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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1996
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1851 East First Street, Suite 600
Santa Ana, California 92705
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(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
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(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
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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
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The aggregate market value of the Common Stock held by nonaffiliates of
the Registrant was approximately $18,320,054 based upon the last reported sale
price of the Common Stock on NASDAQ on February 28, 1997.
As of February 28, 1997, the Registrant had 4,105,517 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.
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TABLE OF CONTENTS
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ITEM PAGE
PART I
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1. Business.............................................. 1
2. Properties............................................ 9
3. Legal Proceedings..................................... 9
4. Submission of Matters to a Vote of Security Holders... 9
PART II
5. Market for the Registrant's Common Equity and
Related Stockholder Matters........................... 10
6. Selected Financial Data............................... 11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 12
8. Financial Statements and Supplementary Data........... 19
9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................ 36
PART III
10. Directors and Executive Officers of the Registrant.... 37
11. Executive Compensation................................ 37
12. Security Ownership of Certain Beneficial Owners
and Management........................................ 37
13. Certain Relationships and Related Transactions........ 37
PART IV
14. Exhibits, Financial Statement Schedules and Reports
on Form 8-k........................................... 38
Signatures............................................ 40
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(ii)
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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
offering convenient point of purchase financing primarily of medical and
medical-related equipment for primary care providers in the healthcare industry.
The Company finances the purchase of medical and medical-related equipment that
costs less than $250,000 and is purchased by healthcare providers, who prefer
the simplified approval process and ease of doing business which the Company
offers, including physicians, dentists, chiropractors, optometrists and home
healthcare providers, and also by outpatient medical centers. In addition to
medical equipment financing, the Company has recently expanded its business into
the financing of small ticket general business equipment.
Since its inception in 1984, the Company's strategy has been to focus its
business development efforts on establishing marketing relationships with
vendors of medical diagnostic, therapeutic and surgical equipment and office
automation systems, in order to establish itself as the recommended provider of
financing by its vendors to their potential equipment purchasers. 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's finance
contracts are structured principally as sales-type leases or direct finance
leases. The Company estimates that approximately 20% of its equipment finance
contract originations during 1996 were generated from additional borrowings by
existing customers.
The Company has originated equipment finance contracts of over
$430,000,000 of equipment since its founding in 1984 and has achieved
significant growth in the last few years. The Company financed approximately
$131,267,000 of equipment during 1996, which represented a 49.4% increase from
the $87,881,000 of equipment it financed in 1995. This increase in financing
volume also resulted in a 40.6% increase in the Company's revenues for 1996
which increased from $74,330,000 in 1995 to $93,613,000 in 1996. In addition,
1996 net income of $2,318,000 represented a 10.8% increase from 1995 net income
of $2,092,000.
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 subsidiaries, Rockford Limited I (New York),
Rockford Limited II-A (New York), Rockford Limited II-B (New York), and Rockford
Limited II-C (New York).
BUSINESS STRATEGY
The Company's objective is to become a leading provider of financing for
lower cost medical and selected non-medical 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:
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.
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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.
INTERNATIONAL FINANCING ACTIVITIES. The majority of the Company's
financings are currently with United States-based borrowers. At the request of
certain of the Company's equipment vendors which market equipment in
international markets, the Company is exploring opportunities to finance
non-United States borrowers pursuant to vendor programs established with United
States-based equipment vendors. The Company intends to explore relationships
with foreign lending sources with respect to international finance contracts
consistent with the Company's objective of minimizing its interest rate and
credit risks.
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 1996,
the Company funded 56% of its total originations through its securitization
program. The Company plans to increase the proportion of total contracts funded
through its securitization programs.
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 continues to play a significant
role in the United States economy, representing 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 the latest 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 has estimated that the
overall equipment leasing market will grow to approximately $176 billion in
1997.
The Company is a specialty finance company, specializing primarily in
providing financing and related services to the healthcare industry, and, to
date, the largest part of its revenues has been derived from its financing of
medical and medical-related equipment. The Company primarily utilizes lease
contracts as the financing vehicle for these equipment financings, regardless of
whether the Company has a continuing economic
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interest in the underlying equipment. As a specialty finance company, the
Company believes that it has strategically positioned itself to capitalize on
the market opportunities arising from 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. A direct consequence
of such high rates of product developments and introductions is the
corresponding rapid technological obsolescence of existing medical equipment,
which, in turn, promotes the continual need for healthcare providers to acquire
new, lower-costing equipment for diagnosis and treatment. In addition, research
and development has reduced substantially the cost of many previously
high-priced medical devices, many of which are now affordable to individual and
small group healthcare providers, thus enlarging the Company's primary target
market.
The medical equipment finance market includes two distinct market segments
which are generally differentiated based on equipment price and customer
sophistication. The first market segment, with equipment costing more than
$250,000, typically represents equipment sold to hospitals and other managed
care groups. The size of the purchase, long sales cycle, and number of financing
alternatives generally available to these types of customers often results in a
financing decision based primarily on price. This segment is generally serviced
primarily by banks and large captive finance companies. The Company has
strategically positioned itself in the second market segment, where equipment
costs $250,000 or less. Much of this lower priced equipment is sold into the
private practice market, including physicians, dentists, chiropractors,
optometrists and other medical service providers. The Company believes that
customers in this market segment desire flexible financing terms and a general
ease of doing business.
EQUIPMENT FINANCE CONTRACTS
GENERAL. The Company's revenues are primarily derived from its origination
of equipment finance contracts pursuant to which the Company provided financing
for the purchase of various types of equipment by healthcare providers.
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 decreased from an average of approximately $26,000 in 1995 to
$23,500 in 1996. The number of new equipment finance contracts originated by the
Company increased from 3,426 in 1995 to 5,587 in 1996.
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.
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CREDIT AND ADMINISTRATIVE PROCEDURES. The processing of potential
customers' equipment finance contract applications forms the bulk of the
Company's activities at its corporate headquarters in Santa Ana, California.
Credit applications are forwarded from sales representatives to the Company's
headquarters. 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).
If approved, contracts are generated and either faxed or sent by overnight
delivery to the customer for signature. 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.
In order to control the funding process, personnel in the collections
department utilize reports generated by the Company's Decision System, Inc,
("DSI") computer system that show fundings due from non-recourse lenders, the
actual customer finance contract file that show daily funding submissions.
Collection personnel assure that the Company is paid on a timely basis, and that
the appropriate present value of the payment stream is discounted with the
lender. The records, reports and listings are reconciled by accounting
personnel.
Timely and accurate vendor payments are essential to the Company's
business. In order to maintain existing vendors and attract new vendors, the
Company must make most payments for financed equipment to vendors within one day
of equipment delivery to the customer.
PORTFOLIO DIVERSITY
From 1992 through 1996, the Company originated approximately 15,700
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. In addition to medical equipment financing, the
Company has recently expanded its business into the financing of small ticket
general business equipment.
While no individual customer accounted for more than 6% of the Company's
financing originations in 1996, certain types of customers are more prominent
than others. Finance contract originations in 1996 can be categorized by
business type as follows: medical doctors, 37.4%; other healthcare providers,
48.2%; and general business, 14.4%.
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 1996
can be categorized by equipment type as follows: medical 53.6%; computer, 22.9%;
and general equipment, 23.5%.
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, 1996, 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, l996, bore an estimated aggregate of $2,376,000
residual value, net of unearned income and valuation allowance.
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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 seeks 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, 1996, bore an aggregate of
$2,376,000 residual value, net of unearned income and valuation allowance,
representing approximately 1.5% of the Company's total assets at December 31,
1996. The Company has historically realized proceeds, with respect to
residuals applicable to finance contract maturities, that are approximately
equivalent to the original recorded residual value. Since inception, the
Company has realized, net of residual adjustments and write-offs, 113% of the
residual values recorded for contracts maturing during that period. During
1996, residual realization was 129%.
DELINQUENCIES
DELINQUENCIES RELATING TO CONTRACTS RETAINED AND SERVICED BY THE COMPANY.
The Company's portfolio (comprised principally of equipment finance contracts
securitized or funded by the Company through 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 2.6% at December 31, 1995 to 5.8% at December 31, 1996. The Company has
reviewed the 1995 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 most 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
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to nonrecourse lenders has experienced delinquency and credit loss percentages
similar to those experienced in the industry.
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 or serviced under the securitization
program 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 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 0.6% and 0.3% of the Company's average receivables
outstanding under its contracts for 1996 and 1995, 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, including its ability to
complete additional asset securitizations.
FUNDING SOURCES
The principal source of funding for the Company's financing transactions
is an asset securitization program with SunAmerica 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 Revolver. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
SERVICING FEES AND INSURANCE
Historically, the Company has assigned the majority of its finance
contracts to nonrecourse lenders who have also been 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 program with
SunAmerica, the Company is entitled to receive a fee from SunAmerica for
servicing the securitized contract portfolios. This fee is paid monthly and is
calculated based on 1/12th of 1% 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.
SALES AND MARKETING
The Company conducts its sales and marketing activities primarily through
44 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 12
marketing support employees, work out of the Company's 31 regional offices which
are located in 16 states. The Company's independent sales representatives and
marketing staff focus on establishing formal and informal relationships with
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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 financing alternatives, 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.
MARKETING PROGRAMS
The Company currently utilizes the following marketing programs, each of
which is designed to address specific needs of equipment vendors and purchasers.
PRIVATE LABEL PROGRAM. For high volume vendors, the Company offers a full
private label finance relationship where the vendor name is featured as the
provider of the financing, underwritten by the Company. The Company has the
ability to print private label documents, provide toll free private label
support as well as provide billing and collection services under the vendor's
name.
NO FINANCIALS PROGRAM. For certain customers, this program permits credit
approvals for financings of up to $175,000 without the need to review the
applicant's tax returns or financial statements. However, the Company follows
certain strict guidelines which center on an analysis of the license status and
credit profile of the applicant and a review of the equipment to be financed.
The convenience of the "No Financials" program is important to the success of
the Company as the types of customers generally financed by the Company could
easily qualify for equipment financing from their banks or elsewhere if they
wished to spend the time and effort necessary to obtain such financing.
SUCCESS LINE(R) PROGRAM. Once an applicant is approved for financing, a
SUCCESS LINE(R) card is issued to the applicant which makes financing additional
equipment with the Company simple and convenient, because the applicant's
information is already on file. Management estimates that this program, along
with the ongoing contact established by the Company's sales representatives with
the Company's customers, have caused approximately 20% of the Company's
equipment finance contracts to be generated from existing customers. This
program serves to increase loyalty and maintain repeat business.
