Exhibit 99
MICROFINANCIAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1997 and 1998 F-4
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1996, 1997 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998 F-6
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
MicroFinancial Incorporated:
In our opinion, the accompanying consolidated balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of MicroFinancial
Incorporated and its subsidiaries (the "Company") at December 31, 1997 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 19, 1999
F-2
MICROFINANCIAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands)
December 31,
---------------------------------
1997 1998
ASSETS
Net investment in leases and loans:
Receivables due in installments $238,979 $251,060
Estimated residual value 16,784 17,562
Initial direct costs 2,777 4,260
Loans receivable 2,467 12,253
Less:
Advance lease payments and deposits (334) (1,081)
Unearned income (73,060) (74,520)
Allowance for credit losses (26,319) (24,850)
---------------------------------
Net investment in leases and loans: $161,294 $184,684
Investment in service contracts 2,145 8,920
Cash and cash equivalents 9,252 6,817
Property and equipment, net 4,265 6,747
Other assets 2,745 3,086
=================================
Total assets $179,701 $210,254
=================================
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Notes payable $116,830 $130,421
Subordinated notes payable 26,382 24,421
Capitalized lease obligations 1,071 774
Accounts payable 89 149
Dividends payable 294 346
Other liabilities 5,300 5,481
Income taxes payable 0 625
Deferred income taxes payable 10,969 18,554
---------------------------------
Total liabilities 160,935 180,771
---------------------------------
Commitments and contingencies - -
Redeemable convertible preferred stock (liquidation preference
$12, at December 31, 1997 and 1998) - -
Stockholders' equity:
Common stock 98 99
Additional paid-in capital 1,604 1,816
Retained earnings 17,366 27,956
Treasury stock, at cost (138) (138)
Notes receivable from officers and employees (164) (250)
---------------------------------
Total stockholders' equity 18,766 29,483
=================================
Total liabilities and stockholders' equity $179,701 $210,254
=================================
The accompanying notes are an integral part of the consolidated financial statements
F-3
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the years ended
December 31,
----------------------------------------
1996 1997 1998
Revenues:
Income on financing leases and loans $38,654 $45,634 $47,341
Income on service contracts 6 501 2,565
Rental income 8,250 10,809 16,118
Loss and damage waiver fees 4,188 5,448 5,441
Service fees 4,487 5,788 5,035
-------------------------------------
Total revenues 55,585 68,180 76,500
-------------------------------------
Expenses:
Selling general and administrative 14,073 17,252 20,061
Provision for credit losses 19,822 21,713 19,075
Depreciation and amortization 2,981 3,787 5,076
Interest 10,163 11,890 12,154
-------------------------------------
Total expenses 47,039 54,642 56,366
-------------------------------------
Income before provision for income taxes 8,546 13,538 20,134
Provision for income taxes 3,466 5,886 8,210
-------------------------------------
Net Income $5,080 $7,652 $11,924
=====================================
Net Income per common share - basic $0.52 $0.78 $1.21
=====================================
Net Income per common share - diluted $0.52 $0.76 $1.19
=====================================
Dividends per common share $0.10 $0.12 $0.14
=====================================
The accompanying notes are an integral part of the consolidated financial statements.
F-4
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1996, 1997, and 1998
(in thousands, except share data)
Notes
Common Stock Additional Receivable Total
------------------------- Paid-in Retained Treasury From Stockholders'
Shares Amount Capital Earnings Stock Officers Equity
-----------------------------------------------------------------------------------------
Balance at December 31, 1995 9,677,720 $ 97 $ 1,438 $ 6,681 $ (100) $ (205) $ 7,911
Exercise of stock options 5,620 4 4
Common stock dividends (920) (920)
Notes receivable from officers 104 104
Net income 5,080 5,080
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 9,683,340 97 1,442 10,841 (100) (101) 12,179
Exercise of stock options 120,910 1 162 163
Common stock dividends (1,127) (1,127)
Purchase of treasury stock (5,250) (38) (38)
Notes receivable from officers
and employees (63) (63)
Net income 7,652 7,652
-----------------------------------------------------------------------------------------
Balance at December 31, 1997 9,799,000 98 1,604 17,366 (138) (164) 18,766
Exercise of stock options 114,166 1 212 213
Common stock dividends (1,334) (1,334)
Conversion of preferred stock to
common stock 19,600
Notes receivable from officers
and employees (86) (86)
Net income 11,924 11,924
-----------------------------------------------------------------------------------------
Balance at December 31, 1998 9,932,766 $ 99 $ 1,816 $ 27,956 $ (138) $ (250) $ 29,483
=========================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
F-5
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the year ended
December 31,
-------------------------------
1996 1997 1998
Cash flows from operating activities:
Cash received from customers $ 87,130 $ 118,444 $ 139,215
