1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
COMMISSION FILE NUMBER 0-26324
ROCKFORD INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 33-0075112
(State of Incorporation) (I.R.S. Employer
Identification No.)
1851 E. FIRST ST.
SANTA ANA, CA 92705
(Address of principal executive offices) (Zip Code)
(714) 547-7166
(Registrant's telephone number, including area code)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS); AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S NO PAR VALUE
COMMON STOCK AT JULY 28, 1997 WAS 4,105,517.
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ROCKFORD INDUSTRIES, INC.
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets - 3
June 30, 1997 (unaudited) and December 31, 1996
Consolidated Statements of Operations (unaudited) - 4
Three months and six months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows (unaudited) - 5
Six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 - 12
PART II. OTHER INFORMATION 13
SIGNATURES 14
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3
ROCKFORD INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1997 1996
-------------- --------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 1,846,014 $ 3,985,350
Restricted cash 10,177,282 6,109,559
Accounts receivable (net of allowance for doubtful
accounts of $530,000 at June 30, 1997 and $385,000
at December 31, 1996) 10,147,020 10,039,818
Note receivable from officer 109,761 143,831
Prepaid expenses 1,554,525 884,184
Income taxes receivable 953,234
Net investment in direct finance leases (net of
lease receivable and residual valuation allowance of
$535,000 at June 30, 1997 and $1,215,000 at
December 31, 1996) 24,937,805 35,530,325
Net fixed assets 2,286,797 1,900,810
Discounted lease rentals assigned to lenders 78,361,345 98,151,318
-------------- --------------
$ 129,420,549 $ 157,698,429
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Note payable to bank $ 5,135,148 $ 10,981,549
Accounts payable 6,740,942 6,030,482
Accrued liabilities 3,880,858 5,919,187
Estimated recourse obligations 1,125,000 -
Income taxes payable 718,816 -
Deferred income taxes 1,460,000 1,820,346
Nonrecourse debt 89,049,495 113,062,823
-------------- --------------
Total liabilities 108,110,259 137,814,387
Commitments and contingencies
Stockholders' equity:
Series A redeemable preferred stock 1,575,000 1,575,000
Common stock, no par value; 10,000,000 shares
authorized; 4,105,517 shares issued and outstanding 14,032,491 14,032,491
Retained earnings 5,702,799 4,276,551
-------------- --------------
Total shareholders' equity 21,310,290 19,884,042
-------------- --------------
$ 129,420,549 $ 157,698,429
============== ==============
See notes to financial statements
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ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ------------ ----------- ------------
REVENUES:
Sales of equipment (Note 2) $ - $ 21,422,458 $ - $ 40,922,216
Gain on sale of financing transactions 2,246,361 789,311 4,555,720 2,041,996
Finance income 997,907 1,187,353 2,126,893 2,451,450
Servicing related income 734,195 387,106 1,462,076 666,436
Gain on sale of residuals 81,634 191,901 230,062 286,467
Other income 454,299 122,451 735,646 298,762
----------- ------------ ----------- ------------
Total revenue 4,514,396 24,100,580 9,110,397 46,667,327
COSTS:
Cost of equipment sold (Note 2) 18,958,273 36,523,759
Interest expense 524,293 677,155 1,145,267 1,325,983
----------- ------------ ----------- ------------
Total costs 524,293 19,635,428 1,145,267 37,849,742
----------- ------------ ----------- ------------
GROSS PROFIT 3,990,103 4,465,152 7,965,130 8,817,585
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 2,921,644 3,208,155 5,496,477 6,462,574
----------- ------------ ----------- ------------
INCOME BEFORE INCOME TAXES 1,068,459 1,256,997 2,468,653 2,355,011
INCOME TAXES 427,461 502,754 987,461 942,004
----------- ------------ ----------- ------------
NET INCOME $ 640,998 $ 754,243 $ 1,481,192 $ 1,413,007
=========== ============ =========== ============
NET INCOME PER SHARE (Note 2) $ 0.15 $ 0.17 $ 0.34 $ 0.32
=========== ============ =========== ============
NET INCOME APPLICABLE TO COMMON
SHAREHOLDERS $ 611,942 $ 733,824 $ 1,426,246 $ 1,375,226
=========== ============ =========== ============
Weighted average shares outstanding 4,397,000 4,521,000 4,389,000 4,479,000
=========== ============ =========== ============
See notes to financial statements
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ROCKFORD INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1997 1996
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,481,192 $ 1,413,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 291,000 144,844