CPT(R) PROGRAM. The CPT(R) (Cost Per Test) program, which was first
introduced in early 1994, is a program that allows vendors the ability to offer
equipment to their customers, at commercially reasonable rates, where the
payments would be scheduled on the basis of a minimum monthly payment, or, in
the alternative, a different rate related to frequency of actual usage of the
equipment and the cost of providing required diagnostic tests. Due to economic
and political pressures, more and more hospitals and physician groups may choose
to utilize this plan to tie reimbursement for tests and procedures directly to
the cost of performing them. See "Healthcare Regulation and Industry Reform."
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
medical and medical-related 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, 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
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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.
SERVICE MARKS
The Company holds registrations for two service marks, "Success Line(R)"
and "CPT(R)" which it uses in conjunction with its marketing programs. The
Company believes that these service marks are important to its marketing
program. The service marks have been registered by the Company under the laws of
the United States. There can be no assurance that these service marks will
provide significant commercial benefits to the Company or that they will protect
the Company's interest in, or the value of, such service marks without resort to
litigation, which could be costly and time consuming. A successful challenge to
the Company's right to market its programs under these service marks may
adversely affect the Company's business.
CPT(R) was registered by the Company in March 1994; Success Line(R) was
registered in August 1993. The Company's right to use these service marks can
continue indefinitely as long as neither service mark is abandoned by the
Company, the Company files a declaration of continued use every six years after
issuance and renews its registration of the service marks every ten years after
issuance.
HEALTHCARE REGULATION AND INDUSTRY REFORM
The Company's present customers are principally healthcare providers. The
healthcare industry is subject to substantial federal, state and local
regulation and is undergoing significant change as a result of market-driven and
regulatory developments. Some customers may be affected adversely by recent
industry, legislative and regulatory changes and a substantial number of
federal, state and local initiatives designed to reduce or limit or control
payments to providers of healthcare and to address issues related to the
availability and cost of healthcare. These changes may affect the level and mix
of demand for medical and medical-related equipment. Major changes in the United
States healthcare delivery include the formation of integrated patient care
networks (often involving joint ventures between hospitals and physician
groups), the consolidation of private health care practices into larger groups,
the acquisition of physician practices by hospitals, as well as the grouping of
healthcare consumers into managed-care organizations sponsored by insurance
companies and a variety of other entities, which could reduce the market for the
type of finance products currently offered by the Company. Reduction in the
anticipated increases in reimbursement for Medicare beneficiaries and changes to
the scope of the Medicare program are being considered by the United States
Congress. Regulatory developments may result in significant cost controls which
could cause hospitals, clinics and other healthcare providers, which form a
significant portion of the Company's customer base, to reduce capital equipment
acquisitions.
The trend toward managed healthcare may also affect the Company's future
operations. The Company believes that it will be able to take advantage of some
of these new developments. As emphasis is placed in primary care physicians as
"gatekeepers" from more specialized care, the Company will be able to accelerate
its marketing programs to family practitioners and general internists.
Various federal and state laws have been enacted which regulate the
relationship between physicians and other healthcare service providers.
Violations of these provisions may result in administrative, civil and criminal
penalties and exclusion from participation in Medicare and Medicaid. Federal and
state legislation and the Medicare and Medicaid programs limit or prevent
physicians from profiting from the referral of patients to a facility in which
they have a proprietary or ownership interest. Federal and state regulatory
authorities have declared any fee splitting arrangement between lessors and
end-users illegal arrangements, thus subjecting both the lessor and the end user
to criminal, civil and administrative liability. The Company's CPT(R) program
has been structured to comply with applicable fee-splitting prohibitions. If the
Company determines that such program
- 8 -
<PAGE> 11
requires modification in structure, the Company will either discontinue such
program in such jurisdiction, or attempt to revise the program consistent with
the applicable regulatory requirements. Certain of the Company's customers may
also become subject to such prohibitions and modifications and could be
adversely affected.
Certain authorities have mandated reductions in some fees for patient
examinations employing diagnostic imaging equipment. These various regulatory
and market driven fee reduction factors, in some cases, may induce the
healthcare provider to acquire newer, faster equipment, and, in other cases,
may reduce the ability of a provider to finance equipment, or increase the
risk of default or financings of such customers.
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, 1996, the Company employed 82 persons. Of these
employees, 10 are principally engaged in management, 42 are engaged in
operations and collections, 11 are engaged in accounting and administration and
19 are engaged in sales and marketing (not including 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
$28,000 per month, which, under the terms of the lease, increases at a rate of
approximately $1,000 per year. 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, 1996, the Company maintained 31 sales branch
offices located in 16 states throughout the United States. Aggregate rental
expense for the corporate headquarters and the regional sales offices was
$573,000 for the fiscal year ended December 31, 1996. In total, the Company
leases an aggregate of approximately 23,000 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 its results of operations or financial
condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
- 9 -
<PAGE> 12
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>
BID PRICE
---------
HIGH LOW
---- ---
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Third Quarter (1).............................. 9.625 8.000
Fourth Quarter................................. 9.875 8.500
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
</TABLE>
- ------------------
(1) The Company completed an initial public offering of its Common Stock on
July 25, 1995. Stock price information quoted is for the period July 25,
1995 through September 30, 1995. Prior to July 25, 1995, there was no
established public trading market for the Common Stock.
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 ($15,738,000 at December 31, 1996), which
have the effect of limiting the payment of cash dividends to holders of Common
Stock.
HOLDERS
As of December 31, 1996, there were approximately 599 beneficial
holders and 27 holders of record of the Company's Common Stock.
- 10 -
<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.......................... $104,539 $74,330 $54,351 $40,702 $26,756
Costs............................. 85,380 61,206 46,745 35,377 23,140
Gross profit...................... 19,159 13,124 7,606 5,325 3,616
Selling, general and 15,296 9,637 6,056 4,229 2,912
administrative expenses...........
Income before income taxes........ 3,863 3,487 1,550 1,096 704
Income taxes (1).................. 1,545 1,395 1,845 28 17
Net income (loss)................. 2,318 2,092 (295) 1,068 687
Net income per share (2).......... .52 .60
PROFORMA STATEMENT OF OPERATIONS
DATA (3):
Historical income before $1,550 $1,096 $704
income taxes................
Proforma provision for 620 438 282
income taxes................
Proforma net income......... 930 658 422
Proforma net income per .38 .27 .17
share (2)...................
Weighted average shares 4,495 3,494 2,454 2,454 2,454
outstanding.......................
OTHER DATA:
Cost of equipment financed........ $131,267 $87,881 $63,579 $48,798 $32,347
Number of financed contracts...... 5,587 3,426 3,122 2,208 1,468
</TABLE>
<TABLE>
DECEMBER 31,
------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets...................... $157,698 $184,658 $129,542 $98,041 $67,956
Total liabilities (4)............. 137,814 167,014 126,732 94,516 65,499
Total shareholders' equity........ 19,884 17,644 2,810 3,525 2,457
</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. See Notes 1 and 7 of Notes to Financial Statements.
(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. Proforma 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. See Notes 1 and 7 of Notes to Financial
Statements.
(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. See Note 1 of Notes to Financial Statements.
- 11 -
<PAGE> 14
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 the
Prospectus.
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. For the
year ended December 31, 1996, finance contracts accounted for as sales
transactions accounted for 83% 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, collectability 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.
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 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.
- 12 -
<PAGE> 15
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, 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 AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1996 were $15.3 million as compared to $9.6 million
in 1995, representing 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.
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. Net income of $0.52 per share on weighted average shares
outstanding of 4,495,000 was earned during 1996, as compared to net income of
$0.60 per share on weighted average shares outstanding of 3,494,000 for 1995.
The number of the Company's outstanding shares of Common Stock increased by
1,897,500 pursuant to the Company's initial public offering in July 1995.
- 13 -
<PAGE> 16
YEARS ENDED DECEMBER 31, 1995 AND 1994
FINANCE CONTRACT ORIGINATIONS. Finance contract originations increased to
$87.9 million in 1995 from $63.6 million in 1994, representing an increase of
$24.3 million or 38.2%. The percentage of the Company's equipment sales
contracts increased to approximately 84% of all of its finance contract
originations in 1995 from 75% of its originations in 1994. Equipment sales
contracts offer the advantage of recognition of the entire gross profit upon
the contract's inception and, thus, involve no estimation or uncertainty with
respect to the recording and future collection of residual values.
REVENUES. Total revenues for the year ending December 31, 1995 were $74.3
million compared to $54.3 million for the prior year, representing an increase
of $20.0 million or 36.8%. The increase in revenues resulted from an increase in
sales of equipment of $17.7 million, an increase in other income of $3.0 million
and a decrease in interest income of $706,000. The increase in sales of
equipment reflected the Company's lower cost of funds which resulted from the
implementation of the securitization program in February 1995, in addition to
increased marketing efforts in the medical marketplace with additional sales
penetration in the non-medical equipment marketplace. The primary reason for the
increase in other income was due to $2.9 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 1995.
GROSS PROFIT. Total gross profit in 1995 was $13.1 million as compared to
$7.6 million in 1994, representing an increase of $5.5 million or 72.5%. This
increase was due principally to the positive effect of lower cost of funds
associated with the securitization arrangement and an increase in aggregate
financing origination volume, which resulted in an increase in gross profit from
sales of equipment of $2.6 million, an increase in other income of $3.0 million
and a decrease in net interest margin (interest income less interest expense) of
$108,000. The increase in other income was primarily due to gains from the
assignment of Company-held direct finance leases and fees and other income
associated with the servicing of the securitized lease portfolio.
GROSS PROFIT PERCENTAGE. Gross profits as a percentage of revenues
increased to 17.7% in 1995 from 14.0% in 1994, primarily as a result of the
lower costs of funds associated with the securitized portfolio and increases in
financing gains and servicing fees described above. Gross profits as a
percentage of sales of equipment increased to 11.0% in 1995 from 9.6% in 1994.
