<PAGE> 1
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 JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
----- SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26324
ROCKFORD INDUSTRIES, INC.
CALIFORNIA 33-0075112
(State of Incorporation) (I.R.S. Employer
Identification No.)
1851 E. FIRST ST.
SANTA ANA, CA
(Address of principal 92705
executive offices) (Zip Code)
(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 AUGUST 12, 1996 WAS 4,101,890.
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ROCKFORD INDUSTRIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION:
- -------------------------------
<S> <C>
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - 3
June 30, 1996 (unaudited) and December 31, 1995
Consolidated Statements of Income - 4
Three months and six months ended June 30,
1996 and 1995 (unaudited)
Consolidated Statements of Cash Flows - 5
Six months ended June 30, 1996 and 1995 (unaudited)
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 7-11
CONDITION AND RESULTS OF OPERATIONS
PART II. OTHER INFORMATION 12
SIGNATURES 13
</TABLE>
2
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ROCKFORD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . $ 3,989,506 $ 9,409,305
Restricted cash and cash equivalents . . . 4,250,047 2,875,544
Accounts receivable . . . . . . . . . . . . 9,461,306 4,366,449
Note receivable from officer . . . . . . . 116,667 175,000
Prepaid expenses . . . . . . . . . . . . . 392,339 359,108
Net investment in direct finance leases . . 35,132,857 34,520,656
Net fixed assets . . . . . . . . . . . . . 1,331,314 869,120
Discounted lease rentals assigned
to lenders (Note 2) . . . . . . . . . . 98,964,510 92,143,770
------------- -------------
$ 153,638,546 $ 144,718,952
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Note payable to bank . . . . . . . . . . . $ 5,077,834 -
Accounts payable . . . . . . . . . . . . . 5,534,870 3,280,651
Accrued liabilities . . . . . . . . . . . . 2,217,238 3,314,116
Income taxes payable . . . . . . . . . . . 316,523 1,204,283
Deferred income taxes . . . . . . . . . . . 595,598 1,074,000
Nonrecourse debt (Note 2) . . . . . . . . . 120,719,123 118,202,211
------------- -------------
Total liabilities . . . . . . . . . . 134,461,186 127,075,261
Commitments and contingencies
Stockholders' equity:
Series A redeemable preferred stock . . . . 1,575,000 1,575,000
Common stock no par value;
10,000,000 shares authorized;
4,101,500 shares issued and outstanding . 14,001,360 14,001,360
Retained earnings . . . . . . . . . . . . . 3,601,000 2,067,331
------------- -------------
Total stockholders' equity . . . . . . 19,177,360 17,643,691
------------- -------------
$ 153,638,546 $ 144,718,952
============= =============
</TABLE>
See notes to financial statements
3
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ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------- ----------------------------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Sales of equipment . . . . . . . . . . .. . $ 21,422,458 $ 14,342,249 $ 40,922,216 $ 25,392,593
Interest income . . . . . . . . . . . . .. . 1,187,353 1,310,941 2,451,450 2,681,700
Gain on sale of financing transactions ... . 1,082,793 625,959 2,335,478 1,337,681
Other income . . . . . . . . . . . . . .. . 701,458 84,947 1,251,665 247,059
------------- ------------- ------------- ------------
Total revenues . . . . . . . . . . .. . 24,394,062 16,364,096 46,960,809 29,659,033
COSTS:
Cost of equipment sold . . . . . . . . . . 18,958,273 12,745,894 36,523,759 22,720,353
Interest expense . . . . . . . . . . . . . 677,155 833,751 1,325,983 1,747,114
------------- ------------- ------------- -----------
Total costs . . . . . . . . . . . . . 19,635,428 13,579,645 37,849,742 24,467,467
------------- ------------- ------------- -----------
GROSS PROFIT . . . . . . . . . . . . . . . . 4,758,634 2,784,451 9,111,067 5,191,566
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES. . . . . . . . 3,208,155 2,179,872 6,462,574 4,266,877
------------- ------------- ------------- ----------
INCOME BEFORE INCOME TAXES . . . . . . . . 1,550,479 604,579 2,648,493 924,689
INCOME TAXES . . . . . . . . . . . . . . . 620,150 241,871 1,059,400 369,871
------------- ------------- ------------- ----------
NET INCOME . . . . . . . . . . . . . . . . $ 930,329 $ 362,708 $ 1,589,093 $ 554,818
============= ============= ============= ==========
INCOME PER SHARE . . . . . . . . . . . . . $ .21 $ .15 $ .35 $ .23
NET INCOME APPLICABLE TO ============= ============= ============= ===========
COMMON STOCK HOLDERS . . . . . . . . . $ 909,910 1,551,312
============= =============
Weighted average shares outstanding .. . . . 4,521,000 2,454,000 4,479,000 2,454,000
============= ============= ============= ===========
</TABLE>
See notes to financial statement.