Dividends payable 29,055 37,781
Change in lease receivable allowance (680,000) 200,000
Increase in reserve for possible losses on securitized accounts 1,125,000 -
Gain on sale of residuals (230,062) (286,466)
Gain on sale of financing transactions (4,555,720) (2,041,996)
Initial direct cost amortization 700,707 784,571
Net amortization of deferred interest (2,303,308) (1,910,038)
Increase in restricted cash (4,067,723) (1,374,503)
Change in accounts receivable, officer note receivable and prepaid expenses (743,473) (5,069,755)
Change in accounts payable and accrued liabilities (1,298,814) 1,119,560
Change in income taxes payable 718,816 (1,005,156)
Change in deferred income taxes (360,346) (478,402)
------------- -------------
Net cash used in operating activities (9,893,676) (8,466,553)
Payments received from lessees 9,987,439 840,719
Proceeds from sale of residuals 782,385 550,515
Purchase of fixed assets (702,921) (607,038)
Initial direct cost capitalization (5,030,137) (963,744)
Equipment purchased for financing (82,335,000) (60,652,724)
------------- -------------
Net cash used in investing activities (77,298,234) (60,832,272)
Proceeds from nonrecourse debt and securitization 90,953,921 58,856,617
Proceeds from notes payable to bank 53,103,548 9,719,570
Preferred stock dividends (54,946) (55,425)
Payments on notes payable to bank (58,949,949) (4,641,736)
------------- -------------
Net cash provided by financing activities 85,052,574 63,879,026
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,139,336) (5,419,799)
CASH AND CASH EQUIVALENTS, beginning of year 3,985,350 9,409,305
------------- -------------
CASH AND CASH EQUIVALENTS, end of year $ 1,846,014 $ 3,989,506
============= =============
SUPPLEMENTAL
Income taxes paid $ 587,494 $ 2,434,128
============= =============
Interest paid $ 421,899 $ 17,136
============= =============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES $ 26,957,384 $ 32,611,928
============= =============
See notes to financial statements
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ROCKFORD INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements, including the
accounts, of Rockford Industries, Inc. and its wholly-owned subsidiaries (the
"Company"), have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles ("GAAP") for complete financial statements. The financial statements
should be read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed with the SEC on March
31, 1997.
In the opinion of management, the consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair statement of the balance sheets as of June 30,
1997 and December 31, 1996, the statements of income for the three-month and
six-month periods ended June 30, 1997 and 1996, and the statements of cash
flows for the six month periods ended June 30, 1997 and 1996. The results of
operations for the three-month and six-month periods ended June 30, 1997 are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year ending December 31, 1997.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
The Company adopted Statement of Financial Accounting Standards No. 125
("SFAS No. 125"), Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities as of January 1, 1997. SFAS No. 125 has changed
the manner in which the Company determines and recognizes the gain recorded upon
the transfer of its interest in finance contracts subsequent to December 31,
1996. Additionally, SFAS No. 125 allows the Company to record gains with respect
to transfers of its interest in leases previously accounted for as direct
finance leases. SFAS No. 125 has also altered the presentation in the Company's
consolidated financial statements of revenues, expenses and certain assets and
liabilities associated with finance contracts sold. As a result, certain aspects
of the Company's financial statements as of June 30, 1997, and for the
three-month and six-month periods, may not be directly comparable to the prior
period financial statements.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS
No. 128"). Under SFAS No. 128, the Company will be required to disclose basic
earnings per share ("EPS") and diluted EPS for all periods for which income is
presented, which will replace disclosure currently being made for primary EPS
and fully-diluted EPS. SFAS No. 128 requires adoption for fiscal periods ending
after December 15, 1997. The Company will adopt the provisions of SFAS No. 128
within the 1997 year-end consolidated financial statements. EPS, as computed
under SFAS No. 128, is not materially different than EPS presented in the
Consolidated Statements of Income for the three months and six months ended June
30, 1997 and 1996.
