.
TERMINATION; FEES AND EXPENSES
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after the approval by the Rockford Shareholders, (i) by
mutual written consent of Rockford and American Express; (ii) by Rockford if:
(a) subject to extensions under the Merger Agreement, the Merger is not
consummated on or before June 30, 1999, unless the failure of such occurrence
is due to Rockford's failure to perform, satisfy or observe the covenants,
agreements and conditions in the Merger Agreement; (b) events occur which
render impossible the satisfaction of one or more of Rockford's closing
conditions and such conditions are not waived by Rockford, unless the failure
of such occurrence is due to Rockford's failure to perform or observe the
covenants, agreements and conditions in the Merger Agreement; (c) Rockford is
enjoined or restrained by any governmental authority or other regulatory body
(including any court) which prevents the performance by Rockford of its
obligations under the Merger Agreement and such injunction is not withdrawn by
June 30, 1999, subject to extensions under the Merger Agreement; (d) Rockford's
shareholders do not approve the Merger; or (e) Rockford's Board withdraws or
materially modifies its approval or recommendation of the Merger or approves or
recommends another Acquisition Proposal, and (iii) by American Express if: (a)
subject to extensions under the Merger Agreement, the Merger is not consummated
on or before June 30, 1999, unless the failure of such occurrence is due to
American Express' failure to perform, satisfy or observe the covenants,
agreements and conditions in the Merger Agreement; (b) events occur which
render impossible the satisfaction of one or more of American Express'
conditions and such conditions are not waived by American Express, unless the
failure of such occurrence is due to American Express' failure to perform or
observe the covenants, agreements and conditions to be performed by American
Express at or before the Effective Time; or (c) American Express is enjoined or
restrained by any governmental authority or other regulatory body (including
any court) which prevents the performance by American Express of its
obligations under the Merger
42
<PAGE>
Agreement and such injunction is not withdrawn by June 30, 1999, subject to
extensions under the Merger Agreement; (d) Rockford's Shareholders do not
approve the Merger; (e) Rockford's Board withdraws or materially modifies its
approval or recommendation of the Merger or approves or recommends another
Acquisition Proposal; or (f) Rockford Shareholders representing 5% or more of
the outstanding shares of Rockford Common Stock have exercised their
dissenters' rights in accordance with the CGCL.
Except as described below, if the Merger Agreement is terminated for any
reason without breach by any party, each party will pay its own expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby, except that all expenses associated with the printing and
mailing of the Registration Statement, the Proxy Statement and related
documents and all filing or registration fees will be divided equally between
American Express and Rockford.
Rockford will be obligated to pay American Express upon demand $2 million
upon the occurrence of the following: (i) the Board takes any action to cause
Rockford to enter into an agreement in connection with an Acquisition Proposal;
(ii) Rockford terminates the Merger Agreement due to the Boards (a) withdrawal
or modification in a manner adverse to American Express of its recommendation
of the Merger or (b) approval or recommendation of another Acquisition
Proposal; (iii) American Express terminates the Merger Agreement based upon the
Rockford's action in (i) and (ii) above; or (iv) the Merger Agreement is
terminated due to the failure to receive shareholder approval of the Merger at
the Special Meeting and at the time of such meeting an Acquisition Proposal has
been announced.
In addition, if Rockford enters into an agreement or consummates an
Acquisition Proposal within one year of the above payment, Rockford will be
obligated to pay to American Express an additional fee equal to 25% of the
difference between (i) the aggregate value of the Acquisition Proposal to the
shareholders of Rockford, valued as of the date of the agreement relating to
such Acquisition Proposal and (ii) the aggregate value of the Merger to the
shareholders of Rockford, valued on the basis of Rockford having outstanding a
specified number of shares of Common Stock and a merger consideration of $11.88
per share.
AMENDMENT AND WAIVER
The Merger Agreement may be amended by the parties thereto at any time,
except that after the approval of the Merger Agreement by the Rockford
Shareholders, no amendment may be made which would reduce the amount or change
the form of the consideration to be delivered to the Rockford Shareholders or
otherwise materially adversely affect the interests of such shareholders unless
such amendment is approved by the Rockford Shareholders. The Merger Agreement
may not be amended, except by an instrument in writing signed by the parties to
the Merger Agreement.
Any term or provision of the Merger Agreement may be waived at any time by
the party which is, or whose shareholders are, entitled to the benefits
thereof. Any such waiver must be set forth in an instrument in writing signed
on behalf of such party.
43
<PAGE>
THE SHAREHOLDERS OPTION AGREEMENT
As a condition to the willingness of American Express to enter into the
Merger Agreement, Gerry Ricco, Larry Hartmann and Brian Seigel (the "Identified
Shareholders") entered into a Shareholders Option Agreement with American
Express dated November 9, 1998. The following summary of the Shareholders'
Option Agreement is qualified in its entirety by reference to the Shareholders'
Option Agreement, which is incorporated herein by reference in its entirety and
a copy of which is filed as an exhibit to the Registration Statement of which
this Proxy Statement-Prospectus is a part. Shareholders of Rockford are urged
to read the Shareholders Option Agreement entirely for a more complete
description of the terms thereof.
OPTION TO PURCHASE THE SHARES OF ROCKFORD COMMON STOCK OWNED BY THE IDENTIFIED
SHAREHOLDERS; PROXY AND AGREEMENT TO VOTE
Pursuant to the Shareholders Option Agreement, each Identified Shareholder
has granted American Express an irrevocable and continuing option (the
"Option"), upon the occurrence of certain events, to purchase all shares of
Rockford Common Stock owned of record by such Identified Shareholders (the
"Option Shares") at a cash price per share equal to $11.88 (the "Purchase
Price"); provided, however, if the Merger is consummated after the purchase of
the Option Shares pursuant to the exercise of the Option and pursuant thereto
American Express pays as Merger consideration a per share price greater than
the Purchase Price, on the Effective Date of the Merger American Express will
pay the Identified Shareholders an additional amount equal to the difference
between the price paid in connection with the consummation of the Merger and
the Purchase Price multiplied by the number of such Identified Shareholders'
shares purchased upon exercise of the Option.
If American Express exercises its Option and the Merger is not consummated,
and within one year from the date American Express exercised its Option
American Express sells all or substantially all of the Option Shares to another
person in connection with an Acquisition Event (as defined below) involving
Rockford and a third party other than a wholly owned subsidiary of American
Express at a price per share above $13.38 (the "Measuring Price"), American
Express will pay each of the Identified Shareholders an amount equal to fifty
percent of the difference between the sales price per share paid to American
Express for the Option Shares of Rockford Common Stock sold by American Express
in such Acquisition Event and the Measuring Price multiplied by the number of
Option Shares sold by such Identified Shareholder to American Express pursuant
to the exercise of the Option.
The Option may be exercised by American Express, in whole but not in part, at
any time following the earliest to occur of any of the following events: (i)
any person shall have commenced or shall have filed a registration statement
under the Securities Act, with respect to a tender offer or exchange offer to
purchase any shares of Rockford Common Stock, such that upon consummation of
such offer such person would own or control 10% or more of the then outstanding
Rockford Common Stock; (ii) Rockford, without American Express' consent, shall
(A) have authorized, recommended, proposed or publicly announced an intention
to authorize, recommend or propose, or shall have entered into or publicly
announced an intention to enter into an agreement with any person to (1) effect
a merger, consolidation, combination, reorganization, share exchange, joint
venture involving an equity control event or similar transaction involving
Rockford or any of its subsidiaries, (2) directly or indirectly sell, lease or
otherwise transfer or dispose of, or agree to sell, lease or otherwise transfer
assets of Rockford or its subsidiaries representing 10% or more of the
consolidated assets of Rockford and its subsidiaries or (3) directly or
indirectly issue, sell or otherwise transfer or dispose of or agree to issue,
sell or otherwise transfer or dispose of securities representing 10% or more of
the voting power of Rockford (any of the foregoing an "Acquisition
Transaction"), or (B) directly or indirectly have otherwise taken any action in
respect of an Acquisition Transaction or an Acquisition Proposal made by any
party other than American Express; (iii) any person or group shall have
acquired beneficial ownership or the right to acquire beneficial ownership of,
or any group shall have been formed which beneficially owns or has the right to
acquire 10% or more of the then outstanding Rockford Common Stock other than
any person or group that, at the date of the Shareholders Option Agreement,
beneficially owns or has the right to acquire beneficial ownership of 10% or
more of the outstanding Rockford Common Stock; or (iv) any person other than
44
<PAGE>
American Express shall have made an Acquisition Proposal to Rockford or its
shareholders and such proposal shall have been publicly announced (any of (i),
(ii), (iii), or (iv) an "Acquisition Event").
Concurrent with the execution of the Shareholders Option Agreement, the
Identified Shareholders delivered the certificates representing the Option
Shares to an Escrow Agent.
CERTAIN COVENANTS OF THE IDENTIFIED SHAREHOLDERS
Each Identified Shareholder has agreed pursuant to the Shareholders Option
Agreement that such Identified Shareholder will not (i) enter into any
transaction, take any action or by inaction permit any event to occur that
would result in any of the representations and warranties of such Identified
Shareholder contained in the Shareholders Option Agreement being untrue or
incorrect at the time immediately after the occurrence of such event or the
date of any closing of the purchase of Option Shares, or (ii) dispose of or
encumber the Option Shares.
IRREVOCABLE PROXY AND RELEASE; AGREEMENT TO VOTE SHARES
Each Identified Shareholder represented that he has revoked or terminated any
proxies, voting agreements or similar arrangements previously given or entered
into with respect to the Option Shares and irrevocably appointed American
Express, during the term of the Shareholders Option Agreement, as proxy for
such Identified Shareholder to vote (or refrain from voting) in any manner as
American Express, in its sole discretion, may see fit, all of the Option Shares
of such Identified Shareholder for such Identified Shareholder and in such
Identified Shareholder's name, place and stead, at any annual, special or other
meeting or action of the shareholders of Rockford in lieu of a meeting or
otherwise, with respect to any issue brought before shareholders of Rockford.
The parties agreed that, neither American Express, nor American Express'
successors, assigns, subsidiaries, divisions, employees, officers, directors,
shareholders, agents and affiliates shall owe any duty to, incur any liability
of any kind whatsoever, including without limitation, with respect to any and
all claims, losses, demands, causes of action, costs, expenses (including
reasonable attorney's fees) and compensation of any kind or nature whatsoever
to any shareholder in connection with, as a result of or otherwise relating to
any vote (or refrain from voting) by American Express of the Option Shares
subject to the irrevocable proxy granted to American Express at any annual,
special or other meeting or action or the execution of any consent of the
shareholders of Rockford. If the issue on which American Express is voting
pursuant to the irrevocable proxy is the proposal to approve the principal
terms of the Merger Agreement, American Express has agreed to vote for such
proposal or give its consent, as applicable. Notwithstanding the foregoing, in
the event American Express elects not to exercise its rights to vote the Option
Shares pursuant to the irrevocable proxy, upon the request of American Express
each Identified Shareholder has agreed to vote all of his Option Shares during
the term of the Shareholders Option Agreement (i) if the issue on which the
Identified Shareholder is requested to vote is a proposal to approve the
principal terms of the Merger Agreement, each Identified Shareholder agreed to
vote in favor of or give his consent to, as applicable, that proposal or (ii)
otherwise in the manner directed by American Express at any annual, special or
other meeting or action of shareholders of Rockford in lieu of a meeting or
otherwise with respect to any issue brought before the shareholders of
Rockford.
TERMINATION
The Shareholders Option Agreement and the Option will terminate on the
earlier of: (i) the termination of the Merger Agreement, or (ii) relinquishment
of the option by American Express (the "Option Termination Date").
Notwithstanding anything to the contrary in the Shareholders Option Agreement
or any other agreement, if during the term of the Shareholders Option Agreement
an Acquisition Event shall occur or Rockford terminates the Merger Agreement
due to the withdrawal or material modification by the Rockford Board in a
manner adverse to American Express of the recommendation of the Merger
Agreement and the Merger or the Rockford Board shall have approved or
recommended another Acquisition Proposal (the date of such occurrence being the
"Trigger Date"), the Option Termination Date of the Shareholders Option
Agreement shall automatically extend to the date which occurs 12 months from
the Trigger Date.
45
<PAGE>
COMPARISON OF THE RIGHTS OF HOLDERS OF AMERICAN EXPRESS COMMON SHARES
AND HOLDERS OF ROCKFORD COMMON STOCK
As a consequence of the consummation of the proposed Merger, the shareholders
of Rockford, a California corporation, will become shareholders of American
Express, a New York corporation. New York corporations are governed by the New
York Business Corporation Law (the "NYBCL"). California corporations are
governed by the CGCL. Thus, the rights of former Rockford shareholders will be
governed by the NYBCL rather than the CGCL.
Differences between CGCL and the NYBCL and between the charters and bylaws of
Rockford and American Express will result in several changes in the rights of
shareholders of Rockford if the proposed Merger is effected. Certain
differences between the rights of holders of shares of American Express Common
Shares and shares of Rockford Common Stock are summarized below. The following
summary does not purport to be a complete statement of the rights of holders of
Rockford Common Stock under the CGCL, the Restated Articles of Incorporation of
Rockford, as amended (the "Rockford Charter"), and the Amended and Restated
Bylaws of Rockford (the "Rockford Bylaws"), as compared with the rights of
holders of American Express Common Shares under the NYBCL, the Restated
Certificate of Incorporation of American Express (the "American Express
Charter") and the Bylaws of American Express (the "American Express Bylaws"),
or a complete description of the specific provisions referred to herein. The
identification of specific differences is not meant to indicate that other
equally or more significant differences do not exist. In addition, the summary
is qualified in its entirety by reference to the CGCL, the NYBCL and the
governing corporate instruments of American Express and Rockford, to which
shareholders are referred. Copies of the American Express Charter and American
Express Bylaws are available for inspection at the offices of American Express
and copies will be sent to the holders of Rockford Common Stock upon request.
Pursuant to Sections 1500 and 213 of the CGCL, copies of the Rockford Charter
and the Rockford Bylaws are available for inspection at the principal executive
offices of Rockford.
DIVIDENDS
Rockford
Generally, a California corporation may pay dividends out of retained
earnings. Dividends may also be made if, immediately after giving effect
thereto, the sum of (i) the assets (excluding goodwill and certain other
assets) of the corporation is at least equal to 1.25 times its liabilities
(excluding certain deferred credits) and (ii) the current assets of such
corporation are at least equal to its current liabilities or, if the average of
the earnings of such corporation before taxes and interest expense for the two
preceding fiscal years were less than the average of the interest expense of
such corporation for such fiscal years, at least equal to 1.25 times its
current liabilities.
American Express
Under the NYBCL, a corporation may declare and pay dividends or make other
distributions on its outstanding shares, in cash, bonds or property except when
currently the corporation is insolvent or would thereby be made insolvent, or
when the declaration, payment or distribution would be contrary to any
restriction contained in the certificate of incorporation. The American Express
Charter contains no such restriction. Dividends may be declared or paid and
other distributions may be made out of surplus only, so that the net assets of
the corporation remaining after such declaration, payment or distribution shall
at least equal the amount of its stated capital.
SPECIAL MEETINGS OF SHAREHOLDERS; QUORUM; SHAREHOLDER ACTION BY WRITTEN CONSENT
Rockford
Under the CGCL, a special meeting of shareholders may be called by the board
of directors, the chairman of the board, the president or the holders of shares
entitled to cast not less than 10% of the votes at the meeting
46
<PAGE>
or such additional persons as may be provided in the charter or bylaws. In
addition, the Rockford Bylaws permit a vice president, the secretary and an
assistant secretary of Rockford to call a special meeting.
A quorum for a meeting of shareholders of Rockford is generally a majority of
the outstanding shares of Rockford entitled to vote at such a meeting. An
action by shareholders of Rockford requires a majority of votes cast at a
meeting of shareholders. The CGCL provides that these quorum requirements may
be increased or decreased by amendment of the charter, except that in no event
shall a quorum consist of less than one-third of the shares entitled to vote.
Under the CGCL, unless otherwise provided in the articles of incorporation,
any action which may be taken at a meeting of shareholders may also be taken by
the written consent of the holders of at least the same proportion of
outstanding shares as would be necessary to take such action at a meeting at
which all shares entitled to vote were present and voted, except that the
election of directors by written consent requires the unanimous consent of all
shares entitled to vote. The Rockford Charter contains no provision limiting
actions by written consent of its shareholders.
American Express
Under the NYBCL, a special meeting of the stockholders may be called by the
board and by such person or persons as may be authorized by the certificate of
incorporation or bylaws. Pursuant to the American Express Bylaws, a special
meeting of shareholders may be called at any time by resolution of the American
Express Board, a majority of the American Express directors then in office, the
chief executive officer of American Express or the secretary of American
Express upon written demand by the holder or holders of a majority of shares of
American Express then outstanding and entitled to vote in the election of
directors. No business other than that specified in the notice of the meeting
may be presented at any such special meeting.
A quorum for a meeting of the shareholders of American Express generally is a
majority of the outstanding shares of American Express entitled to vote at such
meeting. An action by the shareholders of American Express generally requires a
majority of the votes cast at a meeting of shareholders, except that election
of directors requires only a plurality of the votes cast. The NYBCL provides
that these quorum requirements may be increased by a change to the certificate
of incorporation or decreased by a change to the certificate of incorporation
or bylaws (which change to the bylaws may be effected by shareholders or by the
board), so long as the requirement for a quorum does not fall below one-third
of the shares entitled to vote.
Under the NYBCL, whenever shareholders are required or permitted to take any
action by vote, such action may be taken without a meeting on written consent
signed by the holders of all outstanding shares entitled to vote thereon,
unless the certificate of incorporation authorizes written consent of the
holders of less than all outstanding shares, but in no event less than the
minimum number of votes that would be necessary to authorize such action at a
meeting at which all shares entitled to vote thereon are present and voted.
CERTAIN VOTING RIGHTS
Rockford
The CGCL generally requires approval of any reorganization (which includes a
merger, certain exchange reorganizations and certain sale-of-asset
reorganizations) or sale of all or substantially all of the assets of a
corporation, by the affirmative vote of the holders of a majority (unless the
charter requires a higher percentage) of the outstanding shares of each class
of capital stock of the corporation entitled to vote thereon. The Rockford
Charter does not require a higher percentage of the holders of shares of
Rockford Common Stock to approve any such reorganization.
In general, under the CGCL, no approval of a reorganization is required by
the holders of the outstanding shares in the case of any corporation if such
corporation, or its shareholders immediately before such reorganization, or
both, own, immediately after such reorganization, equity securities (other than
warrants or
47
<PAGE>
rights) of the surviving or acquiring corporation, or the parent of either of
the constituent corporations, possessing more than five-sixths of the voting
power of such surviving or acquiring corporation or such parent.
Under the CGCL, a parent corporation may, without shareholder approval, merge
a subsidiary into itself if the parent corporation owns at least 90% of the
outstanding shares of each class of stock of such subsidiary.
American Express
Under the NYBCL, the recommendation of the board of directors and the
approval of two-thirds of the outstanding shares of American Express entitled
to vote thereon are generally required to effect a merger or consolidation or
to sell, lease or exchange substantially all of American Express' assets. The
NYBCL provides that the approval of only a majority of the outstanding shares
of a corporation is required to effect a merger or consolidation or to sell,
lease or exchange substantially all of American Express' assets if the
corporation was in existence on February 22, 1998 and its certificate of
incorporation expressly provides for majority approval or the corporation was
incorporated after February 22, 1998. The American Express Charter does not
contain such a provision.
Under the NYBCL, a New York corporation owning at least 90% of the
outstanding shares of each class of another New York corporation may merge such
corporation with itself without the authorization of the shareholders of either
corporation.
SIZE AND CLASSIFICATION OF THE BOARD OF DIRECTORS
Rockford
Under the CGCL, a Listed Corporation (as defined below) may, by amendment to
its charter or bylaws, divide its board of directors into as many as three
classes, and directors can be elected to serve staggered terms. The Rockford
Charter and Rockford Bylaws contain no such provision and, accordingly, all
directors are elected annually for a term of one year or until a successor is
elected. A "Listed Corporation" is defined under the CGCL as a corporation with
(i) securities listed on the New York or American Stock Exchange or (ii)
securities designated as a National Market System security on the Nasdaq
National Market if the corporation has at least 800 holders of equity
securities.
American Express
Under the NYBCL, by provision in the certificate of incorporation or bylaws,
the board of directors of a corporation may be divided into as many as four
classes, and directors can be elected to serve staggered terms. The American
Express Charter and the American Express Bylaws contain no such provision and
accordingly, all directors are elected annually for a term of one year or until
their successors are elected.
ELECTION OF DIRECTORS
Rockford
Under the CGCL (unless the corporate charter provides otherwise), any
shareholder of a Listed Corporation is entitled to cumulate his votes for the
election of directors provided that at least one shareholder has given notice
at the meeting prior to the voting of such shareholder's intention to cumulate
his votes and the corporation's charter does not specifically eliminate
cumulative voting. The Rockford Charter and the Rockford Bylaws provide for the
elimination of cumulative voting.
American Express
The NYBCL permits a corporation, by inclusion of a provision in its
certificate of incorporation, to utilize cumulative voting. The American
Express Charter does not contain such a provision. Pursuant to the NYBCL
48
<PAGE>
and the American Express Bylaws, directors of American Express are elected by a
plurality of the votes cast at a meeting by the holders of shares entitled to
vote thereon.
REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF DIRECTORS
Rockford
Under the CGCL, the holders of at least 10% of the number of outstanding
shares of any class of stock may initiate a court action to remove any director
for cause. In addition, any or all of the directors of a California corporation
may be removed without cause by the affirmative vote of a majority of the
outstanding shares entitled to vote. However, no director may be removed
(unless the entire board is removed) when the votes cast against removal would
be sufficient to elect the director if voted cumulatively at an election at
which the same total number of votes were cast and the entire number of the
directors authorized at the time of the director's most recent election were
then being elected. In the case of a corporation whose board is classified, a
director may not be removed if the votes cast against removal would be
sufficient to elect the director if voted cumulatively at an election at which
the same number of votes were cast.
Under the CGCL (unless otherwise provided in the charter or bylaws and except
for a vacancy created by the removal of a director), vacancies on the board of
directors may be filled by approval of the board. The Rockford Charter and the
Rockford Bylaws contain no provisions to the contrary. In addition, any vacancy
not filled by the directors and any vacancies on the board resulting from the
removal of directors may be filled by approval of the shareholders.
American Express
Under the NYBCL, any or all of the directors may be removed for cause by vote
of the shareholders. The certificate of incorporation or the specific
provisions of a bylaw adopted by the shareholders may provide for removal for
cause by action of the board of directors or by the holders of the shares of
any class or series, voting as a class, when so entitled by the provisions of
the certificate of incorporation. If the certificate of incorporation or the
bylaws so provide, any or all of the directors may be removed without cause by
vote of the shareholders. The American Express Bylaws provide that any director
may be removed with or without cause by vote of the shareholders, or with cause
by action of the Board.
The NYBCL permits the filling of vacancies on the board of directors by
approval of the board in all cases except where the vacancy was caused by the
removal of a director, in which case the vacancy must be filled by vote of the
shareholders, unless otherwise provided in the certificate of incorporation or
the specific provisions of a bylaw adopted by the shareholders. The American
Express Bylaws provide that vacancies occurring in the American Express board
for any reason, including vacancies occurring by reason of the removal of any
of the directors with or without cause, may be filled by a vote of the majority
of directors then in office.
AMENDMENT OF CHARTER AND BYLAWS
Rockford
Under the CGCL, amendments to the charter of a corporation generally require
approval by vote of directors and the holders of a majority of outstanding
shares entitled to vote thereon and, where their rights are affected, by the
holders of a majority of the outstanding shares of a class, whether or not such
class is entitled to vote thereon by the provision of the charter.
Under the CGCL, bylaws may be adopted, amended or repealed either by the vote
of a majority of the outstanding shares or by the approval of the board of
directors except (i) if the number of directors is set forth in the charter, in
which case such number may only be changed by an amendment to the charter, or
(ii) if the charter requires a larger percentage of shareholder or director
vote to approve a given action. The Rockford Charter does not require approval
by a supermajority of the shareholders of Common Stock or directors to approve
a given action.
49
<PAGE>
American Express
Under the NYBCL, amendments of the certificate of incorporation may generally
be authorized by vote of the board followed by a vote of the holders of a
majority of all outstanding shares entitled to vote thereon at a meeting of
shareholders. If any such amendment would adversely affect the rights of any
holders of shares of a class or series of stock as specified in the statute,
the vote of the holders of a majority of all outstanding shares of the class or
series, voting as a class, is also necessary to authorize such amendment.
Under the NYBCL, except as otherwise provided in the certificate of
incorporation, bylaws may be amended, repealed or adopted by a majority of the
votes of the shares at the time entitled to vote in the election of any
directors. When so provided in the certificate of incorporation or a bylaw
adopted by the shareholders, bylaws also may be amended, repealed or adopted by
the board by such vote as may be therein specified, which may be greater than
the vote otherwise prescribed by law, but any bylaw adopted by the board may be
amended or repealed by the shareholders entitled to vote thereon as provided by
the NYBCL. The American Express Bylaws may be amended or repealed or new bylaws
may be adopted by the Board of Directors, or by vote of the holders of the
shareholders, except that the Board may not amend or repeal any bylaw, or adopt
any new bylaw with respect to the subject matter of any bylaw, which
specifically states that it may be amended or repealed only by the
shareholders.
DISSENTERS'/APPRAISAL RIGHTS
Rockford
The provisions of the CGCL relating to dissenters' rights of appraisal are
described under the caption "The Merger--Dissenters' Rights of Appraisal."
American Express
Under the NYBCL, any shareholder of a corporation has the right to obtain
payment for the fair value of such shareholder's shares in the event of (i)
certain amendments or changes to the certificate of incorporation adversely
affecting the rights of such shares, (ii) certain mergers or consolidations of
the corporation if the shareholder is entitled to vote thereon, (iii) a merger
or consolidation where the shareholder is not entitled to vote or if such
shares will be canceled or exchanged for cash or other consideration other than
shares of the surviving or consolidated corporation or another corporation,
(iv) certain sales, leases, exchanges or other dispositions of all or
substantially all of the assets of the corporation which require shareholder
approval other than a transaction solely for cash, and (v) certain share
exchanges. In addition, any shareholder of a subsidiary corporation in a merger
authorized under NYBCL Section 905 or Section 907(c) (merger of 90% owned
subsidiary into parent corporation) who dissents to such merger is entitled to
appraisal rights. However, no appraisal rights will be available (i) to a
shareholder of the parent corporation in a merger authorized under NYBCL
Section 905 or 907(c), (ii) to a shareholder of the surviving corporation in a
merger whose rights as a shareholder are not adversely affected, and (iii) for
shares of any class or series of stock which at the record date to vote on the
plan of merger or consolidation were either listed on a national securities
exchange or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
CERTAIN BUSINESS COMBINATIONS AND REORGANIZATIONS
Rockford
The CGCL generally requires that, unless all shareholders of a class or
series consent, each share of such class or series of any party to a merger
must be treated equally with respect to any distribution of cash, property,
rights or securities. The CGCL also provides generally that if a corporation
that is party to a merger, or its parent, owns more than 50% but less than 90%
of the voting power of the other corporation that is party to such merger, the
nonredeemable shares of common stock of the controlled corporation may be
converted only into nonredeemable shares of the surviving corporation or a
parent party unless all of the shareholders of the class consent.
50
<PAGE>
The CGCL also provides generally that if a tender offer or a written proposal
for certain business combinations is made to some or all of a corporation's
shareholders by an "interested party," an affirmative written opinion as to the
fairness of the consideration to such shareholders must be delivered. An
"interested party" is generally a control person of the target corporation, an
entity directly or indirectly controlled by an officer or director of such
corporation or an entity in which a material financial interest is held by any
director or executive officer of such corporation.
American Express
Under NYBCL Section 912 (the "Business Combination Statute"), any business
combination (defined to include a variety of transactions, including mergers,
sales or dispositions of assets, issuances of stock, liquidations,
reclassifications and benefits from the corporation, including loans or
guarantees) with an interested shareholder (defined generally as any person
who, directly or indirectly, beneficially owns 20% or more of the outstanding
voting stock of a resident domestic New York corporation) is prohibited for a
period of five years after the date on which the interested shareholder first
became an interested shareholder (the "stock acquisition date"). After such
five-year period a business combination between a resident domestic New York
corporation and such interested shareholder is prohibited unless certain "fair
price" provisions are complied with or the business combination is approved by
a majority of the outstanding shares of voting stock, excluding stock
beneficially owned by such interested shareholder or its affiliates. The
restrictions of this section do not apply, however, to any business combination
with an interested shareholder if such business combination, or the purchase of
the stock by the interested shareholder that caused such shareholder to become
an interested shareholder, is approved by the board of directors of the
resident domestic New York corporation prior to the interested shareholder's
stock acquisition date. A resident domestic New York corporation may adopt an
amendment to its bylaws, approved by the affirmative vote of a majority of the
outstanding shares, other than the shares owned by the interested shareholder
and its affiliates, expressly electing not to be governed by the Business
Combination Statute. Such amendment will not, however, be effective until 18
months after such shareholder vote and will not apply to any business
combination with an interested shareholder who was an interested shareholder on
or prior to the effective date of such amendment. American Express has not
amended its Bylaws to elect not to be governed by the Business Combination
Statute.
American Express will be considered a resident domestic New York corporation
as long as at least 10% of its voting stock is owned beneficially by residents
of (or organizations having their principal offices in) the State of New York.
LIMITATION ON DIRECTORS' LIABILITY
Rockford
The CGCL provides that a corporation's charter may contain a provision
eliminating or limiting the personal liability of a director for monetary
damages in an action brought by or in the right of the corporation for breach
of a director's duties to the corporation and its shareholders. However, no
such provision may eliminate or limit the liability of directors (i) for acts
or omissions that involve intentional misconduct or a knowing and culpable
violation of law, (ii) for acts or omissions that a director believes to be
contrary to the best interests of the corporation or its shareholders or that
involve the absence of good faith on the part of the director, (iii) for any
transaction from which a director derived an improper personal benefit, (iv)
for acts or omissions that show a reckless disregard for the director's duty to
the corporation or its shareholders in circumstances in which the director was
aware, or should have been aware, in the ordinary course of performing a
director's duties, of a risk of serious injury to the corporation or its
shareholders, (v) for acts or omissions that constitute an unexcused pattern of
inattention that amounts to an abdication of the director's duty to the
corporation or its shareholders, (vi) for any improper transaction between a
director and a corporation in which the director has a material financial
interest, (vii) for any unlawful distribution to the shareholders of a
corporation or any unlawful loan of money and property to, or guarantee of the
obligations of, any director or officer of the corporation, (viii) for any act
or omission occurring prior to September 27,
51
<PAGE>
1987 when Section 204 of the CGCL became effective or (ix) for the liability of
an officer for any act or omission as an officer, notwithstanding that the
officer is also a director or that his or her actions, if negligent or
improper, have been ratified by the directors.
The Rockford Charter provides that the liability of Rockford directors for
monetary damages will be eliminated to the fullest extent permissible under the
CGCL.
American Express
Under the NYBCL, a corporation may limit or eliminate the personal liability
of directors to the corporation or its shareholders for damages for breach of
duty in such capacity. This limitation on liability is not available for acts
or omissions by a director which (i) were in bad faith, (ii) involved
intentional misconduct or a knowing violation of law, (iii) involved financial
profit or other advantage to which the director was not entitled or (iv)
resulted in a violation of a statute prohibiting certain dividend declarations,
certain payments to shareholders after dissolution and particular types of
loans. The American Express Charter provides for this limitation on directors'
liability. The American Express Charter also provides that if the NYBCL is
amended after approval by the shareholders of the American Express Charter to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of American Express
will be eliminated or limited to the fullest extent permitted by the NYBCL, as
amended from time to time.
INDEMNIFICATION OF OFFICERS AND DIRECTORS; INSURANCE
Rockford
Under the CGCL, a corporation has the power to indemnify, with certain
exceptions, any agent who is a party to any action (other than an action by or
in the right of the corporation to procure a judgment in its favor) against
expenses, judgments, fines and settlements if that person acted in good faith
and in a manner that person reasonably believed to be in the best interests of
the corporation and, in the case of a criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. In addition, a corporation
has the power to indemnify, with certain exceptions, any agent who is a party
to any action by or in the right of the corporation, against expenses actually
and reasonably incurred by that person in connection with the defense or
settlement of the action if that person acted in good faith and in a manner
that person believed to be in the best interests of the corporation and its
shareholders. An agent of a corporation for purposes of the CGCL includes
directors, officers and employees of such corporation.
The indemnification authorized by the CGCL is not exclusive and a corporation
may grant its directors certain additional rights to indemnification. The
Rockford Bylaws permit Rockford to indemnify each of its agents in excess of
the indemnification otherwise permitted by the CGCL with respect to actions for
breach of duty to Rockford, subject to certain limitations imposed by the CGCL.
American Express
Under the NYBCL, a corporation may indemnify its directors and officers
against judgments, fines, amounts paid in settlements and reasonable expenses,
including attorney's fees, incurred in any action or proceeding, other than an
action by or in the right of the corporation to procure judgment in its favor,
whether civil or criminal, if such director or officer acted in good faith, for
a purpose which he or she reasonably believed to be in or, in the case of
service to another corporation or enterprise, not opposed to, the best
interests of the corporation, and, in criminal proceedings, in addition, had no
reasonable cause to believe his or her conduct was unlawful. In the case of an
action by or in the right of the corporation to procure judgment in its favor,
the corporation may indemnify a director or officer if he or she acted in good
faith for a purpose which he or she reasonably believed to be in or, in the
case of service to another corporation or enterprise, not opposed to, the best
interests of the corporation, except that no indemnification may be made in
respect of (i) a
52
<PAGE>
threatened action, or a pending action which is settled or otherwise disposed
of, or (ii) any claim, issue or matter as to which such person has been
adjudged to be liable to the corporation, unless the court in which the action
was brought, or, if no action was brought, any court of competent jurisdiction,
determines upon application that, in view of all the circumstances of the case,
the person is fairly and reasonably entitled to indemnity for such portion of
the settlement amount and expenses as the court deems proper.
Any person who has been successful on the merits or otherwise in the defense
of a civil or criminal action or proceeding will be entitled to
indemnification. Except as provided in the preceding sentence, and unless
ordered by a court pursuant to the NYBCL, any indemnification under the NYBCL
pursuant to the paragraph above may be made only if authorized in the specific
case and after a finding that the director or officer met the requisite
standard of conduct by (i) the disinterested directors if a quorum is
available, (ii) the board upon the written opinion of independent legal counsel
or (iii) the shareholders.
The indemnification authorized by the NYBCL is not exclusive and a
corporation may grant its directors and officers certain additional rights to
indemnification. The American Express Bylaws provide for indemnification of
officers or directors to the fullest extent permitted by law.
53
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
Rockford and American Express file annual, quarterly and special reports,
proxy statements and other information with the Commission. You may read and
copy any reports, statements or other information that the companies file with
the Commission at the Commission's public reference rooms in Washington, D.C.,
New York, New York, and Chicago, Illinois. Please call the Commission at 1-800-
SEC-0330 for further information on the public reference rooms. These
Commission filings are also available to the public from commercial document
retrieval services at the Internet world wide web site maintained by the
Commission at "http://www.sec.gov." Reports, proxy statements and other
information filed by American Express should also be available for inspection
at the offices of the New York Stock Exchange, 120 Broad Street, New York,
New York 10005. Reports, proxy statements and other information filed by
Rockford should also be available for inspection at the offices of the National
Association of Securities Dealers, Inc., NASDAQ Reports Section, 1735 K Street,
Washington, D.C. 20006.
American Express filed a Registration Statement on Form S-4 (the
"Registration Statement") to register with the Commission its Common Shares to
be issued to Rockford Shareholders in the Merger. This Proxy Statement-
Prospectus is a part of the Registration Statement and constitutes a prospectus
of American Express. As allowed by Commission rules, this Proxy Statement-
Prospectus does not contain all of the information you can find in American
Express' Registration Statement or the exhibits to that Registration Statement.
You should rely only on the information contained or incorporated by
reference in this Proxy Statement-Prospectus. Neither Rockford nor American
Express has authorized anyone to provide you with information that is different
from what is contained in this Proxy Statement-Prospectus. This Proxy
Statement-Prospectus is dated January 6, 1999. You should not assume that the
information contained in this Proxy Statement-Prospectus is accurate as of any
date other than that date or such other date as this Proxy Statement-Prospectus
indicates. Neither the mailing of this Proxy Statement-Prospectus to Rockford
Shareholders nor the issuance of American Express Common Shares in the Merger
creates any implication to the contrary.
ROCKFORD
As allowed by the Commission rules, this Proxy Statement-Prospectus does not
contain all the information concerning Rockford. Rockford's Annual Report on
Form 10-K for the year ended December 31, 1997 and its Quarterly Report on Form
10-Q for the quarter ended September 30, 1998 are attached to this Proxy
Statement-Prospectus as Appendix D and Appendix E, respectively, and are
incorporated herein by reference. These documents contain important information
about Rockford and its finances and should be reviewed carefully and fully.
AMERICAN EXPRESS
The Commission allows American Express to "incorporate by reference"
information into this Proxy Statement-Prospectus, which means that American
Express can disclose important information to you by referring you to another
document filed separately with the Commission. The information incorporated by
reference is considered part of this Proxy Statement-Prospectus, except for any
information superseded by information contained directly in this Proxy
Statement-Prospectus or in later filed documents incorporated by reference in
this Proxy Statement-Prospectus.
54
<PAGE>
This Proxy Statement-Prospectus incorporates by reference the documents set
forth below that American Express has previously filed with the Commission.
These documents contain important information about American Express and its
finances and should be reviewed carefully and fully. Some of these filings have
been amended by later filings, which are also listed.
<TABLE>
<CAPTION>
AMERICAN EXPRESS
COMMISSION FILINGS
(FILE NO. 001-07657) PERIOD/AS OF DATE
-------------------- -----------------
<S> <C>
Annual Report on Form
10-K................... Year ended 12/31/97
(as amended on 06/17/98 and 06/30/98)
Quarterly Reports on
Form 10-Q.............. Quarter ended 03/31/98
Quarter ended 06/30/98
Quarter ended 09/30/98
Current Reports on Form
8-K.................... 01/26/98; 02/04/98;
02/10/98; 04/16/98;
04/23/98; 04/29/98;
07/27/98; 08/05/98;
10/26/98
</TABLE>
All documents filed by American Express under Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date hereof and prior to the date of the Special Meeting will be deemed to be
incorporated herein by reference and to be a part hereof from the date of such
filing. Any statement contained herein or in a document incorporated or deemed
to be incorporated herein by reference will be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
or in any other subsequently filed document which also is, or is deemed to be,
incorporated herein by reference modifies or supersedes such statement. Any
such statement so modified or superseded will not be deemed to constitute a
part hereof, except as so modified or superseded.
ANY DOCUMENTS FILED BY AMERICAN EXPRESS WITH THE COMMISSION AND INCORPORATED
BY REFERENCE (EXCLUDING EXHIBITS, UNLESS SPECIFICALLY INCORPORATED IN THIS
PROXY STATEMENT-PROSPECTUS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST
TO STEVEN P. NORMAN, SECRETARY; AMERICAN EXPRESS COMPANY; WORLD FINANCIAL
CENTER; 200 VESEY STREET; NEW YORK, NEW YORK 10285. TELEPHONE REQUESTS MAY BE
DIRECTED TO STEVEN P. NORMAN AT (212) 640-5583. IN ORDER TO ENSURE TIMELY
DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY FEBRUARY 5, 1999.
55
<PAGE>
DESCRIPTION OF AMERICAN EXPRESS' CAPITAL STOCK
Set forth below is a description of the Common Shares of American Express.
The following statements are summaries of, and are subject to the detailed
provisions of, the American Express Charter and Bylaws, and to the relevant
provisions of the NYBCL.
American Express currently is authorized to issue up to 1,200,000,000 shares
of Common Shares, par value $.60 per share. Dividends may be paid on the
American Express Common Shares out of funds legally available therefor, when
and if declared by American Express' Board of Directors.
Holders of the American Express Common Shares are entitled to share ratably
therein and in assets available for distribution on liquidation, dissolution or
winding up, subject, if preferred stock of American Express is then authorized
and outstanding, to any preferential rights of such preferred stock. Each share
of the American Express Common Shares entitles the holder thereof to one vote
at all meetings of share owners, and such votes are noncumulative. The American
Express Common Shares are not redeemable, have no subscription or conversion
rights and do not entitle the holders thereof to any pre-emptive rights.
LEGAL OPINION
The legality of the American Express Common Shares to be issued in connection
with the Merger will be passed upon by Louise Parent, Executive Vice President
and General Counsel of American Express. Certain federal income tax
consequences of the Merger will be passed upon by King & Spalding. Certain
matters as to Rockford will be passed by O'Melveny & Myers LLP.
EXPERTS
The consolidated financial statements of Rockford at December 31, 1997 and
1996, and for each of the three years in the period ended December 31, 1997,
included in Rockford's Annual Report on Form 10-K for the year ended December
31, 1997 that accompanies this Proxy Statement-Prospectus, have been audited by
Deloitte & Touche LLP, independent auditors, as set forth in their report with
respect thereto, and are included herewith in reliance upon that report, given
on the authority of the firm as experts in auditing and accounting.
The consolidated financial statements of American Express at December 31,
1997 and 1996, and for each of the three years in the period ended December 31,
1997 incorporated in this Proxy Statement-Prospectus by reference to the
American Express Annual Report on Form 10-K for the year ended December 31,
1997, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report with respect thereto, and are included herein by
reference in reliance upon that report, given on the authority of the firm as
experts in accounting and auditing.
Representatives of Deloitte & Touche LLP are expected to be present at the
Special Meeting. Such representatives will have the opportunity to make a
statement if they desire to do so and are expected to be available to respond
to appropriate questions.
56
<PAGE>
SHAREHOLDER PROPOSALS
Rockford will hold a 1999 Annual Meeting of Rockford Shareholders only if the
Merger is not consummated before the time of such meeting. In the event that
such a meeting is held, any proposals of Rockford Shareholders intended to be
presented at the 1999 Annual Meeting of Rockford Shareholders must have been
received by the Secretary of Rockford no later than December 22, 1998 in order
to be considered for inclusion in the Rockford 1999 proxy materials.
OTHER MATTERS
As of the date of this Proxy Statement-Prospectus, the Rockford Board knows
of no matters that will be presented for consideration at the Special Meeting
other than as described in this Proxy Statement-Prospectus. If any other
matters shall properly come before either the Special Meeting or any
adjournments or postponements thereof and be voted upon, the enclosed proxies
will be deemed to confer discretionary authority on the individuals named as
proxies therein to vote the shares represented by such proxies as to any such
matters. The persons named as proxies intend to vote or not to vote in
accordance with the recommendation of the management of Rockford.
57
<PAGE>
APPENDIX A
- --------------------------------------------------------------------------------
PLAN AND AGREEMENT OF MERGER
AMONG
AMERICAN EXPRESS COMPANY,
RXP ACQUISITION CORPORATION
AND
ROCKFORD INDUSTRIES, INC.