4
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ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASHFLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1996 1995
---------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,589,093 $ 554,818
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . 144,844 68,865
Increase in lease receivable allowance . . . . . . . . . . . . . . . . . . . . . . . 200,000 55,747
Gain on sale of residuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (286,466) (145,418)
Gain on sale of financing transactions . . . . . . . . . . . . . . . . . . . . . . . (2,335,478) (1,337,681)
Initial direct cost amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 784,571 728,533
Net amortization of deferred interest income . . . . . . . . . . . . . . . . . . . . (1,910,038) (1,663,119)
Increase in restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,374,503) (1,265,121)
Change in accounts receivable and prepaid expenses . . . . . . . . . . . . . . . . . (5,069,755) (5,746,139)
Change in accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . 1,119,560 1,843,575
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,781 -
Change in income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . (887,760) -
Change in deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (478,402) 344,731
------------ ------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . . . (8,466,553) (6,561,209)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments received from lessees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 840,719 1,873,874
Proceeds from sale of residuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550,515 421,253
Purchase of fixed assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (607,038) (366,337)
Initial direct costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (963,744) (391,462)
Equipment purchased for lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (60,652,724) (36,401,259)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . (60,832,272) (34,863,931)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse debt and securitizations . . . . . . . . . . . . . . . . . . 58,856,617 43,508,864
Proceeds from notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . 9,719,570 6,792,326
Payments on notes payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,641,736) (12,788,218)
Proceeds from sale of preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . - 1,575,000
Dividends on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (55,425) -
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . 63,879,026 39,087,972
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . (5,419,799) (2,337,168)
CASH AND CASH EQUIVALENTS, beginning of year . . . . . . . . . . . . . . . . . . . . . 9,409,305 2,636,043
------------ ------------
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . $ 3,989,506 $ 298,875
============ ============
SUPPLEMENTAL DISCLOSURES:
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,434,128 $ 25,140
============ ============
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,136 $ 211,180
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES -
Estimated lessee payments made directly to nonrecourse lending institutions . . . . . . $ 32,611,928 $ 24,852,824
============ ===========
</TABLE>
See notes to financial statements.
5
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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 28, 1996.
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 June 30, 1996 and
December 31, 1995, the statements of income for the three and six month periods
ended June 30, 1996 and 1995, and the statements of cash flows for the six
month periods ended June 30, 1996 and 1995. The results of operations for the
six month period ended June 30, 1996 are not necessarily indicative of the
results of operations to be expected for the entire fiscal year ending December
31, 1996.
NOTE 2 - RECLASSIFICATION
In June 1996, the Financial Accounting Standards Board issued SFAS 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The release of SFAS 125 caused the Company to reassess its
balance sheet presentation of certain assets and liabilities in light of
current accounting literature and this pending new standard. This reassessment
resulted in the determination that the asset and liability, 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 $39,940,000 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 June 30, 1996 presentation. This reclassification had no impact on the
Company's statements of income, cash flows, or stockholders equity.
6
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PART I, MANAGEMENT'S DISCUSSION AND ANALYSIS OF
ITEM 2 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CUSTOMER FINANCE CONTRACT ACCOUNTING
The Company principally engages in two types of equipment financing
transactions with its customers which transactions are classified for
accounting purposes either as equipment sales or as direct finance leases. The
recognition of income among accounting periods varies depending upon the type
of financing transaction.
EQUIPMENT SALES. Sales of equipment are recognized on equipment
financing transactions when the Company has no continuing economic interest in
the underlying finance contract. 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 is assigned on a nonrecourse basis
to a third party, (ii) the Company has no residual interest in the underlying
transaction, and (iii) all rights to the underlying payment stream and
equipment are transferred to the third party assignee (nonrecourse lender).
The cash proceeds from a nonrecourse assignment, determined by discounting the
customer payments due under the finance contract at the discount rate
established with the nonrecourse lender, are recorded as equipment sales and
the equipment cost associated with a finance contract is recorded as cost of
sales. The Company also records the cash proceeds from the assignment on its
balance sheet as discounted lease rentals assigned to lenders and nonrecourse
debt, unless the Company is legally relieved of all obligations as a result of
the sale, in which case the asset and associated nonrecourse debt are offset on
the balance sheet. For the six months ended June 30, 1996, finance contracts
accounted for as sales transactions amounted to 60.5% (as compared to 63.3% for
the six months ended June 30, 1995) of the Company's total financing
originations.