- 6 -
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CUSTOMER FINANCE CONTRACT ACCOUNTING
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 described below. Subsequently, the Company
may securitize the contract or sell them to nonrecourse lenders. 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. If such sold contracts include a residual payment that is
not assigned to the purchaser, the residual interest is recorded on the
Company's books at the present value of the estimated residual future value.
DIRECT FINANCE LEASES. Equipment financing transactions are classified
as direct finance leases when the Company funds 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.
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.
- 7 -
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PRESENTATION OF FINANCIAL STATEMENTS
The Company adopted Statement of Financial Accounting Standards No.
125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, as of January 1, 1997. SFAS No. 125 has changed
the manner in which the Company determines and recognizes the gain recorded upon
the transfer of its interest in finance contracts subsequent to December 31,
1996. Additionally, SFAS No. 125 allows the Company to record gains with respect
to transfers of its interest in leases previously accounted for as direct
finance leases. SFAS No. 125 has also altered the presentation, in the Company's
consolidated financial statements, of revenues, expenses and certain assets and
liabilities associated with finance contracts sold. As a result, certain aspects
of the Company's financial statements as of June 30, 1997, and for the three
months and six months then ended, may not be directly comparable to the prior
period financial statements. The following pro forma statements of operations
for the three months and six months ended June 30, 1996 reflect certain
reclassifications to present the results of the Company's operations for the
three months and six months ended June 30, 1996 on a basis comparable to the
1997 presentation. The reclassifications pertain to sales of equipment, cost of
equipment sold, and the recording of initial direct costs and estimated bad debt
expense. The provisions of SFAS No. 125 may not be applied retroactively, as a
result, the accompanying pro forma information reflects only reclassification
adjustments to conform presentation.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
JUNE 30,
----------------------------------------------------
ACTUAL PRO FORMA RECLASSIFI- ACTUAL
1997 1996 CATIONS(1) 1996
------ ------ ---------- -------
(IN THOUSANDS)
REVENUES:
Sales of equipment $ - $ - $21,422 $21,422
Gain on sale of financing transactions 2,246 1,315 (526) 789
Finance income 998 1,187 - 1,187
Servicing related revenue 734 387 - 387
Gain on sale of residuals 82 192 - 192
Other income 454 201 (78) 123
------ ------ ------- -------
Total revenues 4,514 3,282 20,818 24,100
COSTS:
Cost of equipment sold - - 18,958 18,958
Interest expense 524 677 - 677
------ ------ ------- -------
Total costs 524 677 18,958 19,635
GROSS PROFIT 3,990 2,605 1,860 4,465
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 2,922 1,348 1,860 3,208
------ ------ ------- -------
INCOME BEFORE INCOME TAXES 1,068 1,257 - 1,257
INCOME TAXES 427 503 - 503
------ ------ ------- -------
NET INCOME $ 641 $ 754 $ - $ 754
====== ====== ======= =======
(1) Represents the reclassification of the following to gain on sale of
financing transactions: $21,422 from sales of equipment, $18,958 from
cost of equipment sold, $1,612 from selling, general and administrative
("SG&A") expenses relating to initial direct costs, $248 from SG&A
expenses relating to estimated bad debt expense on securitized
accounts, and the reclassification of $78 in documentation fees from
gain on sale of financing transactions to other income.