The net interest margin for direct finance leases increased to 38.2% in 1995
from 35.6% in 1994, reflecting lower cost of funds and the Company's higher
level of working capital enabling it to finance an increasing portion of its
direct finance leases with its own funds, thus reducing the amount of borrowed
funds and interest expense related to such contracts.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 1995 were $9.6 million as compared to $6.1 million in
1994, representing an increase of $3.6 million or 59.1%. As a percentage of
revenues, these expenses amounted to 13.0% in 1995 as compared to 11.1% in 1994.
A significant portion of the increase in selling, general and administrative
expenses was due to expenses resulting from increased financing volume,
particularly with respect to commissions and other selling expenses. In
addition, the Company continued to invest in areas such as personnel, offices,
capital equipment and systems in order to establish the necessary infrastructure
to engage in securitization and service its increasing levels of financing
originations.
NET INCOME. Income before taxes was $3.5 million in 1995 as compared to
$1.6 million in 1994, representing an increase of $1.9 million or 125%. As of
December 31, 1994, the Company revoked its election to be taxed as an "S"
Corporation and recorded a deferred tax adjustment of $1.8 million. The net
loss, after recording the effect of the one-time adjustment for deferred income
taxes, in 1994 was $295,000. On a proforma
- 14 -
<PAGE> 17
basis, which gives effect to income tax provision as if the Company was taxed as
a "C" Corporation in the respective periods, net income would have been $930,000
in 1994 as compared to net income in 1995 of $2.1 million, representing an
increase of $1.2 million or 125%.
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 Life Insurance Company, 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 $30.0 million revolving line of credit (not including $5.0 million
which is for the exclusive purpose of funding account overdrafts) 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.
ASSET SECURITIZATION. Asset securitization is a process in which a pool of
equipment finance contracts is transferred to a wholly-owned special-purpose
subsidiary 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 subsidiary 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 subsidiary) has
the right to the residual value, if any, of the equipment underlying the
contracts in the pool should such equipment be resold. The special purpose
subsidiary also provides credit enhancement by maintaining, in the case of the
Company's securitization program, certain cash reserve accounts in connection
with each borrowing under the securitization program. 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 January 1995, the Company and SunAmerica entered into an asset
securitization agreement under which SunAmerica agreed to purchase up to $65.0
million in principal amount of trust certificates. The Company securitized $57.0
million of financing contracts under this facility. In February 1996, the
Company and SunAmerica entered into an agreement pursuant to which SunAmerica
agreed to purchase up to an additional $100.0 million in principal amount of
trust certificates. Through December 31, 1996, the Company has securitized $86.0
million of its financing contracts with SunAmerica. This agreement with
SunAmerica expires on April 30, 1997. Negotiations are currently in progress
that will expand the SunAmerica securitization program under a multi-year
facility providing cost of funds at rates lower than previously in effect.
Management expects that this facility will be finalized during the second
quarter of 1997, provided that the negotiations are completed satisfactorily.
On November 7, 1996, CoreStates Bank, N.A. provided the Company with a
commitment letter under which CoreStates proposed to provide the Company with a
$150 million three-year facility for the securitization of equipment finance
contracts. The CoreStates facility was closed on March 27, 1997 and provides
financing at rates that are about 65 basis points lower than the rates
previously available to the Company.
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-
- 15 -
<PAGE> 18
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. The Company has entered into agreements with various
institutional lenders which make financing available to the Company an a
nonrecourse basis. 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.
At December 31, 1996, the Company had recorded nonrecourse debt of $113.0
million from various institutional lenders. 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 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 has maintained a credit facility with a bank
for such short-term borrowings, and under the terms of the agreement, the
Company may fund certain finance contracts at rates lower per annum than
available through nonrecourse financing. On February 10, 1997, the borrowing
limit of this facility was increased to $30.0 million. The terms of this
facility provide for advances through May 1997 and contains a feature for
pricing at LIBOR plus 1 1/2%. At December 31, 1996, the Company had $11.0
million outstanding under the Revolver.
Under the credit facility, the Company may convert borrowings to term
loans subject to certain conditions. The credit facility is 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 facility contains various covenants,
including those requiring the Company to maintain certain levels of tangible net
worth and debt ratios under which the Company was in compliance at December 31,
1996. 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
facility, if necessary.
CASHFLOWS. The Company's cash and cash equivalents at December 31, 1996
was $4.0 million compared to $9.4 million at December 31, 1995. During the year
ended December 31, 1996 the Company's cash position decreased by $5.4 million,
reflecting the use of cash in operations and investing activities of $6.8
million and $125.5 million, respectively, and the cash provided from financing
activities of $126.9 million. The most significant aspects of the change during
this period was from cash invested in equipment for financing of $131.3
- 16 -
<PAGE> 19
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), and
proceeds from nonrecourse debt and securitizations of $116.0 million, was
largely due to the higher level of the Company's finance contract originations.
In comparison, the Company's cash position increased by $6.8 million during the
year ended December 31, 1995, reflecting the use of cash in operations and
investing activities of $6.0 million and $84.2 million, respectively, and the
cash provided from financing activities of $96.9 million. The change in cash was
primarily due to cash used to purchase equipment for financing of $87.9 million,
a decrease in notes payable to bank of $6.3 million (net of proceeds of $6.8
million), cash provided by nonrecourse debt borrowings and securitizations of
$90.5 million, and cash provided of $11.2 million as a result of the Company's
initial public offering of common stock in July of 1995.
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. However, if significant acquisition opportunities arise, the
Company may need to seek additional capital. Such acquisition could be financed
through incurrence of additional indebtedness or the issuance of common or
preferred stock, depending on market conditions.
SEASONALITY
Historically, the Company generally has experienced lower originations in
its first quarter and relatively higher originations 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. 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 STANDARD
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation, which required adoption of the disclosure provisions
for the year ended December 31, 1996 and adoption of the recognition and
measurement provisions for nonemployee transactions subsequent to December 15,
1995. The new standard defines a fair value method of accounting for stock
options and other equity instruments. Under the fair value method, compensation
cost is measured at the grant date based on the fair value of the award and is
recognized over the service period, which is usually the vesting period.
Pursuant to the new standard, companies are encouraged, but are not
required, to adopt the fair value method of accounting for employee stock-based
transactions. Companies are also permitted to continue to account for such
transactions under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, but would be required to disclose in a note to the
financial statements proforma net income and, if presented, earnings
- 17 -
<PAGE> 20
per share as if the company had applied the new method of accounting. The
Company has determined that it will not change to the fair value method and will
continue to use Accounting Principle Board Opinion No. 25 for measurement and
recognition of employee stock based transactions. See note 10 to consolidated
financial statements.
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. SFAS No. 125
will change the manner in which the Company determines and recognizes the gain
recorded upon the transfer of its interest in finance contracts. SFAS No. 125
will allow the Company to record gains with respect to transfers of its interest
in leases previously accounted for as direct finance leases that under prior
procedures would have been spread over the life of the transactions. Management
believes that the SFAS No. 125 impact on transactions other than direct finance
leases will result in somewhat reduced up-front gains while increasing income
over the life of the transactions. Additionally, SFAS No. 125 will alter the
presentation, in the Company's consolidated financial statements, of revenues
and certain assets and liabilities associated with finance contracts sold. The
Company began applying this new standard effective January 1, 1997.
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 medical equipment on a regular and predictable basis, that
competitive conditions within the equipment financing market will not change
materially or adversely, that the medical 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 with SunAmerica 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> 21
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
Independent Auditors' Report ..................................... 20
Consolidated Balance Sheets as of December 31, 1996 and 1995 ..... 21
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995 and 1994 ........................... 22
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995 and 1994 ..................... 23
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 ........................... 24
Notes to Consolidated Financial Statements ....................... 26
</TABLE>
- 19 -
<PAGE> 22
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, 1996
and 1995, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. 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, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996 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, present fairly in all material respects the information set forth
therein.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 28, 1997
- 20 -
<PAGE> 23
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 3,985,350 $ 9,409,305
Restricted cash 6,109,559 2,875,544
Accounts receivable (Note 2) 10,039,818 4,366,449
Note receivable from officer (Note 2) 143,831 175,000
Prepaid expenses 884,184 359,108
Income taxes receivable 953,234 --
Net investment in direct finance leases (Note 4) 35,530,325 34,520,656
Net fixed assets (Note 3 ) 1,900,810 869,120
Discounted lease rentals assigned to lendors (Note 6) 98,151,318 92,143,770
------------- -------------
$ 157,698,429 $ 144,718,952
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Note payable to bank (Note 5) $ 10,981,549 $ --
Accounts payable 6,030,482 3,280,651
Accrued liabilities 5,919,187 3,314,116
Income taxes payable -- 1,204,283
Deferred income taxes (Note 7) 1,820,346 1,074,000
Nonrecourse debt (Notes 6 and 11) 113,062,823 118,202,211
------------- -------------
Total liabilities 137,814,387 127,075,261
Commitments and contingencies (Note 8)
Shareholders' equity (Notes 1 and 9):
Redeemable preferred stock, par value $25.00; authorized,
1,000,000 shares; issued, 70,000 shares 1,575,000 1,575,000
Common stock, no par value; authorized, 10,000,000 shares;
outstanding, 4,105,517 shares (1996) and 4,101,500 shares (1995) 14,032,491 14,001,360
Retained earnings 4,276,551 2,067,331
------------- -------------
Total shareholders' equity 19,884,042 17,643,691
------------- -------------
$ 157,698,429 $ 144,718,952
============= =============
</TABLE>
See notes to financial statements.
- 21 -
<PAGE> 24
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Sales of equipment $ 93,613,257 $64,998,934 $ 47,345,140
Interest income 4,635,725 5,405,571 6,111,136
Gain on sale of financing transactions 3,406,815 2,889,717 496,328
Other income 2,883,505 1,035,716 398,454
------------ ----------- ------------
Total revenue 104,539,302 74,329,938 54,351,058
COSTS:
Cost of equipment sold 82,922,839 57,865,782 42,807,214
Interest expense 2,457,619 3,340,050 3,937,621
------------ ----------- ------------
Total costs 85,380,458 61,205,832 46,744,835
------------ ----------- ------------
GROSS PROFIT 19,158,844 13,124,106 7,606,223
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (Notes 1 and 8) 15,296,264 9,637,320 6,056,307
------------ ----------- ------------
INCOME BEFORE INCOME TAXES 3,862,580 3,486,786 1,549,916
INCOME TAXES (Note 7) 1,545,000 1,394,715 1,844,732
------------ ----------- ------------
NET INCOME (LOSS) $ 2,317,580 $ 2,092,071 $ (294,816)
============ =========== ============
NET INCOME PER SHARE $ 0.52 $ 0.60
============ ===========
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS (Note 9) $ 2,209,220 $ 2,067,331
============ ===========
PRO FORMA STATEMENT OF INCOME DATA
(Unaudited) (Note 1)
Historical income before income taxes $ 1,549,916
Pro forma provision for income taxes 619,966
------------
Pro forma net income $ 929,950
============
Pro forma net income per share $ 0.38
============
Weighted average shares outstanding 4,495,000 3,494,000 2,454,000
============ =========== ============
</TABLE>
See notes to financial statements.