- --------------------------------------------------------------------------------
-------------------------
NOVEMBER 9, 1998
-------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
ARTICLE 1 PLAN OF MERGER................................................ A-1
1.1 The Merger.............................................. A-1
1.2 Conversion of Shares.................................... A-2
1.3 Exchange of Certificates................................ A-2
1.4 Dividends............................................... A-3
1.5 Escheat Laws............................................ A-4
1.6 Closing of Company Transfer Books....................... A-4
1.7 Dissenting Shares....................................... A-4
ARTICLE 2 CLOSING....................................................... A-4
2.1 Time and Place of Closing............................... A-4
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF COMPANY AND IDENTIFIED
SHAREHOLDERS.................................................. A-5
3.1 Disclosure Letter; Material Adverse Effect on Company... A-5
3.2 Organization, Good Standing and Power................... A-5
3.3 Capitalization.......................................... A-5
3.4 Company Subsidiaries; Voting Trusts..................... A-6
3.5 Authority; Enforceability............................... A-6
3.6 Non-Contravention; Consents............................. A-6
3.7 SEC Reports; Company Financial Statements............... A-7
3.8 Absence of Certain Changes.............................. A-8
3.9 Tax Matters............................................. A-9
3.10 Litigation.............................................. A-10
3.11 Material Contracts...................................... A-11
3.12 Securitization Facilities............................... A-12
3.13 Registration Statement, Etc............................. A-12
3.14 Employee Benefit Plans.................................. A-13
3.15 Property................................................ A-15
3.16 Intellectual Property; Year 2000........................ A-15
3.17 Labor Relations......................................... A-17
3.18 No Violation of Law..................................... A-18
3.19 Environmental Matters................................... A-19
3.20 Insurance Policies...................................... A-20
3.21 Absence of Certain Business Practices................... A-20
3.22 Accounts Receivable and Net Investment in Direct Finance
Leases and Loans: Restricted Cash...................... A-21
3.23 Transactions with Affiliates............................ A-21
3.24 Fairness Opinion........................................ A-21
3.25 Antitakeover Statutes; Shareholders' Rights Plan........ A-21
3.26 Board Recommendations................................... A-21
3.27 Brokers and Finders..................................... A-21
3.28 Merger.................................................. A-22
3.29 Voting Requirements..................................... A-22
3.30 No Existing Discussions................................. A-22
Representations and Warranties of Identified
3.31 Shareholders............................................ A-22
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF PARENT...................... A-23
4.1 Organization, Good Standing and Power................... A-23
4.2 Capitalization.......................................... A-23
4.3 Authority; Enforceability............................... A-23
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
4.4 Non-Contravention; Consents............................. A-23
4.5 SEC Reports............................................. A-24
4.6 Registration Statement, Etc............................. A-24
4.7 Litigation.............................................. A-25
4.8 No Violation of Law..................................... A-25
4.9 Brokers and Finders..................................... A-25
4.10 Merger.................................................. A-25
ARTICLE 5 CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; CERTAIN
COVENANTS..................................................... A-25
5.1 Access and Information.................................. A-25
5.2 Conduct of Business Pending Merger...................... A-25
5.3 Fiduciary Duties........................................ A-29
5.4 Certain Fees............................................ A-29
5.5 Takeover Statutes; Inconsistent Actions................. A-30
5.6 Consents................................................ A-30
5.7 Reasonable Efforts; Further Assurances; Cooperation..... A-30
5.8 NYSE Listing............................................ A-31
5.9 Notice.................................................. A-31
5.10 Registration Statement; Shareholder Approvals........... A-31
5.11 Expenses................................................ A-32
5.12 Press Releases; Filings................................. A-32
5.13 Tax Treatment........................................... A-32
5.14 Employee Benefits....................................... A-32
5.15 Stock Options and Warrants.............................. A-33
5.16 Company Affiliates...................................... A-33
5.17 Supplements to Disclosure Letter........................ A-33
5.18 Post-Closing Cooperation by Identified Shareholders..... A-33
Indemnification of Directors and Officers and Identified
5.19 Shareholders............................................ A-34
5.20 Certain Consents........................................ A-34
ARTICLE 6 CONDITIONS PRECEDENT TO MERGER................................ A-35
6.1 Conditions to Each Party's Obligations.................. A-35
6.2 Conditions to Obligations of Company.................... A-35
6.3 Conditions to Obligations of Parent..................... A-36
ARTICLE 7 TERMINATION AND ABANDONMENT OF THE MERGER..................... A-39
7.1 Termination............................................. A-39
7.2 Specific Performance and Other Remedies................. A-40
7.3 Effect of Termination and Abandonment................... A-40
7.4 Termination Date Extension.............................. A-40
ARTICLE 8 MISCELLANEOUS................................................. A-40
8.1 Waiver and Amendment.................................... A-40
Non-Survival of Representations, Warranties and
8.2 Agreements.............................................. A-40
8.3 Notices................................................. A-41
8.4 Descriptive Headings; Interpretation.................... A-41
8.5 Counterparts............................................ A-41
8.6 Entire Agreement........................................ A-41
8.7 GOVERNING LAW........................................... A-42
8.8 Severability............................................ A-42
8.9 Enforcement of Agreement................................ A-42
</TABLE>
A-ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
8.10 Assignment............................................. A-42
8.11 Liability of Identified Shareholders................... A-42
8.12 Definition of Company's Knowledge...................... A-42
8.13 Disclosure Letter...................................... A-42
EXHIBIT 1.1 SHAREHOLDERS' OPTION AGREEMENT
EXHIBIT 5.16 AFFILIATES LETTER
</TABLE>
A-iii
<PAGE>
PLAN AND AGREEMENT OF MERGER
PLAN AND AGREEMENT OF MERGER (this "Agreement"), dated as of November 9,
1998, among AMERICAN EXPRESS COMPANY, a New York corporation ("Parent"), RXP
ACQUISITION CORPORATION, a Delaware corporation and wholly owned subsidiary of
Parent ("Sub"), and ROCKFORD INDUSTRIES, INC., a California corporation
("Company").
WHEREAS, Parent has formed Sub as a wholly owned subsidiary under the
Delaware General Corporation Law (the "DGCL") for the purpose of Sub merging
with Company pursuant to the applicable provisions of the DGCL and the
California General Corporation Law (the "CGCL") (the "Merger") so that Company
will continue as the surviving corporation of the Merger and Company will
become a wholly owned subsidiary of Parent;
WHEREAS, the respective Boards of Directors of Company, Parent and Sub have
approved and declared advisable the Merger, the terms and provisions of this
Agreement and the transactions contemplated hereby and the Board of Directors
of Company has recommended that the shareholders of Company approve the Merger
upon the terms of this Agreement;
WHEREAS, the respective Boards of Directors of Parent and Company have
determined that the Merger is in furtherance of and consistent with their
respective long-term business strategies and is fair to and in the best
interests of their respective shareholders;
WHEREAS, concurrently with the execution and delivery of this Agreement,
each of Gerry J. Ricco, Larry Hartmann and Brian Seigel (collectively, the
"Identified Shareholders") has duly executed and delivered to Parent a
Shareholders' Option Agreement pursuant to which, among other things, each of
the Identified Shareholders (x) has granted to Parent (i) an irrevocable and
continuing option to purchase all of the shares of capital stock of Company
owned by him, and (ii) an irrevocable proxy, and (y) has agreed to vote all of
the shares of capital stock of Company owned by him in favor of the Merger, on
the terms set forth in Exhibit 1.1 (the "Shareholders' Option Agreement");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), and this Agreement is
intended to be and is adopted as a plan of reorganization; and
WHEREAS, the Merger described herein is subject to the approval of the
shareholders of Company and satisfaction of certain other conditions described
in this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties, covenants and agreements herein contained, the
parties agree as follows:
ARTICLE 1
PLAN OF MERGER
1.1 The Merger
(a) Upon the terms and subject to the conditions of this Agreement, at the
Effective Time (as defined below) and in accordance with the provisions of
this Agreement, the DGCL and the CGCL, Sub shall be merged with and into
Company, which shall be the surviving corporation (sometimes referred to
hereinafter as the "Surviving Corporation") in the Merger, and the separate
corporate existence of Sub shall cease. Subject to the provisions of this
Agreement, a certificate of merger (the "Certificate of Merger") shall be duly
prepared, executed and verified by each of Company and Sub, and thereafter
delivered, respectively, to the Secretary of State of California and the
Secretary of State of Delaware for filing as provided in the CGCL and the DGCL
on the Closing Date (as defined in Section 2.1). The Merger shall become
effective immediately upon the filing of the
A-1
<PAGE>
Certificate of Merger with the Secretary of State of California and the
Secretary of State of Delaware, or at such time thereafter as is provided in
the Certificate of Merger (the "Effective Time").
(b) From and after the Effective Time, the Merger shall have all the effects
set forth in the CGCL and the DGCL. Without limiting the generality of the
foregoing, and subject thereto, by virtue of the Merger and in accordance with
the CGCL and the DGCL, all of the properties, rights, privileges, powers and
franchises of Company and Sub shall vest in the Surviving Corporation and all
of the debts, liabilities and duties of Company and Sub shall become the
debts, liabilities and duties of the Surviving Corporation.
(c) The Articles of Incorporation of Company in effect immediately prior to
the Effective Time shall continue in full force and effect as the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with the provisions thereof and the CGCL.
(d) The Bylaws of Company in effect immediately prior to the Effective Time
shall continue in full force and effect as the Bylaws of the Surviving
Corporation until altered, amended or repealed as provided therein, in the
Articles of Incorporation of the Surviving Corporation and the CGCL.
(e) The officers and directors of Sub immediately prior to the Effective
Time shall be the initial officers and directors of the Surviving Corporation,
in each case until their respective successors are duly elected and qualified.
1.2 Conversion of Shares. As of the Effective Time, by virtue of the Merger
and without any action on the part of any holder thereof:
(a) Each share of capital stock of Sub that is issued and outstanding
immediately prior to the Effective Time shall be converted into and
exchanged for one fully paid and non-assessable share of common stock of
the Surviving Corporation.
(b) All shares of common stock, no par value per share, of Company
("Company Common Stock") or other capital stock of Company that are owned
by Parent shall be canceled and retired and shall cease to exist and no
stock of Parent or other consideration shall be delivered in exchange
therefor.
(c) Subject to Section 1.3(c) and Section 1.7, each share of Company
Common Stock that is issued and outstanding immediately prior to the
Effective Time (other than shares to be canceled in accordance with Section
1.2(b)) shall be converted into a right to receive that number of shares of
Parent Common Stock, par value $.60 per share ("Parent Common Stock"), that
could be purchased for $11.88 based on the average of the closing price per
share of the Parent Common Stock on the New York Stock Exchange, Inc.
("NYSE") during the ten (10) consecutive trading days ending on the third
full trading day immediately preceding the Effective Time (the "Exchange
Ratio"). All such shares of Company Common Stock, when so converted, shall
no longer be outstanding and shall automatically be canceled and retired
and shall cease to exist, and each certificate previously representing any
such shares (a "Certificate") shall thereafter represent the right to
receive that number of shares of Parent Common Stock into which such shares
of Company Common Stock have been converted. Certificates previously
representing shares of Company Common Stock shall be exchanged for
certificates representing whole shares of Parent Common Stock, and cash in
lieu of any fractional share, issued in consideration therefor upon the
surrender of such Certificates in accordance with Section 1.3, without
interest.
1.3 Exchange of Certificates.
(a) As of the Effective Time, Parent shall deposit with a bank or trust
company reasonably designated by Parent (the "Exchange Agent"), for the
benefit of the holders of shares of Company Common Stock, for exchange in
accordance with this Article 1 through the Exchange Agent, certificates
representing the shares of Parent Common Stock (such shares of Parent Common
Stock, together with any dividends or distributions with respect thereto or
cash deposited by Parent in accordance with this Section 1.3, being
hereinafter referred to as the "Exchange Fund") issuable pursuant to Section
1.2 in exchange for outstanding shares of Company
A-2
<PAGE>
Common Stock, together with cash to be paid in lieu of fractional shares. The
aggregate number of shares of Parent Common Stock which shall be issuable
shall be a number of such shares equal to the Exchange Ratio multiplied by the
total number of outstanding shares of Company Common Stock as of the Effective
Time, subject to adjustments for non-issuance of fractional shares as provided
herein.
(b) As soon as practicable after the Effective Time, Parent and the
Surviving Corporation shall cause the Exchange Agent to mail to each holder of
record of a Certificate or Certificates (i) a letter of transmittal (which (x)
shall specify that delivery shall be effected, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent accompanied by a properly executed letter of transmittal and
(y) shall be in such form and have such other provisions as Parent may
reasonably specify), and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for certificates representing shares of Parent
Common Stock. Upon the surrender to the Exchange Agent of one or more
Certificates for cancellation, together with such letter of transmittal, duly
executed, the holder will be entitled to receive certificates representing
that number of whole shares of Parent Common Stock to be issued in respect of
the aggregate number of such shares of Company Common Stock previously
represented by the Certificates surrendered based upon the Exchange Ratio and
cash in lieu of fractional shares as provided in Section 1.3(c).
(c) No certificate or scrip representing fractional shares of Parent Common
Stock shall be issued upon the surrender for exchange of Certificates, and
such fractional share interests will not entitle the owner thereof to vote or
to any rights as a shareholder of Parent. All fractional shares of Parent
Common Stock that a holder of Company Common Stock would otherwise be entitled
to receive as a result of the Merger shall be aggregated and if a fractional
share results from such aggregation, such holder shall be entitled to receive,
in lieu thereof, an amount in cash determined by multiplying (i) the Fair
Market Value at the Effective Time (as defined below) of one share of Parent
Common Stock, by (ii) the fraction of a share of Parent Common Stock to which
such holder would otherwise have been entitled. Parent shall timely make
available to the Exchange Agent any cash necessary to make payments in lieu of
fractional shares as aforesaid. No such cash in lieu of fractional shares of
Parent Common Stock shall be paid to any holder of Company Common Stock until
Certificates are surrendered and exchanged in accordance with Section 1.3(a).
The term "Fair Market Value at the Effective Time" of one share of Parent
Common Stock shall be the average of the closing price per share of Parent
Common Stock on the NYSE during the ten (10) consecutive trading days ending
on the third full trading day immediately preceding the Effective Time.
(d) If a certificate for Parent Common Stock is to be sent to a person other
than the person in whose name the Certificates for shares of Company Common
Stock surrendered for exchange are registered, it shall be a condition of the
exchange that the person requesting such exchange shall pay to the Exchange
Agent any transfer or other taxes required by reason of the delivery of such
Certificate to a person other than the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable.
(e) The cash paid and shares of Parent Common Stock issued upon the
surrender of Certificates in accordance with the terms hereof shall be deemed
to have been paid and issued in full satisfaction of all rights pertaining to
such shares of Company Common Stock.
1.4 Dividends. No dividends or other distributions that are declared or made
after the Effective Time with respect to Parent Common Stock payable to
holders of record thereof after the Effective Time shall be paid to a Company
shareholder entitled to receive certificates representing Parent Common Stock
until such shareholder has properly surrendered such shareholder's
Certificates. Upon such surrender, there shall be paid to the shareholder in
whose name the certificates representing such Parent Common Stock shall be
issued any dividends which shall have become payable with respect to such
Parent Common Stock between the Effective Time and the time of such surrender,
without interest. After such surrender, there shall also be paid to the
shareholder in whose name the certificates representing such Parent Common
Stock shall be issued any dividend on such Parent Common Stock that shall have
a record date subsequent to the Effective Time and prior to such surrender and
a payment date after such surrender; provided that such dividend payments
shall be made on such
A-3
<PAGE>
payment dates. In no event shall the shareholders entitled to receive such
dividends be entitled to receive interest on such dividends. Any portion of
the Exchange Fund which remains undistributed to the shareholders of Company
for one year after the Effective Time pursuant to this Section 1.4 shall be
returned by the Exchange Agent to Parent which shall thereafter act as
Exchange Agent, subject to the rights of holders of unsurrendered Certificates
under this Article 1.
1.5 Escheat Laws. Notwithstanding any other provision of this Article 1,
none of Parent, Sub, Company, the Surviving Corporation, the Exchange Agent or
any other party hereto shall be liable to any holder of Company Common Stock
for any Parent Common Stock, or dividends or distributions thereon or cash in
lieu of fractional shares, delivered to a public official pursuant to any
applicable abandoned property, escheat or similar laws.
1.6 Closing of Company Transfer Books. At the Effective Time, the stock
transfer books of Company shall be closed and no transfer of Company Common
Stock shall thereafter be made. If, after the Effective Time, Certificates are
presented to the Surviving Corporation, they shall, when accompanied by proper
documentation, be exchanged for Parent Common Stock in the manner provided in
this Article 1.
1.7 Dissenting Shares. (a) If provided for under the CGCL, notwithstanding
any other provision of this Agreement to the contrary, shares of Company
Common Stock that are outstanding immediately prior to the Effective Time and
which are held by shareholders who shall not have voted in favor of the Merger
or consented thereto in writing and who shall have demanded properly in
writing appraisal for such shares in accordance with the CGCL and who shall
not have withdrawn such demand or otherwise have forfeited appraisal rights
(collectively, the "Dissenting Shares") shall not be converted into or
represent the right to receive Parent Common Stock. Such shareholders shall be
entitled to receive payment of the appraised value of such shares of Company
Common Stock held by them in accordance with the provisions of the CGCL,
except that all Dissenting Shares held by shareholders who shall have failed
to perfect or who effectively shall have withdrawn or lost their rights to
appraisal of such shares of Company Common Stock under the CGCL shall
thereupon be deemed to have been converted into and to have become
exchangeable, as of the Effective Time, for the right to receive, without any
interest thereon, the Parent Common Stock, upon surrender, in the manner
provided in Section 1.3, of the Certificate or Certificates that formerly
evidenced such shares of Company Common Stock.
(b) Company shall give Parent (i) prompt notice of any demands for appraisal
received by Company, withdrawals of such demands, and any other instruments
served pursuant to the CGCL and received by Company and (ii) the opportunity
to direct all negotiations and proceedings with respect to demands for
appraisal under the CGCL. Company shall not, except with the prior written
consent of Parent, make any payment with respect to any demands for appraisal,
or offer to settle, or settle, any such demands.
ARTICLE 2
CLOSING
2.1 Time and Place of Closing. Unless otherwise mutually agreed upon in
writing by Parent and Company, the closing of the Merger (the "Closing") will
be held at 10:00 a.m., New York City time, on the second business day
following the date that all of the conditions precedent specified in this
Agreement have been (or can be at the Closing) satisfied or waived by the
party or parties permitted to do so (such date being referred to hereinafter
as the "Closing Date"). The place of Closing shall be at the offices of King &
Spalding, 1185 Avenue of the Americas, New York, New York 10036-4003, or at
such other place as may be agreed between Parent and Company.
A-4
<PAGE>
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF COMPANY
AND IDENTIFIED SHAREHOLDERS
As an inducement to Parent and Sub to enter into this Agreement and to
consummate the transactions contemplated hereby, Company hereby represents and
warrants and, pursuant to Section 3.31 only the Identified Shareholders hereby
represent and warrant to Parent and Sub as follows:
3.1 Disclosure Letter; Material Adverse Effect on Company.
(a) Prior to the execution and delivery of this Agreement, Company and
Parent have delivered to each other a letter (the "Disclosure Letter") setting
forth items the disclosure of which is necessary or appropriate either in
response to an express disclosure requirement contained in this Agreement or
as an exception to one or more of such party's representations, warranties or
covenants contained in this Agreement.
(b) As used in this Agreement, the phrase "Material Adverse Effect on
Company" means (i) as to matters which can reasonably be quantified in
economic terms, any effect which has resulted in or would reasonably be
expected to result in, with respect to Company and the Company Subsidiaries
(as defined in Section 3.4) taken as a whole, a diminution or decrease in the
value of properties or assets, an increase in liabilities or obligations
(whether accrued, contingent or otherwise), a diminution or decrease in
profits or cash flow, an increase in losses or expenses, an adverse change in
the business or financial condition, or any combination thereof involving,
individually or in the aggregate more than $1,000,000, (ii) as to matters
which cannot reasonably be quantified in economic terms, a material adverse
effect on the condition (financial or otherwise), business, assets,
liabilities, prospects or results of operations of Company and the Company
Subsidiaries taken as a whole, or (iii) a material adverse effect on the
ability of Company to consummate the transactions contemplated by this
Agreement.
(c) For purposes of determining whether or not the representations and
warranties set forth herein which are qualified by the phrase "Material
Adverse Effect on Company" are true and correct and have not been breached,
such representations and warranties shall be deemed to be true and correct and
not breached unless the failure or failures of such representations and
warranties to be so true and correct (without giving effect to any exception
or "Material Adverse Effect on Company" qualifier), individually or in the
aggregate, has or would reasonably be expected to have a Material Adverse
Effect on Company.
3.2 Organization, Good Standing and Power. Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of California and has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as now being
conducted. Company is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties make such qualification or licensing
necessary, except where the failure to be so qualified or licensed or to be in
good standing does not have and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company.
Company has delivered to Parent complete and correct copies of its Articles of
Incorporation and all amendments thereto to the date hereof and its Bylaws as
amended to the date hereof.
3.3 Capitalization. The authorized capital stock of Company consists of
10,000,000 shares of Common Stock, no par value per share, of which, as of the
date of this Agreement, 4,108,785 shares were issued and outstanding, and
1,000,000 shares of Preferred Stock, no par value per share, of which, as of
the date hereof, 70,000 shares designated as Series A Preferred Stock are
issued and outstanding (the "Series A Shares"). The holder of the Series A
Shares has agreed to vote the Series A Shares in favor of the Merger and to
convert the Series A Shares into Company Common Stock immediately prior to the
Effective Time. All outstanding shares of Company Common Stock are, and all
shares which may be issued prior to the Effective Time pursuant to any
outstanding Company Stock Options (as hereinafter defined) will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to any preemptive rights. Except as set forth above, as of the date of
this Agreement, there were no shares of capital stock or other equity
securities of Company outstanding, and, except as set forth in Section 3.3 of
the Disclosure Letter, (x) there are no outstanding options,
A-5
<PAGE>
warrants or rights to purchase or acquire from Company any capital stock of
Company, (y) there are no existing registration covenants with Company with
respect to outstanding shares of Company Common Stock or the Series A Shares,
and (z) there are no convertible securities or other contracts, commitments,
agreements, understandings, arrangements or restrictions by which Company is
bound to issue any additional shares of its capital stock or other securities.
All outstanding options with respect to Company capital stock (the "Company
Stock Options"), the identity of the holder thereof, the vesting schedule
applicable thereto, the exercise price thereof and the change of control
provisions applicable thereto are listed in Section 3.3 of the Disclosure
Letter. Complete and accurate copies of the material agreements relating to
the Company Stock Options have been provided to Parent. Except as set forth in
Section 3.3 of the Disclosure Letter, there are no shareholder agreements,
voting trust agreements, or similar contracts, agreements, arrangements,
commitments, plans, or understandings restricting or otherwise relating to
voting, dividend, ownership or transfer rights with respect to any share of
Company capital stock to which Company is a party.
3.4 Company Subsidiaries; Voting Trusts. Section 3.4 of the Disclosure
Letter sets forth a correct and complete list of each corporation,
association, partnership, limited liability company or other entity of which
Company owns or controls, directly or indirectly, all of the outstanding
equity interests (such entities are hereinafter referred to as "Company
Subsidiaries"). Except as set forth in Section 3.4 of the Disclosure Letter,
there is no corporation, association, partnership, limited liability company
or other entity of which Company owns or controls, directly or indirectly,
more than 20% of the outstanding equity interests. Except as disclosed in
Section 3.4 of the Disclosure Letter, Company owns, directly or indirectly,
all of the equity interests of each Company Subsidiary, free and clear of all
liens, charges, pledges, security interests or other encumbrances. All of the
capital stock of each Company Subsidiary has been duly authorized and is
validly issued, fully paid and nonassessable, and not subject to any
preemptive rights. There are no outstanding options or rights to subscribe to,
or any contracts or commitments to issue or sell any shares of the capital
stock or other equity interests or any securities or obligations convertible
into or exchangeable for, or giving any person any right to acquire, any
shares of the capital stock or other equity interests of any Company
Subsidiary to which Company or any Company Subsidiary is a party. There are no
voting trusts or other agreements or understandings with respect to the voting
of capital stock or other equity interests of any Company Subsidiary to which
Company or any Company Subsidiary is a party. Each Company Subsidiary is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation and has the requisite corporate
power and authority necessary for it to own or lease its properties and assets
and to carry on its business as it is now being conducted. Each Company
Subsidiary is duly qualified or licensed to do business and is in good
standing in each jurisdiction in which the nature of its business or the
ownership or leasing of its properties makes such qualification or licensing
necessary, except where the failure to be so qualified or licensed or to be in
good standing does not have and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company.
3.5 Authority; Enforceability. Company has the corporate power and authority
to enter into this Agreement and to consummate the transactions contemplated
hereby, subject to the approval of this Agreement by the shareholders of
Company. Subject to such approval, the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Company,
and this Agreement has been duly executed and delivered by Company and
constitutes the valid and binding obligation of Company, enforceable against
Company in accordance with its terms, except as may be limited by bankruptcy,
insolvency, moratorium or other similar laws affecting or relating to the
enforcement of creditors' rights generally and subject to general principles
of equity.
3.6 Non-Contravention; Consents.
(a) Except as set forth in Section 3.6(a) of the Disclosure Letter, neither
the execution, delivery and performance by Company of this Agreement, nor the
consummation by Company of the transactions contemplated hereby, nor
compliance by Company with any of the provisions hereof, will:
(i) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event that, with notice or lapse of time or
both, would constitute a default) under, result in the termination,
cancellation
A-6
<PAGE>
or expiration of, accelerate the performance required by, or result in a
right of termination, cancellation, expiration or acceleration, or the
creation of any lien, security interest, charge or encumbrance upon any of
the properties or assets of Company or any Company Subsidiary, under any of
the terms, conditions or provisions of, (x) its Articles of Incorporation,
Bylaws or other governing documents, or (y) any note, bond, mortgage,
indenture, deed of trust, securitization agreement, license, lease,
contract, agreement or other instrument or obligation to which Company or
any of the Company Subsidiaries is a party, or by which Company or any of
the Company Subsidiaries may be bound, or to which Company or any of the
Company Subsidiaries or the properties or assets of any of them may be
subject and that has or would reasonably be expected to have, in any such
event specified in this clause (y), individually or in the aggregate, a
Material Adverse Effect on Company; or
(ii) subject to compliance with the statutes and regulations referred to
in Section 3.6(b), violate any judgment, award, ruling, order, writ,
injunction or decree, or any statute, rule or regulation applicable to,
Company or any of the Company Subsidiaries or any of their respective
properties or assets where such violation has or would reasonably be
expected to have, individually or in the aggregate, a Material Adverse
Effect on Company.
(b) Except as set forth in Section 3.6(b) of the Disclosure Letter, no
notice to, filing with, authorization of, exemption by, or consent or approval
of, any governmental authority or other regulatory body is necessary to be
obtained by Company or any Company Subsidiary for the consummation by Company
of the transactions contemplated by this Agreement.
3.7 SEC Reports; Company Financial Statements.
(a) Since January 1, 1996, Company has timely filed all reports,
registration statements, proxy statements or information statements and all
other documents, together with any amendments required to be made thereto,
required to be filed with the Securities and Exchange Commission ("SEC") under
the Securities Act of 1933, as amended (the "Securities Act"), or the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(collectively, the "Company Reports"). Company has heretofore made available
to Parent true copies of all the Company Reports, together with all exhibits
thereto. Included in such Company Reports are (i) audited consolidated balance
sheets of Company and its subsidiaries at December 31, 1996 and 1997 and the
related consolidated results of operations, shareholders' equity and cash
flows for the years then ended, and the notes thereto, and (ii) the unaudited
consolidated balance sheet of Company and its subsidiaries at June 30, 1998
(the "Interim Balance Sheet") and the related unaudited consolidated results
of operations, shareholders' equity and cash flows for the periods then ended
and the notes thereto. Company has provided to Parent in Section 3.7 of the
Disclosure Letter an unaudited consolidated balance sheet of Company and its
subsidiaries at September 30, 1998 (the "September Balance Sheet") and the
related unaudited consolidated results of operations, shareholders' equity and
cashflows for the period then ended (the "September Income Statement" and,
together with the September Balance Sheet, the "September Financial
Statements").
(b) All of the financial statements included in the Company Reports (which
are collectively referred to herein as the "Company Consolidated Financial
Statements") and the September Financial Statements fairly presented the
consolidated financial position of Company and its subsidiaries as of the
dates mentioned and the consolidated results of operations, changes in
shareholders' equity and cash flows for the periods then ended in conformity
with generally accepted accounting principles ("GAAP") applied on a consistent
basis (subject to any exceptions as to consistency specified therein or as may
be indicated in the notes thereto or in the case of the unaudited statements,
as may be permitted by Form 10-Q of the SEC and subject, in the case of
unaudited statements, to normal, recurring audit adjustments). As of their
respective dates, the Company Reports complied in all material respects with
all applicable rules and regulations promulgated by the SEC and did not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. At September 30, 1998, neither Company nor any Company
Subsidiary has any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise), except (i) as set forth or reflected in
the September
A-7
<PAGE>
Balance Sheet, (ii) for such liabilities and obligations which individually
are less than $100,000 and in the aggregate are less than $1,000,000 and were
incurred in the ordinary course of business consistent with past practice, or
(iii) as set forth in Section 3.7(b) of the Disclosure Letter. After September
30, 1998, neither Company nor any Company Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or
otherwise), except (i) those liabilities and obligations set forth or
reflected on the September Balance Sheet, (ii) for such liabilities and
obligations which were incurred in the ordinary course of business consistent
with past practice, (iii) to the extent not covered by (i) or (ii),
liabilities and obligations which individually are less than $100,000 and
which, in the aggregate, do not have and would not reasonably be expected to
have a Material Adverse Effect on Company or (iv) as set forth in Section
3.7(b) of the Disclosure Letter.
(c) From October 1, 1998 to the date of this Agreement, neither Company nor
any Company Subsidiary has taken or omitted to take any action which would
have required the consent of Parent if Section 5.2(b) and (c) of this
Agreement had been in effect during such period.
3.8 Absence of Certain Changes.
(a) Except as set forth in Section 3.8(a) of the Disclosure Letter, since
January 1, 1998, there has not been (i) any change in the assets, liabilities,
results of operations, financial condition or business of Company or any
Company Subsidiary which has or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company, (ii)
any damage, destruction, loss or casualty to property or assets of Company or
any Company Subsidiary involving amounts in excess of $100,000 individually or
in excess of $250,000 in the aggregate, whether or not covered by insurance,
which property or assets are material to the operations or business of Company
or any Company Subsidiary, (iii) any declaration, setting aside or payment of
any dividend or distribution (whether in cash, stock or property) in respect
of the capital stock or other equity interests of Company, any redemption or
other acquisition by Company of any of the capital stock or other equity
interests of Company or any split, combination or reclassification of shares
of capital stock or other equity interests declared or made by Company or (iv)
any agreement to do any of the foregoing.
(b) Except as set forth in Section 3.8(b) of the Disclosure Letter or as
consented to in writing by Parent, since January 1, 1998, there have not been
in respect of Company or any Company Subsidiary (i) any extraordinary losses
suffered involving amounts in excess of $100,000 individually or in excess of
$250,000 in the aggregate, (ii) any assets with a value in excess of $100,000
individually or in excess of $250,000 in the aggregate which have been
mortgaged, pledged or made subject to any lien, charge or other encumbrance,
(iii) any material liability or obligation (absolute, accrued, contingent or
otherwise) incurred or any material bad debt, contingency or other reserve
increase suffered, except, in each such case, in the ordinary course of
business and consistent with past practice, (iv) any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) paid, discharged or
satisfied, other than the payment, discharge or satisfaction, in the ordinary
course of business and consistent with past practice, of claims, liabilities
and obligations reflected or reserved against in the Company Consolidated
Financial Statements or incurred in the ordinary course of business and
consistent with past practice, (v) any material guaranteed checks, notes or
loan or lease accounts receivable or contract balances written off as
uncollectible, except write-offs in the ordinary course of business and
consistent with past practice, (vi) any write down or write-off (under
Statement of Financial Accounting Standards No. 121 or otherwise) of the value
of any asset or investment on Company's books or records or any credit loss
involving amounts in excess of $100,000 individually or in excess of $250,000
in the aggregate, except for depreciation and amortization taken in the
ordinary course of business and consistent with past practice, (vii) any
cancellation of any material debts or waiver of any material claims or rights
of substantial value, or sale, transfer or other disposition of any material
properties or assets (real, personal or mixed, tangible or intangible) of
substantial value, except, in each such case, in transactions in the ordinary
course of business and consistent with past practice, (viii) any single
capital expenditure or commitment in excess of $100,000 for additions to
property or equipment, or aggregate capital expenditures and commitments in
excess of $250,000 (on a consolidated basis) for additions to property or
equipment, (ix) any transactions entered into other than in the ordinary
course of business consistent with past practices, (x) any material change in
or modification to Company's credit approval/declination criteria and
practices or (xi) any agreements to do any of the foregoing.
A-8
<PAGE>
(c) Section 3.8(c) of the Disclosure Letter sets forth a true and complete
list of the officers of Company or any Company Subsidiary as of the date of
this Agreement and the salary of each such officer on the date of this
Agreement and as of January 1, 1998.
(d) During the period from January 1, 1998 through October 31, 1998, Company
has originated in the aggregate $181.9 million of new leases and loans in the
ordinary course of business consistent with past practice. Information
relating to the leases and loans originated during the period from January 1,
1998 to September 30, 1998, is set forth in Section 3.8(d) of the Disclosure
Letter.
(e) Section 3.8(e) of the Disclosure Letter identifies all leases and loans
of Company and the Company Subsidiaries (whether held directly by Company and
the Company Subsidiaries or conveyed to the Securitization Facilities (as
defined below)) the scheduled payments under which are 30 days or more overdue
as of September 30, 1998.
3.9 Tax Matters.
(a) For purposes of this Agreement, "Taxes" shall mean all taxes (including
any tax attributable to Company or any Company Subsidiary ceasing to be a
member of an affiliated group as defined in Section 1504(a) of the Code),
assessments, charges, duties, fees, levies or other governmental charges
(including interest, penalties or additions associated therewith) including
federal, state, city, county, foreign or other income, franchise, capital
stock, real property, personal property, tangible, withholding, FICA,
unemployment compensation, disability, transfer, sales, use, excise, gross
receipts and all other taxes of any kind for which Company or any Company
Subsidiary may have any liability imposed by the United States or any state,
county, city, country or foreign government or subdivision or agency thereof,
whether disputed or not.
(b) Except as otherwise disclosed in Section 3.9(b) of the Disclosure
Letter: (i) all returns, including estimated returns and reports of every kind
with respect to Taxes, which are due to have been filed in accordance with any
applicable law, have been duly filed, except where the failure to file does
not have and would not reasonably be expected to have, individually or in the
aggregate, a Material Adverse Effect on Company, (ii) all Taxes, deposits or
other payments for which Company or any Company Subsidiary may have any
liability through the date hereof have been paid in full or are accrued as
liabilities for Taxes on the books and records of Company or the Company
Subsidiaries, as applicable, except for such Taxes as are not required by GAAP
to be accrued or are immaterial in amount, (iii) there are not now any
extensions of time in effect with respect to the dates on which any returns or
reports of Taxes were or are due to be filed, (iv) all deficiencies asserted
as a result of any examination of any return or report of Taxes have been paid
in full or accrued on the books of each of Company and the Company
Subsidiaries, (v) no claims have been asserted and no proposals or
deficiencies for any Taxes are being asserted, proposed or, to the knowledge
of Company, threatened, and no audit or investigation of any return or report
of Taxes is currently underway, pending or, to the knowledge of Company,
threatened, (vi) there are no outstanding waivers or agreements by Company or
any Company Subsidiary for the extension of time for the assessment of any
Taxes or deficiency thereof, nor are there any requests for rulings,
outstanding subpoenas or requests for information, notices of proposed
reassessment of any property owned or leased by Company or any Company
Subsidiary or any other matter pending between Company or any Company
Subsidiary and any taxing authority, and (vii) there are no liens for Taxes
upon any property or assets of Company or any Company Subsidiary except liens
for current Taxes not yet due, nor are there any liens which, to the knowledge
of Company, are pending or threatened.
(c) In each case, adequate provision, including provision in the deferred
tax account, has been made in the audited consolidated balance sheets of
Company and its subsidiaries that are part of the Company Consolidated
Financial Statements for all deferred and accrued Tax liabilities of Company
and the Company Subsidiaries as of their respective dates with respect to
operations for periods ending on such dates.
(d) Company has delivered to Parent true and complete copies of all federal
and state income tax returns (together with any Revenue Agent's Reports)
relating to the operations of Company and the Company Subsidiaries for the
taxable years ended since December 31, 1994.
A-9
<PAGE>
(e) None of Company or the Company Subsidiaries has filed a consent pursuant
to Section 341(f) of the Code. None of Company, the Company Subsidiaries or
any predecessor in interest of such party, has filed, or may be deemed to have
filed, any election under Section 338 of the Code.
(f) Except as set forth in Section 3.9(f) of the Disclosure Letter, neither
Company nor any Company Subsidiary has made any payment which constitutes an
"excess parachute payment" within the meaning of Section 280G of the Code, and
no payment by Company or any Company Subsidiary required to be made under any
contract will, if made, constitute an "excess parachute payment" within the
meaning of Section 280G of the Code.
(g) None of Company and the Company Subsidiaries is a party to any tax
allocation or tax sharing agreement.
(h) None of Company and the Company Subsidiaries has been a member of an
affiliated group (within the meaning of Section 1504(a) of the Code) filing a
consolidated federal income tax return (other than a group the common parent
of which was Company).
(i) Company and the Company Subsidiaries have withheld and paid all Taxes
required to have been withheld and paid in connection with amounts paid or
owing to any employee, independent contractor, creditor, stockholder, or other
third party, except where the failure to withhold or pay such Taxes would not
have a Material Adverse Effect on Company.
(j) Except as set forth in Section 3.9(j) of the Disclosure Letter and to
Company's knowledge: (i) none of Company or the Company Subsidiaries is a
partner or a member of any entity treated as a partnership for federal or
state income tax purposes; (ii) none of Company or the Company Subsidiaries
has any deferred items (or items not yet taken into account) under Treasury
Regulations (S)(S) 1.1502-13 or 14; (iii) none of Company or the Company
Subsidiaries has an "excess loss account" as defined in Treasury Regulations
(S) 1.1502-19 with respect to the stock of any corporation included as a
member of the consolidated group of which Company is the common parent; (iv)
none of Company or the Company Subsidiaries owns or leases any real property
not disclosed in Section 3.11 of the Disclosure Letter; (v) none of Company or
the Company Subsidiaries is required to include any material amount in income
or make any material adjustment under Section 481 or 482 of the Code for any
taxable period ended after December 31, 1997; (vi) none of Company or the
Company Subsidiaries has disposed of any property in a transaction being
accounted for under the installment method pursuant to Section 453 of the
Code; (vii) since April 16, 1997, none of Company or the Company Subsidiaries
has distributed the stock of any corporation in a transaction satisfying the
requirements of Section 355 of the Code; (viii) none of Company or the Company
Subsidiaries has entered into a closing agreement with any taxing authority
that has effect after December 31, 1997; and (ix) none of Company or the
Company Subsidiaries has granted a power of attorney to any person that
concurrently is in effect with respect to any taxable period that remains open
under the applicable statute of limitations.
(k) Company maintained a valid election as an S corporation for federal
income tax purposes and, except as set forth in Section 3.9(k) of the
Disclosure Letter, all applicable state income tax purposes for all taxable
periods from January 1, 1987 through December 31, 1994.
3.10 Litigation.
(a) Section 3.10(a) of the Disclosure Letter (i) sets forth all litigation,
claims, suits, actions, investigations, indictments or informations, or
administrative, arbitration or other proceedings pending, or, to the knowledge
of Company, threatened (including, without limitation, grand jury
investigations, actions or proceedings and workers' compensation suits,
actions or proceedings) against Company or any Company Subsidiary and
(ii) indicates which of such matters are being defended by an insurance
carrier, and which of the matters being so defended are being defended under a
reservation of rights.
(b) Except as set forth in Section 3.10(b) of the Disclosure Letter, there
are no judgments or awards for which amounts payable in respect thereof have
not been fully satisfied or orders, injunctions, decrees or
A-10
<PAGE>
stipulations (whether rendered by a court, administrative agency, governmental
entity or regulatory body or by arbitration, pursuant to a grievance or other
procedure) currently in effect against or relating to Company or any Company
Subsidiary. To Company's knowledge, there are no events, facts or
circumstances giving rise to any claim for indemnification from Company or any
Company Subsidiary by any present or former officer or director of Company or
any Company Subsidiary related to any act or omission prior to the Closing by
such present or former officer or director.
3.11 Material Contracts. As of the date of this Agreement, Section 3.11 of
the Disclosure Letter contains a correct and complete list of the following
(the "Material Contracts"):
(a) all bonds, debentures, notes, loans, credit, loan or securitization
agreements or commitments, mortgages, indentures or guarantees to which
Company or any Company Subsidiary is a party or by which any of its
properties or assets (real, personal or mixed, tangible or intangible) is
bound involving amounts in excess of $50,000 individually or $1,000,000 in
the aggregate (other than leases to which Company or any Company Subsidiary
is the lessor);
(b) (i) all leases to which Company or any Company Subsidiary is a lessee
or by which any of its properties or assets (real, personal or mixed,
tangible or intangible) is bound involving an annual commitment rental or
other payment in excess of $100,000 individually (the "Disclosed Leases")
and (ii) all leases and loan/financing agreements and instruments to which
Company or any Company Subsidiary is a lessor or lender as of October 29,
1998 which have not been sold, transferred or conveyed to a non-recourse
lender and which involve original equipment costs in excess of $50,000
individually;
(c) all contracts or agreements which limit or restrict Company, any
Company Subsidiary or, to Company's knowledge, any of the officers, key
employees or business partners of Company from engaging in any business in
any jurisdiction and all contracts or agreements that limit or restrict
others from competing with Company or any Company Subsidiary in any
jurisdiction;
(d) all contracts or agreements requiring Company or any Company
Subsidiary to register the resale of its capital stock or securities under
federal or state securities law;
(e) all agreements with non-recourse lenders to which Company or any
Company Subsidiary is a party;
(f) all contracts, agreements or arrangements (whether written or oral)
between Company or any Company Subsidiary and a business partner or sales
representative;
(g) representative samples of each type of lease, promissory note,
security agreement and related financing agreements and instruments used by
Company or any Company Subsidiary in the conduct of its business;
(h) all agreements with vendors, manufacturers and distributors to which
Company or any Company Subsidiary is a party involving an annual commitment
or annual payment by any party to such contract or commitment of more than
$100,000 individually;
(i) all partnership, joint venture, or similar contracts or agreements
and all contracts or agreements relating to the future disposition or
acquisition of any assets or properties to which Company or any Company
Subsidiary is a party, other than dispositions or acquisitions in the
ordinary course of business consistent with past practices;
(j) all powers of attorney or comparable delegations of authority granted
by Company or any Company Subsidiary; and
(k) all existing contracts and commitments (other than those described in
subparagraphs (a), (b), (c), (d), (e), (f), (g), (h), (i) and (j) of this
Section 3.11 and the Company Benefit Plans) to which Company or any Company
Subsidiary is a party or by which its properties or assets may be bound
involving an annual commitment or annual payment by any party to such
contract or commitment of more than $100,000 individually.
A-11
<PAGE>
True and complete copies of all Material Contracts, including all
amendments, have been made available to Parent. The Material Contracts are
valid and enforceable in accordance with their respective terms with respect
to Company and any Company Subsidiary and valid and, to the knowledge of
Company, enforceable in accordance with their respective terms with respect to
any other party to a Material Contract, in each case to the extent material to
the business and operations of Company and subject to applicable bankruptcy,
insolvency and other similar laws affecting the enforceability of creditors'
rights generally, general equitable principles and the discretion of courts in
granting equitable remedies. Except for events or occurrences, the
consequences of which, individually or in the aggregate, do not have and would
not be reasonably expected to have, individually or in the aggregate, a
Material Adverse Effect on Company, there is not under any of the Material
Contracts any existing breach, default or event of default by Company or any
Company Subsidiary or event that with notice or lapse of time or both would
constitute a breach, default or event of default by Company or any Company
Subsidiary, nor has Company received notice of, or made a claim with respect
to, any breach or default by any other party to a Material Contract.
3.12 Securitization Facilities. Schedule 3.12 identifies each of the
principal agreements evidencing the two securitization facilities pursuant to
which Company has caused certain of its equipment leases and other chattel
paper to be conveyed to trusts for purposes of selling interests in such
chattel paper to Centre Square Funding Corporation and SunAmerica Life
Insurance Company, respectively (such agreements being collectively referred
to herein as the "Securitization Agreements" and being individually referred
to herein by the terms specified for the respective agreements in Schedule
3.12). All representations and warranties made at any time and from time to
time by Company or any Company Subsidiary in the Securitization Agreements
were true and correct in all material respects when made or deemed to have
been made thereunder. All "Lease Contracts" and "Equipment" (as such terms are
defined in the Securitization Agreements) conveyed by Company to Company
Subsidiaries pursuant to the Equipment Purchase Agreements, and all "Lease
Contracts" and related properties and interests conveyed to the trusts under
the Pooling and Servicing Agreements, satisfy in all material respects the
applicable eligibility criteria and conditions set forth in the Securitization
Agreements, including without limitation, Section 3.02 of each Equipment
Purchase Agreement and Section 3.02 of each Certificate Purchase Agreement.
Each of Company and Company Subsidiaries that are parties to the
Securitization Agreements has performed in all material respects its
obligations and observed and complied in all material respects with those
conditions and requirements applicable to it or its properties under the
Securitization Agreements. No "Trigger Event", "Funding Period Trigger Event"
or "Servicer Default" under the Pooling and Servicing Agreements, or any other
default or breach by Company or any Company Subsidiary under the
Securitization Agreements, has occurred, and neither Company nor any Company
Subsidiary has received notice from any other party to the Security Agreements
asserting or otherwise indicating that any such "Trigger Event", "Funding
Period Trigger Event", "Servicer Default" or other default or breach has
occurred. Neither Company nor any Company Subsidiary that is a party to the
Securitization Agreements has been required to repurchase any "Lease
Contracts" under the terms of the Securitization Agreements.