- 8 -
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PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED
JUNE 30,
---------------------------------------------------
ACTUAL PRO FORMA RECLASSIFI- ACTUAL
1997 1996 CATIONS(1) 1996
-------- -------- ---------- --------
(IN THOUSANDS)
REVENUES:
Sales of equipment $ - $ - $ 40,922 $ 40,922
Gain on sale of financing transactions 4,556 2,677 (635) 2,042
Finance income 2,127 2,451 - 2,451
Servicing related revenue 1,462 666 - 666
Gain on sale of residuals 230 287 - 287
Other income 735 443 (144) 299
-------- -------- -------- --------
Total revenues 9,110 6,524 40,143 46,667
COSTS:
Cost of equipment sold - - 36,523 36,523
Interest expense 1,145 1,326 - 1,326
-------- -------- -------- --------
Total costs 1,145 1,326 36,523 37,849
GROSS PROFIT 7,965 5,198 3,620 8,818
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 5,496 2,843 3,620 6,463
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 2,469 2,355 - 2,355
INCOME TAXES 988 942 - 942
-------- -------- -------- --------
NET INCOME $ 1,481 $ 1,413 $ - $ 1,413
======== ======== ======== ========
(1) Represents the reclassification of the following to gain on sale of
financing transactions: $40,922 from sales of equipment, $36,524 from
cost of equipment sold, $3,127 from selling, general and administrative
("SG&A") expenses relating to initial direct costs, $493 from SG&A
expenses relating to estimated bad debt expense on securitized
accounts, and the reclassification of $144 in documentation fees from
gain on sale of financing transactions to other income.
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RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 1997 AND 1996
FINANCE CONTRACT ORIGINATIONS AND REVENUES. Finance contract
originations increased by approximately $12.6 million or 41% to $43.5 million in
the quarter ended June 30, 1997 from $30.9 million in the quarter ended June 30,
1996 reflecting the benefit of an expanded sales force and penetration into
non-medical markets. Total revenues for the quarter ended June 30, 1997 were
$4.5 million as compared to $24.1 million for the quarter ended June 30, 1996.
This decrease is due to the adoption of SFAS No. 125 as of January 1, 1997. On a
pro forma basis, total revenues for the quarter ended June 30, 1997 were $4.5
million as compared to $3.3 million for the quarter ended June 30, 1996,
representing an increase of $1.2 million or 38%. This increase resulted
primarily from increased finance contract originations and gains derived from
the sale of Company-held finance contracts.
GROSS PROFIT. Total gross profit for the quarter ended June 30, 1997
was $4.0 million as compared to $4.5 million for the same quarter in the prior
year, representing a decrease of $0.5 million or 11%. This decrease in gross
profits was attributable to the reclassification of certain selling costs from
selling, general and administrative expenses to gain on sale of financing
transactions in the first quarter of 1997 associated with the adoption of SFAS
No. 125. On a pro forma basis, gross profit increased from $2.6 million for the
quarter ended June 30, 1996 to $4.0 million for the quarter ended June 30, 1997,
representing an increase of $1.4 million or 53%. This increase was primarily due
to increased finance contract originations, lower cost of funds (borrowing
rates), increased gains on sales of financing transactions, servicing fees and
other revenues associated with an increasing serviced portfolio.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the second quarter of 1997 were $2.9 million as
compared to $3.2 million in the second quarter of 1996, representing a decrease
of $0.3 million. This decrease was attributable to the reclassification of
certain selling costs (bad debt expense on securitized accounts and initial
direct costs) from selling, general and administrative expenses as an offset to
gain on sale of financing transactions in the second quarter of 1997 associated
with the adoption of SFAS No. 125. On a pro forma basis, selling, general and
administrative expenses of $2.9 million for the quarter ended June 30, 1997
represented an increase of $1.5 million or 117% from $1.4 million for the same
period in 1996. This increase in selling, general and administrative expenses
was primarily due to decreased capitalization of initial direct costs and
increases in volume related expenses and additional investment in the
infrastructure and reserves necessary to service and support an increasing level
of finance contract originations and the increased size of the securitized
portfolio.