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 the
Company's retention of a residual interest in the equipment being financed or
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. For the six months ended June
30, 1996, finance contracts accounted for as direct finance leases amounted to
16.4% (as compared to 20.2% for the six months ended June 30, 1995) of the
Company's total financing originations, after adjustment for direct finance
leases sold with financing gain recognition.
GAIN ON SALE OF FINANCING TRANSACTIONS. 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, and during this time, utilizes the accounting and income
recognition methodology relating to direct finance leases as previously
described. Subsequently, the Company may
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sell these contracts in bulk to nonrecourse lenders, at which time the Company
relinquishes any continuing economic interest in such contracts. The
difference between the cash proceeds from the assignment of the remaining
payments due under these contracts and the unamortized net investment balance
is recorded by the Company as a gain or loss on sale of financing transactions,
depending upon whether the cash proceeds are in excess of or less than the
unamortized net investment balance. For the six months ended June 30, 1996,
finance contracts accounted for as gains on sale of financing transactions
amounted to 23.1% (as compared to 16.5% for the six months ended June 30,
1995) of the Company's total financing originations.
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
income.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1996 AND 1995
FINANCE CONTRACT ORIGINATIONS AND REVENUES. Finance contract
originations increased by approximately $12.4 million or 67% to $30.9 million
in the quarter ended June 30, 1996 from $18.5 million in the quarter ended June
30, 1995 reflecting the benefits of an expanded sales force. Total revenues for
the quarter ended June 30, 1996 was $24.4 million as compared to $16.4 million
for the quarter ended June 30, 1995, representing an increase of $8.0 million
or 48.8%. The increase in revenues resulted primarily from increased finance
contract originations and gains derived from the sale of Company held finance
contracts.
GROSS PROFIT. Total gross profit for the quarter ended June 30, 1996
was $4.8 million as compared to $2.8 million for the same quarter in the prior
year, representing an increase of $2.0 million or 71.4%. This increase in
gross profits was attributable to increased finance contract originations,
lower cost of funds (borrowing rates), increased gains on sales of financing
transactions, servicing fees and other revenues associated with an increasing
serviced portfolio.
GROSS PROFIT PERCENTAGE. Gross profits as a percentage of revenues
increased to 19.7% in the second quarter of 1996 as compared to 17.1% for the
same period in 1995, primarily due to increased gains on sales of financing
transactions and increased service fees. Gross profit as a percentage of
equipment sales increased to 11.5% in the second quarter of 1996 from 11.1% in
the second quarter of 1995 reflecting the favorable effect of lower cost of
funds. The net interest (interest income less interest expense) margin
percentage for direct finance leases increased to 43.0% in the quarter ended
June 30, 1996 from 36.4% in the quarter ended June 30, 1995. The improvement
in the net interest margin percentage was due to lower debt levels associated
with the Company's portfolio of direct finance leases and lower cost of funds
applicable to direct finance lease additions during the period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the second quarter of 1996 were $3.2 million as
compared to $2.2 million in the second quarter of 1995, representing an
increase of $1.0 million or 45.5%. As a percentage of revenues, these expenses
amounted to 13.1% in the second quarter of 1996, as compared to 13.4% in the
comparable quarter of the prior year. The decrease in the selling, general and
administrative expense percentage is a result of additional operating leverage
gained as a result of increased finance contract originations. In absolute
dollars, the increase in selling, general and administrative expenses was
primarily due to increased commissions and other selling expenses associated
with new contract originations and additional investment in the infrastructure
necessary to service an increasing level of finance contract originations and
securitized portfolio.
8
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NET INCOME. Income before taxes was $1,550,000 for the quarter ended
June 30, 1996 as compared to $605,000 for the same quarter of the prior year.