3.13 Registration Statement, Etc. None of the information supplied or to be
supplied by Company for inclusion or incorporation by reference in (a) the
Registration Statement to be filed by Parent with the SEC in connection with
the Parent Common Stock to be issued in the Merger (the "Registration
Statement"), and (b) the Proxy Statement (the "Proxy Statement") to be mailed
to Company's shareholders in connection with the meeting (the "Shareholders'
Meeting") to be called to consider the Merger, will, at the respective times
such documents are filed with the SEC and, in the case of the Registration
Statement, when it becomes effective, or at the time any amendment or
supplement thereto becomes effective, cause such documents to contain any
untrue statement of a material fact, or omit to state any material fact
required or necessary in order to make the statements therein not misleading;
and, in the case of the Proxy Statement, when first mailed to the shareholders
of Company or at the time of the Shareholders' Meeting, cause the Proxy
Statement or any amendment thereof or supplement thereto to contain any untrue
statement of a material fact, or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading. All
documents that Company is responsible for filing with the SEC and any other
regulatory agency in connection with the Merger will comply as to form in all
material
A-12
<PAGE>
respects with the provisions of applicable law and any applicable rules or
regulations thereunder, except that no representation is made by Company with
respect to statements made therein based on information supplied by Parent or
with respect to information concerning Parent or Sub which is incorporated by
reference in the Registration Statement or the Proxy Statement.
3.14 Employee Benefit Plans.
(a) For purposes of this Section 3.14, the term "Company Benefit Plan" means
any plan, program, fund, policy or contract which, through which or under
which Company or any Company ERISA Affiliate (as defined in Section 3.14(b))
provides or has an obligation to provide benefits or compensation to or on
behalf of employees or former employees of Company or any Company ERISA
Affiliate whether or not written, including but not limited to the following:
(i) any bonus, incentive compensation, stock option, deferred
compensation, commission, severance pay, golden parachute or other
compensation plan or rabbi trust;
(ii) any "employee benefit plan" (as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA")),
including, but not limited to, any multi-employer plan (as defined in
Section 3(37) and Section 4001(a)(3) of ERISA), defined benefit plan,
profit sharing plan, money purchase pension plan, 401(k) plan, savings or
thrift plan, or any plan, fund or program providing for medical (including
post-retirement medical), hospitalization, accident, sickness, disability,
or life insurance benefits; and
(iii) any stock purchase, vacation, scholarship, sick days, day care,
prepaid legal services, dependent care or other fringe benefits plans,
programs or contracts.
Each Company Benefit Plan is identified in Section 3.14 of the Disclosure
Letter.
(b) For purposes of this Section 3.14 the term "Company ERISA Affiliate"
means each trade or business (whether or not incorporated) which together with
Company is treated as a single employer under Section 414(b), (c), (m) or (o)
of the Code.
(c) Company and each Company ERISA Affiliate is in compliance with the
requirements prescribed by all statutes, orders and governmental rules and
regulations applicable to Company Benefit Plans. All reports and disclosures
relating to Company Benefit Plans required to be filed with or furnished to
any governmental entity, participants or beneficiaries prior to the Closing
Date have been or will be properly completed and filed or furnished in a
timely manner and in accordance with applicable laws, including, without
limitation, Internal Revenue Service (the "IRS"), Department of Labor (the
"DOL") and Pension Benefit Guaranty Corporation ("PBGC") Form 5500. Each
Company Benefit Plan has been administered according to its terms (except for
those terms which are inconsistent with the changes required by statutes,
regulations, and rulings for which changes are not yet required to be made, in
which case the plan has been administered in accordance with the provisions of
those statutes, regulations and rulings) and applicable law.
(d) Neither Company nor any Company ERISA Affiliate maintains, or has at any
time established or maintained, or has at any time been obligated to make, or
made, either directly or indirectly (whether by reimbursing another employer
or otherwise) contributions to or under any plan, program or arrangement that
is subject to Section 412 of the Code, Section 302 of ERISA or Title IV of
ERISA, including any multi-employer plan (as defined in Section 3(37) and
Section 4001(a)(3) of ERISA). Company does not maintain, nor has at any time
established or maintained, nor has at any time been obligated to make, or
made, contributions to or under any plan which provides post-retirement
medical or health benefits with respect to former employees of Company. There
is no lien upon any property of Company or any Company ERISA Affiliate
outstanding except as required by Part 6 of Title I of ERISA pursuant to
Section 412(n) of the Code or Section 302(f) of ERISA in favor of any Company
Benefit Plan. No assets of Company or any Company ERISA Affiliate have been
provided as security for any Company Benefit Plan pursuant to Section
401(a)(29) of the Code.
A-13
<PAGE>
(e) Company has provided to Parent a true and complete copy of the following
documents, if applicable, with respect to each Company Benefit Plan identified
in Section 3.14 of the Disclosure Letter: (1) the most recent documents,
including any insurance contracts and trust agreements, setting forth the
terms of each Company Benefit Plan, or if there are no such documents
evidencing a Company Benefit Plan, a full description of such Company Benefit
Plan, (2) the most recent ERISA summary plan description and the most recent
version of other summary of plan provisions provided to participants or
beneficiaries for each such Company Benefit Plan, (3) the annual reports filed
for the most recent three plan years and most recent financial statements or
periodic accounting or related plan assets with respect to each Company
Benefit Plan, (4) each favorable determination letter, opinion or ruling from
the IRS for each Company Benefit Plan, the assets of which are held in trust,
to the effect that such trust is exempt from federal income tax, including any
outstanding request for a determination letter and (5) each opinion or ruling
from the DOL or the PBGC with respect to any such Company Benefit Plan.
(f) Each Company Benefit Plan identified in Section 3.14 of the Disclosure
Letter that is funded through a trust or insurance contract has at all times
satisfied in all material respects, by its terms and in its operation, all
applicable requirements for an exemption from federal income taxation under
Section 501(a) of the Code. Except for Company's 401(k) Plan (the "Company
401(k) Plan"), neither Company nor any Company ERISA Affiliate maintains or
previously maintained a Company Benefit Plan which meets or was intended to
meet the requirements of Section 401(a) of the Code. Except as set forth in
Section 3.14(f) of the Disclosure Letter, a determination letter has been
issued by the IRS to the effect that the Company 401(k) Plan qualifies under
Section 401(a) of the Code and that the related trust is exempt from taxation
under Section 501(a) of the Code and such determination letter remains in
effect and has not been revoked. The Company 401(k) Plan has been tested for
compliance with, and has satisfied the requirements of, Section 401(k)(3),
401(m)(2) and 415 of the Code for each plan year ending prior to the Closing
Date.
(g) There are no actions, audits, suits or claims which are pending or
threatened against any Company Benefit Plan, any fiduciary of any of the
Company Benefit Plans with respect to the Company Benefit Plans or against the
assets of any of the Company Benefit Plans, except claims for benefits made in
the ordinary course of the operation of such plans and except for routine
actions to join a Company Benefit Plan in a divorce proceeding in order to
effect a "qualified domestic relations order" (as defined in Section 414(p) of
the Code) as required under the California Family Code or other similar state
law.
(h) Company and each Company ERISA Affiliate has made full and timely
payment of all amounts required to be contributed under the terms of each
Company Benefit Plan and applicable law or required to be paid as expenses
under such Company Benefit Plan and no excise taxes are assessable as a result
of any nondeductible or other contributions made or not made to a Company
Benefit Plan. The assets of all the Company Benefit Plans which are required
under applicable laws to be held in trust are in fact held in trust and shown
on the books and records of each such trust at their fair market value, and
the assets of each such Company Benefit Plan shown at such fair market value
equal or exceed the liabilities of each such plan. The liabilities of each
other Company Benefit Plan are properly and accurately reported on the
financial statements and records of Company to the extent such reporting is
required. The assets of each Company Benefit Plan are reported at their fair
market value on the books and records of each plan.
(i) Neither Company nor any Company ERISA Affiliate is subject to any
liability, tax or penalty whatsoever to any person whomsoever as a result of
Company's or any Company ERISA Affiliate's engaging in a breach of fiduciary
duty or a prohibited transaction under ERISA or the Code, and Company has no
knowledge of any circumstances which might result in any such liability, tax
or penalty as a result of any breach of fiduciary duty under ERISA or in any
duty to indemnify any other person for any such liability.
(j) No payment required to be made to any employee associated with Company
or any Company Subsidiary as a result of the transactions contemplated hereby
under any contract or otherwise will, if made, constitute an "excess parachute
payment" within the meaning of Section 280G of the Code.
(k) Company and each Company ERISA Affiliate have complied with the
continuation coverage requirements of Section 4980B of the Code and ERISA
Sections 601 through 608.
A-14
<PAGE>
(l) The consummation of the transactions contemplated hereby will not
accelerate or increase any liability under any Company Benefit Plan or any
employment agreement or contract or otherwise because of an acceleration or
increase of any of the rights or benefits to which employees of Company or any
Company ERISA Affiliate may be entitled thereunder except for stock options
granted by Company and certain employment agreements disclosed under Section
3.17.
(m) Company has made no representations or warranties contractually or
otherwise to any client or customer of Company that Company employees
rendering services to such client or customer cannot be treated as "leased
employees" (within the meaning of Section 414(n) of the Code) of such client
or customer or that such employees would not be required to participate under
any pension benefit plan (within the meaning of Section 3(2) of ERISA) (a
"Pension Benefit Plan") of such client or customer of Company.
3.15 Property.
(a) Company and the Company Subsidiaries have good and valid title to or
valid leasehold interests in its properties reflected in the Company Reports
and the Interim Balance Sheet or acquired after July 1, 1998 (other than
properties sold or otherwise disposed of in the ordinary course of business),
and all of such properties are held free and clear of all liens, encumbrances
and restrictions, except, with respect to all such properties, (a) mortgages
and liens securing debt reflected as liabilities on the Interim Balance Sheet
and (b) (i) liens for current taxes and assessments not in default, (ii)
mechanics', carriers', workmen's, repairmen's, statutory or common law liens
either not delinquent or being contested in good faith, and (iii) liens,
mortgages, encumbrances, covenants, rights of way, building or use
restrictions, easements, exceptions, variances, reservations and other matters
or limitations of any kind, if any, which either individually or in the
aggregate do not have a material adverse effect on Company's or any of the
Company Subsidiaries' use of the property affected.
(b) Company or one of the Company Subsidiaries has physical possession of
all real property, equipment and other assets which are covered by Disclosed
Leases.
(c) The structures and equipment owned or leased by each of Company and the
Company Subsidiaries are, to Company's knowledge, structurally sound with no
defects, are in good and safe operating condition and repair and are adequate
for the uses to which they are being put, except for any such circumstances
which, individually or in the aggregate, do not have or would not reasonably
be expected to have, individually or in the aggregate, Material Adverse Effect
on Company.
(d) The rights, properties and other assets presently owned, leased or
licensed by each of Company and the Company Subsidiaries and reflected on the
Interim Balance Sheet and the September Balance Sheet include all rights,
properties and other assets necessary to permit Company and the Company
Subsidiaries to conduct their businesses in the same manner as such businesses
are currently conducted and as they have been conducted since December 31,
1995, without any need for replacement, refurbishment or extraordinary repair
except in the ordinary course of business consistent with past practice.
3.16 Intellectual Property; Year 2000
(a) Section 3.16(a) of the Disclosure Letter sets forth a complete and
accurate list and description of (i) all United States federal, state and
foreign patents, registered trademarks, trade names, registered service marks,
copyrights (including any registrations and applications therefor) and all
trade secrets, technology, processes, inventions and other intellectual
property owned by Company or any Company Subsidiary that are material to the
business of each of Company and the Company Subsidiaries as conducted as of
the date hereof (hereinafter the "Intellectual Property Rights") and (ii) all
United States federal, state and foreign patents, registered trademarks, trade
names, registered service marks, copyrights (including any registrations and
applications therefor) and all technology, processes, inventions and other
intellectual property licensed to Company or any Company Subsidiary that are
material to the business of each of Company and the Company Subsidiaries as
conducted as of the date hereof (hereinafter the "Licensed Rights"). Except as
specifically set forth in
A-15
<PAGE>
Section 3.16(a) of the Disclosure Letter, (i) Company and the Company
Subsidiaries own and have the full and exclusive right to use the Intellectual
Property Rights and the Intellectual Property Rights are free of any liens,
claims or encumbrances, are not subject to any royalty bearing license, and
are not subject to any other arrangement requiring any material payment to any
person or the obligation to grant material rights to any person in exchange,
(ii) the Licensed Rights are free and clear of any material royalties or
obligations of Company or the Company Subsidiaries in excess of $50,000 per
annum, and (iii) the Intellectual Property Rights and the Licensed Rights are
all those rights necessary and material to the conduct of the business of each
of Company and the Company Subsidiaries as currently being conducted or
currently proposed to be conducted. The validity of the Intellectual Property
Rights and title thereto, and the validity of the Licensed Rights, (i) have
not been questioned in any prior litigation, (ii) are not being questioned in
any pending litigation, and (iii) to the best knowledge of Company, are not
the subject(s) of any threatened or proposed litigation. Except as
specifically set forth in Section 3.16(a) of the Disclosure Letter, the
business of each of Company and the Company Subsidiaries, as now conducted,
does not conflict with, nor has Company or any Company Subsidiary received
notice of any claim that such business conflicts with, any patents,
trademarks, trade names, service marks or copyrights of any third party. The
consummation of the transactions contemplated hereby will not result in the
loss or impairment of any of the Intellectual Property Rights or any of the
Licensed Rights. Each of Company and the Company Subsidiaries does not know of
any infringing use by any third party of the Intellectual Property Rights or
the Licensed Rights.
(b) Each of Company and the Company Subsidiaries owns, or possesses valid
license rights to, all computer software programs that are material to the
conduct of the business of Company and the Company Subsidiaries. Except as
listed in Section 3.16(b) of the Disclosure Letter, there are no infringement
suits, actions or proceedings pending or, to the best knowledge of Company,
threatened against Company or any Company Subsidiary with respect to any
software owned or licensed by Company or any Company Subsidiary, and the
transactions contemplated hereby will not result in the loss or impairment of
any such ownership or license rights.
(c)(i) Neither Company nor any Company Subsidiary is subject to any pending
or threatened regulatory action, proceeding or, to the knowledge of Company,
any pending or threatened investigation concerning Year 2000 Compliance with
respect to all of the services offered by Company and the Company Subsidiaries
("Services") or the operations of Company and the Company Subsidiaries, and,
to the knowledge of Company, there is no basis for any such regulatory action,
proceeding or investigation the result of which would reasonably be expected
to have a Material Adverse Effect on Company. Company and the Company
Subsidiaries are in material compliance with all applicable regulatory rules,
regulations and requirements in regards to the Year 2000 Compliance of
Company's and the Company Subsidiaries' Services and operations, except to the
extent that such non-compliance would not have a Material Adverse Effect on
Company. Except as specifically set forth in Section 3.16(c) of the Disclosure
Letter, neither Company nor any Company Subsidiary has received notice of a
claim against Company or any Company Subsidiary that any of Company's or the
Company Subsidiaries' Services are not Year 2000 Compliant exists and, to the
knowledge of Company, there is no basis for any such claim or action. Company
has furnished or made available to Parent true, correct and complete copies of
any material customer agreements or other materials in which Company has
furnished assurances as to the Year 2000 Compliance of Company's or the
Company Subsidiaries' Services, including any responses to surveys or requests
for certification of Year 2000 Compliance and letters of assurance to
customers.
(ii) All of the internal MIS systems (including hardware, firmware,
operating system software, utilities, and applications software) and all
systems used in the ordinary course of Company's and the Company Subsidiaries'
business by or on behalf of Company or the Company Subsidiaries, including
Company's and the Company Subsidiaries' payroll, accounting,
billing/receivables, customer service, human resources and e-mail systems, are
Year 2000 Compliant except to the extent any non-compliance would not have a
Material Adverse Effect on Company.
(iii) Except as specifically set forth in Section 3.16(c) of the Disclosure
Letter, either Company or the Company Subsidiaries have contacted each
material vendor of products or services and each lessor of facilities
A-16
<PAGE>
that are material to Company or the Company Subsidiaries, and their respective
Services and operations, to request information from such vendor or lessor as
to whether it will be able to continue to furnish its products, services or
facilities to Company on and after January 1, 2000 to the extent such vendor
or lessor is obligated to do so pursuant to existing agreements.
(iv) Except as specifically set forth in Section 3.16(c) of the Disclosure
Letter, all of Company's owned facilities in all locations (including HVAC
systems, mechanical systems, elevators, security systems, fire suppression
systems, telecommunications systems, fax machines, copy machines and
equipment) are Year 2000 Compliant.
(v) For purposes of this Agreement, Year 2000 Compliant means that the
relevant information technology is designed to be used prior to, during and
after the calendar year 2000 A.D. and the information technology used during
such time period will accurately receive, provide and process date/time data
(including, but not limited to, calculating, comparing and sequencing) from,
into and between the twentieth and twenty-first centuries (including the years
1999, 2000 and leap year calculations), and will not malfunction, cease to
function or provide invalid or incorrect results as a result of date/time
data.
(vi) Company has furnished or made available to Parent with a true, correct
and complete copy of any internal memoranda, budget plans, forecasts or
reports concerning the Year 2000 Compliance of the Services, operations,
systems, supplies, and facilities of Company, the Company Subsidiaries and
Company's vendors of which Company has knowledge.
3.17 Labor Relations. Except to the extent set forth in Section 3.17 of the
Disclosure Letter:
(a) There are no agreements or arrangements on behalf of any officer,
director or employee providing for payment or other benefits to such person
contingent upon the execution of this Agreement, the Closing or a transaction
involving a change of control of Company. There are no collective bargaining
agreements to which Company or any Company Subsidiary is a party.
(b) During the five years immediately preceding the date hereof, none of
Company or the Company Subsidiaries has experienced any organized slow down,
work interruption, strike or work stoppage. There are no existing or, to
Company's knowledge, threatened labor disputes. None of Company or the Company
Subsidiaries has failed to pay when due any wages, bonuses, commissions,
benefits, taxes, penalties or assessments or other monies, owed to, or arising
out of the employment of or any relationship or arrangement with, any officer,
director, employee, sales representative, business partner, contractor or
other consultant or agent. Neither Company nor any Company Subsidiary has
taken any action that would constitute a "Mass Layoff" or "Plant Closing"
within the meaning of the Worker Adjustment and Retraining Notification
("WARN") Act or would otherwise trigger notice requirements or liability under
any state or local plant closing notice law, and to the extent any liability
arises between the date of this Agreement and the Closing Date as a result of
employment actions of Company or the Company Subsidiaries, Company and the
Company Subsidiaries will be solely responsible therefor.
(c) Each of Company and the Company Subsidiaries is in compliance in all
material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, wages and hours,
occupational safety and health, and is not engaged in any unfair labor or
unfair employment practices.
(d) There is no unfair labor practice charge or complaint or any other
matter against (or to the knowledge of Company, involving) Company or any
Company Subsidiary pending or, to the knowledge of Company, threatened before
the National Labor Relations Board or any other governmental authority and
none of Company's or the Company Subsidiaries' employees as employees of
Company or the Company Subsidiaries are or have been represented by a labor
organization that was NLRB certified.
(e) No certification or decertification question relating to collective
bargaining units at the premises of Company or any of the Company Subsidiaries
exists or has existed within the past five years.
A-17
<PAGE>
(f) There are no investigations, administrative proceedings or formal
complaints of discrimination (including discrimination based upon sex, age,
marital status, race, national origin, sexual preference, disability, handicap
or veteran status) pending, or to the knowledge of Company, threatened before
the Equal Employment Opportunity Commission or any federal, state or local
agency or court against or involving Company or any Company Subsidiary. No
discrimination and/or retaliation claim is pending or, to the knowledge of
Company, threatened against Company or the Company Subsidiaries under the
1866, 1877, 1964 or 1991 Civil Rights Acts, the Equal Pay Act, the Age
Discrimination in Employment Act, as amended, the Americans with Disabilities
Act, the Family and Medical Leave Act, the Fair Labor Standards Act, ERISA, or
any other Federal Law or any comparable state or local fair employment
practices act regulating discrimination in the workplace, and no wrongful
discharge, libel, slander or other claim under any state law is pending or, to
the knowledge of Company, threatened against Company or any Company Subsidiary
that rises out of the employment or contractor relationship with respect to
any employee or contractor or the termination of any such relationship.
(g) There are no citations, investigations, administrative proceedings or
formal complaints of violations of local, state or federal occupational safety
and health laws pending, or to the knowledge of Company, threatened before the
Occupational Safety and Health Review Commission or any federal, state or
local agency or court against or involving Company or any Company Subsidiary.
(h) Section 3.17(h) of the Disclosure Letter sets forth a true and correct
list of all employees employed by each of Company and the Company Subsidiaries
at the date of this Agreement, together with their respective job titles,
dates of hire and compensation.
(i) No agreement, arbitration or court decision or governmental order in any
way limits or restricts any of Company, any Company Subsidiary or Parent from
relocating or closing any of the operations of Company or any of the Company
Subsidiaries.
(j) If Company or any of the Company Subsidiaries is a Federal, State or
local contractor obligated to develop and maintain an affirmative action plan,
no discrimination claim, show-cause notice, conciliation proceeding, sanctions
or debarment proceedings is pending or has, to the knowledge of Company, been
threatened against Company or the Company Subsidiaries with the Office of
Federal Contract Compliance Programs ("OFCCP") or any other Federal agency or
any comparable state or local agency or court and no desk audit or on-site
review is in progress.
(k) No workers' compensation or retaliation claim is pending against Company
or the Company Subsidiaries in excess of $250,000 in the aggregate and Company
maintains adequate insurance with respect to workers' compensation claims
pursuant to insurance policies that are currently in force, or has accrued an
adequate liability for such obligations, including, without limitation,
adequate accruals with respect to accrued but unreported claims and
retroactive insurance premiums.
3.18 No Violation of Law. The business and operations of Company and the
Company Subsidiaries have been conducted in compliance in all material
respects with all applicable laws, ordinances, regulations and orders of all
governmental entities and other regulatory bodies (including, without
limitation, laws, ordinances, regulations and orders relating to fair credit
practices, commercial finance companies, zoning, environmental matters,
employment law and the safety and health of employees), except where
noncompliance does not have and would not reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Company. Except
as set forth in Section 3.18 of the Disclosure Letter, (i) neither Company nor
any Company Subsidiary has been charged with or, to the knowledge of Company,
is now under investigation with respect to, a violation in any material
respect of any applicable law, regulation, ordinance, order or other
requirement of a governmental entity or other regulatory body, and (ii)
Company and the Company Subsidiaries have filed all reports required to be
filed with any governmental entity or other regulatory body on or before the
date hereof except for reports the failure to file which does not have and
would not reasonably be expected to have, individually or in the aggregate, a
Material Adverse Effect on Company. Company and the Company Subsidiaries have
all permits, certificates, licenses, approvals and other governmental
authorizations required in connection with the operation of the business of
Company and the Company Subsidiaries, except for permits,
A-18
<PAGE>
certificates, licenses, approvals and other governmental authorizations the
failure of which to have does not and would not reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company.
3.19 Environmental Matters. Except as set forth in Section 3.19 of the
Disclosure Letter and except for those matters which would not reasonably be
expected, individually or in the aggregate, to have a Material Adverse Effect
on Company:
(a) Each of Company and the Company Subsidiaries possesses, and is in
compliance with, all permits, licenses and government authorizations and
has filed all notices and registrations that are required under local,
state and federal laws and regulations relating to protection of the
environment, natural resources, health, safety, waste management, pollution
control, product registration and/or Hazardous Materials (as defined below
in this Section 3.19) ("Environmental Laws") and is in compliance with all
applicable limitations, restrictions, conditions, standards, prohibitions,
requirements, obligations, schedules and timetables contained in those
Environmental Laws or contained in any law, regulation, code, plan, order,
decree, judgment, notice, permit or demand letter issued, entered,
promulgated or approved thereunder.
(b) Neither Company nor any Company Subsidiary has received written
notice of any actual or threatened liability under the Federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") or any similar state or local statute or ordinance or any other
Environmental Law from any governmental agency or any third party relating
to the release or threatened release of any Hazardous Material to any
environmental medium or the cleanup or investigation of any Hazardous
Material found in any environmental medium.
(c) Neither Company nor any Company Subsidiary has entered into or agreed
to enter into or is in negotiations with respect to any consent decree or
order, and neither Company nor any Company Subsidiary is subject to any
judgment, decree or judicial or administrative order relating to compliance
with, or the investigation or cleanup of Hazardous Materials under, any
Environmental Laws.
(d) Neither Company nor any Company Subsidiary has received within the
past five years any notice of violation or been subject to any
administrative or judicial proceeding alleging violation of applicable
Environmental Laws.
(e) Neither Company nor any Company Subsidiary is subject to any claim,
obligation, liability (whether based on strict liability or otherwise),
loss, damage or expense of any kind or nature, contingent or otherwise,
incurred or imposed or based upon any provision of any Environmental Law
and arising out of any act or omission of Company or any Company
Subsidiary, or any of their employees, agents or representatives or arising
out of the ownership, use, control or operation by Company or any Company
Subsidiary of any plant, facility, site, area or property (including,
without limitation, any plant, facility, site, area or property currently
or previously owned or leased or used by or on behalf of Company or any
Company Subsidiary) from which any Hazardous Materials were or are being
released into the environment (the term "release" meaning any actual or
threatened spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping or disposing into the
environment (including the abandonment of any barrels, containers, tanks or
other closed receptacles containing any Hazardous Material), and the term
"environment" meaning any surface or ground water, drinking water supply,
soil, surface or subsurface strata or medium, or the ambient air).
(f) Company has provided Parent with true, correct and complete copies of
all documents of Company and the Company Subsidiaries relating to
environmental matters or matters otherwise regulated under any applicable
Environmental Law. Neither Company nor any Company Subsidiary has paid any
fines, penalties or assessments for violations of Environmental Laws within
the past five years.
(g) None of the real property leased or occupied by Company or any
Company Subsidiary or any other assets, improvements or equipment of
Company or any Company Subsidiary contains any asbestos-containing material
(other than non-friable floor tile, roofing material and drywall material),
polychlorinated biphenyls ("PCBs") or underground storage tanks and to the
knowledge of Company and any Company Subsidiary, never contained any PCBs
or underground storage tanks.
A-19
<PAGE>
(h) Company has provided Parent with copies of all work place or worker
exposure measurements made by or on behalf of Company or any Company
Subsidiary, including, without limitation, all work place or worker
exposure measurements for particulates, Occupational Safety and Health
Administration ("OSHA") hazardous chemicals and Hazardous Materials. At no
time since December 31, 1992, have conditions in the work place resulted in
an exceedance or a violation of any OSHA permissible exposure level for
workers of Company or any Company Subsidiary or of any similar state or
local statute, ordinance or regulation intended to protect workers. Company
has established and is in full compliance with its OSHA Hazard
Communication Program and is in full compliance with all other applicable
OSHA standards, including, without limitation, the blood borne pathogens
standard.
(i) There is no radon or regulated radioactive materials present on any
real property leased or occupied by Company or any Company Subsidiary or
any other assets, improvements, or equipment of Company or any Company
Subsidiary.
(j) There is not now and, to the knowledge of Company and any Company
Subsidiary, never has been, in or at any real property leased or occupied
by Company or any Company Subsidiary, or any portion thereof any: (1)
surface impoundment, lagoon, containment facility or other unit regulated
under any applicable Environmental Law, for the temporary or permanent
storage, treatment or disposal of Hazardous Materials or (2) landfill or
solid waste disposal area.
As used in this Section 3.19, the term "Hazardous Materials" means any waste,
pollutant, hazardous substance, toxic, ignitable, reactive or corrosive
substance, hazardous waste, special waste, industrial substance, by-product,
process intermediate product or waste, petroleum or petroleum-derived
substance or waste, chemical liquids or solids, liquid or gaseous products, or
any constituent of any such substance, chemical or waste, the generation, use,
handling, recycling, reclamation, transportation, release, treatment, storage
or disposal of which by Company or any Company Subsidiary is or has been in
any way governed by or subject to any applicable Environmental Law.
3.20 Insurance Policies. Section 3.20 of the Disclosure Letter sets forth a
complete and accurate list and description (including the amount of coverage
provided thereunder) of all insurance policies in force naming Company, any
Company Subsidiary or employees thereof as an insured or beneficiary or as a
loss payable payee and for which Company or any Company Subsidiary has paid or
is obligated to pay all or part of the premiums. Neither Company nor any
Company Subsidiary has received notice of any pending or threatened
cancellation or premium increase (retroactive or otherwise) with respect
thereto, and each of Company and the Company Subsidiaries is in compliance in
all material respects with all conditions contained therein including, without
limitation, the timely payment of all premiums due and payable thereunder.
There are no pending claims against such insurance by Company or any Company
Subsidiary as to which insurers are defending under reservation of rights or
have denied liability, and there exists no claim under such insurance that has
not been properly filed by Company or any Company Subsidiary.
3.21 Absence of Certain Business Practices. None of Company, the Company
Subsidiaries or, to Company's knowledge, any officer, employee or agent of
Company or any of the Company Subsidiaries or any other person acting on its
behalf, has, directly or indirectly, given or agreed to give any gift or
similar benefit (other than with respect to bona fide payments for which
adequate consideration has been given) to any customer, vendor, governmental
employee or other person who is or may be in a position to help or hinder the
business of Company or any of the Company Subsidiaries (or assist Company or
any of the Company Subsidiaries in connection with any actual or proposed
transaction) (a) which might subject Company or any of the Company
Subsidiaries to any damage or penalty in any civil, criminal or governmental
litigation or proceeding, (b) which, if not continued in the future, would
have or would reasonably be expected to have a Material Adverse Effect on
Company or which would or would reasonably be expected to subject Company or
any of the Company Subsidiaries to suit or penalty in any private or
governmental litigation or proceeding, (c) for any of the purposes described
in Section 162(c) of the Code, or (d) for establishment or maintenance of any
concealed fund or concealed bank account.
A-20
<PAGE>
3.22 Accounts Receivable and Net Investment in Direct Finance Leases and
Loans: Restricted Cash.
(a) All accounts receivable and net investment in direct finance leases and
loans of Company and the Company Subsidiaries which are reflected in the
September Balance Sheet (i) are valid, existing and collectible in a manner
consistent with Company's (or the Company Subsidiaries') past practice without
resort to legal proceedings or collection agencies, except where the failure
to be so valid, existing and collectible does not have and would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Company, (ii) represent monies due in the ordinary course of
business and (iii) are not subject to any refunds or adjustments or any
defenses, rights of set-off, assignment, restrictions, security interests or
other encumbrances. Section 3.22(a) of the Disclosure Letter sets forth all
accounts receivable and net investment in direct finance leases and loans, the
scheduled payments under which were more than 60 days past due at September
30, 1998. Neither Company nor any Company Subsidiary has ever factored any of
its accounts receivable, excluding direct finance lease and loan receivables.
(b) Since the date of the Interim Balance Sheet, the amount of cash or cash
equivalents of Company and the Company Subsidiaries classified on the Interim
Balance Sheet as "restricted cash" has not decreased and such restricted cash
equals or exceeds the amount required to be reserved by Company and the
Company Subsidiaries under the Securitization Agreements.
3.23 Transactions with Affiliates. Except as set forth in Section 3.23 of
the Disclosure Letter, no director, officer or other "affiliate" or
"associate" (as such terms are defined in Rule 12b-2 under the Exchange Act)
of Company or any Company Subsidiary or, to Company's knowledge, any person
with whom any such director, officer or other affiliate or associate has any
direct or indirect relation by blood, marriage or adoption, or any entity in
which any such director, officer or other affiliate or associate, owns any
beneficial interest (other than a publicly held corporation whose stock is
traded on a national securities exchange or in the over-the-counter market and
less than 1% of the stock of which is beneficially owned by all such persons)
has any interest in (i) any contract, arrangement or understanding with
Company or any Company Subsidiary, or relating to the business or operations
of Company or any Company Subsidiary, (ii) any loan, arrangement,
understanding, agreement or contract for or relating to indebtedness of
Company or any Company Subsidiary, or (iii) any property (real, personal or
mixed), tangible, or intangible, used or currently intended to be used in, the
business or operations of Company or any Company Subsidiary.
3.24 Fairness Opinion. The Board of Directors of Company has received an
opinion dated the date hereof from Piper Jaffray Inc. to the effect that as of
such date the consideration to be received by the holders of Company Common
Stock in the Merger is fair, from a financial point of view, to such
shareholders.
3.25 Antitakeover Statutes; Shareholders' Rights Plan. Each of Company and
the Board of Directors of Company has taken all action required to be taken by
it in order to exempt this Agreement and the Shareholders' Option Agreement
and the transactions contemplated hereby and thereby from, and this Agreement
and the Shareholders' Option Agreement and the transactions contemplated
hereby and thereby are exempt from the requirements of, any "moratorium",
"control share", "fair price", "affiliate transaction", "business combination"
or similar or other antitakeover laws and regulations of any state. Company
does not have a "shareholders' rights plan", "poison pill" or similar plan or
arrangement.
3.26 Board Recommendations. The Board of Directors of Company, at a meeting
duly called and held, has (i) determined that this Agreement and the
transactions contemplated hereby (including the Merger) are fair to and in the
best interests of the shareholders of Company, and (ii) resolved to recommend
that the holders of the shares of capital stock of Company entitled to vote
thereon approve this Agreement and the transactions contemplated hereby
(including the Merger).
3.27 Brokers and Finders. Neither Company nor any of the Company
Subsidiaries, nor any of their respective officers, directors or employees,
has employed any broker or finder or incurred any liability for any financial
advisory fees, brokerage fees, commissions, or finder's fees, and no broker or
finder has acted directly
A-21
<PAGE>
or indirectly for Company or any of the Company Subsidiaries in connection
with this Agreement, the Shareholders' Option Agreement or any of the
transactions contemplated hereby or thereby, except that Company has retained
Credit Suisse First Boston Corporation and Piper Jaffray Inc. as its financial
advisors, whose fees and expenses will be paid by Company. Company has
previously delivered to Parent complete copies of the engagement letters and
all other agreements entered into by Company with each of Credit Suisse First
Boston Corporation and Piper Jaffray Inc.
3.28 Merger. Neither Company nor any Company Subsidiary has taken any action
or failed to take any action which action or failure to take action would
jeopardize the Merger as a reorganization within the meaning of Section 368(a)
of the Code (including, without limitation, any distribution of property or
other transaction that would cause Company not to hold "substantially all of
its properties", within the meaning of Section 368(a)(2)(E)(i) of the Code,
after the Merger).
3.29 Voting Requirements. The affirmative vote of the holders of a majority
of the outstanding shares of Company Common Stock and the affirmative vote of
the holders of two-thirds () of the outstanding shares of the Series A Shares,
voting as a class with respect to this Agreement and the Merger, are the only
vote of the holders of any class or series of Company's capital stock
necessary to approve this Agreement, the Merger and the transactions
contemplated by this Agreement and the Merger.
3.30 No Existing Discussions. Prior to the date hereof, Company has engaged
in an auction process pursuant to which it, directly and through its financial
advisors, has discussed with other parties the possibility of consummating a
transaction which was the subject of an Acquisition Proposal from such
parties. As of the date hereof, Company has terminated all such discussions
and is not engaged, directly or indirectly, in any negotiations or discussions
with any other party with respect to an Acquisition Proposal.
3.31 Representations and Warranties of Identified Shareholders. As an
inducement to Parent and Sub to enter into this Agreement and consummate the
transactions contemplated hereby, and subject to Section 8.11 hereof, each
Identified Shareholder hereby severally, and not jointly, represents and
warrants to Parent and Sub as follows:
(a) This Agreement has been duly executed and delivered by him, and the
provisions of Sections 3.31, 5.15, 5.18, 6.3(c)(ii), and Article 8 hereof
including, without limitation, Section 8.11 constitute his valid and
binding obligations, enforceable against him in accordance with their
terms, except as may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting or relating to the enforcement of creditors'
rights generally and subject to general principles of equity.
(b) The execution and delivery of this Agreement and the fulfillment of
his obligations under the provisions of Section 3.31, the last sentence of
5.15, 5.18, 6.3(c)(ii), and Article 8 hereof including, without limitation,
Section 8.11 do not and will not (i) violate, conflict with, result in a
breach of any provision of, constitute a default (or an event that, with
notice or lapse of time or both, would constitute a default) under any of
the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, lease, agreement or other instrument or obligation
to which he is a party, or by which he may be bound, or to which he or any
of his properties or assets may be subject or (ii) violate or conflict with
any judgment, ruling, order, writ, injunction or decree, or any statute,
rule or regulation applicable to him or any of his properties or assets.
(c) He has reviewed the representations and warranties of Company set
forth herein and, to his knowledge, such representations and warranties are
accurate and correct in all material respects.
(d) The representations and warranties of such Identified Shareholder set
forth in the Shareholders' Option Agreement are accurate and correct.
A-22
<PAGE>
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF PARENT
As an inducement to Company to enter into this Agreement and consummate the
transactions contemplated hereby, Parent hereby represents and warrants to
Company as follows:
4.1 Organization, Good Standing and Power.
(a) Parent is a corporation duly organized, validly existing and in good
standing under the laws of the State of New York and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. Parent is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties make
such qualification or licensing necessary, except where the failure to be so
qualified or licensed or to be in good standing does not have or would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent (as defined below). Parent has delivered to Company
complete and correct copies of its articles of incorporation and bylaws and
all amendments thereto to the date hereof that have been requested by Company.
As used in this Agreement, the phrase "Material Adverse Effect on Parent"
means a material adverse effect on (a) the condition (financial or otherwise),
business, assets, liabilities or results of operations of Parent and its
subsidiaries taken as a whole or (b) a material adverse effect on the ability
of Parent or Sub to consummate the transactions contemplated by this
Agreement.
(b) Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted. Sub is duly qualified or
licensed to do business and is in good standing in each jurisdiction in which
the nature of its business or the ownership or leasing of its properties make
such qualification or licensing necessary, except where the failure to be so
qualified or licensed or to be in good standing does not have or would not
reasonably be expected to have, individually or in the aggregate, a Material
Adverse Effect on Parent. Sub has delivered to Company complete and correct
copies of its certificate of incorporation and bylaws and all amendments
thereto to the date hereof that have been requested by Company.
4.2 Capitalization. The authorized capital stock of Parent consists of 1.2
billion shares of Common Stock, par value $.60 per share, of which, as of
October 30, 1998, 454,435,465 shares were issued and outstanding. All of the
shares of Parent Common Stock to be issued in exchange for Company Common
Stock at the Effective Time in accordance with this Agreement will be, when so
issued, duly authorized, validly issued, fully paid and nonassessable and,
except as set forth in Section 4.2 of the Disclosure Letter, free of
preemptive rights. Parent owns all of the outstanding capital stock of Sub.
4.3 Authority; Enforceability. Each of Parent and Sub has the corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of each of Parent and
Sub, and this Agreement has been duly executed and delivered by Parent and Sub
and constitutes the valid and binding obligation of each such party,
enforceable against it in accordance with its terms, except as may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting or
relating to the enforcement of creditors' rights generally and subject to
general principles of equity.
4.4 Non-Contravention; Consents.
(a) Except as set forth in Section 4.4(a) of the Disclosure Letter, neither
the execution, delivery and performance by Parent or Sub of this Agreement,
nor the consummation by Parent or Sub of the transactions contemplated hereby,
nor compliance by Parent or Sub with any of the provisions hereof, will:
(i) violate, conflict with, result in a breach of any provision of,
constitute a default (or an event that, with notice or lapse of time or
both, would constitute a default) under, result in the termination,
cancellation
A-23
<PAGE>
or expiration of, accelerate the performance required by, or result in a
right of termination or acceleration, or the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of
Parent or Sub, under any of the terms, conditions or provisions of, (x) its
respective organizational documents, or (y) any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which Parent or any of its subsidiaries is a party, or by
which Parent or any of its subsidiaries may be bound, or to which Parent or
any of its subsidiaries or the properties or assets of any of them may be
subject, and that has or would reasonably be expected to have, in any such
event specified in this clause (y), individually or in the aggregate, a
Material Adverse Effect on Parent; or
(ii) subject to compliance with the statutes and regulations referred to
in Section 4.4(b), violate any judgment, award, ruling, order, writ,
injunction, decree, or any statute, rule or regulation applicable to Parent
or any of its subsidiaries or any of their respective properties or assets
where such violation has or would reasonably be expected to have,
individually or in the aggregate, a Material Adverse Effect on Parent.
(b) Except as set forth in Section 4.4(b) of the Disclosure Letter and other
than notices, filings, authorizations, exemptions, consents or approvals, the
failure of which to give or obtain does not have and would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
on Parent, no notice to, filing with, authorization of, exemption by, or
consent or approval of, any governmental authority or other regulatory body is
necessary for the consummation by Parent or Sub of the transactions
contemplated by this Agreement.
4.5 SEC Reports.
(a) Parent has heretofore made available to Company true copies of all
reports, proxy statements or information statements and all other documents,
together with any amendments required to be made thereto, required to be filed
with the SEC under the Exchange Act (collectively, the "Parent Reports"),
together with all exhibits thereto, that Company has requested.
(b) All of the financial statements included in the Parent Reports (which
are collectively referred to herein as the "Parent Consolidated Financial
Statements") fairly presented the consolidated financial position of Parent
and its subsidiaries as of the dates mentioned and the consolidated results of
operations, changes in shareholders' equity and cash flows for the periods
then ended in conformity with GAAP applied on a consistent basis (subject to
any exceptions as to consistency specified therein or as may be indicated in
the notes thereto or in the case of the unaudited statements, as may be
permitted by Form 10-Q of the SEC and subject, in the case of unaudited
statements, to normal, recurring audit adjustments).
(c) As of their respective dates, the Parent Reports complied in all
material respects with all applicable rules and regulations promulgated by the
SEC and did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
4.6 Registration Statement, Etc. None of the information supplied or to be
supplied by Parent for inclusion or incorporation by reference in (a) the
Registration Statement and (b) the Proxy Statement will, at the respective
times such documents are filed with the SEC, and, in the case of the
Registration Statement, when it becomes effective, or at the time any
amendment or supplement thereto becomes effective, cause such documents to
contain any untrue statement of a material fact, or omit to state any material
fact necessary in order to make the statements therein not misleading, and, in
the case of the Proxy Statement, when first mailed to the shareholders of
Company, or at the time of the Shareholders' Meeting, cause the Proxy
Statement or any amendment thereof or supplement thereto to contain any untrue
statement of a material fact, or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading. All documents that Parent is responsible
for filing with the SEC and any other regulatory agency in connection with the
Merger will comply as to form in all material respects with the provisions of
applicable law, except that no representation is made by Parent with respect
to statements made therein based on information supplied by Company or with
respect to information concerning Company which is incorporated by reference
in the Registration Statement or the Proxy Statement.
A-24
<PAGE>
4.7 Litigation. Except as set forth in the Parent Reports, there are no
litigation, claims, suits, actions, investigations, indictments or
informations, or administrative, arbitration or other proceedings pending, or,
to the knowledge of Parent, threatened, against Parent or any subsidiary of
Parent which has or would reasonably be expected to have, individually or in
the aggregate, a Material Adverse Effect on Parent.
4.8 No Violation of Law. Except as set forth in the Parent Reports, the
business and operations of Parent and its subsidiaries have been conducted in
compliance with all applicable laws, ordinances, regulations and orders of all
governmental entities and other regulatory bodies (including, without
limitation, laws, ordinances, regulations and orders relating to zoning,
environmental matters and the safety and health of employees), except where
the failure to be in compliance does not have and would not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
on Parent.
4.9 Brokers and Finders. Neither Parent nor any of its subsidiaries, nor any
of their respective officers, directors or employees, has employed any broker
or finder or incurred any liability for any financial advisory fees, brokerage
fees, commissions, or finder's fees, and no broker or finder has acted
directly or indirectly for Parent or any of its subsidiaries, in connection
with this Agreement, the Shareholder's Option Agreement or any of the
transactions contemplated hereby or thereby.
4.10 Merger. Neither Parent nor any of its subsidiaries has taken any action
or failed to take any action which action or failure to take action would
jeopardize the Merger as a reorganization within the meaning of Section 368(a)
of the Code.
ARTICLE 5
CONDUCT AND TRANSACTIONS PRIOR TO EFFECTIVE TIME; CERTAIN COVENANTS
5.1 Access and Information. Upon reasonable notice, each of Company and
Parent shall (and Company shall cause the Company Subsidiaries to) give to the
other and to the respective accountants, counsel and other representatives of
such other party reasonable access during normal business hours throughout the
period prior to the Effective Time to all of its and the Company Subsidiaries'
properties, books, contracts, commitments and records (including tax returns
and insurance policies) and shall permit them to consult with its and the
Company Subsidiaries' respective officers, employees, auditors, attorneys and
agents; provided, however, that any such investigation shall be conducted in
such a manner as not to interfere unreasonably with the business or operations
of the other party or the Company Subsidiaries. All confidential information
provided pursuant to this Section 5.1 will be subject to the Confidentiality
Agreements, dated, respectively, as of August 12, 1998 and November 9, 1998
(the "Confidentiality Agreements"), between Company and Parent.