NET INCOME. Income before taxes was $1,068,000 for the quarter ended
June 30, 1997 as compared to $1,257,000 for the same quarter of the prior year.
The effective income tax rate of 40% remained constant for the comparative
periods shown. Net income was $641,000 for the quarter ended June 30, 1997 as
compared to $754,000 for the same quarter of the prior year, representing an
increase of $113,000 or 15%. Net income of $.15 per share on weighted-average
shares outstanding of 4,397,000 was earned during the first quarter of 1997, as
compared to net income of $.17 per share on weighted-average shares outstanding
of 4,521,000 for the first quarter of 1996.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1997 AND 1996
FINANCE CONTRACT ORIGINATIONS AND REVENUES. Finance contract
originations increased by approximately $21.8 million or 36% to $82.3 million
for the six months ended June 30, 1997 from $60.5 million for the six months
ended June 30, 1996 reflecting the benefit of an expanded sales force and
penetration into non-medical markets. Total revenues for the six months ended
June 30, 1997 were $9.1 million as compared to $46.7 million for the six months
ended June 30, 1996. This decrease is due to the adoption of SFAS No. 125 as of
January 1, 1997. On a pro forma basis, total revenues for the six months ended
June 30, 1997 were $9.1 million as compared to $6.5 million for the six months
ended June 30, 1996, representing an increase of $2.6 million or 40%. This
increase resulted primarily from increased finance contract originations and
gains derived from the sale of Company-held finance contracts.
GROSS PROFIT. Total gross profit for the six months ended June 30, 1997
was $8.0 million as compared to $8.8 million for the same six months in the
prior year, representing a decrease of $0.8 million or 10%. This decrease in
gross profits was attributable to the reclassification of certain selling costs
from selling, general and administrative expenses to gain on sale of financing
transactions in the first six months of 1997 associated with the adoption of
SFAS No. 125. On a pro forma basis, gross profit increased from $5.2 million for
the six months ended June 30, 1996 to $8.0 million for the six months ended June
30,
- 10 -
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1997, representing an increase of $2.8 million or 53%. This increase was
primarily due to increased finance contract originations, lower cost of funds
(borrowing rates), increased gains on sales of financing transactions, servicing
fees and other revenues associated with an increasing serviced portfolio.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the six months ended June 30, 1997 were $5.5 million
as compared to $6.5 million in the six months ended June 30, 1996, representing
a decrease of $1.0 million. This decrease was attributable to the
reclassification of certain selling costs (bad debt expense on securitized
accounts and initial direct costs) from selling, general and administrative
expenses as an offset to gain on sale of financing transactions in the first six
months of 1997 associated with the adoption of SFAS No. 125. On a pro forma
basis, selling, general and administrative expenses of $5.5 million for the six
months ended June 30, 1997 represented an increase of $2.7 million or 93% from
$2.8 million for the same period in 1996. This increase in selling, general and
administrative expenses was primarily due to decreased capitalization of initial
direct costs and increases in volume related expenses and additional investment
in the infrastructure and reserves necessary to service and support an
increasing level of finance contract originations and the increased size of the
securitized portfolio.