The effective income tax rate of 40% remained constant for the comparative
periods shown. Net income was $930,000 for the quarter ended June 30, 1996 as
compared to $363,000 for the same quarter of the prior year, representing an
increase of $567,000 or 156.2%, reflecting the benefits of increased finance
contract originations, increasing servicing fee income, and lower borrowing
costs. Net income of $.21 per share on weighted average shares outstanding of
4,521,000 was earned during the second quarter of 1996, as compared to net
income of $.15 per share on weighted average shares outstanding of 2,454,000
for the second quarter of 1995.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
FINANCE CONTRACT ORIGINATIONS AND REVENUES. Finance contract
originations increased by approximately $24.3 million or 66.8% to $60.7 million
for the six months ended June 30, 1996 from $36.4 million for the six months
ended June 30, 1995, reflecting the positive effects of a sales force that
increased to 40 sales professionals as of June 30, 1996. Total revenues of
$47.0 million for the six months ended June 30, 1996 increased by $17.3 million
or 58.2% from total revenues of $29.7 million for the six months ended June 30,
1995. The increase in revenues resulted primarily from increased finance
contract originations, gains derived from the sale of company-held finance
contracts, and increases in fees earned as a result of the servicing of an
expanding securitized portfolio. Interest income decreased somewhat due to
lower yields on the direct finance lease portfolio.
GROSS PROFIT. Total gross profit of $9.1 million for the six months
ended June 30, 1996 increased by approximately $3.9 million or 75.0% from $5.2
million in the six months ended June 30, 1995. The increase in gross profit
was primarily attributable to the increase in finance contract originations,
lower cost of funds (borrowing rates), gains on sales of financing
transactions, and increases in service fee income attributable to an increasing
serviced portfolio for the six months ended June 30, 1996 as compared to the
same period of the prior year.
GROSS PROFIT PERCENTAGE. Gross profits as a percentage of revenues
increased to 19.4% in the first six months of 1996 from 17.5% in the first six
months of 1995 reflecting the following components: gross profits from
equipment sales of 10.8% for the first six months of 1996 versus 10.6% for the
first six months of 1995; net interest (interest income less interest expense)
margin of 45.9% for the first six months of 1996 versus 34.9% for the first six
months of 1995. The gross profit percentage was positively impacted by lower
cost of funds associated with securitizations, lower borrowing levels and rates
applicable to the direct finance contract portfolio, and increasing financing
gains, servicing fees, and other income.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the first six months of 1996 were $6.5 million as
compared to $4.3 million in the same period of 1995, representing an increase
of $2.2 million or 51.2%. As a percentage of revenues, these expenses amounted
to 13.8% in the first six months of 1996, as compared to 14.5% in the same
period of the prior year. The decrease in selling, general and administrative
expense percentage is a result of additional operating leverage gained as a
result of increased finance contract originations. In absolute dollars, the
increase in selling, general and administrative expenses was primarily due to
commissions and other selling expenses associated with new contract
originations and additional investment in the infrastructure necessary to
service an increasing level of finance contract originations and an increasing
securitized portfolio.
NET INCOME. Income before taxes was $2,648,000 for the six months
ended June 30, 1996 as compared to $925,000 for the same period of the prior
year. The effective income tax rate of 40% remained constant for the
comparative periods shown. Net income increased by $1,034,000 or 186.3% to
$1,589,000 for the first six months of 1996 from $555,000 for the first six
months of 1995, reflecting the
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benefits of increased finance contract originations, increasing service fee
income, and lower borrowing costs. Net income of $.35 per share on weighted
average shares outstanding of 4,479,000 was earned during the first six months
of 1996, as compared to net income of $.23 per share on weighted average shares
outstanding of 2,454,000 for the first six months of 1995.
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"), pursuant to the
terms of the securitization arrangement between the Company and SunAmerica,
(ii) nonrecourse borrowings from institutional lenders, and (iii) standard
recourse borrowings under its $15 million revolving line of credit ("Revolver")
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.
SECURITIZED DEBT. Through an arrangement with SunAmerica entered in
1995, the Company began utilizing asset-backed securities (backed by pools of
its equipment finance contracts and the underlying equipment). Since this
method of funding provides the Company with cost of funds substantially lower
than rates charged by traditional nonrecourse financing, securitization
programs, such as this one, are expected to be the Company's primary method of
funding its equipment financing business. The Company and SunAmerica entered
into an agreement in January 1995, and under this agreement SunAmerica agreed
to purchase up to $65 million in principal amount of trust certificates secured
by the beneficial interest of pools of equipment finance contracts originated
by the Company as well as by the payments due under, and the equipment
underlying such contracts. The Company securitized $57 million under this
facility before its extended expiration date of January 31, 1996. In February
1996, the Company and SunAmerica entered into a new agreement, which will
expire on December 31, 1996, wherein SunAmerica agreed to purchase up to an
additional $100 million in principal amount of trust certificates under similar
terms associated with the original agreement, with the exception that the
interest rate applicable to certificates issued under the new agreement is
somewhat lower than the rate set forth in the original agreement. The
agreement with SunAmerica provides that the Company can arrange for the
issuance of certificates in denominations as low as $1 million, a relatively
small amount when compared to other securitization programs used in the
industry. Consequently, the Company can avoid warehousing transactions for
long periods by issuing certificates as often as weekly. As of June 30, 1996,
pursuant to the terms of the new agreement, SunAmerica had purchased $30.6
million of trust certificates issued in several tranches since February 1996.