5.2 Conduct of Business Pending Merger.
(a) Company agrees that from the date hereof to the Effective Time, except
as contemplated by this Agreement or to the extent that Parent shall otherwise
consent in writing, Company and the Company Subsidiaries will operate their
businesses only in the ordinary course in the same manner as previously
conducted and not engage in any new line of business or enter into any
agreement, transaction or activity or make any commitment except in the
ordinary course of business consistent with past practices or as expressly
permitted by this Section 5.2; and, consistent with such operation, will use
all commercially reasonable efforts consistent with past practices to preserve
their business organizations intact, to keep available to them the goodwill of
their customers, vendors, business partners and others with whom business
relationships exist to the end that their goodwill and ongoing business shall
not be impaired at the Effective Time, and will further exercise all
commercially reasonable efforts to maintain their existing relationships with
their employees in general.
(b) Company agrees that from the date hereof to the Effective Time, except
as otherwise consented to by Parent in writing, (i) neither it nor any Company
Subsidiary will change any provision of its Articles of Incorporation or
Bylaws or similar governing documents, (ii) neither it nor any Company
Subsidiary will make,
A-25
<PAGE>
declare or pay any dividend or other distribution, and (iii) neither it nor
any Company Subsidiary will make any distribution or directly or indirectly
sell, issue, redeem, purchase or otherwise acquire, any shares of its
outstanding capital stock, change the number of shares of its authorized or
issued capital stock or issue, grant any option, warrant, call, commitment,
subscription, right to purchase or agreement of any character relating to its
authorized or issued capital stock or any securities convertible into shares
of such stock or otherwise make any change in its capital structure; provided,
however, that nothing set forth in this Section 5.2(b) shall be deemed to
restrict the issuance by Company of Company Common Stock pursuant to the
exercise of any of the Company Options or warrants disclosed in Section 3.3 of
the Disclosure Letter in accordance with the terms thereof as in effect on the
date hereof or upon conversion of the Series A Shares in accordance with the
terms of the Certificate of Determination and Subscription Agreement relating
thereto as in effect on the date hereof.
(c) Without limiting the undertakings of Company pursuant to Section 5.2(a)
and 5.2(b), Company agrees that from the date hereof to the Effective Time it
will not take, or permit any Company Subsidiary to take, any of the following
actions, except to the extent consented to by Parent in writing:
(i)(A) create, incur or assume any long-term debt (including obligations
in respect of capital leases which individually involve annual payments in
excess of $100,000) or, except in the ordinary course of business under
existing lines of credit or existing Securitization Facilities, create,
incur or assume any short-term debt for borrowed money, (B) assume,
guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other
person or entity, except in the ordinary course of business and consistent
with past practice, (C) make any loans or advances to any other person,
except in the ordinary course of business and consistent with past practice
provided, however, that in no event shall Company or any Company Subsidiary
make any loan or advance to any person in an amount in excess of $500,000
that is not committed by a third-party to be purchased by such party on a
non-recourse basis, (D) make any capital contributions to, or investments
in, any person, or (E) make any capital expenditure involving in excess of
$100,000 in the case of any single expenditure or $300,000 in the case of
all capital expenditures;
(ii) sell, transfer, convey, assign, mortgage or pledge any of its
properties or assets involving amounts individually in excess of $100,000
or in the aggregate in excess of $250,000, except in the ordinary course of
business consistent with past practice;
(iii) take any action to (x) amend or terminate any Company Benefit Plan,
(y) implement a general increase in the compensation or benefits of its
employees or to increase the compensation payable to its directors,
officers or key employees involving in the aggregate in excess of $30,000,
adopt any other plan, program, arrangement or practice providing new or
increased benefits or compensation to its employees including, without
limitation, severance benefits or benefits payable in connection with a
change of control transaction involving Company;
(iv) amend, cancel, terminate or renew or agree to the amendment,
cancellation, termination or renewal of any Material Contract or enter into
any new Material Contract other than (x) the amendment of any Material
Contract with a Business Partner identified pursuant to Section 3.11(f) to
effect the terms set forth in the form of amendment previously agreed to by
Company and Parent and (y) such actions taken with respect to a Material
Contract with a non-recourse lender that do not involve, provide for or
relate to a funding commitment or obligation on the part of Company;
(v) enter into any negotiation with respect to any collective bargaining
agreement;
(vi) make any change in any accounting methods or any material change in
any systems of internal accounting controls or lease portfolio servicing
practices, except as may be appropriate to conform to changes in generally
accepted accounting principles;
(vii) pay, loan or advance (other than the payment of compensation,
directors' fees or reimbursements of expenses in the ordinary course of
business and under any existing agreements identified in Section 3.23 of
the Disclosure Letter) any amount to, or sell, transfer or lease any
properties or assets (real, personal or
A-26
<PAGE>
mixed, tangible or intangible) to, or enter into any agreement or
arrangement with, any of its officers or directors or any "affiliate" or
"associate" of any of its officers or directors (as such terms are defined
in Rule 405 promulgated under the Securities Act) or any employee,
consultant or contractor;
(viii) acquire any interest in or form or commence the operations of any
business or any corporation, partnership, joint venture, marketing
arrangement, association or other business organization or division
thereof;
(ix) make any Tax election, or settle or compromise any Tax liability
that Company has contested upon audit;
(x) pay, discharge, settle or satisfy any claims, litigation, liabilities
or obligations (whether absolute, accrued, asserted or unasserted,
contingent or otherwise) involving amounts individually in excess of
$100,000 or in the aggregate in excess of $250,000, other than the payment,
discharge or satisfaction of liabilities when due (i) reflected or reserved
against in, or contemplated by, the financial statements (or the notes
thereto) of Company included in the Company Reports or (ii) incurred since
June 30, 1998 in the ordinary course of business consistent with past
practice and in accordance herewith;
(xi) modify its credit approval/declination criteria and practices in any
material respect;
(xii) fail to perform in any material respect its obligations under any
Material Contract (except those being contested in good faith through
appropriate proceedings or procedures);
(xiii) fail to use all commercially reasonable efforts to maintain in
full force and effect and in the same amounts policies of insurance
comparable in amount and scope of coverage to that now maintained by
Company and the Company Subsidiaries;
(xiv) fail to service, in its capacity as servicer under the
Securitization Facilities, the lease portfolios subject to such
Securitization Facilities in the ordinary course of business consistent
with past practice;
(xv) fail to use all commercially reasonable efforts to continue to
collect its accounts receivable and lease and loan payments due under the
leases and loans subject to the Securitization Facilities or held by
Company in the ordinary course of business consistent with past practice;
(xvi) fail to prepare and file all federal, state, local and foreign
returns for Taxes and other Tax reports, filings and amendments thereto
required to be filed by it, fail to provide to Parent, copies of all
federal income tax returns for Parent's review and approval prior to the
filing thereof, which review and approval shall not interfere with the
timely filing of such returns, as well as a copy of the calendar setting
forth the filing deadlines of all other tax returns, or fail to allow
Parent, at its request, to review all tax returns at Company's office prior
to the filing thereof, which review and approval shall not interfere with
the timely filing of such returns;
(xvii) fail to use all commercially reasonable efforts to maintain any
federal, state, local or foreign license required to conduct its
operations;
(xviii) hire any (x) additional employees, other than such new employees
whose annual compensation and benefits to not, collectively, involve
payments by Company or any Company Subsidiary in excess of $300,000 or (y)
additional business partners, other than business partners who enter into
with Company a business partner agreement in the form previously agreed to
by Parent and Company; or
(xix) enter into any agreement to take any of the actions described in
Section 5.2(b) or elsewhere in this Section 5.2(c).
If Parent requests that Company or any Company Subsidiary take any action or
refrain from taking action between the date of this Agreement and the Closing
Date, other than (x) taking actions which Company has agreed (for itself and
for the Company Subsidiaries) to take pursuant to the terms of this Agreement
or (y) refraining from taking any action which may not be taken by Company or
any Company Subsidiary without the prior written consent of Parent pursuant to
the terms of this Agreement, Company shall take or refrain, or cause any
Company Subsidiary to take or refrain, from taking such requested action only
if prior thereto Parent
A-27
<PAGE>
and Company agree in writing (A) on the estimated effect of taking such action
or refraining from taking such action and (B) the manner in which such effect
will be considered (i) for purposes of Sections 6.3(a), as to any failure of
the representations and warranties of Company set forth in this Agreement to
be true and correct at and as of the Closing Date, (ii) for purposes of
Section 6.3(i), as to any reduction in cash and cash equivalents, or (iii) for
purposes of Section 6.3(k), with respect to any Material Adverse Change.
(d) In connection with the continued operation of the business of Company
and the Company Subsidiaries between the date of this Agreement and the
Effective Time, Company shall communicate in good faith on a regular and
reasonably frequent basis with one or more representatives of Parent
designated in writing with respect to the ongoing operations of Company and
the Company Subsidiaries. Company acknowledges that Parent does not and will
not waive any rights it may have under this Agreement as a result of such
communications.
(e) Parent agrees that from the date hereof to the Effective Time, except as
contemplated by this Agreement or to the extent that Company shall otherwise
consent in writing, it will not take, and will cause each of its subsidiaries
not to take, any action which would materially and adversely affect the
ability of Parent to perform its covenants and agreements under this
Agreement.
(f) Company shall not, nor shall it permit any Company Subsidiary to, nor
shall it authorize or permit any officer, director or employee of, or any
investment banker, attorney or other advisor or representative or agent of,
Company or any Company Subsidiary to, directly or indirectly, (i) solicit,
initiate or encourage the submission of any Acquisition Proposal (as
hereinafter defined) or (ii) participate in or encourage any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to encourage or facilitate any inquiries or the
making of any proposal that constitutes, or may reasonably be expected to lead
to, any Acquisition Proposal; provided, however, that, prior to the approval
of the Merger and the transactions contemplated by this Agreement at the
Shareholders' Meeting, nothing contained in this Section 5.2(f) shall prohibit
the Board of Directors of Company from furnishing information to, or entering
into discussions or negotiations with, any person or entity that makes an
unsolicited Acquisition Proposal if, and only to the extent that (A) the Board
of Directors of Company after consultation with and based on the written
advice of outside counsel, determines in good faith that in order for the
Board of Directors of Company to comply with its fiduciary duties to
shareholders under applicable law it is required to take such action, (B)
prior to providing information in any form (whether orally or in writing) to
any person or entity, Company receives from such person or entity an executed
agreement in reasonably customary form relating to the confidentiality of
information to be provided to such person or entity, and (C) the Acquisition
Proposal contains an offer of consideration that is materially superior to the
consideration set forth herein. Notwithstanding anything in this Agreement to
the contrary, Company shall (i) promptly advise Parent orally and in writing
of (A) the receipt by it (or any of the other entities or persons referred to
above) after the date hereof of any Acquisition Proposal, or any inquiry which
could reasonably be expected to lead to any Acquisition Proposal, (B) the
material terms and conditions of such Acquisition Proposal or inquiry, and (C)
the identity of the person making any such Acquisition Proposal or inquiry,
(ii) keep Parent reasonably informed of the status and details of any such
Acquisition Proposal or inquiry and (iii) negotiate with Parent to make such
adjustments in the terms and conditions of this Agreement as would enable
Company to proceed with the transactions contemplated herein. Without limiting
the foregoing, it is understood that any violation of the restrictions set
forth in the first sentence of this Section 5.2(f) by any officer, director or
employee of Company or any Company Subsidiary or any investment banker,
attorney or other advisor, representative or agent of Company or any Company
Subsidiary, whether or not such person is purporting to act on behalf of
Company or any Company Subsidiary or otherwise, shall be deemed to be a breach
of this Section 5.2(f) by Company. For purposes of this Agreement,
"Acquisition Proposal" means any bona fide proposal with respect to a merger,
consolidation, share exchange, joint venture, business combination,
reorganization or similar transaction involving Company or any Company
Subsidiary, or any purchase of all or any significant portion of the assets of
Company or any Company Subsidiary. For purposes of this Section 5.2, the term
"materially superior" shall mean consideration which, if the transaction
subject to such Acquisition Proposal were consummated, would result in the
Alternative Transaction Value of the transaction which is the subject of such
Acquisition Proposal exceeding the Merger Transaction Value (as such terms are
defined in Section 5.4 herein) by 5% or more.
A-28
<PAGE>
(g) Company agrees to take the following actions with respect to Tax matters
prior to the Closing:
(i) Company and the Company Subsidiaries will prepare and file an amended
federal income tax return for the taxable year ended December 31, 1997, if
Company and Parent, in consultation with Ernst & Young LLP and Deloitte &
Touche LLP, determine that such amendment is appropriate;
(ii) Company will use its commercially reasonable efforts to notify
Parent promptly concerning all material discussions, meetings and other
significant contacts with the Internal Revenue Service relating to the
examination of the federal income tax returns of Company, and will provide
Parent with a reasonable opportunity to attend and participate in all
significant meetings with Internal Revenue Service personnel relating to
issues arising in connection with such examination;
(iii) Company will prepare and submit to Parent a schedule or memorandum
setting forth such information as may reasonably and practicably be
requested by Parent relating to all taxing jurisdictions in which Company
or any Company Subsidiary has employees or independent contractors, owns
property or engages in business activities; and
(iv) Company will prepare and submit to Parent a schedule or memorandum
setting forth such information as may reasonably and practicably be
requested by Parent relating to existing equipment lease transactions in
which Company or any Company Subsidiary is the lessor.
5.3 Fiduciary Duties. Except as set forth below, the Board of Directors of
Company shall not (i) withdraw or modify in a manner adverse to Parent, the
approval or recommendation by such Board of Directors of this Agreement or the
Merger, or (ii) approve, recommend or cause Company to enter into any
agreement with respect to any Acquisition Proposal (an "Alternative
Transaction"). Notwithstanding the foregoing, if prior to the approval of the
Merger and the transactions contemplated by this Agreement at the
Shareholders' Meeting Company receives an unsolicited Acquisition Proposal and
the Board of Directors of Company determines in good faith, following
consultation with and based on the written advice of outside counsel, that it
is required to do so in order to comply with its fiduciary duties to
shareholders under applicable law, the Board of Directors may (w) withdraw or
modify its approval or recommendation of this Agreement and the Merger, (x)
approve or recommend such Acquisition Proposal, (y) cause Company to enter
into an agreement with respect to such Acquisition Proposal or (z) terminate
this Agreement pursuant to Section 7.1(b)(v). If (i) the Board of Directors of
Company takes any action described in clause (y) or (z) of the preceding
sentence, (ii) Parent exercises its right to terminate this Agreement under
Section 7.1(c) based on the Board of Directors of Company having taken any
action described in clause (w) or (x) of the preceding sentence or (iii) the
Agreement is terminated as a result of the failure to receive the requisite
vote for approval of this Agreement and the Merger at the Shareholders'
Meeting and at the time of such meeting an Acquisition Proposal involving
Company shall have been announced, Company shall, concurrently with the taking
of such action or such termination (a "Fee Payment Event"), as applicable, pay
to Parent the Section 5.4 Fee (as hereinafter defined).
5.4 Certain Fees. Company shall pay to Parent upon demand $2.0 million upon
the occurrence of a Fee Payment Event (the "Section 5.4 Fee"), payable in
same-day funds, as liquidated damages and not as a penalty, if the Section 5.4
Fee is payable pursuant to Section 5.3 to reimburse and compensate Parent for
its time, expenses and lost opportunity costs of pursuing the Merger. In
addition, if Company enters into an agreement with respect to, or consummates,
an Alternative Transaction within one year of the payment by Company of the
Section 5.4 Fee and Parent has not exercised the Option to purchase and
purchased shares of Company Common Stock under the Shareholder's Option
Agreement and agrees not to do so, Company shall pay to Parent an additional
fee (the "Topping Fee"), payable in same-day funds, as liquidated damages and
not as a penalty, within two days of the earlier of Company entering into such
agreement or the consummation of such transaction. The Topping Fee shall be
equal to the product obtained by multiplying (a) 25% by (b) the Incremental
Value (as hereinafter defined). The "Incremental Value" shall be equal to the
amount by which the "Alternative Transaction Value" shall exceed the "Merger
Transaction Value" (each as hereinafter defined). The "Alternative Transaction
Value" shall mean the aggregate value of the Alternative Transaction to the
shareholders of Company, valued as of the date of the agreement relating to
such Alternative Transaction and
A-29
<PAGE>
calculated in accordance with generally recognized and accepted valuation
methodologies employed by nationally recognized investment banking firms for
valuing comparable transactions. The "Merger Transaction Value" shall mean the
aggregate value of the Merger to the shareholders of Company, valued on the
basis of Company having outstanding 4,108,785 shares of Common Stock and
merger consideration of $11.88 per share of such Common Stock and calculated
in accordance with generally recognized and accepted valuation methodologies
employed by nationally recognized investment banking firms for valuing
comparable transactions. If the parties do not agree as to the Alternative
Transaction Value or the Merger Transaction Value, Company and Parent shall
negotiate with one another in good faith for a period of ten days to resolve
such dispute. If, after the expiration of such ten-day period, the parties do
not agree as to the Alternative Transaction Value or the Merger Transaction
Value, Company and Parent shall each engage a nationally recognized investment
banking firm to calculate the Alternative Transaction Value or the Merger
Transaction Value, or both, as the case may be. If such investment banking
firms do not agree as to such disputed valuation(s) after 30 days, such firms
shall together appoint a third nationally recognized investment banking firm
to resolve such dispute by calculating the disputed valuation(s). The
calculation of such third investment banking firm shall be conclusive as to
the disputed valuation(s). Each party shall bear the costs and expenses of the
investment banking firm engaged by it pursuant to this Section 5.4, and the
costs and expenses of a third investment banking firm, if necessary, shall be
borne equally by Company and Parent.
5.5 Takeover Statutes; Inconsistent Actions. If any "fair price,"
"moratorium," "control share," "business combination," "fair price,"
"shareholder protection" or similar or other antitakeover statute or
regulation enacted under state or Federal law shall become applicable to the
Merger, the Shareholders' Option Agreement or any of the other transactions
contemplated hereby or thereby, Company and the Board of Directors of Company
shall grant such approvals and take all such actions as are within its
authority so that the Shareholders' Option Agreement shall be in full force
and effect and so that the Merger and the other transactions contemplated
hereby and thereby may be consummated as promptly as practicable on the terms
contemplated hereby and thereby and otherwise use all commercially reasonable
efforts to eliminate or minimize the effects of such statute or regulation on
the Merger, the Shareholders' Option Agreement and the transactions
contemplated hereby and thereby. During the term of this Agreement and the
Shareholders' Option Agreement, Company shall not adopt, effect or implement
any "shareholders' rights plan," "poison pill" or similar arrangement.
5.6 Consents. Company and Parent will use all commercially reasonable
efforts to obtain the written consent or approval of each and every
governmental authority and other regulatory body, the consent or approval of
which shall be required in order to permit Parent, Sub and Company to
consummate the transactions contemplated by this Agreement. Company will use
all commercially reasonable efforts to obtain the written consent or approval,
in form and substance reasonably satisfactory to Parent, of each person whose
consent or approval shall be required in order to permit Parent, Sub and
Company to consummate the transactions contemplated by this Agreement, or
whose consent or approval is required pursuant to the terms of any contract,
agreement, license or instrument, including without limitation any Material
Contract, to which Company or any Company Subsidiary is a party in order to
transfer, convey and vest in Surviving Corporation all of the rights and
benefits of Company or any Company Subsidiary under such contract, agreement,
license or instrument, except for any contracts, agreements, licenses or
instruments of Company as to which the failure to obtain any required written
consent or approval thereunder would not individually or in the aggregate
result in, or be reasonably likely to result in, a Material Adverse Effect on
Company with respect to the Surviving Corporation. Parent will use all
commercially reasonable efforts to obtain the written consent or approval, in
form and substance reasonably satisfactory to Company, of each person whose
consent or approval shall be required in order to permit Parent, Sub and
Company to consummate the transactions contemplated by this Agreement, as to
which the failure to obtain any required written consent or approval
thereunder would not individually or in the aggregate result in, or be
reasonably likely to result in, a Material Adverse Effect on Parent.
5.7 Reasonable Efforts; Further Assurances; Cooperation. Subject to the
other provisions of this Agreement, the parties hereto shall each use all
commercially reasonable efforts to perform their obligations herein and to
take, or cause to be taken or do, or cause to be done, all things necessary,
proper or advisable under applicable law to obtain all regulatory approvals,
including notices and approvals under the Hart-Scott-
A-30
<PAGE>
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and
satisfy all conditions to the obligations of the parties under this Agreement
and to cause the Merger and the other transactions contemplated by this
Agreement and the Shareholders' Option Agreement to be effected as soon as
reasonably practicable in accordance with the terms of this Agreement and
shall cooperate fully with each other and their respective officers,
directors, employees, agents, counsel, accountants and other designees in
connection with any steps required to be taken as a part of their respective
obligations under this Agreement, including without limitation:
(a) Company and Parent shall promptly make their respective filings and
submissions and shall take, or cause to be taken, all actions and do, or
cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to obtain any required approval of any
other federal, state or local governmental agency or regulatory body with
jurisdiction over the transactions contemplated by this Agreement.
(b) If any claim, action, suit, investigation or other proceeding by any
governmental body or other person is commenced which questions the validity
or legality of the Merger, the Shareholders' Option Agreement or any of the
other transactions contemplated by this Agreement or the Shareholders'
Option Agreement or seeks damages in connection with this Agreement or the
Shareholders' Option Agreement, the parties agree to cooperate and use all
commercially reasonable efforts to defend against such claim, action, suit,
investigation or other proceeding and, if an injunction or other order is
issued in any such action, suit or other proceeding, to use all
commercially reasonable efforts to have such injunction or other order
lifted, and to cooperate reasonably regarding any other impediment to the
consummation of the transactions contemplated by this Agreement or the
Shareholders' Option Agreement.
(c) Each party shall give prompt written notice to the other of (i) the
occurrence, or failure to occur, of any event which occurrence or failure
would be likely to cause any of such party's representations or warranties
contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date of this Agreement to the Effective Time
and (ii) any failure of such party to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it under this
Agreement.
(d) Without the prior written consent of Parent, Company will not
terminate any employee if such termination would result in the payment of
any amounts pursuant to "change in control" provisions of any employment
agreement or arrangement.
5.8 NYSE Listing. Parent will use all commercially reasonable efforts to
cause to be approved for listing on the NYSE, subject to official notice of
issuance, a sufficient number of shares of Parent Common Stock to be issued in
the Merger.
5.9 Notice. Company shall promptly notify Parent of any material change in
the normal course of its or the Company Subsidiaries' business or in the
operation of its or the Company Subsidiaries' properties and of the receipt by
it or any of the Company Subsidiaries of notice of any governmental
complaints, investigations, hearings or inquiries (or communications
indicating that the same may be contemplated) or the receipt by it or any of
the Company Subsidiaries of a notice of the institution or the threat of
litigation involving it or any of the Company Subsidiaries which in any such
case, individually or in the aggregate, has or would reasonably be expected to
have, individually or in the aggregate, a Material Adverse Effect on Company,
and will keep Parent fully informed with respect to such events.
5.10 Registration Statement; Shareholder Approvals.
(a) As soon as is reasonably practicable after the execution of this
Agreement, Parent shall prepare and file with the SEC the Registration
Statement (in which the Proxy Statement will be included) and Company shall
prepare and file with the SEC the Proxy Statement. Parent shall use all
commercially reasonable efforts to cause the Registration Statement to become
effective under the Securities Act as promptly as practicable after such
filing and shall take all commercially reasonable actions required to be taken
under any applicable state blue sky or securities laws in connection with the
issuance of the shares of Parent Common Stock pursuant to this
A-31
<PAGE>
Agreement; provided that Parent shall be permitted to delay the filing of the
Registration Statement and shall have the right to cause Company to extend the
date of the Shareholders' Meeting upon a good faith determination by Parent
that the filing or use of the Registration Statement would require the
disclosure of material information concerning Parent or any subsidiary of
Parent which Parent has a bona fide business purpose for preserving as
confidential or Parent is unable to comply with SEC requirements (such events
are hereinafter referred to as a "Blackout" or as "Blackouts"). In no event
shall the length of any Blackout or Blackouts exceed in the aggregate seventy-
five (75) days. In the event Parent exercises its right to effect a Blackout
or Blackouts, the dates set forth in Section 7.1 shall be extended on a day
for day basis by the number of days of such Blackout or Blackouts. Each party
hereto shall furnish all information concerning it and the holders of its
capital stock as the other party hereto may reasonably request in connection
with such actions.
(b) Company shall call a Shareholders' Meeting to be held as soon as
practicable after the date hereof for the purpose of voting upon the Merger
and this Agreement. In connection with the Shareholders' Meeting, Company and
Parent shall prepare and file the Proxy Statement with the SEC. Company shall
mail the Proxy Statement to its shareholders, the Board of Directors of
Company, subject to Section 5.3, shall recommend to its shareholders the
approval of the Merger and this Agreement, and Company shall use commercially
reasonable efforts to obtain such shareholder approval. Without limiting the
generality of the foregoing, Company agrees that, subject to its right to
terminate this Agreement pursuant to Section 7.1(b)(v), its obligations
pursuant to this Section 5.10(b) shall not be affected by the commencement,
public proposal, public disclosure or communication to Company of any
Acquisition Proposal.
5.11 Expenses. Subject to Sections 5.3 and 5.4, if this Agreement is
terminated for any reason without breach by any party, each party hereto shall
pay its own expenses incident to preparing for, entering into, and carrying
out this Agreement and to consummating the Merger, except that Company and
Parent shall divide equally the following expenses: (a) the costs incurred in
connection with the printing and mailing of the Registration Statement, the
Proxy Statement and related documents, and (b) all filing or registration fees
paid by Company or Parent, including state securities laws filing or
registration fees, if any.
5.12 Press Releases; Filings. Without the consent of the other parties, none
of the parties shall issue any press release or make any public announcement
with regard to this Agreement or the Merger or any of the transactions
contemplated hereby or thereby; provided, however, that nothing in this
Section 5.12 shall be deemed to prohibit any party hereto from making any
disclosure which its counsel deems necessary or advisable in order to fulfill
such party's disclosure obligations imposed by law or the rules of any
national securities exchange or automated quotation system so long as such
party consults with the other parties prior to such disclosure. Each of
Company and Parent shall promptly notify the other of each report, schedule
and other document filed by it or any of its respective subsidiaries with the
SEC and of any other document pertaining to the transactions contemplated
hereby filed with any other governmental authorities.
5.13 Tax Treatment. Parent and Company agree to treat the Merger as a
reorganization within the meaning of Section 368(a) of the Code. During the
period from the date of this Agreement through the Effective Time, unless the
parties shall otherwise agree in writing, none of Parent, Company or any of
their respective subsidiaries shall knowingly take or fail to take any action
which action or failure to act would jeopardize qualification of the Merger as
a reorganization within the meaning of Section 368(a) of the Code. Parent and
Company shall use their best efforts to cause one or more of their responsible
officers to execute and deliver certificates to confirm the accuracy of
certain relevant facts as may be reasonably requested by counsel in connection
with the preparation and delivery of the Tax Opinion described in Section
6.1(f).
5.14 Employee Benefits. Prior to the Effective Time, Company shall:
(a) take all actions necessary to correct any failure to timely file any
IRS/DOL/PBGC Form 5500 required to be filed for any Company Benefit Plan
pursuant to the Code or ERISA;
(b) take all commercially reasonable actions necessary to request an
initial favorable determination letter from the Internal Revenue Service on
the current form of any Company Benefit Plan which is intended
A-32
<PAGE>
to qualify under Section 401(a) of the Code and has not requested and
received such a favorable determination letter; and
(c) receive from the Identified Shareholders a written waiver of any
benefit or compensation of any kind each such individual would receive
under his employment agreement due to a termination of employment after the
consummation of the change of control transaction contemplated hereby.
5.15 Stock Options and Warrants. At the Effective Time, Company's
obligations with respect to each outstanding Company Stock Option (as
disclosed in Section 3.3 of the Disclosure Letter), as amended in the manner
described in the following sentence, shall be assumed by Parent. The Company
Stock Options so assumed by Parent shall continue to have, and be subject to,
the same terms and conditions as set forth in the stock option plans and
agreements pursuant to which such Company Stock Options were issued as in
effect immediately prior to the Effective Time, except that each such Company
Stock Option shall be exercisable (subject to applicable vesting schedules)
for that number of whole shares of Parent Common Stock equal to the product of
the number of shares of Company Common Stock covered by such Company Stock
Option immediately prior to the Effective Time multiplied by the Exchange
Ratio and rounded up to the nearest whole number of shares of Parent Common
Stock and the exercise price per share shall be appropriately adjusted. Each
warrant disclosed in Section 3.3 of the Disclosure Letter shall be converted
into a Parent warrant on the same terms and conditions except that each such
warrant shall be exercisable for that number of whole shares of Parent Common
Stock equal to the product of the number of shares of Company Common Stock
covered by such warrant immediately prior to the Effective Time multiplied by
the Exchange Ratio and rounded up to the nearest whole number of shares of
Parent Common Stock and the exercise price per share shall be appropriately
adjusted. Parent shall (i) reserve for issuance the number of shares of Parent
Common Stock that will become issuable upon the exercise of such Company Stock
Options and warrants pursuant to this Section 5.15 and (ii) promptly after the
Effective Time issue to each holder of an outstanding Company Stock Option or
warrant a document evidencing the assumption by Parent of Company's
obligations with respect thereto under this Section 5.15. Nothing in this
Section 5.15 shall affect the schedule of vesting with respect to the Company
Stock Options to be assumed by Parent as provided in this Section 5.15.
Notwithstanding anything to the contrary set forth herein, each Identified
Shareholder agrees (i) to exercise or cause to be exercised all Company Stock
Options directly or indirectly beneficially owned by him (the "Identified
Shareholder Options") prior to the Effective Time and (ii) that to the extent
not exercised in accordance herewith, all Identified Shareholder Options owned
by such Identified Shareholder shall automatically terminate at the Effective
Time.
5.16 Company Affiliates. Company shall deliver to Parent a letter
identifying all persons who are, at the time the Merger is submitted to a vote
of the shareholders of Company, possible "affiliates" of Company for purposes
of Rule 145 under the Securities Act. Company shall cause each person who is
identified as a possible "affiliate" in such letter to deliver to Parent on or
prior to the Effective Time a written statement in the form of Exhibit 5.16
(the "Affiliates Letter"). Parent shall be entitled to place legends on any
certificates of Parent Common Stock issued to such possible affiliates to
restrict transfer of such shares as set forth above.
5.17 Supplements to Disclosure Letter. From time to time prior to the
Effective Time, Company and Parent will each promptly supplement or amend the
respective Disclosure Letters which they have delivered pursuant to this
Agreement with respect to any matter arising after the date of this Agreement
which, if existing or occurring at the date of this Agreement, would have been
required to be set forth or described in any such Disclosure Letters or which
is necessary to correct any information in any such Disclosure Letters which
has been rendered inaccurate by such matter. No supplement or amendment to any
such Disclosure Letters shall have any effect for the purpose of determining
satisfaction of the conditions set forth in Sections 6.2(a) or 6.3(a).
5.18 Post-Closing Cooperation by Identified Shareholders. After the Closing,
the Identified Shareholders shall reasonably cooperate with Parent in the
conduct of any audit, litigation or other proceeding with respect to any Tax
matter involving Company or any Company Subsidiary and shall deliver promptly
to Parent any Tax refund received by such Identified Shareholder of Taxes
previously paid by Company or any Company Subsidiary.
A-33
<PAGE>
5.19 Indemnification of Directors and Officers and Identified Shareholders.
(a) The Articles of Incorporation and By-Laws of the Surviving Corporation
shall contain the provisions or substantially similar provisions with respect
to indemnification set forth in the Articles of Incorporation and By-Laws of
Company on the date of this Agreement, which provisions shall not be amended,
repealed or otherwise modified for a period of six years after the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who at any time prior to the Effective Time were directors or
officers of Company in respect of actions or omissions occurring at or prior
to the Effective Time (including, without limitation, the transactions
contemplated by this Agreement), unless such modification is required by law.
(b) In the event that (i) Parent exercises the Option granted to it pursuant
to the Shareholders' Option Agreement and purchases from the Identified
Shareholders the shares of Company capital stock subject to such Option, (ii)
Parent shall require Company to close the Merger notwithstanding the existence
of pending litigation against the Identified Shareholders with respect to the
exercise by the Parent of the Option, and (iii) the Identified Shareholders
shall not have failed to satisfy their obligations under Section 21(b) of the
Shareholders' Option Agreement, Parent shall indemnify, defend and hold
harmless the Identified Shareholders (collectively, the "Indemnified Parties")
against all losses, liabilities, expenses and costs, including, in settlement
of, with the approval of the Surviving Corporation, or otherwise in connection
with any claim, action, suit, proceeding or investigation (a "Claim"), to the
extent such liabilities, expenses or costs arise from or occur by reason of
the fact that Parent exercised the Option and acquired the shares of capital
stock subject thereto.
(c) For six years from the Effective Time, the Surviving Corporation shall
maintain in effect directors' and officers' liability insurance covering those
persons who are currently covered by Company's directors' and officers'
liability insurance policy on terms no less favorable than the terms of such
current insurance coverage; provided, however, that (i) in lieu of the
purchase of such insurance by the Surviving Corporation or Parent, the
Company, with Parent's written consent, may purchase a six-year extended
reporting period endorsement under its existing directors' and officers'
liability coverage and (ii) if the cost of such insurance in any year during
such six-year period shall exceed 150% of the premium cost for such policy
during the year ended December 31, 1998, then Parent shall cause the Surviving
Corporation to, and the Surviving Corporation shall, provide coverage
affording the same protection as maintained by Parent as of such date for its
officers and directors.
(d) If Parent, the Surviving Corporation or any of their successors or
assigns (i) consolidates with or merges into any other person and shall not be
the continuing or surviving corporation or entity of such consolidation or
merger or (ii) transfers all or substantially all of its properties and assets
to any person, then and in each such case, proper provisions shall be made so
that the successors and assigns of Parent or the Surviving Corporation, as the
case may be, shall assume the obligations set forth in this Section 5.19.
5.20 Certain Consents. Company shall use all commercially reasonable efforts
to provide to Parent prior to the Effective Time the written consent to the
Merger and the transactions contemplated hereby of each of (i) First Union and
SunAmerica as providers of Company's Securitization Facilities, MBIA Insurance
Corporation as bond insurer of such Securitization Facilities and the trustee
and purchasers of certificates under such Securitization Facilities (x)
indicating that at the Effective Time there exists no default on the part of
Company or any Company Subsidiary under the Securitization Agreements between
such parties and Company or any Company Subsidiary and Company and the Company
Subsidiaries have performed in all material respects their obligations under
the Securitization Agreements and (y) First Union's and SunAmerica's
willingness to enter into certain specified amendments to the Securitization
Facilities previously approved by Company, (ii) First Union as lender to
Company under the $30 million Warehouse Facility and $7 million Working
Capital Line provided to Company by First Union indicating that at the
Effective Time there exists no default, event of default or facts or
circumstances that with notice, the passage of time or both would constitute
an Event of Default under either the Warehouse Facility oro the Working
Capital Line and (iii) Xerox Centre Partners as landlord ("Landlord") with
respect to Company's Santa Ana headquarters indicating that the Surviving
Corporation will have the right to exercise Company's renewal option under the
Lease dated August 18, 1994 between Landlord and Company on the terms set
forth in such Lease.
A-34
<PAGE>
ARTICLE 6
CONDITIONS PRECEDENT TO MERGER
6.1 Conditions to Each Party's Obligations. The respective obligations of
each party to effect the Merger shall be subject to the satisfaction on or
prior to the Closing Date of each of the following conditions:
(a) This Agreement and the Merger shall have been approved and adopted by
the affirmative vote or consent of the holders of at least a majority of
the outstanding shares of Company Common Stock and the affirmative vote or
consent of the holders of at least two-thirds ( 2/3) of the outstanding of
Series A Shares.
(b) All consents, authorizations, orders and approvals of (or filings or
registrations with) any governmental authority or other regulatory body
required in connection with the execution, delivery and performance of this
Agreement, the failure to obtain which would prevent the consummation of
the Merger or have a Material Adverse Effect on Company or a Material
Adverse Effect on Parent, shall have been obtained without the imposition
of any condition having a Material Adverse Effect on Company or a Material
Adverse Effect on Parent.
(c) Early termination shall have been granted or applicable waiting
periods shall have expired under the HSR Act.
(d) No governmental authority or other regulatory body (including any
court of competent jurisdiction) shall have enacted, issued, promulgated,
enforced or entered any law, rule, regulation, executive order, decree,
injunction or other order (whether temporary, preliminary or permanent)
which is then in effect and has the effect of making illegal, materially
restricting or in any way preventing or prohibiting the Merger or the
transactions contemplated by this Agreement.
(e) The Registration Statement shall have become effective under the
Securities Act and no stop order suspending the effectiveness of the
Registration Statement shall be in effect and no proceedings for such
purpose, or under the proxy rules of the SEC pursuant to the Exchange Act
and with respect to the transactions contemplated hereby, shall be pending
before or threatened by the SEC.
(f) Parent and Company each shall have obtained a written opinion of King
& Spalding, counsel to Parent, reasonably acceptable to Parent and Company
(the "Tax Opinion"), to the effect that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code and that
the exchange in the Merger of Parent Common Stock for Company Common Stock
will not give rise to gain or loss to the shareholders of Company with
respect to such exchange (except to the extent of any cash paid in lieu of
fractional shares or Dissenting Shares). The Tax Opinion will be addressed
to each of Parent and Company. In rendering the Tax Opinion, such counsel
shall be entitled to rely on the accuracy of facts set forth in the
officers' certificates described in Section 5.13.
(g) The shares of Parent Common Stock to be issued pursuant to this
Agreement and pursuant to the Company Stock Options shall have been
authorized for listing on the NYSE, subject to official notice of issuance.
(h) The sale of Parent Common Stock resulting from the Merger shall have
been qualified or registered with the appropriate state securities law or
"blue sky" regulatory authorities of all States in which qualification or
registration is required under State securities laws and such
qualifications or registrations shall not have been suspended or revoked.
6.2 Conditions to Obligations of Company. The obligations of Company to
effect the Merger shall be subject to the satisfaction on or prior to the
Closing Date of each of the following conditions unless waived by Company:
(a)(i) the representations and warranties of Parent set forth in this
Agreement which are not qualified by the phrase "Material Adverse Effect on
Parent" or otherwise qualified by materiality shall have been true and
correct in all respects at and as of the date of this Agreement and shall
be true and correct in all material respects at and as of the Closing Date
as though made at and as of the Closing Date, except to the
A-35
<PAGE>
extent such representations and warranties speak as of a specified date
(which representations and warranties shall be true and correct as of such
date) and except to the extent contemplated by this Agreement, (ii) the
representations and warranties of Parent set forth in this Agreement which
are not qualified by the phrase "Material Adverse Effect on Parent" but are
otherwise qualified by materiality shall be true and correct in all
respects at and as of the date of this Agreement and at and as of the
Closing Date as though made at and as of the Closing Date, and (iii) the
representations and warranties of Parent set forth in this Agreement which
are qualified by the phrase "Material Adverse Effect on Parent" shall be
true and correct in all respects at and as of the date of this Agreement
and at and as of the Closing Date as though made at and as of the Closing
Date, provided, however, that for purposes of determining the satisfaction
of the condition contained in this clause (iii), such representations and
warranties shall be deemed to be true and correct in all respects unless
the failure or failures of such representations and warranties to be so
true and correct (without giving effect to any exception or "Material
Adverse Effect on Parent" qualifier), individually or in the aggregate,
results or would reasonably be expected to result in a Material Adverse
Effect on Parent.
(b) Parent and Sub each shall have performed in all material respects all
covenants and agreements required to be performed by them under this
Agreement at or prior to the Closing Date.
(c) Parent shall furnish Company with a certificate of its appropriate
officers as to compliance with the conditions set forth in Sections 6.2(a)
and (b).
(d) Company shall have received from Ernst & Young LLP letters dated (i)
the effective date of the Registration Statement and (ii) the Closing Date,
with respect to certain financial information regarding Parent included in
the Registration Statement, in each case in form and substance reasonably
satisfactory to Company and customary in scope and substance for letters
delivered by independent public accountants in connection with registration
statements similar to the Registration Statement.
(e) Company shall have received an opinion, dated the Closing Date, of
the General Counsel of Parent, in the form previously agreed to by Company
and Parent.
(f) No suit, investigation, action or other proceeding shall be pending
against Parent before any court or governmental agency which would result
in the restraint or prohibition of Parent, or the obtaining of damages or
other relief from Parent, in connection with this Agreement or the
consummation of the transactions contemplated hereby which would in any
such case, individually or in the aggregate, have a Material Adverse Effect
on Parent.
6.3 Conditions to Obligations of Parent. The obligations of Parent to effect
the Merger shall be subject to the satisfaction on or prior to the Closing
Date of each of the following conditions unless waived by Parent:
(a)(i) the representations and warranties of Company set forth in this
Agreement which are not qualified by the phrase "Material Adverse Effect on
Company" or otherwise qualified by materiality shall have been true and
correct in all respects at and as of the date of this Agreement and shall
be true and correct in all material respects at and as of the Closing Date
as though made at and as of the Closing Date, except to the extent such
representations and warranties speak as of a specified date (which
representations and warranties shall be true and correct as of such date)
and except to the extent contemplated by this Agreement, (ii) the
representations and warranties of Company set forth in this Agreement which
are not qualified by the phrase "Material Adverse Effect on Company" but
are otherwise qualified by materiality shall be true and correct in all
respects at and as of the date of this Agreement and at and as of the
Closing Date as though made at and as of the Closing Date, (iii) the
representations and warranties of Company set forth in this Agreement which
are qualified by the phrase "Material Adverse Effect on Company" shall be
true and correct in all respects at and as of the date of this Agreement
and at and as of the Closing Date as though made at and as of the Closing
Date, provided, however, that for purposes of determining the satisfaction
of the condition contained in this clause (iii) such representations and
warranties shall be deemed to be true and correct in all respects unless
the failure or failures of such representations and warranties to be so
true and correct (without giving effect to any exception or "Material
Adverse Effect on Company" qualifier), individually or in the aggregate,
results or would reasonably be expected to result in
A-36
<PAGE>
a Material Adverse Effect on Company, and (iv) the representations and
warranties of the Identified Shareholders shall have been true and correct
in all respects at and as of the date of this Agreement and shall be true
and correct at and as of the Closing Date as if made at and as of the
Closing Date.
(b) Company shall have performed in all material respects all covenants
and agreements required to be performed by it under this Agreement at or
prior to the Closing Date.
(c) Company shall furnish Parent with a certificate of (i) its
appropriate officers as to compliance with the conditions set forth in
Sections 6.3(a)(i), (ii) and (iii) and Section 6.3(b) and (ii) the
Identified Shareholders as to compliance with the conditions set forth in
Section 6.3(a)(iv).
(d) Parent shall have received from Deloitte & Touche LLP (A) letters
dated (i) the date of the Proxy Statement and (ii) the Closing Date, with
respect to certain financial information regarding Company included in the
Proxy Statement, in each case in form and substance reasonably satisfactory
to Parent and customary in scope and substance for letters delivered by
independent public accountants in connection with proxy statements similar
to the Proxy Statement and (B) an agreed upon procedures report dated the
Closing Date with respect to the unaudited consolidated balance sheet and
related unaudited consolidated results of operations, shareholders' equity
and cash flow of Company for the quarter ended December 31, 1998 and each
month ended during the period between January 1, 1999 and the Closing Date
(the "Bring-Down Financial Statements").
(e) Parent shall have received an Affiliates Letter from each possible
"affiliate" described in Section 5.16.
(f) Parent shall have received an opinion, dated the Closing Date, of
O'Melveny & Myers LLP, counsel to Company, in the form previously agreed to
by Parent and Company.
(g) No suit, investigation, action or other proceeding (i) shall be
pending or overtly threatened against Parent, Company or any of the Company
Subsidiaries by any governmental agency which seeks to restrain or prohibit
the consummation of the Merger, (ii) shall be pending against Parent,
Company or any of the Company Subsidiaries that seeks damages or other
relief in connection with this Agreement or the consummation of the
transactions contemplated hereby which would, if successful, result in a
Material Adverse Effect on Parent, (iii) shall be pending against Parent,
Company or any of the Company Subsidiaries that seeks damages or other
relief which would reasonably be expected to exceed, individually or in the
aggregate, $1 million, if pending against Parent, or result, individually
or in the aggregate, in a Material Adverse Effect on Company if pending
against Company or any Company Subsidiary, or (iv) shall be pending against
Parent, Company or any of the Company Subsidiaries that would reasonably be
expected to result in any orders restricting Company or any Company
Subsidiary from conducting its business as now being conducted which,
individually or in the aggregate, would have a Material Adverse Effect on
Company.