NET INCOME. Income before taxes was $2,469,000 for the six months ended
June 30, 1997 as compared to $2,355,000 for the same six months of the prior
year. The effective income tax rate of 40% remained constant for the comparative
periods shown. Net income was $1,481,000 for the six months ended June 30, 1997
as compared to $1,413,000 for the same six months of the prior year,
representing an increase of $68,000 or 5%. Net income of $.34 per share on
weighted-average shares outstanding of 4,389,000 was earned during the first six
months of 1997, as compared to net income of $.32 per share on weighted-average
shares outstanding of 4,479,000 for the first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Because equipment financing is a capital intensive business, the
Company requires continual access to substantial short and long-term credit to
generate its new equipment financings and sales. The principal sources of
funding for the Company's equipment finance contracts are (i) funding obtained
from sales of asset-backed securities (backed by pools of the Company's
equipment finance contracts) to SunAmerica Life Insurance Company ("SunAmerica")
and CoreStates Bank, N.A., pursuant to the terms of each securitization
arrangement, (ii) nonrecourse borrowings from institutional lenders, and (iii)
standard recourse borrowings under its $30 million revolving line of credit
("Revolver") used by the Company from time to time to temporarily fund a portion
of its equipment finance contracts, pending more permanent funding arrangements
for such contracts.
SECURITIZED DEBT. 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 or letters of
credit in connection with each borrowing under the securitization program. In
connection with the securitization programs, the Company has agreed to continue
to service the equipment finance contracts included in each pool of transferred
contracts on behalf of the certificate holder. In consideration for servicing
these contract pools, the Company receives a service fee from the certificate
holder.
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. Under this agreement, through June 30, 1997, the Company has
securitized $95.5 million of its financing contracts with SunAmerica. This
agreement with SunAmerica expired on April 30, 1997. A terms sheet was signed in
May 1997 and final documentation is 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 currently expects that this
facility will be finalized during the third quarter of 1997, provided that the
negotiations are completed satisfactorily.
- 11 -
12
On March 27, l997 CoreStates Bank, N.A. provided the Company with a
commitment under which CoreStates provides the Company with a $150 million
three-year facility for the securitization of equipment finance contracts. The
CoreStates facility provides financing at rates that are about 65 basis points
lower than the rates previously available to the Company. Through June 30, 1997,
the Company has securitized $64.8 million of its financing contracts with
CoreStates.
NONRECOURSE DEBT. Prior to the utilization of the securitization
funding methodology described above, the Company's principal source of funding
had been nonrecourse borrowings from institutional lenders, in connection with
which the lender's recourse is to the Company's customers and to the equipment
financed, not to the Company. This method of funding is still utilized by the
Company for a portion of its finance contract originations. To date, the Company
has been successful in attracting nonrecourse lenders and in extending the
levels at which existing lenders are willing to provide nonrecourse financing.
At June 30, 1997, the Company had recorded nonrecourse debt of $89 million.
SHORT-TERM RECOURSE DEBT. The Company has also, from time to time,
relied on standard recourse borrowings for the funding of a smaller, short-term
portion of its financing needs. The Company 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 July 1998 and contains a feature for
pricing at LIBOR plus 1 1/2%. At June 30, 1997, the Company had $5.1 million
outstanding under the Revolver.
CASH FLOWS. The Company's cash and cash equivalents at June 30, 1997
was $1.8 million compared to $4.0 million at June 30, 1996. During the six
months ended June 30, 1997, the Company's cash position decreased by $2.1
million, reflecting the use of cash in operations and investing activities of
$9.9 million and $77.3 million, respectively, and the cash provided from
financing activities of $85.1 million. The most significant aspects of the
change during this period was from cash invested in equipment for financing of
$82.3 million and proceeds from nonrecourse debt and securitizations of $91.0
million. This was largely due to the higher level of the Company's finance
contract originations. In comparison, the Company's cash position decreased by
$5.4 million during the six months ended June 30, 1996, reflecting the use of
cash in operations and investing activities of $8.5 million and $60.8 million,
respectively, and the cash provided from financing activities of $63.9 million.
The change in cash was primarily due to cash used to purchase equipment for
financing of $60.7 million and proceeds from nonrecourse debt borrowings and
securitizations of $58.9 million.
The Company believes that existing cash balances, cash flows from
activities, proceeds from securitization arrangements, nonrecourse assignments,
and bank credit lines will be sufficient to meet its financing needs for the
next twelve months.