- 22 -
<PAGE> 25
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, January 1, 1994 -- $ -- 2,454,000 $ 2,700 $ 3,522,438 $ 3,525,138
Net loss (294,816) (294,816)
Dividends and distributions
to shareholders (420,000) (420,000)
Reclassification of retained
earnings (Note 1) 2,807,622 (2,807,622) --
----------- ----------- ----------- ----------- ------------ ------------
BALANCE, 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 9) 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, 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, December 31, 1996 70,000 $ 1,575,000 4,105,517 $14,032,491 $ 4,276,551 $ 19,884,042
=========== =========== =========== =========== ============ ============
</TABLE>
See notes to financial statements.
- 23 -
<PAGE> 26
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------------
1996 1995 1994
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,317,580 $ 2,092,071 ($ 294,816)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 305,459 140,619 97,631
Dividends payable 26,466 -- (241,500)
Change in lease receivable allowance 815,000 200,000 200,000
Gain on sale of residuals (511,358) (330,985) (337,447)
Gain on sale of financing transactions (3,406,815) (2,889,717) (496,328)
Initial direct cost amortization 1,275,593 1,421,940 1,382,095
Net amortization of deferred interest (2,178,106) (3,487,460) (4,048,459)
Increase in restricted cash (3,234,015) (2,875,544) --
Change in accounts receivable, officer note receivable
and prepaid expenses (6,167,276) (3,813,541) (231,685)
Change in income taxes receivable (953,234) -- --
Change in accounts payable and accrued liabilities 5,328,436 3,157,393 594,942
Change in income taxes payable (1,204,283) 1,204,283 --
Change in deferred income taxes 746,346 (826,000) 1,832,250
-------------- -------------- --------------
Net cash used in operating activities (6,840,207) (6,006,941) (1,543,317)
CASH FLOWS FROM INVESTING ACTVITIES:
Payments received from lessees 7,849,882 4,594,050 6,471,021
Proceeds from sale of residuals 1,361,690 964,734 811,752
Purchase of fixed assets (1,337,149) (704,622) (129,644)
Initial direct cost capitalization (2,076,552) (1,137,479) (1,600,857)
Equipment purchased for financing (131,266,745) (87,881,000) (63,579,313)
-------------- -------------- --------------
Net cash used in investing activities (125,468,874) (84,164,317) (58,027,041)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse debt 115,980,807 90,479,518 56,061,317
Proceeds from notes payable to bank 28,539,402 6,792,326 11,870,347
Proceeds from sale of preferred stock -- 1,575,000 --
Proceeds from sale of common stock 31,131 -- --
Proceeds from initial public offering -- 11,191,038 --
Distribution to shareholders -- -- (178,500)
Preferred stock dividends (108,360) (24,740) --
Payments on notes payable to bank (17,557,854) (13,068,622) (8,488,326)
-------------- -------------- --------------
Net cash provided by financing activities 126,885,126 96,944,520 59,264,838
-------------- -------------- --------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (5,423,955) 6,773,262 (305,520)
CASH AND CASH EQUIVALENTS
beginning of year 9,409,305 2,636,043 2,941,563
-------------- -------------- --------------
CASH AND CASH EQUIVALENTS
end of year $ 3,985,350 $ 9,409,305 $ 2,636,043
============== ============== ==============
</TABLE>
See notes to financial statements.
- 24 -
<PAGE> 27
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE -
Income taxes paid $ 2,970,078 $ 1,024,957 $ 12,482
=========== =========== ===========
Interest paid $ 222,522 $ 221,794 $ 428,741
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -
Estimated lessee payments made directly to
nonrecourse lending institutions $49,000,240 $56,435,079 $40,951,236
=========== =========== ===========
</TABLE>
See notes to financial statements.
- 25 -
<PAGE> 28
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 had
elected to be treated as an S corporation until the election was voluntarily
revoked by the shareholders effective December 31, 1994 and subsequently
approved by the Internal Revenue Service. The Company is principally engaged in
leasing medical diagnostic, therapeutic and surgical equipment to healthcare
providers, including private physicians, outpatient medical facilities and
nonphysician medical service providers.
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 - A transaction is classified as a direct finance lease when
the Company retains a continuing economic interest in the lease. 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.
For leases in which the Company does not retain a continuing economic interest,
sales are recognized upon consummation of the lease assignment to the
nonrecourse lender. The discounted value of aggregate lease payments is recorded
as sales revenue and equipment cost is recorded as cost of sales.
When leases are assigned to lending institutions without recourse, the present
value of the lease receivable is either recorded on the balance sheet as
"Discounted lease rentals assigned to lenders" when the Company has no
continuing economic interest in the lease or included in "Net investment in
direct finance leases" when the Company has a continuing economic interest in
the lease. 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 in the statement of operations.
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 within 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.
Nonrecourse Debt - The Company generally funds purchases of equipment for its
lease portfolio through permanent financing on a nonrecourse basis, or by
financing such purchases through a limited recourse securitization agreement
- 26 -
<PAGE> 29
with a financial institution by discounting lease payments to financial
institutions for cash. The Company is dependent on these financing techniques
for a majority of its working capital needs. There can be no assurance that
nonrecourse financing at terms acceptable to the Company will be available. The
inability to obtain suitable nonrecourse financing could have a material adverse
effect on the Company. 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.
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
utilizes the accounting and income recognition methodology relating to direct
finance leases as previously described. Subsequently, the Company may 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.
Other Income - Other income is comprised of gains from the sale of residual
interests in equipment leased, service fee revenue, late charge income and
interest income.
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
Statement of Financial Accounting Standards No. 109 (SFAS 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 7).
Pro Forma Net Income - Pro forma net income represents the results of operations
for the year ended December 31, 1994, adjusted to reflect a provision for income
tax on historical income before provision for income taxes, which gives effect
to the change in the Company's income tax status to a C corporation.
Net Income per Share - Net income per share has been computed by dividing net
income by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.
Pro Forma Net Income Per Share - Historical net income (loss) per share for the
year ended December 31, 1994, is not presented because it is not indicative of
the ongoing entity. Pro forma net income per share has been computed by dividing
pro forma net income for each year by the weighted average number of shares of
common stock outstanding during the period.
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 Developments - In October, 1995, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation, which required adoption of the
disclosure provisions for the year ended December 31, 1996 and adoption of the
recognition and measurement provisions for nonemployee transactions subsequent
to December 15, 1995. The new standard defines a fair value method of accounting
for stock options and other equity instruments. Under the fair value method,
compensation cost is measured at the grant date based on the fair value of the
award and is recognized over the service period, which is usually the vesting
period.
- 27 -
<PAGE> 30
Pursuant to the new standard, companies are encouraged, but are not required, to
adopt the fair value method of accounting for employee stock-based transactions.
Companies are also permitted to continue to account for such transactions under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, but are required to disclose in a note to the financial statements
pro forma net income and, if presented, earnings per share as if the Company had
applied the new method of accounting (Note 10).
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. This statement
is effective for transfers and servicing of financial assets and extinguishments
of liabilities occurring after December 31, 1996, and is to be applied
prospectively. Earlier or retroactive application is not permitted. SFAS No. 125
will change the manner in which the Company determines and recognizes the gain
recorded upon the transfer of its interest in finance contracts. SFAS No. 125
will allow the Company to record gains with respect to transfers of its interest
in leases previously accounted for as direct finance leases that under prior
procedures would have been spread over the life of the transactions. Management
believes that the impact of SFAS No. 125 on transactions other than direct
finance leases will result in somewhat reduced up-front gains while increasing
income over the life of the transactions. Additionally, SFAS No. 125 will alter
the the presentation, in the Company's consolidated financial statements, of
revenues and certain assets and liabilities associated with finance contracts
sold. The Company began applying this new standard effective January 1, 1997.
Reclassification - 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.
- 28 -
<PAGE> 31
2. ACCOUNTS RECEIVABLE AND NOTE RECEIVABLE FROM OFFICER
The Company's accounts receivable and note receivable from officer consist of
the following:
AS OF DECEMBER 31
-------------------------------
1996 1995
----------- ----------
Financial institutions $ 5,467,395 $2,688,315
Service fee receivable 2,241,218 1,078,053
Lessees 1,476,237 285,971
Other 1,239,968 514,110
Less allowance for doubtful
accounts (385,000) (200,000)
----------- ----------
$10,039,818 $4,366,449
=========== ==========
Note receivable from officer $ 143,831 $ 175,000
=========== ==========
The note receivable from officer is unsecured, bears interest at 6.75% per year
and is due in two annual installments on each of May 20, 1997 and 1998.
3. FIXED ASSETS
The Company's fixed assets consist of the following:
AS OF DECEMBER 31
---------------------------
1996 1995
---------- ----------
Office equipment $1,325,327 $ 714,865
Furniture and fixtures 503,377 298,405
Computer software 764,663 340,512
---------- ----------
2,593,367 1,353,782
Less accumulated depreciation
and amortization (692,557) (484,662)
---------- ----------
$1,900,810 $ 869,120
========== ==========
- 29 -
<PAGE> 32
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
------------------------------------------
1996 1995
----------------- -------------------
<S> <C> <C>
Minimum lease payments receivable $39,053,042 $37,579,468
Estimated unguaranteed residual value 4,350,948 5,497,935
----------------- -------------------
43,403,990 43,077,403
Deferred initial direct costs 2,480,698 2,490,899
Less unearned income (9,139,363) (10,647,646)
Less lease receivable and residual
valuation allowance (1,215,000) (400,000)
----------------- -------------------
(7,873,665) (8,556,747)
----------------- -------------------
Net investment in direct finance leases $35,530,325 $34,520,656
================= ===================
</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.