(h) Each of the directors of Company requested by Parent to do so shall
have tendered to Parent resignation letters on or prior to the Closing
Date, such resignations to be effective at the Effective Time.
(i) Company shall have (i) at least $21 million in cash and cash
equivalents, including cash and cash equivalents classified as restricted
cash on its balance sheet and such amount of restricted cash equals or
exceeds the amount of restricted cash required to be reserved by Company
and the Company Subsidiaries under the Securitization Agreements and (ii)
retained all cash proceeds obtained in connection with the exercise of
Common Stock Options and shall deliver to Parent a certificate to such
effect signed by Company's Chief Financial Officer.
(j) [intentionally omitted].
(k) Between the date of this Agreement and the Closing Date, no event or
events shall have occurred which constitutes or constitute or would
reasonably be expected, individually or in the aggregate to result in, a
Material Adverse Change. For purposes of this Section 6.3(k), a "Material
Adverse Change" shall mean the existence of any of the following
conditions, the existence of any of which conditions is
A-37
<PAGE>
attributable to facts, circumstances or events specific to or relating to
Company and/or the Company Subsidiaries and their business and operations
and which condition is not primarily the result of facts, circumstances or
events affecting the commercial equipment leasing industry generally (a
"Commercial Equipment Leasing Industry Event"), (i) Company shall have
originated, in the ordinary course of business consistent with past
practices, leases for the year ended December 31, 1998 having an aggregate
value of less than $215,000,000, (ii) the leases and loans in Company's and
the Company Subsidiaries' portfolio (whether owned directly or conveyed
under the Securitization Facilities) (the "Leases and Loans"), the
scheduled payments in respect of which are 30 days or more past due at the
end of the calendar month immediately preceding the Closing Date, exceed in
aggregate dollar value more than 10% of the aggregate dollar value of all
outstanding Leases and Loans as of that date, or (iii) at the end of the
calendar month immediately preceding the Closing Date (the "calculation
date") the ratio of the gross unpaid contract balance of Lease and Loan
account, the scheduled payments in respect of which are 180 days past due,
to the gross unpaid contract balance of all Lease and Loan accounts exceeds
the same ratio computed as of September 30, 1998, by (x) 100 basis points,
in the event the Closing Date occurs on or prior to March 31, 1999 and (y)
125 basis points, in the event the Closing Date occurs on or after April 1,
1999. For purposes of this Section 6.3 (k), the ratio at September 30, 1998
and the ratio at the calculation date will be computed without giving
effect to (a) any Lease and Loan account written off during the three-month
period immediately preceding September 30, 1998 and during the three-month
period immediately preceding the end of the month immediately preceding the
Closing Date, respectively, and (b) any extension of payments, grace
periods, rollovers, Lease and Loan amendments or modifications or similar
practices granted to or with respect to any Lease or Loan account since
September 30, 1998 unless they are consistent with past practices and in
the ordinary course of business. Notwithstanding anything to the contrary
set forth herein, any Lease and Loan account write-off made between
September 30, 1998 and the Closing Date shall be made in the ordinary
course of business consistent with the Company's past practices. In making
a determination as to whether a Material Adverse Change is primarily the
result of facts, circumstances or events which constitute a Commercial
Equipment Leasing Industry Event, the parties shall compare the results of
operations and portfolio performance of Company and the Company
Subsidiaries to the results of operations and portfolio performances of
other companies in the commercial equipment leasing industry.
(l) All authorizations, consents, waivers and approvals from parties to
contracts or other agreements to which any of Company or Parent (or their
respective subsidiaries) is a party, or by which either is bound, as may be
required to be obtained by them in connection with the performance of this
Agreement, the failure to obtain which would prevent the consummation of
the Merger or have or would reasonably be expected to have, individually or
in the aggregate, a Material Adverse Effect on Company or, individually or
in the aggregate, a Material Adverse Effect on Parent, shall have been
obtained.
A-38
<PAGE>
ARTICLE 7
TERMINATION AND ABANDONMENT OF THE MERGER
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, whether before or after the approval by the shareholders of
Company:
(a) by the mutual written consent of Parent and Company;
(b) by Company if:
(i) subject to any applicable extension pursuant to Section 5.10(a)
or Section 7.4, the Merger is not consummated on or before June 30,
1999, unless the failure of such occurrence shall be due to the failure
of Company to perform, satisfy or observe the covenants, agreements and
conditions hereof to be performed or observed by it at or before the
Effective Time;
(ii) events occur which render impossible the satisfaction of one or
more of the conditions set forth in Sections 6.1 and 6.2 by the
Effective Time and such conditions are not waived by Company, unless
the failure of such occurrence shall be due to the failure of Company
to perform or observe the covenants, agreements and conditions hereof
to be performed or observed by it at or before the Effective Time;
(iii) Company is enjoined or restrained by any governmental authority
or other regulatory body (including any court), such injunction or
restraining order prevents the performance by Company of its
obligations hereunder and such injunction shall not have been withdrawn
by June 30, 1999, subject to any applicable extension pursuant to
Section 5.10(a) or Section 7.4;
(iv) the holders of Company Common Stock do not approve this
Agreement and the Merger at the Shareholders' Meeting or the holder of
the Series A Shares does not approve this Agreement and the Merger; or
(v) the Board of Directors of Company, subject to and in compliance
with Section 5.3, shall have withdrawn or materially modified in a
manner adverse to Parent its recommendation of this Agreement and the
Merger or the Board of Directors shall have approved or recommended
another Acquisition Proposal.
(c) by Parent if:
(i) subject to any applicable extension pursuant to Section 5.10(a)
or Section 7.4, the Merger is not consummated on or before June 30,
1999, unless the failure of such occurrence shall be due to the failure
of Parent or Sub to perform, satisfy or observe the covenants,
agreements and conditions hereof to be performed or observed by them at
or before the Effective Time;
(ii) events occur which render impossible the satisfaction of one or
more of the conditions set forth in Sections 6.1 and 6.3 by the
Effective Time and such conditions are not waived by Parent, unless the
failure of such occurrence shall be due to the failure of Parent or Sub
to perform or observe the covenants, agreements and conditions hereof
to be performed or observed by them at or before the Effective Time;
(iii) Parent is enjoined or restrained by any governmental authority
or other regulatory body (including any court), such injunction or
restraining order prevents the performance by Parent of its obligations
hereunder and such injunction shall not have been withdrawn by June 30,
1999, subject to any applicable extension pursuant to Section 5.10(a)
or Section 7.4;
(iv) the holders of Company Common Stock do not approve this
Agreement and the Merger at the Shareholders' Meeting or the holder of
the Series A Shares does not approve this Agreement and the Merger and
convert the Series A Shares into Company Common Stock;
(v) the Board of Directors of Company shall have withdrawn or
materially modified in a manner adverse to Parent its recommendation of
this Agreement and the Merger or the Board of Directors shall have
approved or recommended another Acquisition Proposal; or
A-39
<PAGE>
(vi) holders of shares of Company Common Stock representing 5% or
more of the outstanding shares of Company Common Stock shall have
exercised their appraisal/dissenters rights in accordance with the
CGCL.
7.2 Specific Performance and Other Remedies. The parties each acknowledge
that the rights of each party to consummate the transactions contemplated by
this Agreement are special, unique and of extraordinary character, and that,
if any party violates or fails or refuses to perform any covenant or agreement
made by it in this Agreement, the non-breaching party may be without an
adequate remedy at law. The parties each agree, therefore, that if either
party violates or fails or refuses to perform any covenant or agreement made
by such party in this Agreement, the non-breaching party or parties may,
subject to the terms of this Agreement and in addition to any remedies at law
for damages or other relief, institute and prosecute an action in any court of
competent jurisdiction to enforce specific performance of such covenant or
agreement or seek any other equitable relief.
7.3 Effect of Termination and Abandonment. In the event of the termination
and abandonment of this Agreement under Section 7.1, this Agreement shall
become void and have no effect, without any liability on the part of any party
or its directors, officers or shareholders (other than the Identified
Shareholders as set forth herein) and except (i) as provided in the second
sentence of Section 5.1, and in Sections 5.3, 5.4, 5.5, 5.11 and 8.11 and (ii)
to the extent that such termination results from the breach in any material
respect by any party hereto of any representation, warranty or covenant
hereunder.
7.4 Termination Date Extension. Notwithstanding anything to the contrary set
forth herein, Parent shall have the unilateral right to extend the dates set
forth in Section 7.1 from June 30, 1999 to September 30, 1999 in the event
that the Merger has not been consummated by June 30, 1999 (subject to any
applicable extension pursuant to Section 5.10) as a result of any condition
set forth in Section 6.3 (other than the condition set forth in Section
6.3(k)) having not been satisfied.
ARTICLE 8
MISCELLANEOUS
8.1 Waiver and Amendment. Any term or provision of this Agreement may be
waived in writing at any time by the party which is, or whose shareholders
are, entitled to the benefits thereof, and any term or provision of this
Agreement may be amended or supplemented at any time by action of the
respective Boards of Directors (or its authorized representative) of Parent or
Company without action of the shareholders, whether before or after the
Shareholders' Meeting; provided, however, that after approval of the
shareholders of Company no such amendment shall reduce the amount or change
the form of the consideration to be delivered to Company's shareholders as
contemplated by this Agreement or otherwise materially adversely affect the
interests of such shareholders unless such amendment is approved by Company's
shareholders. No amendment to this Agreement shall be effective unless it has
been executed by Company, Parent and Sub.
8.2 Non-Survival of Representations, Warranties and Agreements. Except for
the agreements contained in Sections 1.2, 1.3, 1.4, 1.5, 1.6, 1.7, 3.31, 5.5,
5.11, 5.15, 5.18, 5.19 and Article 8 and the representations and warranties of
the Identified Shareholders in the certificate to be delivered pursuant to
Section 6.3(c)(ii), none of the representations, warranties and agreements of
Company, Parent, Sub or the Identified Shareholders in this Agreement, or in
any instrument or certificate delivered pursuant to this Agreement, shall
survive the Merger nor shall their respective shareholders (other than the
Identified Shareholders on the terms specifically set forth in Sections 3.31,
5.15, 5.18, 6.3(c)(ii), 8.2 and 8.11), directors or officers have any
liability to the other parties hereto after the Effective Time on account of
any breach of warranty or failure or the incorrectness of any of the
representations or warranties contained herein or in any certificate or other
instrument delivered pursuant to this Agreement. Subject to the foregoing, the
sole right and remedy arising from a misrepresentation or breach of warranty,
from the failure of any of the conditions of the Merger to be met, or from the
failure to perform any promise or discharge any obligation in this Agreement
shall be termination of this Agreement by the aggrieved party and the rights
and remedies provided in Sections 5.1, 5.3, 5.4, 5.11, 7.2, 7.3 and 7.4.
A-40
<PAGE>
8.3 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered
personally, telecopied (if confirmed) or sent by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
If to Company:
Rockford Industries, Inc.
1851 East First Street, Suite 600
Santa Ana, California 92705
Facsimile: (714) 547-5091
Attn: President
With a copy to:
O'Melveny & Myers LLP
Suite 1700
610 Newport Center Drive
Newport Beach, California 92660
Facsimile: (714) 669-6994
Attn: J. Jay Herron, Esq.
If to Parent or Sub:
American Express Company
200 Vesey Street, 49th Floor
New York, New York 10285
Facsimile: (212) 619-7099
Attn: Carol V. Schwartz, Esq.
With a copy to:
King & Spalding
191 Peachtree Street
Atlanta, Georgia 30303
Facsimile: (404) 572-5146
Attn: Bruce N. Hawthorne, Esq.
8.4 Descriptive Headings; Interpretation. The descriptive headings are for
convenience of reference only and shall not control or affect the meaning or
construction of any provision of this Agreement. When a reference is made in
this Agreement to Sections, such reference shall be to a Section of this
Agreement unless otherwise indicated. The phrase "made available" in this
Agreement shall mean that the information referred to has been made available
if requested by the party to whom such information is to be made available.
8.5 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement. This Agreement shall become effective when one or more counterparts
have been signed by each of the parties and delivered to the other parties, it
being understood that the parties need not sign the same counterpart.
8.6 Entire Agreement. This Agreement (including the Disclosure Letter) and
the Confidentiality Agreements contain the entire agreement between Parent,
Sub and Company with respect to the Merger and the matters contemplated
hereby, and supersede all prior arrangements or understandings between Parent,
Sub and Company with respect to the subject matter hereof, including the
Letter of Intent dated October 16, 1998. This Agreement and the Shareholders'
Option Agreement contain the entire agreement between Parent and the
Identified Shareholders with respect to the matters addressed herein and
therein and supersede all prior
A-41
<PAGE>
agreements or understandings with respect to the subject matter hereof or
thereof. This Agreement is not intended to confer upon any person other than
the parties hereto any rights or remedies hereunder.
8.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK (WITHOUT REGARD TO ANY
APPLICABLE CONFLICTS OF LAW PROVISIONS THEREOF).
8.8 Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby are not affected in any
manner materially adverse to any party. Upon such determination that any term
or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions be consummated as originally
contemplated to the fullest extent possible.
8.9 Enforcement of Agreement. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions hereof in any court of the United States
or any state having jurisdiction, this being in addition to any other remedy
to which they are entitled at law or in equity.
8.10 Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether
by operation of law or otherwise) without the prior written consent of the
other parties, and any attempt to make any such assignment without such
consent shall be null and void. Subject to the preceding sentence, this
Agreement will be binding upon, inure to the benefit of and be enforceable by
the parties hereto and their respective successors and assigns.
8.11 Liability of Identified Shareholders. Notwithstanding anything to the
contrary set forth in this Agreement, the representations and warranties of
the Identified Shareholders set forth in Section 3.31 hereof (and in the
Closing Certificate to be delivered by the Identified Shareholders pursuant to
Section 6.3(c)(ii) hereof) and the covenants of the Identified Shareholders in
Sections 5.15 and 5.18 shall survive the Merger indefinitely. The Identified
Shareholders shall have liability with respect to any breach of the
representations and warranties to Parent set forth in Section 3.31(c) on a
several basis based on their pro rata Company Common Stock ownership prior to
the Merger only in the event that in making such representations and
warranties an Identified Shareholder is determined to have acted with actual
and intentional fraud.
8.12 Definition of Company's Knowledge. For purposes of this Agreement, the
term Company's knowledge shall mean the actual knowledge of any of Gerry
Ricco, Larry Hartmann, Brian Seigel, Kevin McDonnell, Tom Ware, Robert Sweeney
and Linda Fulton.
8.13 Disclosure Letter.
The disclosures in the Disclosure Letter, and those in any supplement
thereto, relate only to the representations and warranties in the Section and
Subsection of this Agreement to which they expressly relate and not to any
other representation or warranty in this Agreement.
A-42
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed and delivered by its respective duly authorized officers, all as
of the date first above written.
AMERICAN EXPRESS COMPANY
/s/ Steve Alesio
By:__________________________________
Name: Steve Alesio
Title: Authorized Signatory
/s/ Stephen P. Norman
By:__________________________________
Name: Stephen P. Norman
Title: Secretary
RXP ACQUISITION CORPORATION
/s/ Danny Lam
By:__________________________________
Name: Danny Lam
Title: President
/s/ Stephen P. Norman
By:__________________________________
Name: Stephen P. Norman
Title: Secretary
ROCKFORD INDUSTRIES, INC.
/s/ Gerry J. Ricco
By:__________________________________
Name: Gerry J. Ricco
Title: President/CEO
/s/ Brian A. Seigel
By:__________________________________
Name: Brian A. Seigel
Title: Executive Vice President
IDENTIFIED SHAREHOLDERS ONLY WITH
RESPECT TO SECTIONS 3.31, 5.15,
5.18, 6.3(C)(II), ARTICLE 8
INCLUDING, WITHOUT LIMITATION,
SECTION 8.11 HEREOF.
/s/ Gerry J. Ricco
_____________________________________
Gerry J. Ricco
/s/ Brian A. Seigel
_____________________________________
Brian A. Seigel
/s/ Larry Hartmann
_____________________________________
Larry Hartmann
A-43
<PAGE>
APPENDIX B
November 9, 1998
Rockford Industries, Inc.
1851 East First Street
Santa Ana, CA 92705
Members of the Board:
[Letterhead of Piper Jaffray Inc.]
We understand that Rockford Industries, Inc. ("Rockford" or the "Company"),
American Express Company ("American Express"), and RXF Acquisition
Corporation, a wholly owned subsidiary of American Express ("Merger
Subsidiary"), propose to enter into an Plan and Agreement of Merger to be
dated as of November 9, 1998 (the "Merger Agreement"), pursuant to which,
among other things, Rockford will become a wholly owned subsidiary of American
Express through the merger of Merger Subsidiary with and into Rockford (the
"Transaction"). Pursuant to the Merger Agreement, and subject to certain
exceptions and adjustments, each share of Company Common Stock that is issued
and outstanding shall be converted into a right to receive that number of
shares of American Express Common Stock, par value $0.60 per share, that could
be purchased for $11.88 based on the average of the closing price per share of
American Express Common Stock on the New York Stock Exchange, Inc. ("NYSE")
during the ten (10) consecutive trading days ending on the third full trading
day immediately preceding the merger. We have assumed that the Company's
convertible preferred stock will be converted to shares of Common Stock prior
to the closing of the Transaction and consequently such shares are included in
the Common Stock issued and outstanding. You have requested our opinion as to
whether the consideration to be received in the Transaction by the common
stockholders of Rockford, pursuant to the Merger Agreement, is fair, from a
financial point of view, as of the date hereof, to the common stockholders of
Rockford.
Piper Jaffray Inc. ("Piper Jaffray"), as a customary part of its investment
banking business, is engaged in the valuation of businesses and their
securities in connection with mergers and acquisitions, underwritings and
secondary distributions of securities, private placements, and valuations for
estate, corporate and other purposes. For our services in rendering this
opinion, Rockford will pay us a fee and indemnify us against certain
liabilities. Piper Jaffray is also entitled to additional fees which are
contingent on consummation of the Transaction. We have, in the past, provided
financing and financial advisory services to the Company and have received
fees and other compensation for the rendering of such services. In the
ordinary course of our respective businesses, we and our affiliates may
actively trade securities of Rockford and American Express for our own account
or the accounts of our customers and, accordingly, may at any time hold a long
or short position in such securities.
In arriving at our opinion, we have undertaken such reviews, analyses and
inquiries as we deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. Reviewed a draft of the Merger Agreement dated November 3, 1998.
2. Reviewed the Reports on Form 10-K for Rockford for the years ended
December 31, 1997, December 31, 1996 and December 31, l995.
3. Reviewed the Reports on Form 10-Q for Rockford for the quarters ended
June 30, 1998 and March 31, 1998.
4. Reviewed Rockford's final prospectus dated July 19, l995 relating to
Rockford's initial public offering of common stock.
5. Reviewed the Reports on Form 10-K for American Express for the years
ended December 31, 1997, December 31, 1996 and December 31, 1995.
B-1
<PAGE>
6. Reviewed the Reports on Form 10-Q for American Express for the
quarters ended June 30, 1998 and March 31, 1998.
7. Reviewed financial forecasts for Rockford for the years ending
December 31, 1998 through December 31, 2000 furnished by Rockford
management.
8. Reviewed equity research analysts' consensus earnings per share
estimates for Rockford and American Express for the fiscal years ending
December 31, 1998 and December 31, 1999.
9. Visited the headquarters of Rockford and conducted discussions with
members of senior management of Rockford, including the Chief Executive
Officer and Chief Financial Officer. Topics discussed included, but were
not limited to, the background and rationale of the proposed Transaction,
the financial condition, operating performance and the balance sheet
characteristics of Rockford and the prospects for Rockford, as well as for
Rockford and American Express on a combined basis.
10. Reviewed selected market information for Rockford and American
Express common stock.
11. Reviewed the financial terms, to the extent publicly available, of
certain comparable merger and acquisition transactions which we deemed
relevant.
12. Considered the projected pro forma effect of the Transaction on
Rockford's implied share equivalent earnings per share for the fiscal years
ending December 31, 1999 and December 31, 2000.
13. Analyzed the premiums paid in acquisitions involving the sale of
certain publicly traded companies we deemed reasonably similar or
comparable to Rockford.
14. Compared certain financial data of Rockford and American Express with
certain financial data of companies we deemed reasonably similar or
comparable to Rockford and American Express.
15. Reviewed such other financial data, performed such other analyses and
considered such other information as we deemed necessary and appropriate
under the circumstances.
We have relied upon and assumed the accuracy and completeness of the
financial statements and other information provided by Rockford and American
Express or otherwise made available to us from public and other sources and
have not assumed responsibility independently to verify such information. We
have further relied upon the assurances of Rockford's and American Express's
managements that the information provided has been prepared on a reasonable
basis in accordance with industry practice and, with respect to financial
forecasts, reflects the best currently available estimates and judgment of
Rockford's and American Express's respective managements as to the expected
future financial performance of Rockford and American Express, and that they
are not aware of any information or facts that would make the information
provided to us incomplete or misleading. Without limiting the generality of
the foregoing, for the purpose of this opinion, we have assumed that Rockford
and American Express are not a party to any pending transactions, including
external financing, recapitalizations, acquisitions or merger discussions,
other than the Transaction or in the ordinary course of business. We have also
assumed that the Transaction will be consummated in accordance with the draft
Merger Agreement, including, without limitation, that the Transaction will
qualify as a tax-free transaction for Rockford's stockholders.
In arriving at our opinion, we have not performed any appraisals or
valuations of specific assets or liabilities of Rockford or American Express
and have not been furnished with any such appraisals or valuations, and
express no opinion regarding the liquidation value of Rockford or American
Express. Without limiting the generality of the foregoing, we have undertaken
no independent analysis of any pending or threatened litigation, possible
unasserted claims or other contingent liabilities to which either Rockford or
American Express or its affiliates is a party or may be subject and, at
Rockford's direction and with its consent, our opinion makes no assumption
concerning, and therefore does not consider, the possible assertion of claims,
outcomes or damages arising out of any such matters.
[Letterhead of Piper Jaffray Inc.]
B-2
<PAGE>
Our opinion is necessarily based upon information available to us, facts and
circumstances and economic, market and other conditions as they exist and are
subject to evaluation on the date hereof. Events occurring after the date
hereof could materially affect the assumptions used in preparing this opinion.
However, we do not have any obligation to update, revise or reaffirm this
opinion except as required by the Merger Agreement. We are not expressing any
opinion herein as to the prices at which shares of Rockford's or American
Express's common stock have traded or at which such shares may trade at any
future time.
We have been authorized by the Board of Directors to solicit and have
solicited other purchasers for the Company or alternative transactions to the
Transaction. We were not requested to opine as to, and this opinion does not
in any manner address, Rockford's underlying decision to proceed with or
effect the Transaction or structure thereof.
This opinion is for the benefit of the Board of Directors of Rockford in
evaluating the Transaction and shall not be published or otherwise used by any
other persons for any other purposes nor shall any public references to Piper
Jaffray be made without our prior written consent. This opinion is not
intended to be and does not constitute a recommendation to any stockholder as
to how such stockholder should vote at the stockholders' meeting to be held in
connection with the Transaction.
Based upon and subject to the foregoing and based upon such other factors as
we consider relevant, it is our opinion that, as of the date hereof, the
consideration proposed to be received by the common stockholders of Rockford
in the Transaction pursuant to the Merger Agreement is fair, from a financial
point of view, to the common stockholders of Rockford.
Sincerely,
PIPER JAFFRAY INC.
[Letterhead of Piper Jaffray Inc.]
B-3
<PAGE>
APPENDIX C
CHAPTER 13. DISSENTERS' RIGHTS
(S) 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that sub-
paragraph (A) rather than subparagraph (B) of this paragraph applies in any
case where the approval required by Section 1201 is sought by written
consent rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(S) 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
C-1
<PAGE>
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
(S) 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
C-2
<PAGE>
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S) 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S) 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
C-3
<PAGE>
(S) 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of dissenting shares.
(S) 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDER'S APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S) 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
(S) 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attach the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions, or if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form set aside or rescinded
shall not restrain or enjoin the consummation of the
C-4
<PAGE>
transaction except upon 10 days' prior notice to the corporation and upon a
determination by the court that clearly no other remedy will adequately
protect the complaining shareholder or the class of shareholders of which such
shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
C-5
<PAGE>
APPENDIX D
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _____ to _____.
Commission file number 0-26324
ROCKFORD INDUSTRIES, INC.
(Exact name of registrant as specified in charter)
California 33-0075112
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1851 East First Street, Suite 600
Santa Ana, California 92705
- ----------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 547-7166
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock,
no par value
------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No
----- -----
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant was approximately $16,200,000 based upon the last reported sale price
of the Common Stock on NASDAQ on February 26, 1998.
As of February 26, 1998, the Registrant had 4,107,117 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the Registrant's definitive
Proxy Statement to be filed with the Commission within 120 days after the close
of the Registrant's fiscal year.
<PAGE>
TABLE OF CONTENTS
ITEM PAGE
PART I
1. Business....................................................... 1
2. Properties..................................................... 7
3. Legal Proceedings.............................................. 7
4. Submission of Matters to a Vote of Security Holders............ 7
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters.................................... 8
6. Selected Financial Data........................................ 9
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 10
8. Financial Statements and Supplementary Data.................... 18
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 18
PART III
10. Directors and Executive Officers of the Registrant............. 19
11. Executive Compensation......................................... 19
12. Security Ownership of Certain Beneficial Owners and Management. 19
13. Certain Relationships and Related Transactions................. 19
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-k.................................................... 21
Signatures..................................................... 22
ii
<PAGE>
PART I
ITEM 1. BUSINESS
References to the "Company" are to Rockford Industries, Inc., a California
corporation, unless the context indicates otherwise.
General
Rockford Industries, Inc. (the "Company") is a specialty finance company
that originates or acquires, sells and services equipment leases. The underlying
leases financed by the Company relate to a wide range of equipment, including
medical, dental and diagnostic, computers and peripherals, computer software,
telecommunications, office and other. The equipment generally has a purchase
price of less than $250,000 (with an average of $23,700 as of December 31,
1997), and such leases are commonly referred to as "small ticket leases". The
Company initially funds the origination of its leases through its line of credit
facilities or from working capital and, upon achieving a sufficient portfolio
size, sells such leases principally through its securitization programs and non
recourse sales. The Company focuses on maximizing the spread between the yield
on its leases and its cost of funds by obtaining favorable terms on its line of
credit facilities and securitizations.
Since its inception in 1984, the Company's strategy has been to focus its
business development efforts on establishing marketing relationships with
vendors and other sources of small ticket equipment, in order to establish
itself as the recommended provider of financing for potential equipment
purchasers. The Company customizes lease financing products to meet the specific
equipment financing needs of it vendors, and in many cases, provides them with
servicing and technological support. By providing vendors and their customers
with timely, convenient and competitive equipment financing, the Company
promotes both equipment sales by the vendor and the utilization of the Company
as a financing source. The Company estimates that approximately 20% of its
equipment finance contract originations during 1997 were generated from
additional borrowings by existing customers.
The Company has originated equipment finance contracts for over
$596,000,000 of equipment since its founding in 1984 and has achieved
significant growth in the last few years. The Company financed approximately
$166,748,000 of equipment during 1997, which represented a 27.2% increase from
the $131,267,000 of equipment it financed in 1996. This increase in financing
volume also resulted in a 41% increase in the Company's revenues for 1997, after
considering pro forma adjustments due to the mandatory adoption of Statement of
Financial Accounting Standards No. 125 ("SFAS No. 125"), Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
as of January 1, 1997. On a pro forma basis, assuming SFAS No. 125 was adopted
as of January 1, 1996, total revenues increased from $13,557,000 in 1996 to
$19,108,000 in 1997. Despite the record growth in originations, net income
decreased by 8.8% from $2,318,000 in 1996 to $2,120,000 in 1997 primarily due to
an increased provision for credit losses. (See Management's Discussion and
Analysis of Financial Condition and Results of Operations).
The Company was incorporated in California on December 27, 1984. The
Company's executive office is located at 1851 East First Street, Suite 600,
Santa Ana, California 92705, and its telephone number is (714) 547-7166.
As used in this report, unless otherwise indicated, the term "Company"
includes the Company's wholly-owned unconsolidated subsidiaries.
Business Strategy
The Company's objective is to become a leading provider of financing for
lower cost equipment. The Company believes that it has significant opportunities
to achieve its goal, while enhancing operating efficiency, through the
implementation of its business strategy, the principal components of which
include the following:
<PAGE>
Point of Purchase Financing. The Company has made and continues to make
substantial investments in information processing and delivery systems that
facilitate the Company's processing of credit applications and finance
contracts. These systems increase the ease with which customers do business with
the Company and the attractiveness of the Company to vendors of the equipment it
finances.
Enhanced Vendor Relationships. The Company seeks to increase both the
number of relationships it has with vendors and the proportion of a vendor's
total financing business provided by the Company in existing relationships. The
Company plans to increase the number and scope of its vendor relationships by
expanding its marketing efforts. These efforts include (i) increased
participation by the Company at equipment vendor trade shows; (ii) initiation of
a direct marketing campaign to targeted equipment vendors; (iii) continuing to
recruit experienced marketing professionals; and (iv) improvement of the support
services provided to the Company's independent sales force in order to allow
these professionals to spend more time on business development and less time on
account servicing. The Company seeks to increase its penetration rate with its
existing vendor relationships by increasing the range of programs offered to
such vendors.
Target High Volume Vendors. Historically, a majority of the Company's
originations have been from vendors which generate less than $500,000 in
equipment financings annually. The Company seeks to increase its business
development efforts with accounts which are expected to produce $1.0 million to
$5.0 million annually in originations by: (i) developing vendor programs and
more formal relationships, including private label programs, designed
specifically to address the needs of this segment of the vendor market; (ii)
improving the Company's information systems which will allow the Company to
efficiently process a high volume of transactions; and (iii) expanding current
informal or local relationships with high volume vendors into formal or national
relationships.
Reduced Borrowing Costs. The Company uses several methods to fund its
financing activities, including asset securitization, nonrecourse loans from
institutional lenders and a revolving line of credit. Generally, asset
securitization provides the Company with the lowest cost of funds. During 1997,
the Company funded 77% of its total originations through its securitization
program, compared to 56% in 1996.
Pursue Strategic Acquisitions. The Company intends to pursue strategic
acquisitions of businesses that will complement or expand the Company's
business. The Company believes that acquisitions will enable it to expand its
vendor relationships and the services it offers to customers.
Industry Overview
The equipment financing industry in the United States includes a wide range of
entities that provide funding for the purchase of equipment, ranging from
specialized financing companies, which focus on a particular industry or
financing vehicle, to large multinational banking institutions, which offer a
full panoply of financial services. According to the Equipment Leasing
Association of America ("ELA"), lease financing has played a significant role in
the United States economy and represented 30% of all business investment in
productive assets during 1996. The ELA also estimates that approximately 80% of
all United States companies finance the purchase of some or all of their
equipment through lease financing.
According to recent information available from the United States Department
of Commerce ("DOC"), the annual volume of new capital equipment (measured by
original equipment cost) placed on lease in the United States grew from $85
billion in 1986 to $169 billion in 1996. The DOC had estimated that the overall
equipment leasing market would grow to approximately $176 billion in 1997.
The Company is a specialty finance company providing equipment financing
and related services. The Company primarily utilizes lease contracts as the
financing vehicle for these equipment financings, regardless of whether the
Company has a continuing economic interest in the underlying equipment. As a
specialty finance company, the Company believes that it has strategically
positioned itself to capitalize on the small ticket segment of the equipment
leasing industry, which is one of the most rapidly growing segments of the
industry in part due to (i) the consolidation of the banking industry, which has
eliminated many of the smaller community banks that traditionally provided
equipment financing for small to mid-size companies, forcing these businesses to
seek alternative financing rather than deal with the approval process of
commercial banks; (ii) stricter lending requirements of commercial banks; (iii)
a trend
2
<PAGE>
toward instant approvals at the point of sale made possible by improved
technology; (iv) the accelerating pace of research and development in the high
technology medical equipment industry, which has led to a rapid introduction and
enhancement of medical equipment; and (v) the decline in the price of computer
hardware and software and increasing demand therefor.
Equipment Finance Contracts
General. The Company's revenues are primarily derived from its origination
and sale of equipment finance contracts pursuant to which the Company provided
financing for the purchase of various types of equipment. Substantially all of
the Company's finance contracts are noncancellable for a specified term during
which the Company generally receives scheduled payments sufficient, in the
aggregate, to cover the Company's borrowing costs and the costs of the
underlying equipment, and to provide the Company with an appropriate profit
margin. The initial noncancellable term of the contract is equal to or less than
the equipment's estimated economic life and a small portion of the Company's
equipment finance contracts provide the Company with additional revenues based
on the residual value at the end of the contract. Initial terms for new
equipment finance contracts generally range from 12 to 66 months. The average
cost of the equipment underlying the Company's equipment finance contracts
increased from an average of approximately $23,500 in 1996 to $23,700 in 1997.
The number of new equipment finance contracts originated by the Company
increased from 5,587 in 1996 to 7,040 in 1997.
Terms and Conditions. The terms and conditions of the Company's equipment
finance contracts, which are generally structured principally as sales-type
leases or direct finance leases, vary somewhat from transaction to transaction.
In substantially all cases, however, the Company's customers are required to (i)
maintain, service and operate the equipment in accordance with the
manufacturer's and government-mandated procedures; (ii) insure the equipment
against property and casualty loss; (iii) pay all taxes associated with the
equipment; and (iv) make all scheduled contract payments regardless of the
performance of the equipment. The Company's standard equipment finance contract
provides that, in the event of a default by the customer, the Company can
require payment of liquidated damages to make the Company whole and can seize
and remove the equipment for subsequent sale, refinancing or other disposal at
its discretion.
The Company's equipment finance contracts fall within three general
categories: (i) those which transfer ownership of the underlying equipment to
the customer automatically by granting the customer an option to purchase the
underlying equipment at a nominal price upon the expiration of the original
contract; (ii) those which grant the customer an option, or require the customer
to purchase the underlying equipment at fair market value or to renew the
contract at a fair market rate upon the expiration of the original contract term
(and, in some cases, include maximum and/or minimum pricing provisions); and
(iii) those which generally require the customer to purchase the underlying
equipment at a fixed price or renew the contract at a fixed rate upon the
expiration of the original contract term.
Credit Policies and Procedures. The Company has developed credit
underwriting policies and procedures that management believes have been
effective in the selection of creditworthy equipment lessees and in minimizing
the risks of delinquencies and credit losses. The Company's underwriting
guidelines generally require a credit investigation of an equipment lessee,
including an analysis of personal credit of the owner who typically guarantees
the lease, verification of time in business and corporate name and bank and
trade references. The lease approval process begins with the submission by
facsimile or electronic transmission of a credit application by a Company sales
representative or directly by the lease originator. Upon receipt of a credit
application, a credit analyst enters it into the Company's proprietary credit
processing system. The credit profile of the potential customer is checked with
commercial credit reporting agencies, such as TRW, Inc., Dun and Bradstreet and
Equifax Inc., and the customer's professional status is checked in various
listings with the appropriate professional organizations. The equipment type and
vendor are also considered in this assessment. A credit decision can frequently
be reached within one hour (more complicated transactions require three to four
days, particularly if extensive due diligence is required).
Once a determination to fund has been made, the Company requires receipt of
signed lease documentation before funding. Once the equipment is shipped and
installed, the vendor invoices the Company. The Company verifies that the
customer has received and accepted the equipment and obtains the customer's
authorization to pay the vendor. Following this telephone verification, the file
is forwarded to the contract administration department for audit, booking and
funding and to commence automated billing and transaction accounting procedures.
3
<PAGE>
In connection with the Company's securitization programs, extensive reviews of
the Company's underwriting standards and procedures are conducted by financial
guaranty insurer and rating agencies.
Servicing and Administration
Prior to 1994, the Company assigned the majority of its finance contracts
to nonrecourse lenders who were also assigned the right to collect any service
fee income, late fee income and/or insurance fee income associated with these
contracts. The Company's asset securitization transactions give the Company the
opportunity to service the portfolio of finance contracts it has originated and
securitized. Servicing consists primarily of billing the equipment purchasers
for each finance payment and collecting payments. Servicing securitized
portfolios has generated additional revenue, including late fee income and fees
for servicing securitized finance contract portfolios originated by other
finance companies
Currently, pursuant to the Company's securitization programs with
SunAmerica Life Insurance Company ("SunAmerica") and CoreStates Bank, N.A.
("CoreStates"), the Company is entitled to receive a fee for servicing the
securitized contract portfolios. This fee is paid monthly and is calculated
based on 0.5% per annum of the outstanding principal balance due under the
contracts. Late fees are charged on overdue payments and are typically 10% of
the payment amount. In addition, the Company's finance contracts require that
its customers carry fire, theft and casualty insurance on the equipment financed
and customers have also requested that the Company offer life and disability
insurance with respect to their finance contracts. As of December 31, 1997, the
Company had a servicing portfolio of $198.0 million.
The small ticket leasing industry is operationally intensive due, in part,
to the small average lease size. Accordingly, state-of-the-art technology is
critical in keeping servicing costs to a minimum and providing quality customer
service. Recognizing the importance of servicing, the Company utilizes a lease
administration system tailored to support the Company's technological needs. The
system handles application tracking, invoicing, payment processing, automated
collection queuing, portfolio evaluation, cash forecasting and report writing.
The system is linked with a lockbox bank account for payment processing and
provides for direct withdrawal of lease payments. The system also allows users
to view all lease documents on-line.
Portfolio Diversity
From 1993 through 1997, the Company originated approximately 21,400 finance
contracts. During this period, most of the Company's financing contracts have
been with a variety of medical professionals, including physicians, dentists,
optometrists, chiropractors and home healthcare providers and also with
outpatient medical centers. Over the past two years, the Company has recently
expanded its business into the financing of small ticket general business and
other non-medical equipment.
While no individual customer accounted for more than 2.5% of the Company's
financing originations in 1997, certain types of customers are more prominent
than others. Finance contract originations in 1997 can be categorized by
business type as follows: medical doctors, 40.0%; other healthcare providers,
23.2%; and general business, 36.8%.
In addition to the diversity of the types of business served by the
Company, the equipment finance contracts originated have covered a diverse range
of high-technology medical diagnostic, therapeutic, surgical and related
equipment provided by over 1,100 vendors. Finance contract originations in 1997
can be categorized by equipment type as follows: medical 49%; computer, 25.2%;
and general equipment, 25.8%.
Residual Values
Equipment financing provided by the Company is generally structured such
that the full cost of the equipment and all financing costs are repaid during
the initial financing term. Of the equipment finance contracts originated by the
Company and outstanding as of December 31, 1997, 90% (as measured by net
investment) bore no residual value on the Company's books, generally because
they granted the customer a purchase option at a nominal price or required the
contract customer to purchase the equipment at a fixed price at the end of the
contract term. The balance of the contracts originated by the Company and
outstanding at December 31, l997, bore an estimated aggregate of $3,473,000
residual value, net of unearned income and valuation allowance.
4
<PAGE>
At the inception of an equipment finance contract classified as a direct
finance lease, the Company estimates the fair market value of the underlying
equipment that would be obtained at the end of the initial contract term based
upon its judgment, as supported by data from the used equipment market,
discussions with manufacturers, and consultations with equipment users and
records that value as the residual value on its balance sheet. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Direct Finance Leases." Residual values ascribed to individual items of
equipment depend upon various factors including the technical specifications of
the equipment, obsolescence of the equipment, performance and capabilities of
the equipment, the financial strength and reputation of the equipment
manufacturer and the widespread availability of long-term maintenance for the
equipment.
Upon the expiration of an equipment finance contract for which a residual
value has been recorded, the original contract customer will: (i) purchase the
equipment outright; (ii) extend the contract for an additional term; or (iii)
return the equipment to the Company. Should the equipment be returned to the
Company, the Company generally would seek to sell or refinance it. The Company
reviews, on a quarterly basis, the residual value estimates recorded on its
books based on its own analysis and prevailing market data. Under generally
accepted accounting principles, any downward revision would result in an
immediate charge to reserves or earnings, while an upward revision may not be
recorded until actually realized as a gain. At the end of the initial contract
term, when the equipment is either sold or refinanced, the amount by which the
net proceeds exceed or fall short of the residual value is recorded as a gain or
loss. When a new finance contract is entered into for such equipment at a gain,
the Company recognizes the gain ratably over the new contract term.
The Company's results of operations depend in part upon its ability to
realize the residual equipment value reflected on its balance sheet as net
investment in direct financing leases. The balance of the contracts originated
by the Company and outstanding at December 31, 1997, bore an aggregate of
$3,473,000 residual value, net of unearned income and valuation allowance,
representing approximately 2.9% of the Company's total assets at December 31,
1997. The Company has historically realized proceeds, with respect to residuals
applicable to finance contract maturities, which are approximately equivalent to
the original recorded residual value.
Delinquencies
Delinquencies Relating to Contracts Serviced by the Company. The Company's
portfolio (comprised principally of equipment finance contracts securitized or
funded by the Company through a revolving line of credit facility (the
"Revolver") or by cash and held or warehoused by the Company on a full recourse
basis) is comprised primarily of medical equipment finance contracts entered
into with physicians and other medical professionals. The Company believes that
its specialization in medical equipment financing provides it with advantages in
the lower-priced equipment markets in controlling the delinquencies and
minimizing the losses in its contract portfolio, since health care practitioners
generally have higher incomes, making default rates relatively low. As the
Company's portfolio matured, its delinquency rate (payments more than thirty
days past due) rose from 4.5% at December 31, 1996 to 4.6% at December 31, 1997,
net of fully reserved contracts. The Company has reviewed the 1996 ELA Industry
Survey and, based upon the information contained in that survey, believes that
the Company's delinquencies and credit loss rates compare favorably to industry
norms. There can be no assurance that, as the Company's portfolio increases, it
will be able to sustain favorable levels of delinquencies.
Delinquencies Relating to Contracts Held by the Company's Lenders. The
Company sells or discounts on a nonrecourse basis or through its securitization
programs a portion of the equipment finance contracts it originates;
consequently, the Company has historically borne minimal credit risk on those
contracts. However, in an effort to foster strong relationships with its
lenders, the Company assists its nonrecourse lenders with collection matters and
endeavors to stay informed about the performance of the equipment finance
contracts originated by the Company and held in the lenders' portfolios. Based
on delinquency reports and credit loss information provided by many of the
Company's nonrecourse lenders, the Company believes that the portfolio of
equipment finance contracts which it has assigned to nonrecourse lenders has
experienced delinquency and credit loss percentages similar to those experienced
in the industry.
5
<PAGE>
Allowance for Doubtful Accounts. The Company maintains an allowance for
doubtful accounts in connection with payments due under equipment finance
contracts held in the Company's portfolio at a level which the Company deems
sufficient to meet future asset writedowns, based on an analysis of the
delinquencies, problem accounts, and overall risks and probable losses
associated with such contracts, together with a review of the Company's
historical loss experience. There can be no assurance that this allowance will
prove to be adequate. Although the Company attempts to mitigate its credit risk
through the use of a variety of commercial credit reporting agencies when
processing the finance contract applications of its customers and through
various forms of nonrecourse financing, failure of the Company's customers to
make scheduled payments under their equipment finance contracts could require
the Company to forfeit its residual interest, if any, in the underlying
equipment, to make payments in connection with the recourse portion of its
borrowings and to forfeit cash collateral pledged as security in connection with
the Company's asset securitizations. Credit losses on the contracts maintained
by the Company in its owned or serviced portfolio have amounted to approximately
1.0 % and 0.6% of the Company's average receivables outstanding under its
contracts for 1997 and 1996, respectively. Any increase in such loss or in the
rate of payment defaults under any of the equipment finance contracts originated
by the Company could adversely affect the Company's ability to obtain additional
funding or to complete additional asset securitizations.
Estimated Recourse Obligations. As part of the sale and securitization of
direct finance leases, the Company writes a put option in the form of a recourse
obligation. This recourse obligation is recorded at its estimated fair value.
Although management uses the best information available to make these estimates,
future adjustments to the obligation may be necessary due to economic, operating
and other conditions that may be beyond the Company's control. Actual results
could differ from those estimates.
Funding Sources
The principal source of funding for the Company's financing transactions
are asset securitization programs with both SunAmerica and CoreStates backed
by pools of the Company's equipment finance contracts. In addition, the Company
obtains funding for financing transactions from nonrecourse loans made by
institutional lenders and, to a lesser extent, recourse borrowings under the
Company's line of credit. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Sales and Marketing
The Company conducts its sales and marketing activities primarily through
59 exclusive independent or salaried sales representatives who are highly
incentivized through the Company's compensation program and who average over 10
years of industry experience. These sales representatives, along with 29
marketing support employees, work out of 31 regional locations which operate in
16 states. The Company's independent sales representatives and marketing staff
focus on establishing formal and informal relationships with equipment vendors.