SEASONALITY
Historically, the Company has generally 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. General inflation in the economy has driven upward the
operating expenses of many businesses, and accordingly, the Company has
increased salaries and borne higher prices for most other goods and services.
The Company continuously seeks methods of reducing costs and streamlining
operations while maximizing efficiencies and internal operating controls through
development of cost reducing funding mechanisms, such as the securitization
program, and through systems automation and enhancement. While the Company is
subject to inflation as described above, the Company believes that
inflation does not have a material effect on its operating results.
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SAFE HARBOR STATEMENT
The preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section contains "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, which represent the
Company's judgment concerning the future and are subject to risks and
uncertainties that could cause the Company's actual operating results and
financial position and cash flows to differ materially. Such statements include
the following: the Company's expectation that the new securitization facility
with SunAmerica, will be finalized during the third quarter of 1997 and the
Company's belief that existing cash balances, cash flows from activities,
proceeds from securitization arrangement, non-recourse assignments and bank
credit lines will be sufficient to meet its financing needs for the next twelve
months.
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 and other equipment on a regular and predictable
basis, that competing conditions within the equipment financing market will
not change materially or adversely, that the medical equipment financing market
will continue to experience a 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 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 judgements 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.
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings - Not Applicable
Item 2 - Changes in Securities - Not Applicable
Item 3 - Defaults Upon Senior Securities - Not Applicable
Item 4 - Submission of Matters to a Vote of Security Holders
Annual Meeting of Shareholders
(a) The Annual Meeting of Shareholders was held on June 18, 1997.
(b) The following directors were elected at the Annual Meeting:
1. Gerry J. Ricco
2. Larry E. Hartmann
3. Brian A. Seigel
4. Floyd S. Robinson
5. Robert S. Vaters
There were no other directors whose term of office as director
continued after the Annual Meeting. Shareholders representing
2,981,200 shares voted for each of the directors and shareholders
representing 2,750 shares withheld authority to vote for each
director.
(c) At the Annual Meeting, shareholders also voted on amendments to
the Company's 1995 Stock Option Plan (the "Plan") to (i) modify
the automatic grant feature to increase the number of shares of
common stock granted to a non-employee director when he or she is
first elected to 5,000 shares and increase the number of shares
covered by each annual option grant to a non-employee director as
of the date he or she is re-elected to the board to 5,000 shares,
(ii) permit one discretionary grant of options to non-employee
directors during a 12-month period, including a grant on April 25,
1997 of 20,000 options to each of the two non-employee directors
and (iii) increase the number of shares to be issued under the
Plan from 350,000 to 550,000 shares.
Votes received from shareholders for the Plan amendments were as
follows:
Votes Against Abstentions and
Votes For or Withheld Broker Non-Votes
--------- ------------- ----------------
2,958,095 21,855 4,000
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits:
10.32 Pooling and Servicing Agreement, dated as of March 27, 1997,
by and among Rockford Lease Funding Corp., the registrant,
Texas Commerce Bank National Association and CoreStates Bank,
N.A.
10.33 Equipment and Lease Purchase Agreement, dated as of March 27,
1997, by and between among Rockford Lease Funding Corp. and
the registrant.
10.34 Purchase Agreement, dated as of March 27, 1997, by and among
Rockford Lease Backed Trust 1997-I, the registrant, Texas
Commerce Bank National Association and CoreStates Bank, N.A.
10.35 Form of Rockford Lease Funding Corp. Fixed Rate Lease
Receivables - Backed Senior Certificate, Series 1997-1 (Class
A).
27 Financial Data Schedule
(b) Reports on Form 8-K;
No reports were filed on Form 8-K
during the quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Rockford Industries, Inc.
(Registrant)
Date: /s/ GERRY J. RICCO
-----------------------------------------------------
Gerry J. Ricco
President and Chief Executive Officer and Director
(Principal Executive Officer)
Date: /s/ KEVIN P. McDONNELL
-----------------------------------------------------
Kevin P. McDonnell
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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