At December 31, 1996, 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:
1997 $18,092,736 $1,197,379 $19,290,115
1998 9,231,823 1,132,676 10,364,499
1999 6,215,877 1,040,075 7,255,952
2000 3,470,853 559,785 4,030,638
2001 1,917,789 411,794 2,329,583
Thereafter 123,964 9,239 133,203
----------------- ------------------- ----------------
39,053,042 4,350,948 43,403,990
Initial direct costs 2,480,698 2,480,698
Less unearned income (7,264,362) (1,875,001) (9,139,363)
Less lease receivable and
residual valuation allowance (1,115,000) (100,000) (1,215,000)
----------------- ------------------- ----------------
(5,898,664) (1,975,001) (7,873,665)
----------------- ------------------- ----------------
Net investment in direct finance leases $33,154,378 $2,375,947 $35,530,325
================= =================== ================
</TABLE>
- 30 -
<PAGE> 33
5. LINE OF CREDIT
The Company has a $30,000,000 revolving line of credit, plus an additional
$5,000,000 which is used exclusively for overdraft protection, with a Bank,
which it uses from time to time for the funding of certain of its financing and
equipment transactions. The Revolver provides for borrowings at rates based on a
short-term index plus 150 basis points, allows for advances through May 31,
1997, 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. As of December 31, 1996, the balance outstanding
under the Revolver was $10,982,000 and there were no outstanding term loans with
the Bank.
The line of credit is 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 line of credit excludes an arrangement
for compensating balances. Under the provisions of the line of credit, the
Company must maintain certain net worth requirements ($15,738,000 at December
31, 1996) and a defined debt to net worth ratio of not greater than 3.25. The
Company was in compliance with these covenants at December 31, 1996.
6. NONRECOURSE DEBT AND ASSET SECURITIZATION
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, 1996 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:
1997 $8,127,169 $43,083,351 $51,210,520
1998 5,147,319 33,612,160 38,759,479
1999 2,680,119 22,607,637 25,287,756
2000 799,290 10,414,492 11,213,782
2001 144,981 3,612,407 3,757,388
Thereafter 2,720 79,596 82,316
----------------- ------------------- ----------------
16,901,598 113,409,643 130,311,241
Less deferred interest expense (1,977,426) (15,270,992) (17,248,418)
----------------- ------------------- ----------------
$14,924,172 $98,138,651 $113,062,823
================= =================== ================
</TABLE>
Installments made by lessees on discounted lease rentals assigned to lenders
match the related maturity amounts set forth above.
In January 1995, the Company and SunAmerica entered into an asset securitization
agreement under which SunAmerica agreed to purchase up to $65.0 million in
principal amount of trust certificates. The Company securitized $57.0 million of
financing contracts under this facility. In February 1996, the Company and
SunAmerica entered into an agreement pursuant to which SunAmerica agreed to
purchase up to an additional $l00.0 million in principal amount of trust
certificates. Through December 31, 1996, the Company has securitized $86.0
million of its financing contracts with SunAmerica. This agreement with
SunAmerica expires on April 30, 1997. 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.
- 31 -
<PAGE> 34
7. INCOME TAXES
For the years ended December 31, 1996, 1995 and 1994 income tax expense consists
of the following:
YEAR ENDED DECEMBER 31
---------------------------------------
1996 1995 1994
----------- ----------- -----------
Current
Federal $ 572,248 $ 1,735,522 $ --
State 367,297 485,193 19,000
----------- ----------- -----------
939,545 2,220,715 19,000
Deferred
Federal 510,963 (622,319) 1,430,000
State 94,492 (203,681) 395,732
----------- ----------- -----------
605,455 (826,000) 1,825,732
----------- ----------- -----------
$ 1,545,000 $ 1,394,715 $ 1,844,732
=========== =========== ===========
The reconciliation of income tax expense computed at U.S. federal statutory
rates to income tax expense for the years ended December 31, 1996, 1995 and 1994
is as follows:
YEAR ENDED DECEMBER 31
-----------------------------------------
1996 1995 1994
---------- ----------- ----------
Tax at U.S. federal statutory
rates $1,313,277 $1,220,376 $ 527,000
State income taxes 180,769 185,798 19,000
S corporation earnings not
subject to federal income
taxes -- -- (527,000)
Restoration of deferred
income tax liabilities in
connection with the Company's
conversion to a C corporation -- (11,459) 1,825,732
Other 50,954 -- --
========== ========== ==========
$1,545,000 $1,394,715 $1,844,732
========== ========== ==========
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, 1996 and
1995 are as follows:
AS OF DECEMBER 31
----------------------------
1996 1995
---------- ----------
Deferred tax assets:
Allowance for doubtful accounts $ 657,554 $ 252,000
State income taxes 116,254 245,000
Other 101,046 --
---------- ----------
Total deferred assets 874,854 497,000
---------- ----------
Deferred tax liabilities:
Book to tax basis difference
on certain leased equipment 2,695,200 1,554,000
Other -- 17,000
---------- ----------
Total deferred liabilities 2,695,200 1,571,000
---------- ----------
Net deferred liabilities $1,820,346 $1,074,000
========== ==========
- 32 -
<PAGE> 35
For all periods prior to December 31, 1994, the Company elected to be treated as
an S corporation under the provisions of the Internal Revenue Code. Effective
December 31, 1994, the Company converted to a C corporation and became subject
to regular federal and state income taxes on a go-forward basis. As a result,
the Company recorded $1,825,732 of deferred income tax liabilities at December
31, 1994.
8. COMMITMENTS AND CONTINGENCIES
Leases - The Company leases its corporate offices and certain fixed assets under
operating and capital leases which expire on various dates through February
2001. Rent expense was $573,269 (1996), $385,731 (1995), and $260,090 (1994).
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:
1997 $65,574 $473,408 $538,982
1998 60,712 425,677 486,389
1999 47,044 419,677 466,721
2000 6,337 -- 6,337
----------------- ------------------- ----------------
$179,667 $1,318,762 $1,498,429
Less amount representing interest (25,377) -- (25,377)
----------------- ------------------- ----------------
$154,290 $1,318,762 $1,473,052
================= =================== ================
</TABLE>
Employment Agreements - The Company has employment agreements with four company
officers which call for minimum annual salaries and annual bonuses payable to
each officer during each of the next two years.
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.
9. STOCKHOLDERS EQUITY
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.
- 33 -
<PAGE> 36
Initial Public Offering - 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.
10. 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. 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, 1995 and 1996:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
OPTION SHARES PRICE
----------------- --------
<S> <C> <C>
Outstanding at January 1, 1995 --
Granted during 1995 153,861 $ 7.77
Canceled during 1995 --
Exercised during 1995 --
-----------------
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
=================
</TABLE>
Additional information regarding options outstanding as of December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- ------------------------------
WEIGHTED AVG
REMAINING
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG NUMBER WEIGHTED AVG
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 7.75 - 17.00 149,783 8.36 $ 7.99 69,096 $ 8.02
</TABLE>
As disclosed in Note 1, 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.
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123), 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 granted during fiscal 1995. Under SFAS No. 123, the fair
value of
- 34 -
<PAGE> 37
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, 60 months - 120
months; stock volatility, 25.9% - 48.0% in 1996 and 27.6% in 1995; risk free
interest rates, 6.0% in 1996 and 1995; no dividends during the expected term and
forfeitures are recognized as they occur.
If the computed fair value of the 1995 and 1996 awards had been amortized to
expense over the vesting period of the awards, pro forma net income would have
been $1,980,000 or $0.57 per share in 1995 and $2,205,000 or $0.49 per share in
1996.
11. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENT
In accordance with Statement of Financial Accounting Standards 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, 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,
1995 was $113,062,823 and $113,147,000 respectively. The Company estimated the
fair value of nonrecourse debt at December 31, 1996 using the Company's funding
rates at December 31, 1996.
The carrying values of cash and cash equivalents, restricted cash, receivables
from sale of leases and notes secured by equipment, accounts payable, and other
accrued expenses approximate fair values at December 31, 1996 due to the
relatively short maturities of these instruments.
12. SELECTED QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
March 31 June 30 Sept. 30 Dec. 31 Total
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
Income per share 0.15 0.17 0.17 0.03 0.52
FISCAL YEAR 1995
Total revenue $13,294,936 $16,364,096 $19,764,808 $24,906,098 $74,329,938
Gross profit 2,407,113 2,784,451 3,017,200 4,915,342 13,124,106
Income before taxes 320,109 604,579 981,779 1,580,319 3,486,786
Net income 192,109 362,708 589,064 948,190 2,092,071
Income per share 0.08 0.15 0.15 0.22 0.60
</TABLE>
- 35 -
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
- 36 -
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's Directors is incorporated herein by
reference to the Company's definitive proxy statement filed not later than April
30, 1997, with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended. Information regarding the
Company's Executive Officers is set forth in Part I of this Form 10-K.
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 filed not later than April
30, 1997 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 filed not later than April
30, 1997, 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 filed not later than April
30, 1997, with the Securities and Exchange Commission pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended.
- 37 -
<PAGE> 40
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 19.
(2) Financial Statement Schedules:
<TABLE>
<CAPTION>
SCHEDULE PAGE
NUMBER DESCRIPTION NUMBER
------ ----------- ------
<S> <C>
II. Valuation and Qualifying Accounts 41
</TABLE>
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:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
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)
</TABLE>
- 38 -
<PAGE> 41
<TABLE>
<S> <C>
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)
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.
10.30 Master Demand Note in the principal amount of $5.0 million issued by the
registrant in favor of CoreStates.
10.31 Cashpivot Investment/Loan Agreement by and between the registrant and
CoreStates.
21.1 List of Subsidiaries. (1)
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
- ------------------
(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.
(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, 1996.
- 39 -
<PAGE> 42
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Gerry J. Ricco President and Chief March 27, 1997
- --------------------------- Executive Officer
Gerry J. Ricco and Director (Principal
Executive Officer)
/s/ Larry Hartmann Executive Vice President and March 27, 1997
- --------------------------- Director
Larry Hartmann
/s/ Brian Siegel Executive Vice President and March 27, 1997
- --------------------------- Director
Brian Siegel
/s/ Larry E. Davis Senior Vice President and March 27, 1997
- --------------------------- Chief Financial Officer
Larry E. Davis (Principal Financial and
Accounting Officer)
/s/ Robert S. Vaters Director March 27, 1997
- ---------------------------
Robert S. Vaters
/s/ Floyd S. Robinson Director March 27, 1997
- ---------------------------
Floyd S. Robinson
</TABLE>
- 40 -
<PAGE> 43
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>
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
================== ================ ============= ================ ============
Year ended December 31, 1994 -
Allowance for doubtful accounts $200,000 $579,703 -- $379,703 $400,000
================== ================ ============= ================ ============
</TABLE>
- 41 -
<PAGE> 1
EXHIBIT 10.29
Amendment dated February 10, 1997 to the Master Agreement ("Master Agreement")
dated March 7, 1996 between Rockford Industries, Inc. and CoreStates Bank, N.A.
and to the Security Agreement as defined in the Master Agreement. All defined
terms shall have the meaning given them in the Master Agreement.