The primary objectives of these relationships are to promote the vendors'
equipment sales by providing timely, convenient and competitive financing for
their equipment sales as well as the utilization of the Company as a financing
source.
Services provided by the Company include structuring the financing to meet
the needs of equipment vendors and purchasers, training vendors' sales and
marketing staffs to market the Company's various lease funding programs, and
customizing financial products to encourage equipment sales. In most cases, the
Company's sales representatives also work directly with equipment purchasers,
providing them with the guidance necessary to complete the equipment financing
transaction.
Competition
The Company operates in a highly competitive environment. The Company
competes with a number of national, regional and local finance companies,
including those which, similar to the Company, specialize in the financing of
small ticket equipment, for customers, relationships with equipment
manufacturers, vendors and distributors, financing sources and sales and other
personnel. In addition, the Company's competitors include those equipment
manufacturers which finance the sale or lease of their products themselves,
other traditional types of financial services companies,
6
<PAGE>
such as commercial banks and savings and loan associations, and conventional
finance and leasing companies, all of which provide financing for the purchase
of medical and medical-related equipment. The Company competes on the basis of
conveniences with vendors and knowledge of vendors' products, responsiveness to
customer needs, flexibility in structuring lease transactions and price. Many of
the Company's competitors and potential competitors possess substantially
greater financial, marketing, and operational resources than the Company.
Moreover, the Company's future profitability will be directly related to the
Company's ability to access capital funding and to obtain favorable funding
rates as compared to the access to capital and costs of capital available to its
competitors. The Company's competitors and potential competitors include many
larger, more established companies that have a lower cost of funds than the
Company and access to capital markets and to other funding sources which may be
unavailable to the Company. There can be no assurance that the Company will be
able to continue to compete successfully in its targeted market.
Equal Credit Opportunity Act
Pursuant to the terms and conditions of agreements entered into by the
Company and certain of its nonrecourse lenders, the Company is required to
comply with the Equal Credit Opportunity Act ("ECOA"). Pursuant to the terms of
the ECOA, creditors, such as the Company, are required to give all credit
applicants notice of their right to receive a written statement of reasons if
their application for credit is denied, unless the applicant had gross revenues
exceeding $1,000,000 during its last fiscal year. Creditors are also required to
give oral or written notice of a credit denial within 30 days after receipt of
completed application (or a "reasonable time" thereafter for applicants whose
gross revenues exceed $1,000,000 during its last fiscal year).
Employees
As of December 31, 1997, the Company employed 121 persons. Of these
employees, 12 are principally engaged in management, 37 are engaged in
operations and collections, 27 are engaged in accounting and administration and
45 are engaged in sales and marketing (not including 38 exclusive independent
sales representatives). None of the Company's employees is represented by a
labor union. The Company considers its employee relations to be satisfactory.
ITEM 2. PROPERTIES
The Company owns no real property and leases all of its offices. The
Company occupies approximately 18,800 square feet of office space at its
executive offices in Santa Ana, California. The original lease term is for a
period of five years ending October 31, 1999, at a current rent of approximately
$29,000 per month. The lease is extendable, at the option of the Company, for a
period of five years, at a rental rate of 95% of the estimated prevailing market
rate.
Space for branch sales offices is generally leased from buildings that
provide executive suite arrangements under leases of one year or less in
duration. As of December 31, 1997, the Company maintained 40 sales branch
locations operating in 16 states throughout the United States. Aggregate rental
expense for the corporate headquarters and the regional sales offices was
$707,000 for the fiscal year ended December 31, 1997. In total, the Company
leases an aggregate of approximately 33,700 square feet of office space. The
Company believes that these facilities are adequate to meet its current needs
and will be adding space as necessary in the future.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any pending litigation or legal proceedings,
or to the best of its knowledge any threatened litigation or legal proceedings,
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on the results of operations or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
7
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information
Rockford Industries, Inc. trades under the symbol ROCF on the NASDAQ
National Market System. The following table sets forth high and low last
reported sales prices per share of Common Stock for the periods indicated.
<TABLE>
<CAPTION>
High Low
--------- ---------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1996
- ----------------------------
First Quarter............................ 17.500 8.750
Second Quarter........................... 20.250 15.000
Third Quarter............................ 19.750 13.250
Fourth Quarter........................... 24.000 10.000
YEAR ENDED DECEMBER 31, 1997
- ----------------------------
First Quarter............................ 11.875 7.000
Second Quarter........................... 9.875 6.125
Third Quarter............................ 11.625 7.500
Fourth Quarter........................... 12.250 7.500
</TABLE>
Dividend Policy
During its status as an S Corporation which ended on December 31, 1994, the
Company distributed to its shareholders certain cash dividends. Except for such
distributions, the Company has not paid dividends on its Common Stock since its
inception and does not intend to make any further distributions or to pay any
dividends on its Common Stock in the foreseeable future. The holder of the
Company's outstanding Series A Preferred Stock is entitled to receive cumulative
dividends, payable quarterly out of funds legally available commencing on August
31, 1995, at the annual rate of 4% of the par value of the Series A Preferred
Stock until May 31, 1996, 6% of the par value until May 31, 1997 and 8% of the
par value thereafter, each of which is subject to an increase by 1% should the
Company default in its payment obligations for two consecutive quarters until
the overdue amounts are paid. The Company currently intends to reinvest
earnings, if any, in the development and expansion of its business, except to
the extent required to satisfy its obligations under the terms of the Series A
Preferred Stock. The declaration of dividends in the future will be at the
election of the Board of Directors and will depend upon the earnings, capital
requirements and financial position of the Company, general economic conditions
and other relevant factors. In addition, the Company's ability to pay cash
dividends to holders of Common Stock is subject to the terms of the outstanding
shares of Series A Preferred Stock. Such terms include preferences in payment of
cash dividends, and if the Company shall be in arrears on one or more quarterly
dividend payments or shall have failed to redeem the Series A Preferred Stock
when required to so redeem, the Company may not declare or pay any dividends to
holders of Common Stock. The Company is also subject to certain other
restrictions pursuant to the terms of the Revolver, including the maintenance of
minimum levels of tangible net worth which have the effect of limiting the
payment of cash dividends to holders of Common Stock.
Holders
As of December 31, 1997, there were approximately 600 beneficial holders
and 26 holders of record of the Company's Common Stock.
8
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues...................................................... $ 19,108 $104,539 $ 74,330 $ 54,351 $ 40,702
Costs......................................................... 2,032 85,380 61,206 46,745 35,377
Gross profit.................................................. 17,076 19,159 13,124 7,606 5,325
Selling, general and administrative expenses.................. 13,613 15,296 9,637 6,056 4,229
Income before income taxes.................................... 3,463 3,863 3,487 1,550 1,096
Income taxes (1).............................................. 1,343 1,545 1,395 1,845 28
Net income (loss)............................................. 2,120 2,318 2,092 (295) 1,068
Basic net income per share (2)................................ 0.49 0.54 0.64 - -
Diluted net income per share (2).............................. 0.48 0.52 0.60 - -
Pro Forma Statement of Operations Data (3):
Historical income before income taxes................... $ 1,550 $ 1,096
Pro forma provision for income taxes.................... 620 438
Pro forma net income.................................... 930 658
Pro forma net income per share (2)...................... .38 .27
Weighted average common shares outstanding:
Basic.................................................... 4,106 4,103 3,219 2,454 2,454
Diluted.................................................. 4,441 4,452 3,504 2,454 2,454
Other Data:
Cost of equipment financed.................................... $166,748 $131,267 $ 87,881 $63,579 $48,798
Number of financed contracts.................................. 7,040 5,587 3,426 3,122 2,208
<CAPTION>
DECEMBER 31,
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Total assets................................................. $125,067 $157,698 $184,658 $129,542 $98,041
Total liabilities (4)........................................ 103,176 137,814 167,014 126,732 94,516
Total shareholders' equity................................... 21,891 19,884 17,644 2,810 3,525
</TABLE>
__________
(1) Effective December 31, 1994, the Company revoked its election to be taxed as
an S Corporation for federal and certain state income tax purposes. In
connection with this election, the Company reclassified its retained
earnings at December 31, 1994 of $2,807,622 to Common Stock. As a result of
the Company's conversion to a C Corporation the Company recorded a one-time
charge against earnings for deferred income tax liabilities of approximately
$1,825,000 (reflecting the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes) at December 31, 1994.
(2) Historical net income per share has not been shown prior to the Company's
election to be taxed as a C Corporation on December 31, 1994, because it is
not indicative of the Company's ongoing operations. Pro forma net income per
share is shown for prior periods.
(3) Represents adjustments for federal and certain state income taxes as if the
Company had been taxed as a C Corporation rather than an S Corporation for
all periods presented.
(4) Consists primarily of nonrecourse debt. The release of SFAS No. 125 caused
the Company to reassess its balance sheet presentation of certain assets and
liabilities in light of current accounting literature and this new standard.
This reassessment resulted in the determination that the assets and
liabilities, previously recorded on the Company's balance sheet as
discounted lease rentals assigned to lenders and nonrecourse debt, should be
offset for associated finance transactions in which the Company has no
continuing economic interest and in which the Company is legally relieved of
all obligations as a result of the sale. Consequently, the Company has
recorded a reclassification of $39,939,044 resulting in a decrease of
discounted lease rentals assigned to lenders and nonrecourse debt at
December 31, 1995, in order to conform the December 31, 1995 balance sheet
to the December 31, 1996 presentation. This reclassification had no impact
on the Company's statements of income, cash flows, or shareholders' equity.
9
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto appearing elsewhere in this Annual
Report on Form 10-K.
Customer Finance Contract Accounting
The Company primarily structures equipment financing transactions with its
customers which are classified for accounting purposes as direct finance leases.
The Company may sell these contracts in bulk to nonrecourse lenders or
securitize these contracts, at which time the Company relinquishes control over
such contracts.
Presentation of Financial Statements. The Company adopted Statement of
Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which was
amended by SFAS No. 127, as of January 1, 1997. SFAS No. 125 has changed the
manner in which the Company determines and recognizes the gain recorded upon the
transfer of its interest in finance contracts subsequent to December 31, 1996.
Additionally, SFAS No. 125 allows the Company to record gains with respect to
transfers of its interest in leases previously accounted for as direct finance
leases. With the implementation of SFAS No. 125, the Company has altered the
presentation in the Company's consolidated financial statements of revenues,
expenses and certain assets and liabilities associated with finance contracts
sold. As a result, certain aspects of the Company's financial statements as of
December 31, 1997 and for the year then ended may not be directly comparable to
the prior year financial statements. Retroactive implementation of SFAS 125 was
not permitted. The following pro forma financial statement of operations for the
year ended December 31, 1996 reflects certain reclassifications to present the
results of the Company's operations for the year ended December 31, 1996 on a
basis comparable to the 1997 presentation. The reclassifications pertain to
sales of equipment, cost of equipment sold and the recording of initial direct
costs and estimated bad debt expense. The accompanying pro forma information
reflects only reclassification adjustments to conform presentation for
comparison purposes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
Pro Forma Reclassifi- Actual
1997 1996 cations 1996
-------- --------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
REVENUES:
Sales of equipment.......................... $ - $ - $ 93,613 $ 93,613
Gain on sale of financing transactions...... 10,027 5,728 (2,321) 3,407
Finance income.............................. 4,088 4,636 4,636
Servicing related income.................... 2,652 1,712 1,712
Other income................................ 2,341 1,481 (310) 1,171
------- ------- --------- --------
Total revenues........................ 19,108 13,557 90,982 104,539
COSTS:
Cost of equipment sold...................... - - 82,923 82,923
Interest expense............................ 2,032 2,457 2,457
------- ------- --------- --------
Total costs............................ 2,032 2,457 82,923 85,380
GROSS PROFIT................................ 17,076 11,100 8,059 19,159
SELLING, GENERAL & ADMINISTRATIVE EXPENSES.. 10,792 5,932 7,122 13,054
PROVISION FOR CREDIT LOSSES................. 2,821 1,305 937 2,242
------- ------- --------- --------
Total expenses......................... 13,613 7,237 8,059 15,296
INCOME BEFORE TAXES......................... 3,463 3,863 - 3,863
INCOME TAXES................................ 1,343 1,545 - 1,545
------- ------- --------- --------
NET INCOME.................................. $ 2,120 $ 2,318 $ - $ 2,318
======= ======= ========= ========
</TABLE>
10
<PAGE>
Equipment Sales. For leases in which the Company does not retain a
continuing economic interest at origination, sales are recognized upon
consummation of the lease assignment to the nonrecourse lender. The Company does
not retain a continuing economic interest in the transaction when the following
criteria are met: (i) at the time of origination, the transaction was assigned
on a nonrecourse basis to a third party, (ii) the Company had no residual
interest in the underlying transaction, and (iii) all rights to the underlying
payment stream and equipment were transferred to the third party assignee
(nonrecourse lender). For sales recognized prior to the implementation of SFAS
No. 125, the discounted value of aggregate lease payments is recorded as
discounted lease rentals assigned to lenders and sales of equipment and the
equipment cost is recorded as cost of sales. The related obligation resulting
from this discounting of the leases is recorded as nonrecourse debt. The related
interest income and expense for transactions recorded as sales are netted and
included in finance income. Subsequent to the Company's adoption of SFAS No. 125
as of January 1, 1997, the difference between the discounted value of aggregate
lease payments due under lease contract and the equipment cost is recognized as
gain or loss on sale of financing transactions.
Direct Finance Leases. Equipment financing transactions are classified as
direct finance leases when the Company retains a continuing economic interest in
the underlying finance contract which results from funding the transaction with
recourse debt or the Company's own working capital. Additionally, collectibility
of the contract payments must be reasonably certain and the transaction must
meet at least one of the following criteria: (i) the contract transfers
ownership of the equipment to the customer at the end of the contract term, (ii)
the contract contains a bargain purchase option, (iii) the contract term at
inception is at least 75% of the estimated economic life of the financed
equipment, or (iv) the present value of the minimum payments required of the
customer is at least 90% of the fair market value of the equipment at the
inception of the contract. For direct finance leases, the Company records the
total contract payments, estimated unguaranteed residual value and initial
direct costs (consisting of sales commissions, referral fees and other
origination costs) as the gross investment in the direct finance lease. The
difference between the gross investment in the direct finance lease and the cost
to the Company of the equipment being financed is recorded as unearned income.
Interest income is recognized over the term of the contract by amortizing the
unearned income using the interest method. Cash proceeds from a funding source
are recorded as nonrecourse debt or additions to notes payable to bank,
depending on the source of the funding. Interest expense is recognized over the
term of the contract using the respective discount rates of the Company's
nonrecourse lenders or the interest rate applicable to the Company's line of
credit. Included in net investment in direct finance leases at December 31, 1997
and 1996 are those transactions transferred prior to the adoption of SFAS No.
125 where the Company has a continuing economic interest in the lease.
Gain on Sale of Financing Transactions. Subsequent to origination, the
Company may sell its investment in direct finance leases in bulk to nonrecourse
lenders or securitize these contracts, at which time the Company relinquishes
any control over such contracts. The difference between the cash proceeds from
the assignment of the remaining payments due under these contracts and the total
of the unamortized net investment balance, fair value of estimated recourse
obligation and accrued letter of credit fees is recorded as gain on sale of
financing transactions. The present value of the Company's retained interest in
the unguaranteed residual value of the equipment under lease remains on the
consolidated balance sheet, classified as net investment in direct finance
leases.
In connection with these securitization transactions, the Company is
required to originate and maintain a letter of credit with a qualifying
financial institution. Such letter of credit serves as a credit enhancement for
the related trust. Withdrawals on the letter of credit are required in the event
of shortfalls in amounts due to investors. All projected costs of origination
and maintaining the letter of credit are accrued in the period in which the
securitization closes. As collateral for the letter of credit, the Company
initially deposits cash with the issuing bank. The amount set aside is available
for distribution to the issuing bank in the event of withdrawals on the letter
of credit. Cash amounts on deposit are invested in certain instruments as
permitted by the related securitization documents. To the extent amounts on
deposit exceed specified levels, distributions are made by the Company, and, at
termination of the related trust, any remaining amounts on deposit are
distributed to the Company. The amount on deposit at December 31, 1997 and 1996
is classified as restricted cash on the Company's consolidated balance sheet.
11
<PAGE>
As part of the sale and securitization of direct finance leases, the
Company writes a put option in the form of a recourse obligation. For
transactions originated subsequent to the implementation of SFAS No. 125, this
recourse obligation is recorded at its estimated fair value. Although management
uses the best information available to make these estimates, future adjustments
to the obligation may be necessary due to economic, operating and other
conditions that may be beyond the Company's control. Actual results could differ
from those estimates.
Gain or Loss on Sale of Residuals. The estimated unguaranteed residual
value represents management's estimate of the amount expected to be received at
the termination of a direct finance lease as a result of remarketing the
equipment originally financed by such contract. Management reviews such
estimates quarterly and records a residual valuation allowance if the
equipment's estimated fair market value is below its recorded value. When
equipment is sold by the Company at the expiration of the contract term, a gain
or loss is recorded depending upon whether the net proceeds from the sale are
above or below the estimated unguaranteed residual value. The net gain or loss
from the sale of residuals is included in other income in the statement of
operations. See "Business - Finance Contracts - Residual Values."
Results of Operations
Years Ended December 31, 1997 and 1996
Finance Contract Originations. Finance contract originations increased by
approximately $35.4 million or 27% to $166.7 million for the year ended December
31,1997 from $131.3 million for the year ended December 31, l996, principally
due to significant investments in both personnel and systems allowing further
penetration into all targeted market niches: healthcare, information technology,
telecommunications and office products.
Revenues. Total revenues recognized for the year ended December 31, 1997
were $19.1 million compared to $104.5 million for the year ended December 31,
1996. This decrease is due to the adoption of SFAS No. 125 as of January 1,
1997. On a pro forma basis, assuming SFAS No. 125 had been adopted as of January
1, 1996, total revenues for the year ended December 31, 1997 were $19.1 million
compared to $13.5 million for the year ended December 31, 1996 which represents
an increase of $5.6 million, or 41%. This pro forma increase was primarily due
to increased sales of finance contracts and higher gain margins on those sales.
The improved gain margin was the result of lower cost of funds on the Company's
securitization facilities and a one-time gain of approximately $900,000 from
restructuring a securitization facility in the third quarter, as well as an
increase in servicing fees and other income associated with servicing the
securitized portfolio.
Gross Profit. Total gross profit realized for the year ended December 31,
1997 was $17.1 million compared to $19.2 million for the year ended December 31,
1996, which represented a decrease of $2.1 million. This decrease is due to the
adoption of SFAS No. 125 as of January 1, 1997. On a pro forma basis, assuming
SFAS No. 125 had been adopted as of January 1, 1996, gross profit for the year
ended December 31, 1997 was $17.1 million compared to $11.1 million for the year
ended December 31, 1996 which represents an increase of $6.0 million, or 54.1%.
This pro forma increase was primarily due to the increase in finance contract
originations, gains on sale of financing transactions, and from an increase of
other income, such as servicing fees.
Gross Profit Percentage. On a pro forma basis, assuming SFAS No. 125 had
been adopted as of January 1, 1996, gross profit as a percentage of revenues
increased to 89.4% in 1997 from 81.9% in l996. The gross profit percentage was
positively impacted by gains on sales of financing transactions, by other
income, including servicing fees, associated with an increase in the size of the
portfolio of finance contracts serviced by the Company and by reduced funding
through nonrecourse debt which resulted in a decrease in interest expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in 1997 were $10.8 million as compared to $13.1 million
in 1996, representing a decrease of $2.3 million or 17.6%. The decrease was
primarily due to substantial investments in automated systems during 1996 and
1997 which have resulted in productivity and processing efficiencies thereby
allowing the Company to increase origination volume with a minimal increase in
personnel for credit and documentation. The investment in systems enabled
electronic applications, electronic proposal generators and expanded financing
programs as well as development of a Wide Area Network establishing an
electronic link between the credit, documentation and sales functions.
12
<PAGE>
Provision for Credit Losses. The provision for credit losses were $2.8
million in 1997 as compared to $2.2 million in 1996, representing an increase of
$600,000 or 27.2%. This increase stems primarily from an increase in the
Company's delinquency rate (payments more than 30 days past due) from 5.8% to
6.2% at December 31, 1996 and 1997, respectively, inclusive of fully reserved
contracts. Additionally, for transactions securitized subsequent to January 1,
1997, SFAS 125 requires the Company to record its estimated recourse obligations
under its securitization agreements at the time of recording the gain on sale of
financing transactions. In the aggregate, the Company's provision for estimated
credit losses for the year ended December 31, 1997 was $4.9 million, or 2.9% of
originations, compared to $2.2 million or 2% of originations for the year ended
December 31, 1996, representing an increase of $2.7 million or 122.7%. Although
management uses the best information available to make these estimates, future
adjustments may be necessary due to economic, operating and other conditions
that may be beyond the Company's control. Actual results could differ from these
estimates.
Net Income. Income before taxes was $3.5 million for the year ended
December 31, 1997 as compared to $3.9 million for the prior year, representing a
decrease of $0.4 million. The effective income tax rate remained consistent for
the comparative periods shown, decreasing to 39% for 1997 from 40% for 1996. Net
income decreased by $0.2 million or 8.5% to $2.1 million for 1997 from $2.3
million for 1996. Basic net income of $0.49 per share on weighted average shares
outstanding of 4,106,000 was earned during 1997, as compared to basic net income
of $0.54 per share on weighted average shares outstanding of 4,103,000 for 1996.
Diluted net income of $0.48 per share on weighted average shares outstanding of
4,441,000 was earned during 1997, as compared to diluted net income of $0.52 per
share on weighted average shares outstanding of 4,452,000 for 1996. The number
of the Company's outstanding shares increased during 1997 by 1,600 due to the
exercise of stock options.
Years Ended December 31, 1996 and 1995
Finance Contract Originations. Finance contract originations increased by
approximately $43.4 million or 49.4% to $131.3 million for the year ended
December 31,1996 from $87.9 million for the year ended December 31, l995,
principally due to the addition of 12 sales professionals during the year ended
December 31, 1996 and further penetration into the general business markets. The
percentage of the Company's equipment sales contracts decreased to approximately
83% of all of its finance contract originations in 1996 from 84% in 1995.
Revenues. Total revenues of $104.5 million for the year ended December 31,
1996 increased by $30.2 million or 40.6% from total revenues of $74.3 million
for the year ended December 31, 1995. The increase in revenues resulted from an
increase in sales of equipment of $28.6 million, an increase in financing gains
and other income of $2.4 million and a decrease in interest income of $770,000.
The increase in sales of equipment reflected the Company's lower cost of funds
which resulted from the securitization program, in addition to increased
marketing efforts in the medical and non-medical equipment marketplaces. The
primary reason for the increase in other income was due to $3.4 million in gains
derived from assignment of Company-held direct finance leases, and to a lesser
extent the increase in servicing fees and other income associated with servicing
the securitized portfolio. Since interest income primarily relates to the
portfolio of direct finance leases held by the Company, the lowering of the
average direct finance lease balance during the year resulted in a decrease in
interest income for 1996.
Gross Profit. Total gross profit of $19.2 million for the year ended
December 31, 1996 increased by approximately $6.0 million or 46.0% from $13.1
million for the year ended December 31, 1995. The increase in gross profit was
primarily attributable to the increase in finance contract originations, gains
on sale of financing transactions, and from an increase of other income, such as
servicing fees.
Gross Profit Percentage. Gross profit as a percentage of revenues
increased to 18.3% in 1996 from 17.7% in l995 reflecting the following
components: gross profit from equipment sales of 11.4% for 1996 versus 11.0% for
1995; and net interest (interest income less interest expense) margin percentage
for direct finance leases of 47.0% for 1996 versus 38.2% for 1995. The gross
profit percentage was positively impacted by gains on sales of financing
transactions and by other income, including servicing fees, associated with an
increase in the size of the portfolio of finance contracts serviced by the
Company.
Selling, General, Administrative Expenses, and Provision for Credit Losses.
Selling, general, administrative expenses, and provision for credit losses in
1996 were $15.3 million as compared to $9.6 million in 1995, representing
13
<PAGE>
an increase of $5.7 million or 58.7%, which increase was primarily due to volume
related expenses associated with increased contract originations, increases in
legal and professional expenses associated with the Company's first year being
publicly traded, additional capitalized systems costs and related systems
support expenses, and additional provision for bad debt resulting from an
increase in customer delinquencies which continue to compare favorably to
industry norms. As a percentage of revenues, these expenses amounted to 14.6% in
1996, as compared to 13.0% in 1995 which was principally due to a higher
percentage of gains on sales of financing transactions in 1996 as compared to
the prior year.
14
<PAGE>
Net Income. Income before taxes was $3.9 million for the year ended
December 31, 1996 as compared to $3.5 million for the prior year. The effective
income tax rate of 40% remained constant for the comparative periods shown. Net
income increased by $0.2 million or 10.8% to $2.3 million for 1996 from $2.1
million for 1995. Basic net income of $0.52 per share on weighted average shares
outstanding of 4,103,000 was earned during 1996, as compared to basic net income
of $0.60 per share on weighted average shares outstanding of 3,219,000 for 1995.
Diluted net income of $0.52 per share on weighted average shares outstanding of
4,452,000 was earned during 1996, as compared to diluted net income of $0.60 per
share on weighted average shares outstanding of 3,504,000 for 1995. The number
of the Company's outstanding shares increased during 1996 by 4,017 due to the
exercise of stock options.
Liquidity and Capital Resources
Because equipment financing is a capital intensive business, the Company
requires continual access to substantial short and long-term credit to generate
equipment financings and sales. The principal sources of funding for the
Company's equipment finance contracts are: (i) funding obtained from sales of
asset-backed securities (backed by pools of the Company's equipment finance
contracts) to SunAmerica and CoreStates, pursuant to the terms of each
securitization arrangement; (ii) nonrecourse borrowings from institutional
lenders; and (iii) standard recourse borrowings under its $17.0 million
revolving and $7.0 million working capital lines of credit used by the Company
from time to time to temporarily fund a portion of its equipment finance
contracts, pending more permanent funding arrangements for such contracts.
Securitization Facilities. Asset securitization is a process in which a
pool of equipment finance contracts is transferred to a wholly-owned special-
purpose entity which, in turn, transfers the contracts and the payments due
thereunder to a trust which issues trust certificates to investors relating to
the contract pool. The source of repayment for the trust certificates is the
stream of payments which are made on the equipment finance contracts included in
the corresponding pool of transferred contracts. In addition, the special
purpose entity pledges, as collateral to support payment of the trust
certificates, the equipment underlying the equipment finance contracts in each
pool. To the extent adequate payments on the trust certificates are not realized
by the investor, the investor (as opposed to the special purpose entity) has the
right to the residual value, if any, of the equipment underlying the contracts
in the pool should such equipment be resold. The Company provides credit
enhancement by maintaining, in the case of the Company's securitization program,
a letter of credit in connection with each transaction under the securitization
program. In connection with the securitization programs, the Company receives a
service fee from the certificate holder.
In connection with these securitization transactions, the Company is
required to originate and maintain a letter of credit with a qualifying
financial institution. Such letter of credit serves as credit enhancement for
the related trust. Withdrawals on the letter of credit are required in the event
of shortfalls in amounts due to investors. All projected costs of origination
and maintaining the letter of credit are accrued in the period in which the
securitization closes. As collateral for the letter of credit, the Company
initially deposits cash with the issuing bank. The amount set aside is available
for distribution to the issuing bank in the event of withdrawals on the letter
of credit. Cash amounts on deposit are invested in certain instruments as
permitted by the related securitization documents. To the extent amounts on
deposit exceed specified levels, distributions are made to the Company, and, at
termination of the related trust, any remaining amounts on deposit are
distributed to the Company. The amount on deposit at December 31, 1997 and 1996
is classified as restricted cash in the accompanying consolidated balance
sheets.
In August 1997, the Company and SunAmerica amended an agreement pursuant
to which SunAmerica agreed to purchase up to $250.0 million in principal amount
of trust certificates. This agreement, as amended with SunAmerica expires on
August 28, 2000. During 1997, the Company securitized $47.0 million of its
financing contracts with SunAmerica. Also under this amended agreement, the
Company has consolidated $95.8 million of financing contracts securitized with
SunAmerica under the previous agreement. In connection with the securitization
program with SunAmerica, the Company has agreed to continue to service the
equipment finance contracts included in each pool of transferred contracts on
behalf of SunAmerica. In consideration for servicing these contract pools, the
Company receives a service fee from SunAmerica.
In March 1997, the Company entered into an agreement with CoreStates that
provides the Company with a credit facility for the securitization of up to $150
million of finance contract obligations and provides financing at rates that are
approximately 65 basis points lower than the rates previously available to the
Company. Under this agreement, during December 31, 1997, the Company securitized
$81.5 million of it financing contracts with CoreStates.
15
<PAGE>
The Company's ability to complete additional asset securitizations will
depend upon a number of factors, including general conditions in the credit
markets and the financial performance of already outstanding asset-backed
securities issued by the Company or others. There can be no assurance that the
Company will be able to continue to arrange securitization agreements.
Nonrecourse Debt. Prior to the utilization of the securitization funding
methodology described above, the Company's principal source of funding had been
nonrecourse borrowings from institutional lenders. Under a nonrecourse loan, the
Company borrows an amount from the institutional lender equal to the present
value of the payments due from the borrowers discounted at a fixed rate of
interest. The lender receives the payments due to the Company under the
particular finance contract in repayment of the nonrecourse debt, and takes a
security interest in the related equipment. The Company generally retains
ownership of the equipment during the term of the finance contract, subject to
the lender's security interest. Interest rates under this type of financing are
negotiated with each lender and reflect the financial condition of the equipment
finance customer, the term of the equipment finance contract and the dollar
amount being financed. The Company is not liable for the repayment of
nonrecourse loans unless the Company breaches certain limited representations
and warranties set forth in its loan agreements with the institutional lenders.
The Company's nonrecourse lenders assume the credit risk of each finance
contract assigned to them by the Company, and their only recourse, upon a
default under a finance contract, is against the customers and the financed
equipment.
This method of funding is still utilized by the Company for a portion of
its finance contract originations. To date, the Company has been successful in
attracting nonrecourse lenders and in extending the levels at which existing
lenders are willing to provide nonrecourse financing. At December 31, 1997, the
Company had recorded nonrecourse debt of $69.0 million from various
institutional lenders related to transactions recorded prior to January 1, 1997.
Each of these lenders has entered into funding arrangements with the Company and
agreements relating thereto which set forth the general terms and conditions
regulating the Company's borrowings from such lenders. Each of such arrangements
require that the noncancellable payments due to the Company under equipment
finance contracts funded by borrowings from such lenders be assigned by the
Company to the lenders as payment of the principal and interest on such borrowed
funds. The agreements also provide credit guidelines to assess the credit
quality of a potential customer and the interest rate to be charged by the
Company to its customers, depending upon the type of transaction. Certain of
such arrangements regarding the funding of the Company's future equipment
finance contracts (but not as they relate to outstanding borrowings from such
lenders) are terminable at any time by either party upon thirty-days to sixty-
days written notice. Certain lenders may, at their discretion, provide the
Company with funding for equipment finance contracts which do not meet their
credit guidelines if the Company deposits an amount equal to a designated
portion of the payments to be made by its customers under such contracts into a
reserve account as security for defaults by such customers. If any of its
nonrecourse lenders should terminate its lending relationship with the Company,
the Company believes that it would be able to enter into a comparable lending
relationship with another nonrecourse lender on substantially similar terms, if
necessary.
Short-Term Recourse Debt. The Company has maintained the Revolver and a
working capital facility with a bank which it uses from time to time for the
funding of certain of its financing and equipment transactions. On November 21,
1997, this credit facility was restructured to decrease the borrowing limit on
the line of credit to $17.0 from $30.0, eliminate the $5.0 million overdraft
protection facility and provide for an additional $7.0 million working capital
line of credit. The Revolver provides for advances through August 1998 and
contains a feature for pricing at LIBOR plus 1 1/2%. The working capital line
provides for advances through August 1998 and contains a feature for pricing at
the Bank's overnight borrowing rate plus 2%. At December 31, 1997, the Company
had $15.9 million outstanding under these credit facilities.
Under these credit facilities, the Company may convert borrowings to term
loans subject to certain conditions. The credit facilities are collateralized by
the finance contracts assigned to the bank simultaneously with each advance and
provides the bank with full recourse against the Company should the collateral
prove to be insufficient. The credit facilities contain various covenants,
including those requiring the Company to maintain certain levels of tangible net
worth and debt ratios. The Company was in compliance with these covenants at
December 31, 1997. The Company believes it would be able to enter into other
lines of credit on terms substantially similar to the terms of the existing
credit facilities, if necessary.
Cash Flows. The Company's cash and cash equivalents at December 31, 1997
was $1.1 million compared to $4.0
16
<PAGE>
million at December 31, 1996. During the year ended December 31, 1997 the
Company's cash position decreased by $2.9 million, reflecting the use of cash in
operations of $24.3 million and the cash provided by investing and financing
activities respectively, of $16.6 million and $4.8 million. The most significant
aspects of the change during this period was from cash invested in equipment for
financing of $166.7 million, gains on sale of financing transactions of $10.0
million, an increase in restricted cash of $9.5 million, increase in notes
payable to bank of $4.9 million (net of proceeds of $160.3 million), and
proceeds and payments from sales and assignments of leases of $192.2 million,
which was largely due to the higher level of the Company's finance contract
originations. In comparison, the Company's cash position decreased by $5.4
million during the year ended December 31, 1996, reflecting the use of cash in
operations and investing activities of $6.8 million and $68.3 million,
respectively, and the cash provided from financing activities of $69.7 million.
The change in cash was primarily due to cash used to purchase equipment for
financing of $131.3 million, increases in receivables and prepaids of $6.2
million, an increase in notes payable to bank of $11.0 million (net of proceeds
of $17.6 million), proceeds and payments from sales and assignments of leases of
$57.2 million from nonrecourse debt of $58.8 million.
In order to meet its operating, investing and financing needs for the next
twelve months, in addition to existing cash balances, cash flows from
activities, proceeds from securitization arrangements, nonrecourse assignments
and bank credit lines, the Company may need to seek additional capital through
incurrence of additional indebtedness or the issuance of common or preferred
stock, depending on market conditions.
Impact of Inflation
The Company funds a majority of its equipment finance contracts with fixed
rate loans in order to maintain a spread between the interest rates charged to
the Company and those implicit in the financing the Company provides. Due to
this timely matching of finance contract yields with funding rates, the Company
generally has mitigated the effects of rising interest rates during inflationary
periods. While the Company is subject to inflation as described above, the
Company believes that inflation does not have a material effect on its operating
results.
Recently Issued Accounting Standards
In June 1997, FASB issued SFAS No. 130, Reporting Comprehensive Income,
which is effective for annual and interim periods beginning after December 15,
1997. This statement requires that all items that are required to be recognized
under accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes standards
for the method that public entities report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about product and services, geographical areas and major customers. The adoption
of this standard is not expected to have a material effect on the Company's
financial reporting.
17
<PAGE>
Year 2000 Compliance
The Company recognizes that the arrival of the Year 2000 poses a unique
worldwide challenge to the ability of all systems to recognize the date change
from December 31, 1999 to January 1, 2000 and, like other companies, has
assessed and is repairing its computer applications and business processes to
provide for their continued functionality. An assessment of the readiness of
external entities which it interfaces with, such as vendors, counterparties,
customers, payment systems, and others, is ongoing.
The total cost to the Company of these Year 2000 Compliance activities has
not been and is not anticipated to be material to its financial position or
results of operations in any given year. These costs and the date on which the
Company plans to complete the Year 2000 modification and testing processes are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
Safe Harbor Statement
Statements which are not historical facts, including statements about the
Company's confidence and strategies and its expectations regarding reductions in
cost of funds, plans to increase market share, plans to enter new markets, and
the impact of SFAS No. 125 are forward looking statements that involve risks and
uncertainties. These include but are not limited to (i) reducing borrowing costs
by expanding the Company's asset-backed securitization funding program; (ii)
increasing origination of equipment finance contracts by maintaining and
expanding strategic relationships with vendors of medical and medical-related
equipment; (iii) increasing business with high volume vendors; (iv) increasing
its financing of non-medical equipment; (v) expanding into new market niches and
the international market; (vi) reducing indirect costs associated with the
Company's financings; (vii) minimizing delinquencies relating to contracts
retained and serviced by the Company, as well as contracts held by the Company's
lenders; (viii) the Company's ability to realize the residual equipment value
reflected on its balance sheet; (ix) maintaining a diverse base of customers to
which the Company provides equipment financing; (x) successfully enlarging the
Company's sales force and the Company's geographic penetration of the medical
equipment market; and (xi) the size and growth rate of the medical equipment
leasing industry. The historical results acheived are not necessarily indicative
of future prospects of the Company.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These forward-
looking statements are based upon assumptions that the Company will continue to
finance equipment on a regular and predictable basis, that competitive
conditions within the equipment financing market will not change materially or
adversely, that the equipment financing market will continue to experience
steady growth, that demand for the Company's financing will remain strong, that
the Company will retain existing sales representatives and key management
personnel, that the Company's will accurately anticipate market demand that
planned financing arrangements will be completed satisfactorily and that there
will be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the results contemplated in the forward looking
statements will be realized. In addition, as disclosed above, the business and
operations of the Company are subject to substantial risks which increase the
uncertainty inherent in such forward-looking statements. Any of the other
factors disclosed above could cause the Company's net income or growth in net
income to differ materially from prior results.
18
<PAGE>
ITEM 8. SEE CONSOLIDATED FINANCIAL STATEMENTS BEGINNING ON PAGE F-1 OF THIS
ANNUAL REPORT ON FORM 10-K
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's Directors and Executive Officers is
incorporated herein by reference to the Company's definitive proxy statement
filed not later than April 30, 1998, with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as
amended.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 402 of Regulation S-K is incorporated herein by
reference to the Company's definitive proxy statement to be filed not later than
April 30, 1998 with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 403 of Regulation S-K is incorporated herein by
reference to the Company's definitive proxy statement to be filed not later than
April 30, 1998, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 404 of Regulation S-K is incorporated herein by
reference to the Company's definitive proxy statement to be filed not later than
April 30, 1998, with the Securities and Exchange Commission pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
See Index to Consolidated Financial Statements included as part of this
Form 10-K at Page F-1.
(2) Financial Statement Schedules:
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
II. Valuation and Qualifying Accounts F-18
All other schedules are omitted because of the absence of conditions under
which they are required or because all material information required to be
reported is included in the consolidated financial statements and notes
thereto.
(3) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Incorporation of the registrant. (1)
3.2 Certificate of Determination of the Registrant. (1)
3.3 Amended and Restated Bylaws of the Registrant. (1)
4.1 Specimen Copy of Stock Certificate for shares of Common
Stock of the Registrant. (1)
10.1 Employment Agreement, dated as of January 1, 1995, between
the Registrant and Gerry Ricco. (1)
10.2 Employment Agreement, dated as of January 1, 1995, between
the Registrant and Brian Seigel. (1)
10.3 Employment Agreement, dated as of January 1, 1995, between
the Registrant and Larry Hartmann. (1)
10.4 Bonus Agreement, dated as of May 20, 1995, between the
Registrant and Larry Davis. (1)
10.5 Promissory Note, dated May 20, 1995, executed by Larry Davis
in favor of the Registrant in the principal amount of
$175,000. (1)
10.6 Non-competition Agreement, dated as of May 20, 1995, between
the Registrant and Larry Davis. (1)
10.7 Shareholders Agreement, dated May 1, 1995, between Gerry
Ricco, Larry Hartmann, and Brian Seigel. (1)
10.8 Office space lease for the Registrant's corporate
headquarters, dated as of August 15, 1994, by and between
Xerox Centre Partners and the Registrant. (1)
10.9 1995 Stock Option Plan. (1)
10.10 Form of Registrant's standard financing agreement. (1)
10.11 Form of Registrant's "snap" financing agreement. (1)
10.12 Credit Agreement, between the Company and CoreStates Bank,
N. A., dated August 6, 1993, as amended. (1)
10.13 Pooling and Servicing Agreement, dated as of January 31,
1995 by and among Rockford Limited I, the Registrant, Texas
Commerce Bank national Association and Sun Life Insurance
Company of America. (1)
10.14 Equipment and Lease Purchase Agreement, dated as of January
31, 1995, by and between Rockford Limited I and the
Registrant. (1)
10.15 Purchase Agreement, dated as of January 31, 1995, by and
among Rockford Limited I, the Registrant, Texas Commerce
Bank National Association and Sun Life Insurance Company of
America. (1)
10.16 Form of Rockford Limited I Fixed Rate Lease Receivables -
Backed Senior Certificate, Series 1995-A (Class A). (1)
10.17 Form of Rockford Limited I Fixed Rate Lease Receivables -
Backed Senior Certificate, Series 1995-A (Class B). (1)
10.18 Form of Rockford Limited I Fixed Rate Lease Receivables -
Backed Senior Certificate, Series 1995-A (Class C). (1)
10.19 Amendments to office space lease for the registrant's
corporate headquarters, dated October 23, 1995, by and
between Xerox Centre Partners and the Registrant. (2)
10.20 Revised credit agreement, between the registrant and
CoreStates Bank, N.A., dated March 7, 1996. (2)
10.21 Pooling and Servicing Agreement, dated as of February 23,
1996, by and among Rockford Limited II, the registrant,
Texas Commerce Bank National Association and SunAmerica Life
Insurance Company. (2)
21
<PAGE>
10.22 Equipment and Lease Purchase Agreement, dated as of February
23, 1996, by and between Rockford Limited II and the
registrant. (2)
10.23 Purchase Agreement, dated as of February 23, 1996, by and
among Rockford Limited II, the registrant, Texas Commerce
Bank National Association and SunAmerica Life Insurance
Company. (2)
10.24 Form of Rockford Limited II Fixed Rate Lease Receivables -
Backed Senior Certificate, Series 1996-A (Class A). (2)
10.25 Form of Rockford Limited II Fixed Rate Lease Receivables -
Backed Senior Certificate, Series 1996-A (Class B). (2)
10.26 Form of Rockford Limited II Fixed Rate Lease Receivables -
Backed Senior Certificate, Series 1996-A (Class C). (2)
10.27 Subscription Agreement dated May 25, 1995, by and between
Anchor National Life Insurance Company (a wholly-owned
subsidiary of SunAmerica, Inc.) and the registrant
(incorporation by reference to Exhibit 10.19 of the
registrant's Registration Statement on Form S-1 declared
effective on July 19, 1995 (File No. 33-92756)).
10.28 Form of Warrant Agreement dated July 19, 1995, by and among
Commonwealth Associates, Cruttenden Roth Incorporated and
the registrant (incorporation by reference to Exhibit 10.20
of the registrant's Registration Statement on Form S-1
declared effective on July 19, 1995 (File No. 33-92756))
10.29 Amendment to Master Agreement and Master Security Agreement
dated March 7, 1996 by and between CoreStates and the
registrant. (3)
10.30 Master Demand Note in the principal amount of $5.0 million
issued by the registrant in favor of CoreStates. (3)
10.31 Cash pivot Investment/Loan Agreement by and between the
registrant and CoreStates. (3)
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial data schedule.
- ----------------------
(1) Filed previously as an Exhibit to the Company's Registration Statement on
Form S-1 declared effective July 19, 1995 (File No. 33-92756) and by this
reference incorporated herein.
(2) Filed previously as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1995 (File No. 0-26324) and by this reference
incorporated herein.
(3) Filed previously as an Exhibit to the Company's Form 10-K for the year
ended December 31, 1996 (File No. 0-26324) and by this reference
incorporated herein.
(B) REPORTS ON FORM 8-K:
There were no reports on Form 8-K filed during the fourth quarter of the year
ended December 31, 1997.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
Rockford Industries, Inc.