Cash paid to suppliers and employees (16,708) (29,113) (31,993)
Interest paid (10,724) (12,334) (11,648)
Interest received 406 396 399
--------------------------------
Net cash provided by operating activities 60,104 77,393 95,973
--------------------------------
Cash flows from investing activities:
Investment in leased equipment (81,303) (71,943) (83,786)
Investment in direct costs (2,186) (2,354) (4,070)
Investment in service contracts (2,431) (2,972) (8,080)
Investment in loans receivable 0 (2,538) (11,683)
Investment in fixed assets (628) (288) (459)
Issuance of notes from officers and employees 0 (150) (145)
Repayment of notes from officers 104 87 59
Investment in notes receivable (349) (160) (228)
Repayment of notes receivable 111 191 281
--------------------------------
Net cash used in investing activities (86,682) (80,127) (108,111)
--------------------------------
Cash flows from financing activities:
Proceeds from secured debt 181,006 56,639 96,817
Repayment of secured debt (29,946) (56,194) (83,135)
Proceeds from refinancing of secured debt 0 203,580 343,499
Prepayment of secured debt (129,049) (203,580) (343,499)
Proceeds from short term demand notes payable 123 497 280
Repayment of short term demand notes payable (833) (315) (369)
Proceeds from issuance of subordinated debt 15,410 2,123 1,200
Repayment of subordinated debt (1,740) (2,891) (3,261)
Proceeds from exercise of common stock options 4 162 162
Repayment of capital leases (393) (697) (709)
Purchase of treasury stock 0 (38) 0
Payment of dividends (871) (1,075) (1,282)
---------------------------------
Net cash provided by (used in)
financing activities 33,711 (1,789) 9,703
---------------------------------
Net increase (decrease) in cash and cash equivalents: 7,133 (4,523) (2,435)
Cash and cash equivalents, beginning of period: 6,642 13,775 9,252
=================================
Cash and cash equivalents, end of period: $ 13,775 $ 9,252 $ 6,817
=================================
F-6
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
For the year ended
December 31,
-------------------------------
1996 1997 1998
Reconciliation of net income to net cash
provided by operating activities:
Net Income $ 5,080 $ 7,652 $ 11,924
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 2,981 3,787 5,076
Provision for credit losses 19,822 21,713 19,075
Recovery of equipment cost and residual value,
net of revenue recognized 29,378 41,334 51,271
Increase (decrease) in current taxes (379) (1,266) 1,285
Increase in deferred income taxes 1,892 4,897 7,585
Change in assets and liabilities:
Decrease (increase) in other assets (603) (173) (809)
(Decrease) increase in accounts payable 711 65 60
Increase (decrease) in accrued liabilities 1,222 (616) 506
=================================
Net cash provided by operating activities $ 60,104 $ 77,393 $ 95,973
=================================
Cash paid for income taxes $ 1,954 $ 2,254 $ 146
=================================
Supplemental disclosure of noncash activities:
Property acquired under capital leases $ 985 $ 246 $ 412
Accrual of common stock dividends $ 242 $ 294 $ 346
The accompanying notes are an integral part of the consolidated financial statements.
F-7
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands)
A. Nature of Business
MicroFinancial Incorporated (the "Company") which operates primarily
through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized
commercial finance company that leases and rents "microticket" equipment and
provides other financing services in amounts generally ranging from $900 to
$2,500, with an average amount financed of approximately $1,400 and an average
lease term of 45 months. The Company does not market its services directly to
lessees but sources leasing transactions through a network of independent sales
organizations and other dealer-based origination networks nationwide. The
Company funds its operations primarily through borrowings under its credit
facilities, issuances of subordinated debt and securitizations. One dealer
accounted for 11.6% of originations in the year ended December 31, 1998. In July
1998, the Company changed its name from Boyle Leasing Technologies, Inc. to
MicroFinancial Incorporated.
In December 1992, May 1993 and November 1994, Leasecomm Corporation created
wholly-owned subsidiaries, BLT Finance Corporation I ("BLT I"), BLT Finance
Corporation II ("BLT II") and BLT Finance Corporation III ("BLT III"),
respectively, which are special purpose corporations for the securitization and
financing of lease receivables.
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). SFAS
No. 125 is effective for transactions entered into after December 31, 1996.
Under SFAS No. 125, an entity will recognize the financial and servicing assets
it controls and the liabilities it has incurred, derecognize financial assets
when control has been surrendered and derecognize liabilities when extinguished.
Effective January 1997, the Company adopted SFAS No. 125.
While the Company generally does not sell its interests in leases, service
contracts or loans to third parties after origination, the Company does,
however, from time to time, contribute certain leases to special purpose
corporations for purposes of obtaining financing in connection with its lease
receivables. As these transfers do not result in a change in control over the
lease receivables, sale treatment and related gain recognition under SFAS No.