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 contracts securing such certificates. 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
arrange similar securitization agreements at similar terms in the future.
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, in connection with
which the lender's recourse is to the Company's customers and to the equipment
financed, not to the Company. 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 June 30, 1996, the Company had recorded nonrecourse debt of $121
million.
SHORT-TERM RECOURSE DEBT. The Company has also, from time to time,
relied on standard recourse borrowings for the funding of a smaller, short-term
portion of its financing needs. The Company
10
<PAGE> 11
has maintained the Revolver with a bank for such short-term borrowings, and
under the terms of the agreement, the Company was able to fund certain finance
contracts at rates lower per annum than available through nonrecourse
financing. In March 1996, the borrowing limit of this facility was increased
to $15 million, the term was extended to May 1997, and the borrowing rate was
lowered. At June 30, 1996, the Company had $5.1 million outstanding under the
Revolver.
CASHFLOWS. The Company's cash and cash equivalents at June 30, 1996
was $4.0 million compared to $.3 million at June 30, 1995. The consummation of
the Company's initial public offering of its common stock in July 1995 yielding
net proceeds of $11.2 million positively impacted this change in cash position.
During the six months ended June 30, 1996, the Company's cash position
decreased by $5.4 million, reflecting the use of cash in operations and
investing activities of $8.5 million and $60.8 million, respectively, and the
cash provided from financing activities of $63.9 million. The most significant
aspect of the change during this period was from cash invested in equipment for
financing of $60.7 million and proceeds from nonrecourse debt and
securitizations of $58.8 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 $2.3 million during the six months ended June 30, 1995,
reflecting the use of cash in operations and investing activities of $6.6
million and $34.9 million, respectively, and the cash provided from financing
activities of $39.1 million. The change in cash was primarily due to cash used
to purchase equipment for financing of $36.4 million, a decrease in notes
payable to bank of $5.0 million (net of proceeds of $6.8 million), and cash
provided by nonrecourse debt borrowings and securitizations of $43.5 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 at least the
next twelve months.
SEASONALITY
Historically, the Company has generally experienced lower revenues and earnings
in its first quarter and relatively higher revenues and earnings in its fourth
quarter. The Company believes that the first quarter has been negatively
affected by the requirements of its vendors to rebuild equipment inventories
and order backlog at the beginning of a new year and that the fourth quarter is
favorably affected by greater customer demand for equipment which is fostered,
in part, by budget and tax considerations.
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.
11
<PAGE> 12
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
(a) The annual meeting of shareholders was held on June 12, 1996.
(b) The following directors were elected at the meeting:
1. Gerry J. Ricco
2. Larry E. Hartmann
3. Brian A. Seigel
4. Floyd S. Robinson
5. Robert S. Vaters
There were no other directors whose term of office as director
continued after the meeting.
(c) There were no other matters voted upon.
(d) The shareholders voted 3,996,921 in the affirmative and 11,640
shares in the negative to re-elect each of the directors shown
above.
Item 5 - Other Information
On June 10, 1996, the Company filed a form S-8 Registration Statement
under the Securities Act of 1933, with the Securities and Exchange
Commission, registering 350,000 shares of Common Stock for the
Rockford Industries, Inc. Stock Option Plan.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
27 - Financial Data Schedule
(b) Reports on Form 8-K;
No reports were filed on form 8-K during the quarter for which this
report is filed.
12
<PAGE> 13
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: August 8, 1996 /s/ GERRY J. RICCO
-----------------------------------------------
Gerry J. Ricco
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: August 8, 1996 /s/ LARRY E. DAVIS
-----------------------------------------------
Larry E. Davis
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF THE COMPANY AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE 2ND QUARTER 10-Q.
</LEGEND>
<CIK> 0000945901
<NAME> ROCKFORD INDUSTRIES, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 8,239,553
<SECURITIES> 0
<RECEIVABLES> 45,510,830
<ALLOWANCES> 800,000
<INVENTORY> 0
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1,575,000
<COMMON> 14,001,360
<OTHER-SE> 3,601,000
<TOTAL-LIABILITY-AND-EQUITY> 153,638,546
<SALES> 40,922,216
<TOTAL-REVENUES> 46,960,809
<CGS> 36,523,759
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<OTHER-EXPENSES> 3,744,939
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