By /s/ GERRY J. RICCO
------------------------
Gerry J. Ricco
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GERRY J. RICCO President and Chief March 30, 1998
------------------------- Executive Officer
Gerry J. Ricco and Director (Principal
Executive Officer)
/s/ LARRY HARTMANN Executive Vice President March 30, 1998
- ----------------------------- and Director
Larry Hartmann
/s/ BRIAN SIEGEL Executive Vice President March 30, 1998
------------------------- and Director
Brian Siegel
/s/ KEVIN MCDONNELL Executive Vice President March 30, 1998
------------------------- and Chief Financial Officer
Kevin McDonnell (Principal Financial and
Accounting Officer)
/s/ ROBERT S. VATERS Director March 30, 1998
-------------------------
Robert S. Vaters
/s/ FLOYD S. ROBINSON Director March 30, 1998
-------------------------
Floyd S. Robinson
23
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
---------
Consolidated Balance Sheets as of December 31, 1997 and 1996...... F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995................................ F-3
Consolidated Statements of Shareholders' Equity for the years
Ended December 31, 1997, 1996 and 1995.......................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995................................ F-5
Notes to Consolidated Financial Statements........................ F-7
Independent Auditors' Report...................................... F-19
F-1
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,077,056 $ 3,985,350
Restricted cash 15,590,153 6,109,559
Accounts receivable (Note 2) 14,532,094 10,039,818
Note receivable from officer (Note 2) - 143,831
Prepaid expenses 1,767,185 884,184
Income taxes receivable (Note 8) 2,606,295 953,234
Net investment in direct finance leases (Note 4) 24,345,620 35,530,325
Net fixed assets (Note 3) 3,263,778 1,900,810
Discounted lease rentals assigned to lendors (Note 7) 61,884,943 98,151,318
------------ ------------
$125,067,124 $157,698,429
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Lines of credit (Note 6) $ 15,862,275 $ 10,981,549
Accounts payable 8,566,382 6,030,482
Accrued expenses and other liabilities 1,887,706 5,919,187
Estimated recourse obligations 2,122,985 -
Deferred income taxes (Note 8) 5,719,641 1,820,346
Nonrecourse debt (Notes 7 and 12) 69,017,039 113,062,823
------------ ------------
Total liabilities 103,176,028 137,814,387
Commitments and contingencies (Note 9)
Shareholders' equity (Notes 1 and 10):
Redeemable preferred stock, par value $25.00; authorized,
1,000,000 shares; issued and outstanding, 70,000 shares 1,575,000 1,575,000
Common stock, no par value; authorized, 10,000,000 shares;
outstanding, 4,107,117 shares (1997) and 4,105,517 shares
(1996) 14,044,891 14,032,491
Retained earnings 6,271,205 4,276,551
------------ ------------
Total shareholders' equity 21,891,096 19,884,042
------------ ------------
$125,067,124 $157,698,429
============ ============
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales of equipment $ - $ 93,613,257 $ 64,998,934
Gain on sale of financing transactions 10,026,678 3,406,815 2,889,717
Finance income 4,088,338 4,635,725 5,405,571
Servicing income 2,651,779 1,712,100 409,711
Other income 2,341,337 1,171,405 626,005
------------ ------------ ------------
Total revenue 19,108,132 104,539,302 74,329,938
COSTS:
Cost of equipment sold - 82,922,839 57,865,782
Interest expense 2,031,877 2,457,619 3,340,050
------------ ------------ ------------
Total costs 2,031,877 85,380,458 61,205,832
------------ ------------ ------------
GROSS PROFIT 17,076,255 19,158,844 13,124,106
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Notes 1 and 9) 10,791,629 13,053,972 8,898,780
PROVISION FOR CREDIT LOSSES 2,821,451 2,242,292 738,540
------------ ------------ ------------
Total expenses 13,613,080 15,296,264 9,637,320
INCOME BEFORE INCOME TAXES 3,463,175 3,862,580 3,486,786
INCOME TAXES (Note 8) 1,343,000 1,545,000 1,394,715
------------ ------------ ------------
NET INCOME $ 2,120,175 $ 2,317,580 $ 2,092,071
============ ============ ============
NET INCOME ATTRIBUTABLE TO
COMMON SHAREHOLDERS: $ 1,994,654 $ 2,209,220 $ 2,067,331
============ ============ ============
NET INCOME PER SHARE (Note 13) $ 0.49 $ 0.54 $ 0.64
Basic ============ ============ ============
Diluted $ 0.48 $ 0.52 $ 0.60
============ ============ ============
Weighted average number of common shares
outstanding:
Basic 4,105,772 4,102,780 3,218,911
============ ============ ============
Diluted 4,440,512 4,451,711 3,504,449
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Redeemable
Preferred Stock Common Stock Total
--------------------- ------------------------ Retained Shareholders'
Shares Amount Shares Amount Earnings Equity
-------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- $ -- 2,454,000 $ 2,810,322 $ - $ 2,810,322
Net proceeds from sale of
preferred stock 70,000 1,575,000 1,575,000
Net proceeds from initial public
offering of common stock
(Note 1) 1,647,500 11,191,038 11,191,038
Net income 2,092,071 2,092,071
Preferred stock dividends (24,740) (24,740)
-------- ---------- ---------- ------------ ------------ ------------
Balance at December 31, 1995 70,000 1,575,000 4,101,500 14,001,360 2,067,331 17,643,691
Net proceeds from exercise
of stock options 4,017 31,131 31,131
Net income 2,317,580 2,317,580
Preferred stock dividends (108,360) (108,360)
-------- ---------- ---------- ------------ ------------ ------------
Balance at December 31, 1996 70,000 1,575,000 4,105,517 14,032,491 4,276,551 19,884,042
Net proceeds from exercise
of stock options 1,600 12,400 12,400
Net income 2,120,175 2,120,175
Preferred stock dividends (125,521) (125,521)
-------- ---------- ---------- ------------ ------------ ------------
Balance at December 31, 1997 70,000 $1,575,000 4,107,117 $ 14,044,891 $ 6,271,205 $ 21,891,096
======== ========== ========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,120,175 $ 2,092,071 $ 2,317,580
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 548,597 305,459 140,619
Change in lease receivable and residual
valuation allowance 230,000 815,000 200,000
Gain on sale of residuals (2,057,014) (511,358) (330,985)
Gain on sale of financing transactions (10,026,678) (3,406,815) (2,889,717)
Initial direct cost amortization 1,146,875 1,275,593 1,421,940
Net amortization of deferred interest (4,396,928) (2,178,106) (3,487,460)
Changes in assets and liabilities:
Restricted cash (9,480,594) (3,234,015) (2,875,544)
Accounts receivable, officer note receivable
and prepaid expenses (5,231,446) (6,167,276) (3,813,541)
Income taxes receivable (1,653,061) (953,234) -
Accounts payable and accrued expenses and
other liabilities (1,495,581) 5,354,902 3,157,393
Estimated recourse obligations 2,122,985
Income taxes payable - (1,204,283) 1,204,283
Deferred income taxes 3,899,295 746,346 (826,000)
------------ ------------ -------------
Net cash used in operating activities (24,273,375) (6,840,207) (6,006,941)
CASH FLOWS FROM INVESTING ACTVITIES:
Proceeds from sales and assignments of
leases and payments received from lessees 192,158,229 65,056,118 4,594,050
Proceeds from sale of residuals 3,201,505 1,361,690 964,734
Purchase of fixed assets (1,911,565) (1,337,149) (704,622)
Initial direct cost capitalization (10,102,693) (2,076,552) (1,137,479)
Equipment purchased for financing (166,748,000) (131,266,745) (87,881,000)
------------- ------------- -------------
Net cash provided by (used in) investing
activities 16,597,476 (68,262,638) (84,164,317)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse debt - 58,774,571 90,479,518
Proceeds from line of credit 160,347,423 28,539,402 6,792,326
Proceeds from sale of preferred stock - - 1,575,000
Proceeds from sale of common stock 12,400 31,131 -
Proceeds from initial public offering - - 11,191,038
Preferred stock dividends (125,521) (108,360) (24,740)
Payments on line of credit (155,466,697) (17,557,854) (13,068,622)
------------- ------------ -------------
Net cash provided by financing activities 4,767,605 69,678,890 96,944,520
------------- ------------ -------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (2,908,294) (5,423,955) 6,773,262
CASH AND CASH EQUIVALENTS
beginning of year 3,985,350 9,409,305 2,636,043
------------- ------------ -------------
CASH AND CASH EQUIVALENTS
end of year $ 1,077,056 $ 3,985,350 $ 9,409,305
============= ============ =============
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE -
Income taxes paid $ 414,357 $ 2,970,078 $ 1,024,957
=========== =========== ===========
Interest paid $ 891,580 $ 222,522 $ 221,794
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Estimated lessee payments made directly to
nonrecourse lending institutions $44,045,784 $49,000,240 $56,435,079
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
ROCKFORD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SIGNIFICANT ACCOUNTING PRINCIPLES
Business - Rockford Industries, Inc. (the "Company") was incorporated on
December 27, 1984 and commenced operations in January 1985. The Company is a
specialty finance company that originates or acquires, sells and services
leases related to a wide range of equipment, including medical, dental and
diagnostic, computers and peripherals, computer software, telecommunications,
office and other. The Company may sell these contracts in bulk to nonrecourse
lenders or securitize these contracts, at which time the Company relinquishes
any control over such contracts. In July 1995 the Company completed an
initial public offering of 1,647,500 shares of its Common Stock at a price of
$7.75 per share, netting proceeds to the Company of $11,191,038.
Principles of Consolidation - The accompanying consolidated financial
statements include the accounts of Rockford Industries, Inc. and its wholly-
owned subsidiaries. All significant intercompany balances and transactions
have been eliminated.
Use of Estimates - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
require management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Lease Accounting - The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 125 Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, which was amended by SFAS No. 127
as of January 1, 1997. SFAS No. 125 has changed the manner in which the
Company determines and recognizes the gain recorded upon the transfer of its
interest in finance contracts subsequent to December 31, 1996. Additionally,
SFAS No. 125 allows the Company to record gains with respect to transfers of
its interest in leases previously accounted for as direct finance leases.
With the implementation of SFAS No. 125, the Company has altered the
presentation in the consolidated financial statements for revenues, expenses
and certain assets and liabilities associated with finance contracts sold. As
a result, as described below, certain aspects of the Company's financial
statements as of December 31, 1997 and for the year then ended may not be
directly comparable to the prior year financial statements. Retroactive
implementation of SFAS No. 125 was not permitted. There was no material
impact on the Company's net income from the adoption of SFAS No. 125.
Certain of the Company's direct finance leases are initially funded with
recourse debt or with the Company's own working capital. The Company
warehouses these contracts for a period of time. For these transactions, the
Company records total lease rentals, estimated unguaranteed residual value
and initial direct costs as the gross investment in the lease. The difference
between the gross investment in the lease and the cost of the leased
equipment is defined as "unearned income." Interest income is recognized over
the term of the lease by amortizing the unearned income and deferred initial
direct costs using the interest method. The gross investment in the lease and
unearned income are included in net investment in direct finance leases.
Included in net investment in direct finance leases are those transactions
transferred to third parties prior to the Company's adoption of SFAS No. 125,
where the Company has a continuing economic interest in the lease, typically
in the form of a residual interest in the underlying equipment. These
transactions are accounted for in a manner consistent with direct finance
leases funded with recourse debt or with the Company's own working capital.
Prior to the adoption of SFAS No. 125, for leases in which the Company did
not retain a continuing economic interest at origination, sales were
recognized upon consummation of the lease assignment to the nonrecourse
lender. The related obligation resulting from this discounting of the leases
was recorded as nonrecourse debt. Under the assignment, the lender takes a
first lien against the lease equipment. In the event of default by the
lessee, the lender would exercise its rights under the lien with no further
recourse against the Company. The related interest income and expense for
transactions recorded as sales are netted and included in finance income. For
sales recognized prior to the implementation of SFAS No. 125, the discounted
value of aggregate lease payments is recorded as discounted lease rentals
assigned to lenders and sales of
F-7
<PAGE>
equipment and the equipment cost is recorded as cost of sales. Subsequent to
SFAS No. 125, the difference between the discounted value of aggregate lease
payments due under lease contract and the equipment cost is recognized as
gain or loss on sale of financing transactions.
Securitization Accounting - During the years ended December 31, 1997 and
1996, the Company completed the securitization and sale of approximately
$128.5 million and $57.2 million, respectively, in direct finance leases in
the form of asset-backed pass-through certificates and recognized gains of
approximately, $9.0 million and $2.4 million, respectively. These
certificates are held in a trust independent of the Company. The Company acts
as a servicer for the trust and receives a stated servicing fee. Because the
difference between the Company's servicing costs and the stated servicing fee
is not significant, no servicing asset or liability has been recorded.
The difference between the cash proceeds from the assignment of the remaining
payments due under these contracts and the total of the unamortized net
investment balance, fair value of estimated recourse obligation and accrued
letter of credit fees is recorded as gain on sale of financing transactions.
The present value of the Company's retained interest in the unguaranteed
residual value of the equipment under lease remains on the consolidated
balance sheet, classified as net investment in direct finance leases.
In connection with these securitization transactions, the Company is required
to originate and maintain a letter of credit with a qualifying financial
institution. Such letter of credit serves as credit enhancement for the
related trust. Withdrawals on the letter of credit are required in the event
of shortfalls in amounts due to investors. All projected costs of origination
and maintaining the letter of credit are accrued in the period in which the
securitization closes. As collateral for the letter of credit, the Company
initially deposits cash with the issuing bank. The amount set aside is
available for distribution to the issuing bank in the event of withdrawals on
the letter of credit. Cash amounts on deposit are invested in certain
instruments as permitted by the related securitization documents. To the
extent amounts on deposit exceed specified levels, distributions are made to
the Company, and, at termination of the related trust, any remaining amounts
on deposit are distributed to the Company. The amount on deposit to support
the letter of credit at December 31, 1997 and 1996 is classified as
restricted cash.
Cash Equivalents - The Company considers cash equivalents to be all highly-
liquid debt instruments purchased with an original maturity of three months
or less.
Allowance for Doubtful Accounts - The Company maintains an allowance for
doubtful accounts in connection with payments due under equipment finance
contracts held in the Company's portfolio. The allowance is determined by
management's estimate of future uncollectible contract receivables, based on
an analysis of delinquencies and historical loss experience. There can be no
assurance that historical delinquencies and loss experience will continue in
the future. Increases in delinquencies and loss rates in the future could
have a material adverse effect on the Company's business, operating results
and financial condition. The Company's policy is to write-off accounts when
deemed uncollectible and historically, such write-offs have been consistent
with management's expectation.
Fixed Assets - Fixed assets are stated at cost less accumulated depreciation
and amortization. Depreciation and amortization are computed using the
straight-line method over estimated useful lives which range from five to
seven years.
Estimated Recourse Obligations As part of the sale and securitization of
direct finance leases, the Company writes a put option in the form of a
recourse obligation. This recourse obligation is recorded at its estimated
fair value. Although management uses the best information available to
estimate fair value, future adjustments to the obligation may be necessary
due to economic, operating and other conditions that may be beyond the
Company's control. Actual results could differ from those estimates.
F-8
<PAGE>
Revenue Recognition - The Company derives its revenue principally from gains
on sales of financing transactions, servicing and other fees, finance income
and other income. Gains on sales of financing transactions are recognized as
discussed previously under lease accounting. Servicing and other fees are
recorded as earned. Finance income is recorded as earned and represents the
interest earned on finance lease contracts during the period prior to their
securitization or sale. Other income is comprised of miscellaneous income,
which is recorded as earned, and gains from the sale of residual interests in
equipment leased, which is recognized at the end of a lease contract based on
the difference between the cash proceeds from the sale of a residual interest
and the remaining unamortized net investment balance.
Selling, General and Administrative Expenses - A portion of the Company's
selling, general and administrative expenses directly related to originating
direct finance lease transactions is deferred and amortized under the
interest method as a reduction of interest income over the lease term. Total
deferred initial direct costs, net of accumulated amortization, are included
in the Company's net investment in direct finance leases (Note 4).
Income Taxes - The Company accounts for income taxes in accordance with SFAS
No. 109, Accounting for Income Taxes. Deferred taxes on income result from
temporary differences between the reporting of income for financial
statements and tax reporting purposes (Note 8).
Net Income Per Share - In February 1997, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, Earnings Per Share, which is effective
for annual and interim periods ending after December 15, 1997, and requires
retroactive application to all periods presented. It supercedes the
presentation of primary earnings per share with a presentation of basic
earnings per share which does not consider the effect of common stock
equivalents. The computation of diluted earnings per share, which gives
effect to all dilutive potential common shares that were outstanding during
the period, is consistent with the computation of fully diluted earnings per
share per Accounting Principles Board Opinion No. 15. The adoption of this
standard did not have a material effect on the Company's net income per share
in 1997, 1996 and 1995.
Stock Split - On May 10, 1995, the Company's Board of Directors approved a
818-for-one stock split of the Company's common stock, subject to stockholder
approval. All share and per share amounts included in the accompanying
financial statements and notes have been restated to reflect the stock split.
Additionally, the Company increased the number of shares of common stock
authorized to 10,000,000 shares.
Recent Accounting Pronouncements - In June 1997, FASB issued SFAS No. 130,
Reporting Comprehensive Income, which is effective for annual and interim
periods beginning after December 15, 1997. This statement requires that all
items that are required to be recognized under accounting standards as
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes
standards for the method that public entities report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about product and services, geographical areas and major
customers. The adoption of this standard is not expected to have a material
effect on the Company's financial reporting.
F-9
<PAGE>
2. ACCOUNTS RECEIVABLE AND NOTE RECEIVABLE FROM OFFICER
The Company's accounts receivable and note receivable from officer consist of
the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Receivable from sale and assignments of leases $11,901,504 $ 5,467,395
Receivable from lessees 627,771 1,476,237
Receivable from trusts 1,564,895 2,241,218
Other 1,048,374 1,239,968
Less allowance for doubtful accounts (610,000) (385,000)
----------- -----------
$14,532,094 $10,039,818
=========== ===========
Note receivable from officer $ - $ 143,831
=========== ===========
</TABLE>
Included in other accounts receivable at December 31, 1997 is a note receivable
from a former officer of the Company for $109,760. The note is unsecured, bears
interest at 6.75% per year and is due in 1998.
3. FIXED ASSETS
The Company's fixed assets consist of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Office equipment $1,979,607 $1,325,327
Furniture and fixtures 718,950 503,377
Computer software 1,806,375 764,663
---------- ----------
4,504,932 2,593,367
Less accumulated depreciation and amortization (1,241,154) (692,557)
---------- ----------
$3,263,778 $1,900,810
========== ==========
</TABLE>
4. NET INVESTMENT IN DIRECT FINANCE LEASES
The Company's net investment in direct finance leases consists of the following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable $26,243,829 $39,053,042
Estimated unguaranteed residual value 4,208,754 4,350,948
----------- -----------
30,452,583 43,403,990
----------- -----------
Deferred initial direct costs 1,013,263 2,480,698
Less unearned income (5,675,226) (9,139,363)
Less lease receivable and residual valuation
allowance (1,445,000) (1,215,000)
----------- ----------
(6,106,963) (7,873,665)
----------- ----------
Net investment in direct finance leases $24,345,620 $35,530,325
=========== ===========
</TABLE>
The estimated unguaranteed residual value represents management's estimate of
the amount expected to be received at lease termination as a result of
disposition of equipment under the direct finance leases. Management reviews
such estimates quarterly and records a residual valuation allowance if the
equipment's estimated fair market value is below its recorded value.
F-10
<PAGE>
At December 31, 1997, a summary of installments due on minimum lease payments
receivable and expected realization of the Company's estimated unguaranteed
residual value, net of the related valuation allowance is as follows:
<TABLE>
<CAPTION>
MINIMUM ESTIMATED
LEASE PAYMENTS UNGUARANTEED
RECEIVABLE RESIDUAL VALUE TOTAL
-------------------- -------------------- -------------
<S> <C> <C> <C>
Year ending December 31:
1998 $12,051,339 $ 673,401 $12,724,740
1999 5,937,093 900,673 6,837,766
2000 3,862,358 913,300 4,775,658
2001 2,382,773 749,158 3,131,931
2002 1,548,332 686,027 2,234,359
Thereafter 461,934 286,195 748,129
----------- ---------- ------------
26,243,829 4,208,754 30,452,583
----------- ---------- ------------
Initial direct costs 1,013,263 - 1,013,263
Less unearned income (4,917,376) (757,850) (5,675,226)
Less lease receivable and residual valuation
allowance (1,320,000) (125,000) (1,445,000)
----------- ---------- ------------
(5,224,113) (882,850) (6,106,963)
----------- ---------- ------------
Net investment in direct finance leases $21,019,716 $3,325,904 $24,345,620
=========== ========== ============
</TABLE>
5. SERVICING PORTFOLIO
Trust and other custodial funds, relating to lease contracts serviced for
others, totaled $6.2 million and $1.8 million at December 31, 1997 and 1996,
respectively. Such funds, which are maintained in separate bank accounts, are
excluded from the company's assets and liabilities.
Total lease contracts serviced amounted to $198 million and $63 million at
December 31, 1997 and 1996, respectively.
6. LINES OF CREDIT
The Company has maintained a revolving line of credit facility ("The Revolver")
and a working capital facility with a bank which it uses from time to time for
the funding of certain of its financing and equipment transactions. On November
21, 1997, this credit facility was restructured to decrease the borrowing limit
on the line of credit to $17.0 from $30.0, eliminate the $5 million overdraft
protection facility and provide for an additional $7.0 million working capital
line of credit. The Revolver provides for borrowings at rates based on a short-
term index plus 150 basis points, allows for advances through August 31, 1998,
and grants the Company the option of converting borrowings thereunder to term
loans, provided certain conditions are met by the Company. Term loans are
collateralized by qualifying equipment finance contracts and bear interest at
fixed rates quoted by the Bank. The working capital facility provides for
borrowings at rates based on the Bank's overnight borrowing rate plus 200 basis
points and allows for advances through August 31, 1998. As of December 31, 1997,
the balance outstanding under these credit facilities was $15,862,275 and there
were no outstanding term loans with the Bank.
The credit facilities are collateralized by the leases assigned to the Bank
under each advance and is granted with full recourse against the Company should
the collateral prove to be insufficient. The credit facilities exclude an
arrangement for compensating balances. Under the provisions of the credit
facilities, the Company must maintain certain minimum net worth requirements
($16,127,250 at December 31, 1997) and a defined debt to net worth ratio of not
greater than 3.25. The Company was in compliance with all covenants at
December 31, 1997.
The following table presents data on the line of credit for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------ -------------
<S> <C> <C> <C>
Weighted average interest rate for the period 7.57% 6.41% 7.00%
Weighted average interest rate at the end of the period 8.25% 8.50% 7.00%
Average amount outstanding for the period $13,548,123 $ 5,824,349 $2,201,425
Maximum amount outstanding at any month-end $28,774,701 $11,145,106 $7,440,885
</TABLE>
F-11
<PAGE>
Nonrecourse debt, which relates to direct finance leases and discounted lease
rentals assigned to lenders or permanently funded through asset securitizations,
bears interest at rates ranging from 8% to 18%. Maturities of such obligations
at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Discounted
Lease Rentals Total
Direct Assigned to Lenders Nonrecourse
Finance Leases or Securitized Debt
-------------- ------------------- -----------
<S> <C> <C> <C>
Year ending December 31:
1998 $4,669,201 $33,204,803 $37,874,004
1999 2,414,678 22,178,825 24,593,503
2000 706,582 10,238,189 10,944,771
2001 143,497 3,524,072 3,667,569
2002 - 79,596 79,596
---------- ----------- -----------
7,933,958 69,225,485 77,159,443
Less deferred interest expense (801,862) (7,340,542) (8,142,404)
---------- ----------- -----------
$7,132,096 $61,884,943 $69,017,039
========== =========== ===========
</TABLE>
Installments made by lessees on discounted lease rentals assigned to lenders
match the related maturity amounts set forth above.
In August 1997, the Company and SunAmerica amended an agreement pursuant
to which SunAmerica agreed to purchase up to $250.0 million in principal amount
of trust certificates. This agreement, as amended with SunAmerica expires on
August 28, 2000. During 1997, the Company securitized $47.0 million of its
financing contracts with SunAmerica. Also under this amended agreement, the
Company has consolidated $95.8 million of financing contracts securitized with
SunAmerica under the previous agreement. In connection with the securitization
program with SunAmerica, the Company has agreed to continue to service the
equipment finance contracts included in each pool of transferred contracts on
behalf of SunAmerica. In consideration for servicing these contract pools, the
Company receives a service fee from SunAmerica.
In March 1997, the Company entered into an agreement with CoreStates Bank
which provides the Company with a credit facility for the securitization of up
to $150 million of finance contract obligations. During 1997, the Company has
securitized $81.5 million of its financing contracts with CoreStates. This
agreement with CoreStates expires on September 28, 1998. In connection with the
securitization program with CoreStates, the Company has agreed to continue to
service the equipment finance contracts included in each pool of transferred
contracts on behalf of CoreStates. In consideration for servicing these contract
pools, the Company receives a service fee from CoreStates.
F-12
<PAGE>
8. INCOME TAXES
For the years ended December 31, 1997, 1996 and 1995 income tax expense consists
of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $ - $ 572,248 $1,735,522
State 50,000 367,297 485,193
----------------------------------
50,000 939,545 2,220,715
Deferred
Federal 1,051,088 510,963 (622,319)
State 241,912 94,492 (203,681)
----------------------------------
1,293,000 605,455 (826,000)
----------------------------------
$1,343,000 $1,545,000 $1,394,715
==================================
</TABLE>
The reconciliation of income tax expense computed at U.S. federal statutory
rates to income tax expense for the years ended December 31, 1997, 1996 and 1995
is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Tax at U.S. federal statutory rates $1,170,565 $1,313,277 $1,220,376
State income taxes 192,662 180,769 185,798
Restoration of deferred income tax
liabilities in connection with the
Company's conversion to a C Corporation - - (11,459)
Other (20,227) 50,954 -
----------------------------------
$1,343,000 $1,545,000 $1,394,715
==================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------
1997 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net Operating Losses $ 4,156,994 $ -
Allowance for doubtful accounts 844,455 657,554
State income taxes 293,753 116,254
Other 62,919 101,046
------------------------
Total deferred assets 5,358,121 874,854
Deferred tax liabilities:
Book to tax basis difference on certain
leased equipment 1,887,172 2,689,828
Book to tax difference in recognition of
securitizations 9,150,626 -
Other 39,964 5,372
------------------------
Total deferred tax liabilities 11,077,762 2,695,200
------------------------
Net deferred tax liabilities $ 5,719,641 $1,820,346
========================
</TABLE>
F-13
<PAGE>
9. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
Leases - The Company leases its corporate offices and certain fixed assets under
operating and capital leases which expire on various dates through 2002. Rent
expense was $706,748 (1997), $573,269 (1996), and $385,731 (1995). Amortization
of assets under capital leases is included in depreciation expense.
Future minimum lease payments under these non-cancelable leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Year ending December 31:
1998 $ 218,217 $ 599,913 $ 818,130
1999 201,380 560,210 761,590
2000 158,213 115,646 273,859
2001 135,788 48,764 189,552
Thereafter - 24,382 24,382
---------- ---------- ----------
Less amount representing $ 713,598 $1,348,915 $2,062,513
interest (88,138) - (88,138)
---------- ---------- ----------
$ 625,460 $1,348,915 $1,974,375
========== ========== ==========
</TABLE>
Employment Agreements - The Company has employment agreements with three company
officers that call for minimum annual salaries and annual bonuses payable to
each officer in 1998.
Employee Benefit Plan - In January 1996 the Company adopted an Employee Savings
Plan pursuant to Internal Revenue Code Section 401(k). The plan provides for
contributions by the Company as defined in the plan.
Litigation - The Company is involved in litigation both as a plaintiff and
defendant in matters arising out of the Company's normal business activities.
Management does not expect the outcome of these lawsuits to have a material
adverse effect on the financial statements of the Company.
Concentrations - At December 31, 1997, lease contacts related to equipment
located in the state of California comprised approximately 13% of the total
serviced lease contract portfolio while no other state comprised more than 8%.
The Company funds substantially all of the lease contracts it originates through
borrowings under its line of credit facilities and internally generated funds.
These borrowings are in turn repaid with the proceeds received by the Company
from selling such leases through securitizations. Any failure to renew or
obtain adequate funding under those line of credit facilities, or other
borrowings, or any substantial reduction in the size of or pricing in the
markets for the Company's leases, could have a material adverse effect on the
Company's operations. To the extent that the Company is not successful in
maintaining or replacing existing financing, it could have a material adverse
effect on the company's consolidated financial condition and consolidated
results of operations.
Since 1995, the Company has pooled and sold through securitizations an
increasing percentage of the lease contracts that it originates. The Company
derives a significant portion of its income by recognizing gains upon the sales
of leases through securitizations. Adverse changes in the securitization market
could impair the company's ability to sell lease contracts through
securitizations on a favorable or timely basis. Any such impairment could have
a material adverse effect upon the Company's consolidated balance sheet and
consolidated results of operations.
The Company has relied on credit enhancement to achieve a "AAA/aaa" rating for
the interests of the trusts in its securitizations. The credit enhancement has
generally been in the form of an insurance policy issued by an insurance company
insuring the timely repayment of the regular interests in each of the
securitization trusts. There can be no assurance that the Company will be able
to obtain credit enhancement in any form from the current insurer or any other
provider of credit enhancement on acceptable terms or that future
securitizations will be similarly rated. A downgrading of the insurer's credit
rating or its withdrawal of credit enhancement could have a material adverse
effect on the Company's consolidated balance sheet and consolidated results of
operations.
F-14
<PAGE>
10. REDEEMABLE PREFERRED STOCK
Series A Redeemable Preferred Stock - In May 1995, the Company issued 70,000
shares of Series A Redeemable Preferred Stock ("Preferred Stock") for net
proceeds of approximately $1,575,000. The holder of the Preferred Stock is
entitled to receive dividends, when declared by the Company's Board of
Directors, at the rate of 4% of the par value of Preferred Stock until May 31,
1996, 6% from June 1, 1996 to May 31, 1997 and 8% thereafter. The dividends
accrue quarterly and are cumulative. Net income applicable to common
shareholders represents net income less preferred stock dividends. The Company,
at its option may redeem the outstanding shares of Preferred Stock subsequent to
May 1997 at 120% of the original purchase price, plus unpaid dividends. The
Company's redemption price is subject to reduction under certain circumstances.
The Preferred Stock is convertible, at the election of the holders, into 275,373
shares of the Company's Common Stock.
11. STOCK OPTION PLAN
In May 1995, the Board of Directors adopted, and the shareholders approved, the
Company's 1995 Stock Option Plan. The Stock Option Plan provides for the grant
of (i) options that are intended to qualify as incentive stock options
("Incentive Stock Options") to certain employees and consultants and (ii)
options not intended to so qualify ("Nonqualified Stock Options") to employees
(including directors and officers who are employees of the Company), directors
and consultants. The total number of shares of Common Stock for which options
may be granted under the Stock Option Plan is 350,000 shares. On June 18,
1997, the Stock Option Plan was amended to increase the number of shares
authorized to be issued under the plan to 550,000. The exercise price of all
stock options granted under the Stock Option Plan must be at least equal to the
fair market value of such shares on the date of grant, will expire not later
than 10 years from the date of grant, and vest over a period not exceeding 5
years.
The following table summarizes information with respect to the Plan for the
years ended December 31, 1996 and 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTION SHARES PRICE
------------------ ------------
<S> <C> <C>
Outstanding at December 31, 1995 153,861 7.77
Granted during 1996 7,100 $12.33
Canceled during 1996 (7,161) $ 7.75
Exercised during 1996 (4,017) $ 7.75
-------
Outstanding at December 31, 1996 149,783 $ 7.99
Granted during 1997 394,750 $ 7.67
Canceled during 1997 (18,781) $ 8.28
Exercised during 1997 (1,600) $ 7.75
-------
Outstanding at December 31, 1997 524,152 $ 7.74
=======
</TABLE>
Additional information regarding options outstanding as of December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
REMAINING
NUMBER CONTRACTUAL NUMBER
EXERCISE PRICE OUTSTANDING LIFE (YRS) EXERCISABLE
-------------- ----------- ----------- ----------
<S> <C> <C> <C>
$ 7.00 185,000 9.31 2,000
$ 7.75 126,052 7.55 90,980
$ 8.125- 8.50 181,000 9.50 -
$ 9.25 27,000 9.89 -
$10.38 3,000 8.17 600
$16.88 -17.00 2,100 6.5 1,700
------- ------
524,152 95,280
======= ======
</TABLE>
F-15
<PAGE>
The Company applies Accounting Principles Board No. 25, Accounting for Stock
Issued to Employees, and related interpretations in accounting for its stock-
based awards. Accordingly, no compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the disclosure
of pro forma net income and net income per share had the Company adopted the
fair value method in accounting for stock-based awards. Under SFAS No. 123, the
fair value of stock-based awards to employees is calculated through the use of
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes option
pricing model with the following weighted average assumptions: expected life, 48
months; stock volatility, 61.7% - 94.8% in 1997 and 25.9% - 48.0% in 1996; risk
free interest rates, 6.0% in 1997 and 1996; no dividends during the expected
term and forfeitures are recognized as they occur.
If the computed fair value of the awards granted through December 31, 1997 had
been amortized to expense over the vesting period of the awards, pro forma net
income would have been $1,634,000 in 1997 and $2,205,000 in 1996. Pro forma
basic and diluted net income per share would have been $0.37 and 0.37,
respectively, in 1997 and $0.51 and 0.50, respectively, in 1996.
12. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with SFAS No. 107, Disclosures About Fair Value of Financial
Instruments, a summary of the estimated fair value of the Company's consolidated
financial instruments at December 31, 1997 and 1996 is presented below. The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data to develop the
estimated fair values. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
The carrying value and estimated fair value of nonrecourse debt at December 31,
1997 was $69,017,039 and $68,666,098, respectively and was $113,062,823 and
$113,147,000, respectively, at December 31, 1996. The Company estimated the
fair value of nonrecourse debt using the Company's funding rates at December 31,
1997 and 1996.
The carrying values of cash and cash equivalents, restricted cash, receivables,
lines of credit and accounts payable, approximate fair values at December 31,
1997 and 1996 due to the relatively short maturities of these instruments.
The estimated recourse obligations at December 31, 1997 was $2,122,985. The
Company believes this approximates the fair value of this obligation at December
31, 1997.
The Company believes the carrying value of Net investments in direct finance
leases and discounted lease rentals assigned to lenders are a reasonable
estimate of their fair value at December 31, 1997 and 1996.
F-16
<PAGE>
13. NET INCOME PER SHARE
A reconciliation of the numerators and denominators used in basic and diluted
net income per share are as follows for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Net income $2,120,175 $2,317,580 $2,092,071
Preferred stock dividends (125,521) (108,360) (24,740)
-------------- -------------- --------------
Net income available to common shareholders $1,994,654 $2,209,220 $2,067,331
============== ============== ==============
Weighted average number of common shares
Basic 4,105,772 4,102,780 3,218,911
Effect of dilutive securities - stock options 334,740 348,931 285,538
-------------- -------------- --------------
Diluted 4,440,512 4,451,711 3,504,449
Net income per share:
Basic $ 0.49 $ 0.54 $ 0.64
Effect of dilutive securities - stock options (0.01) (0.02) (0.04)
-------------- -------------- --------------
Diluted $ 0.48 $ 0.52 $ 0.60
</TABLE>
14. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
------------ ------------ ------------ -------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. Year-end
March 31 June 30 Sept. 30 Dec. 31 Dec. 31
------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
FISCAL YEAR 1997
Total revenue $ 4,596,001 $ 4,514,396 $ 5,401,865 $ 4,595,870 $ 19,108,132
Gross profit 3,975,027 3,990,103 4,979,094 4,132,029 17,076,255
Income before taxes 1,400,194 1,068,459 1,396,735 (402,215) 3,463,175
Net income 840,194 640,998 884,131 (245,150) 2,120,175
Basic net income per share 0.20 0.15 0.21 (0.07) 0.49
Diluted net income per share 0.19 0.15 0.20 (0.07) 0.48
FISCAL YEAR 1996
Total revenue $22,566,747 $24,100,580 $30,341,619 $27,530,356 $104,539,302
Gross profit 4,352,433 4,465,152 5,597,022 4,744,237 19,158,844
Income before taxes 1,098,014 1,256,997 1,253,649 253,920 3,862,580
Net income 658,764 754,243 752,189 152,384 2,317,580
Basic net income per share 0.15 0.18 0.18 0.03 0.54
Diluted net income per share 0.15 0.17 0.17 0.03 0.52
</TABLE>
F-17
<PAGE>
ROCKFORD INDUSTRIES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
Classification of Year Expenses Recoveries Written Off End of Year
- --------------------------------------------------- ---------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997 -
Allowance for doubtful accounts $1,600,000 $2,821,451 - $2,366,451 $2,055,000
========== ========== ========== ========== ===========
Year ended December 31, 1996 -
Allowance for doubtful accounts $ 600,000 $2,242,292 $1,242,292 $1,600,000
========== ========== ========== ========== ===========
Year ended December 31, 1995 -
Allowance for doubtful accounts $ 400,000 $ 738,540 $ 538,540 $ 600,000
========== ========== ========== ========== ===========
</TABLE>
F-18
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Rockford Industries, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Rockford
Industries, Inc. and its subsidiaries (the "Company") as of December 31, 1997
and 1996, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. Our audits also included the financial statement schedule listed in
the Index at Item 14(a)(2). These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Rockford Industries, Inc. and its
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 26, 1998
F-19
<PAGE>
APPENDIX E
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-26324
----------------
ROCKFORD INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
<TABLE>
<S> <C>
CALIFORNIA 33-0075112
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
1851 E. FIRST ST.
SANTA ANA, CA 92705
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(714) 547-7166
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
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 [_]
The number of shares outstanding of the registrant's no par value Common
Stock at November 3, 1998 was 4,108,785
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ROCKFORD INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets--September 30, 1998 (unaudited) and
December 31, 1997.................................................... E-1
Consolidated Statements of Income--Three months and Nine months ended
September 30, 1998 and 1997 (unaudited).............................. E-2
Consolidated Statements of Cash Flows--Nine months ended September 30,
1998 and 1997 (unaudited)............................................ E-3
Notes to Consolidated Financial Statements............................ E-4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................. E-5
PART II. OTHER INFORMATION.............................................. E-9
SIGNATURES.............................. ............................... E-10
</TABLE>
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
(IN THOUSANDS EXCEPT
NUMBER OF SHARES AND PER
SHARE DATA)
ASSETS
------
<S> <C> <C>
Cash and cash equivalents........................... $ 3,188 $ 1,077
Restricted cash and cash equivalents................ 20,254 15,590
Accounts receivable (net of allowance for doubtful
accounts of $123 at September 30, 1998 and $610 at
December 31, 1997)................................. 22,693 14,532
Prepaid expenses.................................... 2,029 1,767
Income taxes receivable............................. 2,606 2,606
Net investment in direct finance leases (net of
lease receivable and residual valuation allowance
of $1,442 at September 30, 1998 and $1,445 at
December 31, 1997)................................. 22,449 24,346
Net fixed assets.................................... 3,480 3,264
Discounted lease rentals assigned to lenders........ 40,135 61,885
-------- --------
$116,834 $125,067
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Lines of credit..................................... $ 12,035 $ 15,862
Accounts payable.................................... 22,599 8,566
Accrued expenses and other liabilities.............. 4,019 1,888
Estimated recourse obligations...................... 5,291 2,123
Deferred income taxes............................... 5,720 5,720
Nonrecourse debt.................................... 43,691 69,017
-------- --------
Total liabilities................................. 93,355 103,176
-------- --------
Commitments and contingencies
Stockholders' equity:
Series A redeemable preferred stock............... 1,575 1,575
Common stock no par value; 10,000,000 shares au-
thorized; 4,108,785 and 4,107,117 shares out-
standing......................................... 14,057 14,045
Retained earnings................................. 7,847 6,271
-------- --------
Total stockholders' equity...................... 23,479 21,891
-------- --------
$116,834 $125,067
======== ========
</TABLE>
See notes to financial statements
E-1
<PAGE>
ROCKFORD INDUSTRIES INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
(IN THOUSANDS EXCEPT SHARES OUTSTANDING
AND PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Gain on sale of financing transac-
tions.............................. $ 3,707 $ 3,247 $ 9,654 $ 7,803
Finance income...................... 879 920 2,782 3,047
Servicing related revenue........... 486 747 1,437 2,439
Other income........................ 843 488 1,899 1,223
--------- --------- --------- ---------
Total revenues.................... 5,915 5,402 15,772 14,512
--------- --------- --------- ---------
COSTS:
Operating expenses.................. 3,988 2,661 10,793 7,207
Provision for losses................ 461 921 942 1,872
Interest expense.................... 295 423 1,281 1,568
--------- --------- --------- ---------
Total costs....................... 4,744 4,005 13,016 10,647
--------- --------- --------- ---------
Income before income taxes............ 1,171 1,397 2,756 3,865
Income taxes.......................... 457 513 1,077 1,500
--------- --------- --------- ---------
Net income............................ $ 714 $ 884 $ 1,679 $ 2,365
========= ========= ========= =========
Net income applicable to Common stock-
holders.............................. $ 680 $ 849 $ 1,577 $ 2,275
========= ========= ========= =========
Net income per share:
Basic............................... 0.17 0.21 0.38 0.55
Diluted............................. 0.16 0.20 0.38 0.53
Weighted average shares outstanding:
Basic............................... 4,108,785 4,105,517 4,107,951 4,105,517
Diluted............................. 4,501,323 4,458,400 4,471,338 4,422,233
</TABLE>
See notes to financial statements
E-2
<PAGE>
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1998 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)...................................... $ 1,681 $ 2,365
Adjustments to reconcile net income to net cash pro-
vided by operating activities:
Depreciation and amortization........................ 1,464 420
Provision for losses................................. 942 (390)
Estimated recourse obligations....................... 3,168 1,868
(Gain) loss on sale of residuals..................... 35 (324)
Gain on sale of financing transactions excluding est.
recourse obligations................................ (12,822) (6,904)
Initial direct cost amortization..................... 602 941
Net amortization of deferred interest................ (3,130) (2,420)
Changes in assets and liabilities:
Restricted cash...................................... (4,240) (7,782)
Accounts receivable and prepaid expenses............. (9,102) 1,164
Income taxes receivable.............................. -- 665
Accounts payable and accrued liabilities............. 14,668 (545)
Income taxes payable................................. 1,075 --
Deferred income taxes................................ -- 1,139
--------- ---------
Net cash used in operating activities.............. (5,659) (9,803)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds sales and assignments of leases and payments
received from lessees................................. 185,545 144,090
Proceeds from sale of residuals........................ 4,767 1,265
Purchase of fixed assets............................... (802) (985)
Initial direct cost capitalization..................... (9,194) (7,450)
Equipment purchased for financing...................... (168,649) (122,213)
--------- ---------
Net cash provided by (used in) investing activi-
ties.............................................. 11,667 14,707
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit........................... 173,322 79,069
Preferred stock dividends.............................. (70) (90)
Payments on line of credit............................. (177,149) (87,123)
--------- ---------
Net cash provided by financing activities.......... (3,897) (8,144)
--------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..... 2,111 (3,240)
CASH AND CASH EQUIVALENTS, beginning of year............. 1,077 3,985
--------- ---------
CASH AND CASH EQUIVALENTS, end of period................. $ 3,188 $ 745
========= =========
SUPPLEMENTAL DISCLOSURES:
Income taxes paid...................................... $ -- $ --
========= =========
Interest paid.......................................... $ 1,281 $ 607
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES--
Estimated lessee payments made directly to nonrecourse
lending institutions.................................. $ 41,604 $ 39,405
========= =========
</TABLE>
See notes to financial statements
E-3
<PAGE>
ROCKFORD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
The accompanying consolidated financial statements, including the accounts
of Rockford Industries, Inc. and its wholly-owned subsidiaries (the
"Company"), have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. The financial
statements should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K filed with
the SEC on March 31, 1998.
In the opinion of management, the consolidated financial statements contain
all adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair statement of the balance sheets as of September 30, 1998
and December 31, 1997, the statements of income for the three month and nine
month periods ended September 30, 1998 and 1997, and the statements of cash
flows for the nine month periods ended September 30, 1998 and 1997. The
results of operations for the three month and nine month periods ended
September 30, 1998 are not necessarily indicative of the results of operations
to be expected for the entire fiscal year ending December 31, 1998.
NOTE 2--NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS No.
128"). Under SFAS No. 128, the Company is required to disclose basic earnings
per share ("EPS") and diluted EPS for all periods for which income is
presented. SFAS No. 128 requires adoption for fiscal periods ending after
December 15, 1997. The Company has adopted the provisions of SFAS No. 128
beginning with the 1997 year-end consolidated financial statements. EPS for
the three month and nine month periods ending September 30, 1997 have been
restated to conform with SFAS No. 128.
In June 1997, FASB issued SFAS No. 130. Reporting Comprehensive Income,
which is effective for annual and interim periods beginning after December 15,
1997. This statement requires all items to be recognized under accounting
standards as comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has adopted SFAS No. 130 beginning March 31, 1998. Comprehensive income for
the three month and nine month periods ending September 30, 1998 was $680,000
and $1,577,,000 respectively. Comprehensive income differs from net income by
$34,000 and $102,000 for the respective three month and nine month periods
ending September 30, 1998. This difference is attributable to preferred stock
dividends.