You have requested and we have agreed, intending to be legally bound, to
increase the "Maximum Line" from $15,000,000.00 to $30,000,000.00. Therefore,
(i) the amount "$15,000,000.00" shall be deleted from the sixth line of the
first paragraph of the Master Agreement and the amount "$30,000,000.00"
substituted therefor and (ii) in Section 1 1.1 Advances of the Security
Agreement, the amount of "$15,,000,000.00" appearing in lines two and three will
be deleted and the amount of "$30,000,000.00" shall be substituted therefor.
CORESTATES BANK, N.A. ROCKFORD INDUSTRIES, INC.
By: /s/ Hugh Connelly By: /s/ Larry E. Davis
--------------------------- -------------------------------
Hugh Connelly Larry E. Davis
- 42 -
<PAGE> 2
RESTATED AND AMENDED
MASTER SECURED PROMISSORY NOTE
$30,000,000.00 As of March 7, 1996
FOR VALUE RECEIVED, Rockford Industries, Inc., a California corporation (the
"Borrower"), HEREBY PROMISES TO PAY to the order of CoreStates Bank, N.A., a
national banking association (the "Lender"), at its offices at 1339 Chestnut
Street, Philadelphia, PA 19107, the principal sum of Thirty Million Dollars
($30,000,000.00) or such lesser amount as shall have been advanced hereunder,
and interest on the unpaid balance of such principal as hereinafter provided,
in lawful money of the United States and in immediately available funds.
Interest (the "Default Rate") on overdue amounts of principal (and to the
extent legally enforceable, interest) shall be payable on demand at the rate of
2% over the then applicable rate.
This Note is entitled to the benefits and security of a Master Agreement (Full
Recourse) dated March 7, 1996 ("Credit Agreement") and a Master Security
Agreement ("Security Agreement") dated as of March 7, 1996, (together "Loan
Agreements") as amended, modified or supplemented from time to time between the
Borrower and the Lender, and is subject to mandatory prepayment and the
maturity hereof may be accelerated, all as provided in said Loan Agreements.
The principal amount of each advance hereunder at any time outstanding
hereunder ("Loan Amount") shall bear interest from the date of such advance at
either the "Reference Rate" or the "ADJUSTED LIBOR RATE" as such terms are
hereinafter defined. "Reference Rate" shall mean Lender's overnight borrowing
rate as it may be changed from time to time, "Adjusted Libor Rate" shall mean,
for any Interest Period (defined below), the rate per annum determined pursuant
to the following formula:
Libor Rate
Adjusted Libor Rate = ------------------------ + 1.50%
1 - Reserve Percentage
For purposes hereof, "LIBOR RATE" shall mean the arithmetic average of the rates
of interest per annum (rounded upwards, if necessary to the next 1/16 of 1%) at
which Lender is offered deposits of United States dollars in the London
Interbank Market on or about eleven o'clock (11:00) a.m. London time, two London
Business Days prior to the commencement of the Interest Period in amounts
substantially equal to the
- 43 -
<PAGE> 3
outstanding Loan Amount for a maturity of comparable duration to the Interest
Period. The "RESERVE PERCENTAGE" shall mean, for the Lender on any day, that
percentage (expressed as a decimal) prescribed by the Board of Governors of the
Federal Reserve System (or any successor or any other banking authority to which
Lender is subject, including any board of governmental or administrative agency
of the United States or any other jurisdiction to which the Lender is subject),
for determining the reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for deposits of United States
Dollars in a non-United States or an international banking office of a bank used
to finance the Loan Amount at the Adjusted Libor Rate or any loan made with the
proceeds of such deposit. The Adjusted Libor Rate shall be adjusted on and as of
the effective day of any change in the Reserve Percentage.
An "INTEREST PERIOD" shall mean for each advance bearing interest at the
Adjusted Libor Rate a period of 30, 60, 90 or 180 days duration during which the
Adjusted Libor Rate is applicable; provided, however, that (i) an Interest
Period shall commence only on a London Business Day of a particular month; (ii)
an Interest Period which would otherwise expire on a day which is not a London
Business Day of a particular month shall expire on the next London Business Day
of such month; (iii) interest shall accrue from and including the first day of
any Interest Period to, but excluding, the day on which any Interest Period
expires and (iv) no Interest Period may extend beyond the Termination Date (as
defined in the Credit Agreement). A "LONDON BUSINESS DAY" shall mean any
Business Day on which banks in London, England are open for business.
Borrowers shall elect five (5) business days before the expiration of any
Interest Period, by written notice to Lender, the applicable period of the
succeeding Interest Period. Such election shall be irrevocable. If Borrower
fails to give Lender written notice, five (5) business days before the
expiration of any Interest Period of the applicable term of the succeeding
Interest Period then Borrower shall be deemed to have elected an Interest Period
of the same term as that of the Interest Period which preceded it.
Interest based on the Adjusted Libor Rate for a particular Interest Period or
for any advance bearing interest at the Reference Rate shall be calculated on
the basis of the actual number of days elapsed over a year of three hundred
sixty-five (365) days. Interest on an advance bearing
- 44 -
<PAGE> 4
interest at the Adjusted Libor Rate shall be due at the end of each Interest
Period, provided that accrued interest shall be paid at least quarterly.
Interest on an advance bearing interest at the Reference Rate shall be payable
on the first day of each month. Principal shall be due and payable, unless
accelerated pursuant to the terms hereof or of the Loan Agreements, on the
Termination Date (as defined in the Credit Agreement).
The Adjusted Libor Rate may be automatically adjusted by Lender on a prospective
basis to take into account the additional or increased cost of maintaining any
necessary reserves for Eurodollar deposits or increased costs due to changes in
applicable law or regulation or the interpretation thereof occurring subsequent
to the commencement of the then applicable Interest Period, including but not
limited to changes in tax laws (except changes of general applicability in
corporate income tax laws) and changes in the reserve requirements imposed by
the Board of Governors of the Federal Reserve System (or any successor),
excluding the Reserve Percentage, that increase the cost to Lender of financing
the Loan Amount at the Adjusted Labor Rate. The Lender shall give the Borrower
notice of such a determination and adjustment, which determination shall be
prima facie evidence of the correctness of the fact and the amount of such
adjustment. The Borrower may, by notice to the Lender request Lender to furnish
to Borrower a statement setting forth the basis for adjusting such Adjusted
Libor Rate and the method for determining the amount of such adjustment.
In the event that Lender shall have reasonably determined that Eurodollar
deposits equal to the amount of the outstanding principal of the Loan Amount and
for the Interest Period are unavailable, or that the Adjusted Libor Rate will
not adequately and fairly reflect the cost of making or maintaining the Loan
Amount during the Interest Period based upon Lender`s standard accounting
practices and anticipated returns for similar loans or that by reason of
circumstances affecting Eurodollar markets, adequate and reasonable means do not
exist for ascertaining the Adjusted Libor Rate applicable to the Interest
Period, Lender shall promptly give notice of such determination to Borrower that
the Adjusted Libor Rate is not available. A determination by Lender hereunder
shall be conclusive. Until such time as Lender determines that the Adjusted
Libor Rate is again
- 45 -
<PAGE> 5
available the Loan Amount shall bear interest based at the Reference Rate plus
1.5% ("Adjusted Alternate Rate").
In the event that it becomes unlawful for Lender to maintain Eurodollar
liabilities sufficient to finance the Loan Amount at the Adjusted Libor Rate,
then Lender shall immediately notify the Borrower thereof and Lender's
obligation hereunder to maintain an Adjusted Libor Rate shall cease. The Loan
Amount shall then be subject to the Adjusted Alternate Rate.
The Borrower may prepay any Loan Amount on one day prior notice, but for any
advances bearing interest at the Adjusted Libor Rate or Adjusted Alternate Rate
only on the last day of the applicable Interest Period; provided, however, that
in the event of the prepayment of a Loan Amount during such time as the Adjusted
Libor Rate or Adjusted Alternate Rate is in effect on a date other than the last
day of the applicable Interest Period for any reason, including, without
limitation, acceleration pursuant to an event of Default, Borrower shall
reimburse Lender for all funding costs and loss of earnings and anticipated
profits which may arise in connection with such prepayment.
Provided no default exists hereunder or under the Loan Agreements all sums
received by Borrower with respect to the surrender or sale of any of the
Collateral (as defined in the Security Agreement) and all insurance proceeds to
which Borrower may be entitled with respect to any of the Collateral by reason
of damage, destruction or loss of the Collateral (which are not required by the
terms of the Security Agreement to be applied to the repair or replacement of
any Collateral shall be applied by Borrower immediately upon receipt to the
prepayment of this Note. Such sums shall be applied first to accrued interest,
then to prepay principal; any excess will be held to satisfy any contingent
liability, including without limitation under the Applications as defined in the
Credit Agreement and any further excess shall be remitted to Borrower. Anything
contained herein to the contrary notwithstanding, if a Default (as defined in
the Credit Agreement) shall occur, Lender may retain all payments then or
thereafter made and other monies received, and apply the same as provided in the
Loan Agreements.
The Borrower hereby waives all defenses and all rights to setoff and
deductions of any kind, with respect to the Borrower's obligations under this
Note, not arising out of
- 46 -
<PAGE> 6
this Note or the Loan Agreements. The Borrower hereby waives diligence, demand,
protest, notice of any defense by reason of extension of time for payment or
other indulgence granted by the holder hereof. Borrower agrees to pay any and
all costs and expenses, including attorneys fees, which may be incurred in
connection with the enforcement of this Note. This Note shall be governed by,
and construed in accordance with, the laws of the Commonwealth of Pennsylvania.