In June 1997, FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is effective for annual and interim
periods beginning after December 15, 1997. This statement establishes
standards for the method that public entities report information about
operating segments in annual financial statements and requires enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about product and services, geographical areas and major
customers. The adoption of this standard does not have a material effect on
the Company's financial reporting.
In June 1998, FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for annual periods
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
adoption of this standard is not expected to have a material effect on the
Company's financial condition, results of operations or cash flows.
E-4
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
FINANCE CONTRACT ORIGINATIONS AND REVENUES. Finance contract originations
increased by approximately $19.1 million or 48% to $59.0 million in the
quarter ended September 30, 1998 from $39.9 million in the quarter ended
September 30, 1997 reflecting the benefits of an expanded sales force. Total
revenues for the quarter ended September 30, 1998 were $5.9 million as
compared to $5.4 million for the quarter ended September 30, 1997. This
increase is primarily due from increased finance contract originations and
gains derived from securitizations and non recourse sales. During the quarter,
the Company sold approximately $60.7 million of finance contracts for a gain
of $3.7 million compared to $37.0 million of finance contract sales and a gain
of $2.3 million in the same quarter in 1997. The gain of $2.3 million in the
third quarter in 1997 excludes a one time gain of $898,000 attributed to the
amended securitization agreement with SunAmerica dated August 28, 1997. Gain
margins decreased to 6.1% compared to 6.3% for the same period a year ago. The
decline in gain margin is primarily a result of increasing the gain on sale
loss reserve assumption from 1.5% in 1997 to 2.5% in 1998, partially offset by
a lower cost of funds.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the third quarter of 1998 were $4.0 million as
compared to $2.7 million in the third quarter of 1997, representing an
increase of $1.3 million or 48%. This increase was primarily due to expenses
related to the Company's expanded sales and marketing group and additional
investment in the infrastructure necessary to service and support an
increasing level of finance contract originations and the increased size of
the securitized portfolio.
PROVISION FOR LOSSES. Provision for losses for the quarter ending September
30, 1998 were $461,000 as compared to $921,000 for the same period a year ago,
representing a decrease of $460,000 or 50%. The Company records provision for
losses on transactions in which the past due receivable is greater than 120
days. Provision for losses on securitized transactions sold subsequent to
January 1, 1997 are netted against finance gains per SFAS No. 125. The Company
believes its estimates of reserves at September 30, 1998 are adequate based
upon historical data and industry standards.
INTEREST EXPENSE. Interest expense decreased to $295,000 for the quarter
ending September 30, 1998 from $423,000 for the quarter ending September 30,
1997. This decrease is primarily due to principal amortization of non recourse
debt, which decreased from $70 million at September 30, 1997 to $40 million at
June 30, 1998.
NET INCOME. Income before taxes was $1,171,000 for the quarter ended
September 30, 1998 as compared to $1,397,000 for the same quarter of the prior
year. The effective income tax rate remained consistent for the comparative
periods shown. Net income was $714,000 for the quarter ended September 30,
1998 as compared to $884,000 for the same quarter of the prior year,
representing a decrease of $170,000 or 19%. Basic net income of $.17 per share
on weighted average shares outstanding of 4,109,000 was earned during the
third quarter of 1998, as compared to basic net income of $.21 per share on
weighted average shares outstanding of 4,106,000 for the third quarter of
1997. Diluted net income of $.16 per share on weighted average shares
outstanding of 4,501,000 was earned for the third quarter of 1998, as compared
to diluted net income of $.20 per share on weighted average shares outstanding
of 4,458,000 for the third quarter of 1997.
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
FINANCE CONTRACT ORIGINATIONS AND REVENUES. Finance contract originations
increased by approximately $45.6 million or 37% to $167.8 million for the nine
months ended September 30, 1998 from $122.2 million for the nine months ended
September 30, 1997, reflecting the benefits of an expanded sales force. Total
revenues for the nine months ended September 30, 1998 were $15.8 million as
compared to $14.6 million for the nine months ended September 30, 1997. This
increase is primarily due from increased finance contract originations and
gains
E-5
<PAGE>
derived from securitizations and non recourse sales. During the nine month
period, the Company sold approximately $159.7 million of finance contracts for
a gain of $9.7 million compared to $113.9 million of finance contract sales
and a gain of $6.9 million for the same period in 1997. 1997 gain excludes a
one time gain of $898,000 attributed to the amended securitization agreement
with SunAmerica dated August 28, 1997. Gain margins decreased to 6.0% compared
to 6.1% for the same period a year ago due to increasing gain on sale loss
reserve assumption from 1.5% in 1997 to 2.5% in 1998, partially offset by a
lower cost of funds.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 1998 were
$10.8 million as compared to $7.2 million for the same period a year ago,
representing a increase of $3.6 million or 50%. This increase was primarily
due to expenses related to the Company's expanded sales and marketing group
and additional investment in the infrastructure necessary to service and
support an increasing level of finance contract originations and the increased
size of the securitized portfolio.
PROVISION FOR LOSSES. Provision for losses for the nine months ending
September 30, 1998 were $942,000 as compared to $1,872,000 for the same period
a year ago, representing a decrease of $930,000 or 50%. The Company records
provision for losses on transactions in which the past due receivable is
greater than 120 days. Provision for losses on securitized transactions sold
subsequent to January 1, 1997 are netted against finance gains per SFAS No.
125. The Company believes it estimates of reserves at September 30, 1998 are
adequate based upon historical data and industry standards.
INTEREST EXPENSE. Interest expense decreased to $1,281,000 for the nine
months ending September 30, 1998 from $1,568,000 for the nine months ending
September 30, 1997. This decrease is primarily due to principal amortization
of non recourse debt.
NET INCOME. Income before taxes was $2,756,000 for the nine months ended
September 30, 1998 as compared to $3,865,000 for the same period of the prior
year. The effective income tax rate remained consistent for the comparative
periods shown. Net income was $1,679,000 for the nine months ended September
30, 1998 as compared to $2,365,000 for the same period of the prior year,
representing a decrease of $686,000 or 29%. Basic net income of $.38 per share
on weighted average shares outstanding of 4,108,000 was earned during the nine
months ending September 30, 1998, as compared to basic net income of $.55 per
share on weighted average shares outstanding of 4,106,000 for the nine months
ending September 30, 1997. Diluted net income of $.38 per share on weighted
average shares outstanding of 4,471,000 was earned for the nine months ending
September 30, 1998, as compared to diluted net income of $.53 per share on
weighted average shares outstanding of 4,422,000 for the same period of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Because equipment financing is a capital intensive business, the Company
requires continual access to substantial short and long-term credit to
generate its new equipment financings and sales. The principal sources of
funding for the Company's equipment finance contracts are (i) funding obtained
from sales of asset-backed securities (backed by pools of the Company's
equipment finance contracts) to SunAmerica Life Insurance Company
("SunAmerica") and First Union N.A., pursuant to the terms of each
securitization arrangement, (ii) nonrecourse borrowings from institutional
lenders, and (iii) standard recourse borrowings under its revolving line of
credit ("Revolver") which was increased from $17 million to $20 million in
April 1998, used by the Company from time to time to temporarily fund a
portion of its equipment finance contracts, pending more permanent funding
arrangements for such contracts, and (iv) $7 million working capital line of
credit. The Company has $142 million available in its securitization
facilities for future sales of asset backed securities, as well as $15.0
million available credit related to the Revolver and working capital line of
credit as of September 30, 1998.
CASHFLOWS. The Company's cash and cash equivalents at September 30, 1998 was
$3.1 million compared to $1.1 million at September 30, 1997. During the nine
months ended September 30, 1998, the Company's cash
E-6
<PAGE>
position increased by $2.1 million, reflecting the use of cash in operations
and financing activities of $5.7 million and $3.9 million, respectively and
the cash provided by investing activities of $11.7 million. The most
significant aspects of the change during this period was from cash invested in
equipment for financing of $168.6 million, increases in receivables and
prepaids of $9.1 million, increases in accounts payable and accrued
liabilities of $14.7 million and proceeds from sales and assignments of leases
and payments received from lessees of $185.5 million. This was largely due to
the higher level of the Company's finance contract originations. In
comparison, the Company's cash position decreased by $3.2 million during the
nine months ended September 30, 1997, reflecting the use of cash in operations
and financing activities of $9.8 million and $8.1 million, respectively, and
the cash provided by financing activities of $14.7 million. The change in cash
was primarily due to cash used to purchase equipment for financing of $122.2
million, increase in restricted cash of $7.8 million and proceeds from sales
and assignments of leases and payments from lessees of $144.0 million.
The Company believes that existing cash balances, cash flows from
activities, proceeds from securitization arrangements, nonrecourse
assignments, and bank credit lines will be sufficient to meet its financing
needs for the next twelve months.
IMPACT OF INFLATION
The Company funds a majority of its equipment finance contracts with fixed
rate loans in order to maintain a spread between the interest rates charged to
the Company and those implicit in the financing the Company provides. Due to
this timely matching of finance contract yields with funding rates, the
Company generally has mitigated the effects of rising interest rates during
inflationary periods. General inflation in the economy has driven upward the
operating expenses of many businesses, and accordingly, the Company has
increased salaries and borne higher prices for most other goods and services.
The Company continuously seeks methods of reducing costs and streamlining
operations while maximizing efficiencies and internal operating controls
through development of cost reducing funding mechanisms, such as the
securitization program, and through systems automation and enhancement. While
the Company is subject to inflation as described above, the Company believes
that inflation does not have a material effect on its operating results.
YEAR 2000 COMPLIANCE
The Company recognizes the uncertainty regarding the effect of the year 2000
problem as it relates to computer systems properly identifying and
distinguishing the year 2000 from the year 1900. The Company's major
operating, financial and telecommunication systems are licensed or purchased
from well known vendors in the information technology market. The Company has
determined, through discussions and documentation provided by its vendors,
that the majority of its software and hardware systems are year 2000
compliant. In specific cases the Company is working with its vendors to
install system upgrades which would be year 2000 compliant. The Company plans
to be fully compliant by December 31, 1999.
The cost of becoming year 2000 compliant has been minimal and future cost of
compliance are not expected to have a material adverse effect on the future
results of operations for the Company.
The Company is aware a system failure may adversely effect revenues in the
short term, however the Company does not believe this will have a material
effect on the Company's results of operations, liquidity, and financial
position. The Company is developing a contingency plan which will help insure
a continuity of operations which should be completed in the first quarter of
1999.
Although the Company believes it will be year 2000 compliant by December 31,
1999, the company can not measure the impact of the year 2000 problem as it
relates to vendors, suppliers, and other parties with which the Company
conducts business, some of which may have an adverse impact on future results
of operations.
E-7
<PAGE>
SAFE HARBOR STATEMENT
Statements which are not historical facts, including statements about the
Company's confidence and strategies and its expectations regarding reductions
in cost of funds, plans to increase market share, plans to enter new markets,
and the impact of SFAS No. 125 are forward looking statements that involve
risks and uncertainties. These include but are not limited to (i) reducing
borrowing costs by expanding the Company's asset-backed securitization funding
program; (ii) increasing origination of equipment finance contracts by
maintaining and expanding strategic relationships with vendors of medical and
medical-related equipment; (iii) increasing business with high volume vendors;
(iv) increasing its financing of non-medical equipment; (v) expanding into new
market niches and the international market; (vi) reducing indirect costs
associated with the Company's financings; (vii) minimizing delinquencies
relating to contracts retained and serviced by the Company, as well as
contracts held by the Company's lenders; (viii) the Company's ability to
realize the residual equipment value reflected on its balance sheet; (ix)
maintaining a diverse base of customers to which the Company provides
equipment financing; (x) successfully enlarging the Company's sales force and
the Company's geographic penetration of the medical equipment market; and (xi)
the size and growth rate of the medical equipment leasing industry. The
historical results achieved are not necessarily indicative of future prospects
of the Company.
The forward-looking statements included herein are based upon current
expectations that involve a number of risks and uncertainties. These forward-
looking statements are based upon assumptions that the Company will continue
to finance equipment on a regular and predictable basis, that competitive
conditions within the equipment financing market will not change materially or
adversely, that the equipment financing market will continue to experience
steady growth, that demand for the Company's financing will remain strong,
that the Company will retain existing sales representatives and key management
personnel, that the Company's will accurately anticipate market demand that
planned financing arrangements will be completed satisfactorily and that there
will be no material adverse change in the Company's operations or business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although
the Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in the
forward looking statements will be realized. In addition, as disclosed above,
the business and operations of the Company are subject to substantial risks
which increase the uncertainty inherent in such forward-looking statements.
Any of the other factors disclosed above could cause the Company's net income
or growth in net income to differ materially from prior results.
E-8
<PAGE>
PART II--OTHER INFORMATION
ITEM 1--LEGAL PROCEEDINGS--NOT APPLICABLE
ITEM 2--CHANGES IN SECURITIES--NOT APPLICABLE
ITEM 3--DEFAULTS UPON SENIOR SECURITIES--NOT APPLICABLE
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5--OTHER INFORMATION
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<C> <S>
10.36 Employment Agreement, dated as of January 1, 1998 between the
Registrant and Gerry Ricco.
10.37 Employment Agreement, dated as of January 1, 1998 between the
Registrant and Brian Seigel.
10.38 Employment Agreement, dated as of January 1, 1998 between the
Registrant and Larry Hartmann.
10.39 Amended, Restated and Consolidated Pooling and Servicing Agreement
dated August 28, 1997, by and among Rockford Limited I, the
registrant, Texas Commerce Bank National Association and Sun
America Life Insurance Company.
10.40 Amended, Restated and Consolidated Equipment and Lease Purchase
Agreement dated August 28, 1997, by and between Rockford Limited I,
and the registrant.
10.41 Purchase Agreement dated August 28, 1997, by and among Rockford
Limited I, the registrant, Texas Commerce Bank National Association
and Sun America Life Insurance Company.
10.42 First Amendment to Amended, Restated and Consolidated Pooling and
Servicing Agreement dated April 8, 1998, by and among Rockford
Limited I, the registrant, Chase Bank of Texas, N.A., f/k/a Texas
Commerce Bank National Association and Sun America Life Insurance
Company.
10.43 First Amendment to Amended, Restated and Consolidated Equipment and
Lease Purchase Agreement dated April 8, 1998 by and between
Rockford Limited I, and the registrant.
10.44 First Amendment to Purchase Agreement dated April 8, 1998, by and
among Rockford Limited I, the registrant, Chase Bank of Texas,
N.A., f/k/a Texas Commerce Bank National Association and Sun
America Life Insurance Company.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K;
No reports were filed on form 8-K during the quarter for which this
report is filed.
E-9
<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.
Rockford Industries, Inc.
(Registrant)
Date: November 13, 1998 /s/ Gerry J. Ricco
________________________________________
Gerry J. Ricco
President, Chief Executive Officer and
Director
(Principal Executive Officer)
Date: November 13, 1998 /s/ Kevin McDonnell
________________________________________
Kevin McDonnell
Executive Vice President and Chief
Financial Officer
(Principal Financial and
Accounting Officer)
E-10
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article VI of the Company's Bylaws, as amended, provides as follows:
"Section 6.1--The corporation shall, to the fullest extent permitted by
applicable law as the same exists or may hereafter be in effect, indemnify any
person who is or was or has agreed to become a director or officer of the
corporation and who is or was made or threatened to be made a party to, and
may, in its discretion, indemnify, any person who is or was or has agreed to
become a director or officer and is otherwise involved in, any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative, legislative or investigative, including an action by or in the
right of the corporation to procure a judgment in its favor and an action by
or in the right of any other corporation of any type of kind, domestic or
foreign, or any partnership, joint venture, trust, employee benefit plan or
other enterprise, which such person is serving or has served or has agreed to
serve in any capacity at the request of the corporation, by reason of the fact
that he is or was or has agreed to become a director or officer of the
corporation, or is or was serving or has agreed to serve such other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise in any capacity, against judgments, fines, amounts paid or to be
paid in settlement, penalties, costs, charges and expenses, including
attorneys' fees, incurred in connection with such action or proceeding or any
appeal thereof; provided, however, that no indemnification shall be provided
to any such person if a judgment or other final adjudication adverse to the
director or officer establishes that (i) his acts were committed in bad faith
or were the result of active and deliberate dishonesty and, in either case,
were material to the cause of action so adjudicated, or (ii) he personally
gained in fact a financial profit or other advantage to which he was not
legally entitled. The benefits of this Section 6.1 shall extend to the heirs,
executors, administrators and legal representatives of any person entitled to
indemnification under this Section.
Section 6.2--The Board in its discretion may authorize the corporation to
indemnify any person, other than a director or officer, for expenses incurred
or other amounts paid in any civil or criminal action, suit or proceeding, to
which such person was, or was threatened to be made a party by reason of the
fact that he, his testator or intestate is or was an employee of the
corporation.
Section 6.3--The corporation may indemnify any person to whom the
corporation is permitted by applicable law or these by-laws to provide
indemnification or the advancement of expenses, whether pursuant to rights
granted pursuant to, or provided by, the New York Business Corporation Law or
any other law or these by-laws or other rights created by (i) a resolution of
shareholders, (ii) a resolution of directors, or (iii) an agreement providing
for such indemnification, it being expressly intended that these by-laws
authorize the creation of other rights in any such manner. The right to be
indemnified and to the reimbursement or advancement of expenses incurred in
defending a proceeding in advance of its final disposition authorized by the
Section 6.3, shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, provision of the certificate of
incorporation, by-laws, agreement, vote of shareholders or disinterested
directors or otherwise.
Section 6.4--The right to indemnification conferred by Section 6.1, and any
indemnification extended under Section 6.3, (i) is a contract right pursuant
to which the person entitled thereto may bring suit as if the provisions
thereof were set forth in a separate written contract between the corporation
and such person, (ii) is intended to be retroactive to events occurring prior
to the adoption of this Article VI, to the fullest extent permitted by
applicable law, and (iii) shall continue to exist after the rescission or
restrictive modification thereof with respect to events occurring prior
thereto."
With certain limitations, a director or officer of a corporation organized
under the New York Business Corporation Law is entitled to indemnification by
the corporation against reasonable expenses, including attorneys fees,
incurred by him in connection with the defense of a civil or criminal
proceeding to which he has been made, or has threatened to be made, a party by
reason of the fact that he was such director or officer. In
II-1
<PAGE>
certain circumstances, indemnity is provided against judgments, fines and
amounts paid in settlement. Specific court approval is required in some cases.
The foregoing is subject to the detailed provisions of the New York Business
Corporation Law.
In addition, the Company has purchased insurance policies which provide
coverage for its directors and officers in certain situations where the
Company cannot directly indemnify such directors or officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
a. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2.1 Merger Agreement dated as of November 9, 1998, by and among Registrant, RXP
Acquisition Corporation and Rockford Industries, Inc. (included as Annex A to
the Proxy Statement/Prospectus which forms a part of this Registration
Statement).
2.2 Shareholders' Option Agreement dated as of November 9, 1998 by and among
Registrant, Gerry J. Ricco, Larry Hartman and Brian Seigel (incorporated by
reference to Exhibit 2 of the Registrant's Notification by a Five Percent Owner
on Schedule 13D dated November 18, 1998).
2.3 Voting and Conversion Agreement dated as of November 9, 1998 by and among
Registrant, Anchor National Life Insurance Company and Rockford Industries, Inc.
(incorporated by reference to Exhibit 3 of the Registrant's Notification by a
Five Percent Owner on Schedule 13D dated November 18, 1998).
3.1 Registrant's Restated Certificate of Incorporation, dated May 29, 1997, as
amended to date (incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement on Form S-3 (File No. 333-325251), filed with the
Commission on July 31, 1997).
3.2 Registrant's By-laws, as amended to date (incorporated by reference to Exhibit
3.2 of the Registrant's Annual Report on Form 10-K (Commission File No. 1-7657)
for the year ended December 31, 1997).
*5.1 Opinion of Louise M. Parent, General Counsel of Registrant, regarding the
validity of the securities being registered.
*8.1 Opinion of King & Spalding regarding certain tax matters.
*23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Deloitte & Touche LLP.
*23.3 Consent of Louise M. Parent (included as part of the opinion in Exhibit 5.1).
*23.4 Consent of King & Spalding (included as part of the opinion in Exhibit 8.1).
*23.5 Consent of Piper Jaffray Co.
*24.1 Power of Attorney of the officers and directors of Registrant signing this
Registration Statement.
*99.1 Form of Proxy Card.
99.2 Opinion of Piper Jaffray (included as Annex B to the Proxy Statement/Prospectus
which forms a part of this Registration Statement).
</TABLE>
- --------
* Filed herewith
b. Financial Statement Schedules.
None.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
II-2
<PAGE>
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved therein, that was not the subject of and included in
the registration statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on December 31, 1998.
American Express Company
Stephen P. Norman
By: _________________________________
Stephen P. Norman
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated below on December 31, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Harvey Golub Chairman of the Board and Chief
____________________________________ Executive Officer and Director
Harvey Golub
* Kenneth I. Chenault President, Chief Operating Officer and
____________________________________ Director
Kenneth I. Chenault
* Richard K. Goeltz Vice Chairman and Chief Financial
____________________________________ Officer
Richard K. Goeltz
* Daniel T. Henry Senior Vice President and Comptroller
____________________________________
Daniel T. Henry
* Daniel F. Akerson Director
____________________________________
Daniel F. Akerson
* Anne L. Armstrong Director
____________________________________
Anne L. Armstrong
* Edwin L. Artzt Director
____________________________________
Edwin L. Artzt
* William G. Bowen Director
____________________________________
William G. Bowen
* Charles W. Duncan, Jr. Director
____________________________________
Charles W. Duncan, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
* Beverly Sills Greenough Director
____________________________________
Beverly Sills Greenough
* F. Ross Johnson Director
____________________________________
F. Ross Johnson
Director
____________________________________
Vernon E. Jordan, Jr.
* Jan Leschly Director
____________________________________
Jan Leschly
* Drew Lewis Director
____________________________________
Drew Lewis
* Richard A. McGinn Director
____________________________________
Richard A. McGinn
* Frank P. Popoff Director
____________________________________
Frank P. Popoff
</TABLE>
/s/ Stephen P. Norman
*By: __________________________
Stephen P. Norman
Attorney-in-fact
II-5
<PAGE>
Exhibit 5.1
December 29, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: American Express Company -- Registration Statement on Form S-4
--------------------------------------------------------------
Ladies and Gentlemen:
I am Executive Vice President and General Counsel of, and have represented,
American Express Company, a New York corporation (the "Company"), in connection
with the preparation and filing of a Registration Statement on Form S-4 (File
No. 333-______) (the "Registration Statement") filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, relating to
the merger (the "Merger") of RXP Acquisition Corporation, a Delaware corporation
("Sub"), with and into Rockford Industries, Inc., a California corporation
("Rockford"), as set forth in the Proxy Statement/Prospectus contained in the
Registration Statement and in accordance with Agreement and Plan of Merger (the
"Merger Agreement"), dated as of November 9, 1998, among the Company, Sub and
Rockford attached as Annex A to the Proxy Statement/Prospectus.
In my capacity as such counsel, I or members of my staff have reviewed (i)
the Registration Statement and (ii) the Merger Agreement. I or members of my
staff have reviewed such matters of law and fact and examined original,
certified, conformed or photostatic copies of such documents, records,
agreements and certificates including, without limitation, resolutions of the
Board of Directors of the Company as in my judgment are necessary or appropriate
to form the basis for the opinions hereinafter set forth.
This opinion is limited in all respects to the Business Corporation Law of
the State of New York, and no opinion is expressed with respect to the laws of
any other jurisdiction or any effect which such laws may have on the opinions
expressed herein. This opinion is limited to the matters stated herein, and no
opinion is implied or may be inferred beyond the matters expressly stated
herein.
Based upon and subject to the foregoing, I am of the opinion that the
Common Shares, $.60 par value per share, of the Company to be issued in
connection with the Merger have been duly
<PAGE>
authorized and, when issued in accordance with the terms of the Merger
Agreement, will be validly issued, fully paid and nonassessable.
This opinion is given as of the date hereof, and I assume no obligation to
advise you after the date hereof of facts or circumstances that come to my
attention or changes in law that occur which could affect the opinions contained
herein.
I hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to my name under the caption "Legal
Matters" in the Proxy Statement/Prospectus that is included in the Registration
Statement.
Sincerely,
LOUISE M. PARENT
--------------------------------------
Louise M. Parent
Executive Vice President
and General Counsel
<PAGE>
EXHIBIT 8.1
December 31, 1998
American Express Company
200 Vesey Street, 49th Floor
New York, NY 10285
Rockford Industries, Inc.
1851 East First Street, Suite 600
Santa Ana, California 92705
Re: Federal Income Tax Consequences of Merger of RXP Acquisition
Corporation, a Wholly Owned Subsidiary of American Express Company,
with and into Rockford Industries, Inc.
Ladies and Gentlemen:
We have acted as counsel to American Express Company ("American Express")
in connection with the merger (the "Merger") of RXP Acquisition Corporation
("Subsidiary"), with and into Rockford Industries, Inc. ("Rockford"), pursuant
to the Plan and Agreement of Merger dated as of November 9, 1998 (the
"Agreement") by and among American Express, Subsidiary, and Rockford. As
requested by American Express, we are hereby providing our opinion regarding
certain of the federal income tax consequences of the Merger.
We understand that our opinion will be filed as an exhibit to the
Registration Statement on Form S-4 to be filed with the Securities and Exchange
Commission in connection with the Merger (the "Registration Statement"). We
hereby consent to such use of our opinion.
Unless specified, capitalized terms used herein shall have the meanings
assigned to them in the Proxy Statement-Prospectus included in the Registration
Statement. All references herein to the Code are to the United States Internal
Revenue Code of 1986, as amended.
INFORMATION RELIED ON
---------------------
In rendering the opinion expressed herein, we have examined such documents
as we have deemed appropriate, including the Agreement and the Proxy Statement-
Prospectus.
<PAGE>
American Express Company
Rockford Industries, Inc.
December 31, 1998
Page 2
In our examination of documents, we have assumed, with your consent, that all
documents submitted to us as photocopies or telecopies faithfully reproduce the
originals thereof, that such originals are authentic, that all such documents
have been or will be duly executed to the extent required, and that all
statements set forth in such documents are accurate. We also have assumed, with
your consent, that the Merger will be consummated in compliance with the
material terms of the Agreement.
We also have obtained such additional information and representations as we
have deemed relevant and necessary through consultation with various
representatives of American Express, Subsidiary and Rockford. Prior to the
Effective Time, we expect to receive certificates from officers of American
Express, Subsidiary and Rockford (the "Certificates") verifying certain relevant
facts that have been represented to us or that we have assumed in rendering this
opinion. We have assumed, with your consent, that the statements contained in
the Certificates are true and correct on the date hereof and will be true and
correct at the Effective Time, and that any representation made in any of the
documents referred to herein "to the best of the knowledge and belief" (or with
similar qualification) of any person is true and correct without such
qualification. We have not attempted independently to verify such
representations.
Based upon the aforementioned consultations and Certificates, we have
assumed that the following statements are true on the date hereof and will be
true at the time of the Merger:
1. The Merger will be consummated in compliance with the material
terms of the Agreement and none of the material terms and conditions therein
have been waived or modified and neither American Express nor Rockford has any
plan or intention to waive or modify any such material term or condition.
2. The fair market value of the American Express Common Stock and
other consideration received by each Rockford stockholder will be approximately
equal to the fair market value of the Rockford Common Stock surrendered in the
Merger.
3. Prior to the Effective Time, neither American Express nor any
person related (as defined below) to American Express has acquired, or will
acquire, any shares of Rockford stock for consideration other than American
Express Common Stock in connection with
<PAGE>
American Express Company
Rockford Industries, Inc.
December 31, 1998
Page 3
or in contemplation of the Merger. Neither American Express nor any person
related to American Express has any plan or intention to acquire, in connection
with the Merger, any shares of American Express Common Stock issued in the
Merger or otherwise outstanding following the Merger. For purposes of the
foregoing assumptions, a person is related to American Express if it is so
related within the meaning of Treasury Regulation (S) 1.368-1(e)(3). In general,
under such regulation, a person is deemed to be related to American Express if
it is (i) a member of its affiliated group within the meaning of Section 1504 or
(ii) a corporation as to which American Express owns, actually or constructively
(under the constructive ownership rules of Section 318, as modified by Section
304(c)(3)(B)), 50% or more of the total voting power or total value of all
shares of all classes of stock of such corporation. Further, a person will be
deemed related to American Express within the meaning of such regulation if such
relationship exists either immediately before or immediately after such
acquisition or arises in connection with the Merger. In applying such
regulation, a person that is a partner in a partnership will be deemed to own or
have acquired any stock that such partnership acquired in accordance with that
partner's interest in the partnership.
4. Neither Rockford nor any person related (as defined below) to
Rockford has acquired, or will acquire, any shares of Rockford stock from the
Rockford stockholders in connection with or in contemplation of the Merger. A
person is deemed to be related to Rockford for purposes of this assumption if it
is so related within the meaning of Temporary Treasury Regulation (S) 1.368-
1T(e)(2)(ii). In general, under such regulation, a person is deemed to be
related to Rockford if it is a corporation as to which Rockford owns, actually
or constructively (under the constructive ownership rules of Section 318, as
modified by Section 304(c)(3)(B)), 50% or more of the total voting power or
total value of shares of all classes of stock of such corporation. Further, a
person will be deemed related to Rockford within the meaning of such regulation
if such relationship exists either immediately before or immediately after such
acquisition. In applying such regulation, a person that is a partner in a
partnership will be deemed to own or have acquired any stock that such
partnership acquired in accordance with that partner's interest in the
partnership.
5. Following the Merger, Rockford will hold at least 90 percent of
the fair market value of its net assets and at least 70 percent of the fair
market value of its gross assets and at least 90 percent of the fair market
value of Subsidiary's net assets and at least 70 percent of the fair market
value of Subsidiary's gross assets held immediately prior to the Merger. For
purposes of this representation, amounts paid by Rockford or Subsidiary to
dissenters, amounts paid by Rockford or Subsidiary to stockholders who receive
cash or other property, amounts
<PAGE>
American Express Company
Rockford Industries, Inc.
December 31, 1998
Page 4
used by Rockford or Subsidiary to pay reorganization expenses, and all
redemptions and distributions (except for regular, normal dividends) made by
Rockford or Subsidiary will be included as assets of Rockford or Subsidiary,
respectively, held immediately prior to the Merger.
6. Prior to the Merger, American Express will directly own all of
the outstanding shares of stock of Subsidiary.
7. Rockford has no plan or intention to issue additional shares of
its stock that would result in American Express acquiring or owning after the
Merger less than 80 percent of the total combined voting power of all classes of
Rockford stock entitled to vote and at least 80 percent of the total number of
shares of all other classes of Rockford stock.
8. American Express has no plan or intention to cause Rockford to
issue additional shares of Rockford stock that would result in American Express
(or a wholly owned subsidiary of American Express) owning after the Merger less
than 80 percent of the total combined voting power of all classes of Rockford
stock entitled to vote and at least 80 percent of the total number of shares of
all other classes of Rockford stock.
9. American Express has no plan or intention to liquidate Rockford;
to merge Rockford with or into another corporation; to sell or otherwise dispose
of any of the Rockford Common Stock except for a transfer to a corporation all
of the stock of which is owned by American Express; or to cause Rockford to sell
or otherwise dispose of any of its assets or any of the assets acquired from
Subsidiary, except for dispositions made in the ordinary course of business or
transfers that do not violate the continuity of business enterprise requirement
of Treasury Regulation Section 1.368-1(d) in connection with the Merger.
10. Subsidiary will have no liabilities at the time of the Merger,
and will not transfer to Rockford any assets subject to liabilities in the
transaction.
11. Following the Merger, Rockford will continue its historic
business or use a significant portion of its historic business assets in a
business, within the meaning of Treasury Regulation Section 1.368-1(d).
12. American Express, Subsidiary, Rockford, and the stockholders of
Rockford will pay their respective expenses, if any, incurred in connection with
the Merger.
13. There is no intercorporate indebtedness existing between American
Express and Rockford or between Subsidiary and Rockford that was or will be
issued, acquired, or settled at a discount.
14. In the Merger, American Express will acquire shares of Rockford
Common Stock representing at least 80 percent of the total combined voting power
of all classes of Rockford stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of Rockford stock, solely in
exchange for voting stock of American Express. For
<PAGE>
American Express Company
Rockford Industries, Inc.
December 31, 1998
Page 5
purposes of this representation, shares of Rockford Common Stock exchanged for
cash or other property originating with American Express will be treated as
outstanding Rockford Common Stock on the date of the Merger.
15. At the time of the Merger, Rockford will not have outstanding any
warrants, options, convertible securities, or any other type of right pursuant
to which any person could acquire stock in Rockford that, if exercised or
converted, would affect American Express's acquisition or retention of Rockford
Common Stock representing at least 80 percent of the total combined voting power
of all classes of Rockford stock entitled to vote and at least 80 percent of the
total number of shares of all other classes of Rockford stock.
16. Neither American Express nor any subsidiary of American Express
owns, directly or indirectly, nor has any such corporation owned during the past
five years, directly or indirectly, any capital stock of Rockford.
17. Neither Rockford, American Express, nor Subsidiary is a regulated
investment company, a real estate investment trust, or a corporation 50 percent
or more of the value of whose total assets (excluding cash, cash items,
receivables and U.S. government securities) are stock or securities and 80
percent or more of the value of whose total assets are assets held for
investment. For purposes of the 50 percent and 80 percent determinations under
the preceding sentence, (a) stock and securities in any subsidiary corporation
shall be disregarded, and the parent corporation shall be deemed to own its
ratable share of the subsidiary's assets; (b) a corporation shall be considered
a subsidiary corporation for purposes of this paragraph if the parent owns 50
percent or more of the combined voting power of all classes of stock entitled to
vote, or 50 percent or more of the total value of shares of all classes of stock
outstanding; and (c) in general, under proposed Treasury regulations, a partner
is treated as owning a ratable share of the fair market value of the assets of a
partnership based on its interest therein, unless such interest is a less than
50% interest as a limited partner or a less than 50% interest as a "passive"
general partner, in which event such interest will itself be treated as a
"security."
18. On the date of the Merger, the fair market value of the assets of
Rockford will exceed the sum of its liabilities, plus the amount of liabilities,
if any, to which the assets are subject.
19. Rockford is not under the jurisdiction of a court in a case under
Title 11 of the United States Code or a receivership, foreclosure, or similar
proceeding in a federal or state court.
20. None of the compensation received by any stockholder-employees of
Rockford in contemplation of or as a result of the Merger will be separate
consideration for, or
<PAGE>
American Express Company
Rockford Industries, Inc.
December 31, 1998
Page 6
allocable to, any of their shares of Rockford Common Stock; none of the shares
of American Express Common Stock received by any stockholder-employees of
Rockford in exchange for Rockford Common Stock in the Merger will be separate
consideration for, or allocable to, any employment agreement; and the
compensation paid to any stockholder-employees pursuant to the Merger will be
for services actually rendered and will be commensurate with amounts paid to
third parties bargaining at arm's length for similar services.
21. The payment of cash in lieu of fractional shares of American
Express Common Stock is solely for the purpose of avoiding the expense and
inconvenience to American Express of issuing fractional shares and does not
represent separately bargained-for consideration. The total cash consideration
that will be paid in the Merger to the Rockford stockholders instead of issuing
fractional shares of American Express Common Stock will not exceed one percent
of the total consideration that will be issued in the Merger to the Rockford
stockholders in exchange for their shares of Rockford Common Stock. The
fractional share interests of each Rockford stockholder will be aggregated and
no Rockford stockholder will receive cash in an amount equal to or greater than
the value of one full share of American Express Common Stock.
OPINION
-------
Based upon the foregoing, it is our opinion that:
(1) The Merger will constitute a "reorganization" within the meaning
of Section 368(a) of the Code;
(2) The exchange in the Merger of Rockford Common Stock for American
Express Common Stock will not give rise to gain or loss to the Rockford
stockholders;
(3) The tax basis of the American Express Common Stock received in
the Merger by a Rockford stockholder (including any fractional share interest)
will be the same as the tax basis of the Rockford Common Stock exchanged for
such American Express Common Stock;
(4) The holding period for the American Express Common Stock received
in the Merger by a Rockford stockholder will include the holding period of such
stockholder in the Rockford Common Stock exchanged for such American Express
Common Stock, provided that the Rockford Common Stock is held as a capital asset
at the Effective Time; and
(5) A Rockford stockholder who receives cash in lieu of a fractional
share of
<PAGE>
American Express Company
Rockford Industries, Inc.
December 31, 1998
Page 7
American Express Common Stock will recognize gain or loss equal to the
difference between such cash amount and the stockholder's basis in the
fractional share interest; and
(6) A Rockford stockholder who exercises his dissenters rights with
respect to his shares and who receives payment in cash for the "fair value" of
his Rockford Common Stock will be treated as having exchanged such stock in a
redemption subject to Section 302 of the Code, and the Rockford stockholder
generally will recognize capital gain or loss in such exchange equal to the
difference between the cash received and the tax basis of such stock.
The opinion expressed herein is based upon existing statutory, regulatory,
and judicial authority, any of which may be changed at any time with retroactive
effect. In addition, our opinion is based solely on the documents that we have
examined, the additional information that we have obtained, and the statements
set out herein that we have assumed to be true on the day hereof and at the
Effective Time. Our opinion cannot be relied upon if any of the material facts
contained in such documents or in any such additional information is, or later
becomes, inaccurate or if any of the material statements set out herein is, or
later becomes, inaccurate. Finally, our opinion is limited to the tax matters
specifically covered thereby, and we have not been asked to address herein, nor
have we addressed herein, any other tax consequences of the Merger.
Very truly yours,
KING & SPALDING
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement on Form S-4 and related Prospectus of American Express
Company (the "Company"), for the merger of Rockford Industries, Inc. with a
wholly owned subsidiary of American Express Company and to the incorporation by
reference therein of our report dated February 5, 1998 with respect to the
consolidated financial statements and schedules of the Company incorporated by
reference in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997, filed with the Securities and Exchange Commission.
ERNST & YOUNG LLP
New York, New York
January 4, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation in this Registration Statement of American
Express Company on Form S-4 of our report dated February 26, 1998, on the
consolidated financial statements of Rockford Industries, Inc. as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997 appearing in the Annual Report on Form 10-K of Rockford Industries,
Inc. for the year ended December 31, 1997 and in the Proxy Statement --
Prospectus which is part of this Registration Statement.
We also consent to the reference to us under the heading "Experts" in the Proxy
Statement -- Prospectus which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
January 4, 1999
<PAGE>
EXHIBIT 23.5
[LETTERHEAD OF PIPER JAFFRAY INC.]
CONSENT OF PIPER JAFFRAY INC.
We hereby consent to the inclusion in the Registration Statement of American
Express Company ("Amex") relating to the proposed merger of Rockford Industries,
Inc. with and into a wholly owned subsidiary of Amex, of our opinion letter
appearing as Appendix B to the Joint Proxy Statement/Prospectus which is a part
of the Registration Statement, and to the references of our firm name therein.
In giving such consent, we do not thereby admit that we come within the
category of person whose consent is required under Section 7 or Section 11 of
the Securities Act of 1933, as amended, or the rules and regulations adopted by
the Securities and Exchange Commission thereunder nor do we admit that we are
experts with respect to any part of such Registration Statement within the
meaning of the term "experts" as used in the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
PIPER JAFFRAY INC.
By JOYCE NELSON SCHUETTE
---------------------------
Its Managing Director
Minneapolis, Minnesota
January 4, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that we, the directors and officers of
American Express Company do hereby constitute and appoint Richard Karl Goeltz,
Stephen P. Norman and Louise M. Parent, and each of them severally, his or her
true and lawful attorney-in-fact, with power to act with or without each other
and with power of substitution and resubstitution, to do any and all acts and
things in our names and on our behalf in our capacities as directors and
officers of American Express Company and to execute any and all instruments for
us and in our names in the capacities indicated below, which said attorneys and
agents, or any of them, may deem necessary or advisable in connection with the
merger of Rockford Industries, Inc. into a subsidiary of the Company and the
issuance of common shares of the Company pursuant to such merger to enable
American Express Company to comply with the Securities Act of 1933 and any
rules, regulations and requirements of the Securities and Exchange Commission,
including without limitation the execution and filing of a Registration
Statement with respect to the registration of common shares of the Company to be
issued in connection with such merger, any and all amendments to such
Registration Statement, with exhibits thereto and all instruments necessary or
incidental in connection therewith, and to file the same with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or their substitutes, may do or cause to be done by virtue
hereof.
This Power of Attorney may be executed in counterparts.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney as
of the 23rd day of November, 1998.
AMERICAN EXPRESS COMPANY
By: RICHARD KARL GOELTZ
----------------------------------------
Richard Karl Goeltz
Vice Chairman and Chief Financial Officer
[CORPORATE SEAL]
Attest: STEPHEN P. NORMAN
----------------------
Stephen P. Norman
Secretary
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
HARVEY GOLUB CHARLES W. DUNCAN, JR.
- --------------------------------- ---------------------------------
Harvey Golub Charles W. Duncan, Jr.
Chairman, Chief Executive Director
Officer and Director
KENNETH I. CHENAULT BEVERLY SILLS GREENOUGH
- --------------------------------- ---------------------------------
Kenneth I. Chenault Beverly Sills Greenough
President, Chief Operating Director
Officer and Director
RICHARD K. GOELTZ F. ROSS JOHNSON
- --------------------------------- ---------------------------------
Richard K. Goeltz F. Ross Johnson
Vice Chairman and Director
Chief Financial Officer
DANIEL T. HENRY
- --------------------------------- ---------------------------------
Daniel T. Henry Vernon E. Jordan, Jr.
Senior Vice President and Director
Comptroller
DANIEL F. AKERSON JAN LESCHLY
- --------------------------------- ---------------------------------
Daniel F. Akerson Jan Leschly
Director Director
ANNE L. ARMSTRONG DREW LEWIS
- --------------------------------- ---------------------------------
Anne L. Armstrong Drew Lewis
Director Director
EDWIN I. ARTZT RICHARD A. MCGINN
- --------------------------------- ---------------------------------
Edwin L. Artzt Richard A. McGinn
Director Director
WILLIAM G. BOWEN FRANK P. POPOFF
- --------------------------------- ---------------------------------
William G. Bowen Frank P. Popoff
Director Director
</TABLE>
<PAGE>
EXHIBIT 99.1
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
- -----------------------------------------------------------------------------
<PAGE>
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
ROCKFORD INDUSTRIES, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY FOR SPECIAL MEETING
ON FEBRUARY 12, 1999
The undersigned, a shareholder of ROCKFORD INDUSTRIES, INC., a California
corporation (the "Company"), acknowledges receipt of a copy of the Notice of
Special Meeting of Shareholders and the accompanying Proxy Statement-
Prospectus; and, revoking any proxy previously given, hereby constitutes and
appoints Gerry J. Ricco, Brian A. Seigel and Kevin McDonnell and each of them,
his or her true and lawful agents and proxies with full power of substitution
in each, to vote the shares of Common Stock of the Company standing in the name
of the undersigned at the Special Meeting of Shareholders of the Company to be
held at the Company's headquarters located at 1851 East First Street, Suite
600, Santa Ana, California 92705, on February 12, 1999, at 10:00 a.m., local
time, and at any adjournment thereof, on all matters coming before said
Meeting.
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
- --------------------------------------------------------------------------------
<PAGE>
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
PLEASE DATE, SIGN AND MAIL YOUR
PROXY CARD BACK AS SOON AS POSSIBLE!
SPECIAL MEETING OF SHAREHOLDERS
ROCKFORD INDUSTRIES, INC.
FEBRUARY 12, 1999
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
- --------------------------------------------------------------------------------
<PAGE>
- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- --
[X] PLEASE MARK YOUR
VOTES AS IN THIS
EXAMPLE
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEM 1
1. Approve and adopt the Plan and Agreement of Merger, dated as of November 9,
1998, by and among Rockford Industries, Inc., American Express Company and
RXP Acquisition Corporation and the transactions contemplated thereby.
FOR AGAINST ABSTAIN
[_] [_] [_]
2. In their discretion upon any other matters as may properly come before the
special meeting or at any adjournment or postponement thereof.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREBY
BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSAL 1.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
_________________________ Dated __,1999 ________________________ Dated __, 1999
Signature of Shareholder Signature of Shareholder
NOTE: THIS PROXY MUST BE SIGNED EXACTLY AS YOUR NAME APPEARS HEREON.
EXECUTORS, ADMINISTRATORS, TRUSTEES, ETC. SHOULD GIVE FULL TITLE AS
SUCH. IF THE SHAREHOLDER IS A CORPORATION, A DULY AUTHORIZED OFFICER
SHOULD SIGN ON BEHALF OF THE CORPORATION AND SHOULD INDICATE HIS OR HER
TITLE.
- --------------------------------------------------------------------------------