CONSENT TO JURISDICTION AND VENUE. IN ANY LEGAL PROCEEDING INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE OR THE
RELATIONSHIP ESTABLISHED HEREUNDER, EACH UNDERSIGNED PARTY HEREBY IRREVOCABLY
SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED
IN ANY COUNTY IN THE COMMONWEALTH OF PENNSYLVANIA WHERE THE LENDER MAINTAINS AN
OFFICE AND AGREES NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO THE
LAYING OR MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY. EACH
UNDERSIGNED PARTY AGREES THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE
DULY EFFECTED UPON IT BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE
PREPAID, TO EACH UNDERSIGNED PARTY. EACH OF THE UNDERSIGNED WAIVES THE RIGHT TO
JURY TRIAL IN ANY PROCEEDINGS RELATED TO THIS NOTE.
This Restated and Amended Master Secured Promissory Note is issued in
amendment and substitution for, but not in payment of, that certain Master
Secured Promissory Note dated March 7, 1996 issued by Rockford Industries, Inc.
to Lender (the "Prior Note"), and evidences in lieu of the Prior Note, the same
outstanding indebtedness, including interest thereon, as that heretofore
evidenced by the Prior Note. No part of such indebtedness shall be deemed by
reason of the issuance hereof to have been repaid and reborrowed pursuant to a
new promissory note.
ROCKFORD INDUSTRIES, INC.
By: /s/Larry E. Davis
------------------------------
Larry E. Davis
- 47 -
<PAGE> 1
EXHIBIT 10.30
MASTER DEMAND NOTE
$5,000,000.00 September 30, 1996
- ------------- ------------------
FOR VALUE RECEIVED, each of the undersigned, jointly and severally if more than
one (hereinafter collectively referred to as "Borrower"), promises to pay to the
order of CoreStates Bank, NA.*, a national banking association (the "Bank"), at
any of its banking offices in Pennsylvania, the principal amount of Five Million
and 00/100 DOLLARS in lawful money of the United States, or, if less, the
outstanding principal balance on all loans and advances made by Bank evidenced
by this Note ("Loans"), plus interest. Said principal and interest shall be
payable ON DEMAND
Interest shall accrue at a rate per annum which is at all times equal to the
Bank's Prime Rate. Bank's Prime Rate, such rate to change each time the Prime
Rate changes, effective on and as of the date of the change.
INTEREST-Interest shall be calculated based on a year of 360 days but shall be
charged on actual days.
Accrued interest shall be payable monthly. Accrued interest shall also be
payable on demand and when the entire principal balance of this Note is paid to
Bank. The term "Prime Rate" is defined as the rate of interest for loans
established by Bank from time to time as its prime rate. Interest shall accrue
on each disbursement hereunder from the date such disbursement is made by Bank,
provided, however, that to the extent this Note represents a replacement,
substitution, renewal or refinancing of existing indebtedness, interest shall
accrue from the date hereof. Interest shall accrue on the unpaid balance hereof
at the rate provided for in this Note until the entire unpaid balance has been
paid in full, notwithstanding the entry of any judgment against Borrower.
BANK'S LOAN RECORDS - The actual amount due and owing from time to time under
this Note shall be evidenced by Bank's books and records of receipts and
disbursements hereunder. Bank shall set up and establish an account on the books
of Bank in which will be recorded Loans evidenced hereby, payments on such Loans
and other appropriate debits and credits as provided herein, including any Loans
which represent reborrowings of amounts previously repaid. Bank shall also
record, in accordance with customary accounting practice, all other interest,
charges, expenses and other items properly chargeable to Borrower hereunder, and
other appropriate debits and credits. Such books and records of Bank shall be
presumed to be complete and accurate and shall be deemed correct, except to the
extent shown by Borrower to be manifestly erroneous.
NOTE NOT A COMMITMENT TO LEND - Borrower acknowledges and agrees that no
provision hereof, and no course of dealing by Bank in connection herewith, shall
be deemed to create or shall imply the existence of any commitment or obligation
on the part of Bank to make Loans. Except as otherwise provided in a currently
effective written agreement by Bank to make Loans, each Loan shall be made
solely at Bank's discretion.
PREPAYMENT - Borrower may at its option prepay all or any portion of the
principal balance of any Loans made hereunder at any time without premium or
penalty.
COLLATERAL - As security for all indebtedness to Bank now or hereafter incurred
by Borrower, under this Note or otherwise, Borrower grants Bank a lien upon and
security interest in any securities, instruments or other personal property of
Borrower now or hereafter in Bank's possession and in any deposit balances now
or hereafter held by Bank for Borrower's account and in all proceeds of any such
personal property or deposit balances. Such liens and security interests shall
be independent of Bank's right of setoff. This Note and the indebtedness
evidenced hereby shall be additionally secured by any lien or security interest
evidenced by a writing (whether now existing or hereafter executed) which
contains a provision to the effect that such lien or security interest is
intended to secure (a) this Note or indebtedness evidenced hereby or (b) any
category of liabilities, obligations or the indebtedness of Borrower to Bank
which includes this Note or the indebtedness evidenced hereby, and all property
subject to any such lien or security interest shall be collateral for this Note.
DEMAND NOTE - This Note is and shall be construed as a "demand instrument" under
the Uniform Commercial Code. Bank may demand payment of the indebtedness
outstanding under this Note or any portion thereof at any time.
- 48 -
<PAGE> 2
BANK'S REMEDIES - In the event that any payment hereunder is not made when due
or demanded, Bank may, immediately or any time thereafter, exercise any or all
of its rights hereunder or under any agreement or otherwise under applicable law
against Borrower, against any person liable, either absolutely or contingently,
for payment of any indebtedness evidenced hereby, and in any collateral, and
such rights may be exercised in any order and shall not be prejudiced by any
delay in Bank's exercise thereof. At any time after such non-payment, Bank may,
at its option and upon five days written notice to Borrower, begin accruing
interest on this Note at a rate not to exceed five percent (5%) per annum in
excess of the rate of interest provided for above on the unpaid principal
balance hereof; provided, however, that no such interest shall accrue hereunder
in excess of the maximum rate permitted by law. All such additional interest
shall be payable upon demand.
NOTICE TO BORROWER - Any notice required to be given by Bank under the
provisions of this Note shall be effective as to each Borrower when addressed to
Borrower and deposited in the mail, postage prepaid, for delivery by first class
mail at Borrower's mailing address as it appears on Bank's records.
DISBURSEMENTS AND PAYMENTS - The proceeds of any Loan may be credited by Bank to
the deposit account of Borrower or disbursed in any other manner requested by
Borrower and approved by Bank. All payments due under this Note are to be made
in immediately available funds. If Bank accepts payment in any other form, such
payment shall not be deemed to have been made until the funds comprising such
payment have actually been received by or made available to Bank. If Borrower is
not an individual, Borrower authorizes Bank (but Bank shall have no obligation)
to charge any deposit account in Borrower's name at Bank for any and all
payments of principal, interest, or any other amounts due under this Note.
PAYMENT OF COSTS - In addition to the principal and interest and other sums
payable hereunder, Borrower agrees to pay Bank on demand, all costs and expenses
(including reasonable attorneys' fees and disbursements) which may be incurred
by Bank in the collection of this Note or the enforcement of Bank's rights and
remedies hereunder.
REPRESENTATIONS BY BORROWER - In order to induce Bank to make Loans, Borrower
represents and warrants as follows: if Borrower is a corporation or a general or
limited partnership, Borrower represents and warrants that it is validly
existing and in good standing in the jurisdiction of whose laws it was
organized. If Borrower is a corporation, Borrower represents and warrants that
the execution, delivery and performance under this Note are within Borrower's
corporate powers, have been duly authorized by all necessary action by
Borrower's Board of Directors, and are not in contravention of the terms of
Borrower's charter, by-laws, or any resolution of its Board of Directors. If
Borrower is a general or limited partnership, Borrower represents and warrants
that the execution, delivery and performance of this Note have been duly
authorized and are not in conflict with any provision of Borrower's partnership
agreement or certificate of limited partnership. Borrower further represents and
warrants that this Note has been validly executed and is enforceable in
accordance with its terms, that the execution, delivery and performance by
Borrower of this Note are not in contravention of law and do not conflict with
any indenture, agreement or undertaking to which Borrower is a party or is
otherwise bound, and that no consent or approval of any governmental authority
or any third party is required in connection with the execution, delivery and
performance of this Note. If this Note is secured by "margin stock" as defined
in Regulation U of the Board of Governors of the Federal Reserve System,
Borrower warrants that no Loan or portion thereof shall be used to purchase or
carry margin stock, and that each Loan shall be used for the purpose or purposes
indicated on the most recent Form FR U-1 executed by Borrower in connection with
Loans made by Bank.
WAIVERS, ETC - Borrower and each additional obligor on this Note waive
presentment, dishonor, notice of dishonor, protest and notice of protest.
Neither the failure nor any delay on the part of Bank to exercise any right,
remedy, power or privilege hereunder shall operate as a waiver or modification
thereof. No consent, waiver or modification of the terms of this Note shall be
effective unless set forth in a writing signed by Bank. All rights and remedies
of Bank are cumulative and concurrent and no single or partial exercise of any
power or privilege shall preclude any other or further exercise of any right,
power or privilege.
MISCELLANEOUS - This Note is the unconditional obligation of Borrower, and
Borrower agrees that Bank shall not be required to exercise any of its rights or
remedies against any collateral in which it holds a lien or security interest,
or against which it has right of setoff, or against any particular obligor. All
representations, warranties and agreements herein are made jointly and severally
by each Borrower. If any provision of this Note shall be held invalid or
- 49 -
<PAGE> 3
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof. To the extent that this Note represents a replacement,
substitution, renewal or refinancing of a pre-existing note or other evidence of
indebtedness, the indebtedness represented by such pre-existing note or other
instrument shall not be deemed to have been extinguished hereby. This Note has
been delivered in and shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania without regard to the law of conflicts.
In the event any due date specified or otherwise provided for in this Note shall
fall on a day which Bank is not open for business, such due date shall be
postponed until the next banking day, and interest and any fees or similar
charges shall continue to accrue during such period of postponement. This Note
shall be binding upon each Borrower and each additional Obligor and upon their
personal representatives, heirs, successors and assigns, and shall benefit Bank
and its successors and assigns.
CONSENT TO JURISDICTION AND VENUE - IN ANY LEGAL PROCEEDING INVOLVING, DIRECTLY
OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATED TO THIS NOTE OR THE
RELATIONSHIP EVIDENCED HEREBY, EACH UNDERSIGNED PARTY HEREBY IRREVOCABLY SUBMITS
TO THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT LOCATED IN ANY
COUNTY IN THE COMMONWEALTH OF PENNSYLVANIA WHERE BANK MAINTAINS AN OFFICE AND
AGREES NOT TO RAISE ANY OBJECTION TO SUCH JURISDICTION OR TO THE LAYING OR
MAINTAINING OF THE VENUE OF ANY SUCH PROCEEDING IN SUCH COUNTY. EACH UNDERSIGNED
PARTY AGREES THAT SERVICE OF PROCESS IN ANY SUCH PROCEEDING MAY BE DULY EFFECTED
UPON IT BY MAILING A COPY THEREOF, BY REGISTERED MAIL, POSTAGE PREPAID, TO EACH
UNDERSIGNED PARTY.
WAIVER OF JURY TRIAL - EACH UNDERSIGNED PARTY HEREBY WAIVES, AND BANK BY ITS
ACCEPTANCE HEREOF THEREBY WAIVES, TRIAL BY JURY IN ANY LEGAL PROCEEDING
INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT,
CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF OR RELATED TO THIS NOTE OR THE
RELATIONSHIP EVIDENCED HEREBY. THIS PROVISION IS A MATERIAL INDUCEMENT FOR BANK
TO ENTER INTO, ACCEPTED' OR RELY UPON THIS NOTE.
IN WITNESS WHEREOF, Borrower, intending this to be a sealed instrument and
intending to be legally bound hereby, has executed and delivered this Note as of
the day and year first above written.
Name of Corporation or Partnership ROCKFORD INDUSTRIES, INC.
By: /s/ Larry E. Davis
------------------------------
Larry E. Davis
- 50 -
<PAGE> 1
EXHIBIT 10.31
CORESTATES BANK
CASHPIVOT INVESTMENT/LOAN AGREEMENT
-----------------------------------
CoreStates Bank N. A. (the "Bank") provides an automatic funds management
service for its commercial deposit customers (the "Customer"). This automatic
funds management service, called "CashPivot" may involve an investment sweep
module, a loan sweep module and an investment and loan sweep module.
CashPivot, as more fully described below, will be provided by the Bank upon its
acceptance of a Customer's application as provided below. The Bank offers other
services related to the investment of excess deposits, but those services are
not covered by this agreement.
GENERAL DESCRIPTION OF CASHPIVOT SERVICE
CashPivot, in the investment module, permits a Customer to invest and earn a
market rate of return on excess funds which would otherwise remain in its
commercial checking account with the Bank (the "DDA Account"). The Customer and
the Bank will from time to time establish an appropriate demand deposit balance
(i.e. minimum account balance) to be maintained in the DDA Account to cover the
Customer's normal activity and service charges (the "Base Balance"). Collected
funds in excess of the Base Balance are "swept" from the Customer's account at
the end of each day and transferred to a separate account established in the
Customer's name by the Bank's Trust Department (the "CashPivot Custody Account")
for immediate investment in a Bank money market deposit account (the "MMA
Account"). In addition to the investment module of CashPivot, a Customer to whom
a line of credit has been extended by the Bank for use with CashPivot may
drawdown and repay loans or both make investments and drawdown and repay loans,
all as cash assets and needs fluctuate by use of the loan module or the
investment and loan module.
CashPivot does not constitute a line of credit. Any line of credit established
by the Bank for a Customer in connection with the CashPivot will be set forth,
and more fully detailed, in a line of credit letter from the Bank to a Customer
or in a loan agreement or other documentation between the Bank and such
Customer. The provisions of such letter, loan agreement or other documentation
shall govern the terms of the line of credit. CashPivot, in the loan module,
covers only the method of making and recording advances and payments under a
line of credit.
OPERATION OF INVESTMENT MODULE
At the end of each business day, the Bank will post all debits and credits to
the DDA Account. The Bank will subtract from the resulting balance the amount of
the float, any holds which may be in effect, and the Base Balance. If the net
amount is positive, that amount will be transferred to the CashPivot Custody
Account for immediate investment in the MMA Account. If the net amount is
negative, that amount will be charged to the CashPivot Custody Account (but only
to the extent of the positive balance therein) and transferred, through the
CashPivot Custody Account, from the MMA Account to the DDA Account to maintain
the Base Balance.
CashPivot Custody Account
The CashPivot Custody Account is a separate account established and
administered by the Bank's Trust Department for each CashPivot Customer
solely for the purposes of this agreement. Transactions in the CashPivot
Custody Account reflect each Customer's investment in and withdrawals
from the MMA Account, proportionate share of interest earned and paid on
the MMA Account, and monthly charges of CashPivot service fees. The
Customer will receive a CashPivot Custody Account statement on a monthly
basis. For purposes of FDIC Insurance limitations, the CashPivot Custody
Account will be treated as if it were a Bank deposit account in the
Customer's name.
- 51 -
<PAGE> 2
MMA Account
The MMA Account is a single money market deposit account in the Bank,
maintained by the Bank's Trust Department for the collective benefit of
all CashPivot Customers. The rate of interest on the MMA Account, which
is determined by the Bank on a weekly basis, will generally reflect
changes in short-term, money market rates, but will not be tied to any
particular market rate or indicator. Interest on the MMA Account will be
calculated daily and paid monthly.
OPERATION OF THE LOAN MODULE
The loan module may be used only by a Customer who has requested and received a
line of credit. At the end of each business day, the Bank will post all debits
and credits to the DDA Account. If there is a resulting negative collected
balance position or a positive collected balance less than the designated Base
Balance, the Customer's line of credit will be charged for an amount sufficient
(but not to exceed the amount available under the line of credit) to cover such
position and the DDA Account shall be credited with such amount so as to leave a
collected balance equal to the designated Base Balance. If the amount available
under the line of credit is not sufficient to cover a negative collected
position, the account will incur a negative collected and/or ledger overdraft
position and any associated charges within the DDA Account.
If there is a positive collected balance greater than the Base Balance, at the
end of a business day after the posting of all debits and credits to the DDA
Account, the Customer's DDA Account will be charged the amount, limited to such
excess balance, necessary to pay down or pay off any outstanding loans under the
line of credit.
OPERATION OF INVESTMENT AND LOAN MODULE
As with the loan module, this module may be used only by a Customer who has
requested and received a line of credit. At the end of each business day, the
Bank shall post all debits and credits to the DDA Account. If there is a
resulting negative collected position or a positive collected balance less than
the designated Base Balance, a loan computation will be made and CashPivot shall
operate in the loan module.
If after posting all debits and credits, there is a positive collected balance
greater than the Base Balance and an outstanding loan under the line of credit,
a paydown computation will be made and CashPivot shall operate first in the loan
module. If there remains a positive collected balance greater than the Base
Balance in the DDA Account after payment in full of the loan under CashPivot,
then an investment computation shall be made and CashPivot shall operate in the
investment module.
DDA ACCOUNT ACTIVITIES
CashPivot will operate by use of the DDA Account from which funds will be swept,
to which investments will be returned, to which loan proceeds will be credited
and to which loan and interest payments will be charged.
Except as otherwise provided in this agreement, the DDA Account will be governed
by the Bank's policies, procedures and fee schedules that are generally
applicable to commercial demand deposit accounts.
FEES FOR CASHPIVOT
The Bank's fees for CashPivot are set forth in the current Schedule of CashPivot
Fees appended to this agreement. This Schedule may be changed by the Bank from
time to time upon thirty days prior written notice to the Customer. CashPivot
service fees are in addition to normal account charges applicable to the DDA
Account. CashPivot service fees shall be billed monthly and paid monthly through
a debit to the CashPivot Custody Account.
- 52 -
<PAGE> 3
MISCELLANEOUS
Either the Customer or the Bank may terminate CashPivot without cause upon
thirty days prior written notice to the other. Either partv may terminate the
service for cause immediately upon written notice to the other. The Bank will
have the right to amend this Agreement, or any provision hereof, at any time,
provided that any such amendments will be effective only on the 10th day
following the Bank's mailing, by regular mail, of the terms of such amendment to
the Customer.
All notices shall be delivered or mailed to the Customer or the Bank at the
respective address indicated below which address may be changed by notice to the
other party.
This agreement shall be governed by and construed in accordance with the laws of
the Commonwealth of Pennsylvania.
The Customer requests that the Bank provide CashPivot services under this
agreement and provides the following information to the Bank:
By: /s/ Larry E. Davis
--------------------------------------
Larry E. Davis, SVP/CFO
- 53 -
<PAGE> 4
Monthly Maintenance Fee
SCHEDULE OF CASHPIVOT FEES
$120 00
Investment Fee - a per annum fee, payable monthly and based on the average daily
CashPivot Custody Account balance for the month.
<TABLE>
<CAPTION>
Average Annual Rate
Custody Account Balance ($) -----------
---------------------------
<S> <C> <C>
$0 - 2,999,999.99 20 b.p.
$3,000,000 and above 10bp
</TABLE>
- 54 -
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
33-5609 of Rockford Industries, Inc. on Form S-8 of our report, dated February
28, 1997, appearing in this Annual Report on Form 10-K of Rockford Industries,
Inc. for the year ended December 31, 1996.
DELOITTE & TOUCHE LLP
Costa Mesa, California
March 27, 1997
- 55 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEET STATEMENT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH ANNUAL
10-K.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,094,909
<SECURITIES> 0
<RECEIVABLES> 46,928,974
<ALLOWANCES> 1,215,000
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 2,593,367
<DEPRECIATION> 692,557
<TOTAL-ASSETS> 157,698,429
<CURRENT-LIABILITIES> 137,814,387
<BONDS> 0
0
1,575,000
<COMMON> 14,032,491
<OTHER-SE> 4,276,551
<TOTAL-LIABILITY-AND-EQUITY> 157,698,429
<SALES> 93,630,694
<TOTAL-REVENUES> 104,539,302
<CGS> 82,922,840
<TOTAL-COSTS> 89,055,737
<OTHER-EXPENSES> 8,600,576
<LOSS-PROVISION> 2,242,292
<INTEREST-EXPENSE> 2,457,619
<INCOME-PRETAX> 3,862,580
<INCOME-TAX> 1,545,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,317,580
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