125 does not occur. Accordingly, the lease receivable and related liability
remain on the balance sheet.
If SFAS No. 125 were effective for transactions prior to 1997, there would
have been no change in the accounting for these financing transactions.
During 1997 and 1996, the credit facilities related to the securitizations
of BLT I and BLT II were paid off, respectively. Both of these subsidiaries were
dissolved on December 31, 1997.
B. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
F-8
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
Stock Splits
On June 16, 1997, the Company's Board of Directors authorized a ten-for-one
stock split. This resulted in the issuance of 4,432,824 additional shares of
common stock. On June 12, 1998, the Company's Board of Directors authorized a
two-for-one stock split to be effective with the Company's initial public
offering. All share and per share amounts have been restated to reflect these
stock splits. The two-for-one stock split resulted in the issuance of 5,047,478
additional shares of common stock including the automatic conversion of 490
shares of preferred stock to 19,600 shares of common stock.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reported
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with initial
maturities of less than three months to be cash equivalents. Cash equivalents
consist principally of overnight investments.
Leases and Loans
The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and initial direct costs incurred are amortized
over the related lease term using the interest method which results in a level
rate of return on the net investment in leases. Amortization of unearned lease
income and initial direct costs is suspended if, in the opinion of management,
the lease agreement is determined to be impaired. It is management's opinion
given the nature of its business and the large number of small balance lease
receivables that a lease is impaired when one of the following occurs: (i) the
obligor files for bankruptcy; (ii) the obligor dies and the equipment is
returned; or (iii) when an account has become 360 days past due. It is also
management's policy to maintain an allowance for credit losses that will be
sufficient to provide adequate protection against losses in its portfolio.
Management regularly reviews the collectibility of its lease receivables based
upon all of its communications with the individual lessees through its extensive
collection efforts and through further review of the creditworthiness of the
lessee.
In conjunction with the origination of leases, the Company may retain a
residual interest in the underlying equipment upon termination of the lease. The
value of such interests is estimated at inception of the lease and evaluated
periodically for impairment. An impairment is recognized when expected cash
flows to be realized subsequent to the end of the lease are expected to be less
than the residual value recorded. Other revenues such as loss and damage waiver
and service fees relating to the leases, contracts and loans and rental revenues
are recognized as they are earned.
Loans are reported at their outstanding principal balance. Interest income
on loans is recognized as it is earned.
F-9
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(Continued)
Allowance for Credit Losses
The Company maintains an allowance for credit losses on its investment in
leases, service contracts and loans at an amount that it believes is sufficient
to provide adequate protection against losses in its portfolio. The allowance is
determined principally on the basis of the historical loss experience of the
Company and the level of recourse provided by such lease, service contract or
loan, if any, and reflects management's judgment of additional loss potential
considering future economic conditions and the nature and characteristics of the
underlying lease portfolio. The Company determines the necessary periodic
provision for credit losses taking into account actual and expected losses in
the portfolio as a whole and the relationship of the allowance to the net
investment in leases, service contracts and loans.
Investment in Service Contracts
The Company's investments in cancelable service contracts are recorded at
cost and amortized over the expected life of the service period. Income on
service contracts from monthly billings is recognized as the related services
are provided. The Company periodically evaluates whether events or circumstances
have occurred that may affect the estimated useful life or recoverability of the
investment in service contracts.
Property and Equipment
Rental equipment is recorded at estimated residual value and depreciated
using the straight-line method over a period of twelve months.
Office furniture, equipment and capital leases are recorded at cost and
depreciated using the straight-line method over a period of three to five years.
Leasehold improvements are amortized over the shorter of the life of the lease
or the asset. Upon retirement or other disposition, the cost and related
accumulated depreciation of the assets are removed from the accounts and the
resulting gain or loss is reflected in income.
Fair Value of Financial Instruments
For financial instruments including cash and cash equivalents, investments
in financing leases and loans, accounts payable, and accrued expenses, it is
assumed that the carrying amount approximates fair value due to their short
maturity.
F-10
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share data)
(Continued)
Interest-Rate Hedging Agreements
The Company enters into interest-rate hedging agreements to hedge against
potential increases in interest rates on the Company's outstanding borrowings.
The Company's policy is to accrue amounts receivable or payable under such
agreements as reductions or increases in interest expense, respectively.
Debt Issue Costs
Debt issuance costs incurred in securing credit facility financing are
capitalized and subsequently amortized over the term of the credit facility.
Income Taxes
Deferred income taxes are determined under the liability method.
Differences between the financial statement and tax bases af assets and
liabilities are measured using the currently enacted tax rates expected to be in
effect when these differences reverse. Deferred tax expense is the result of
changes in the liability for deferred taxes. The principal differences between
assets and liabilities for financial statement and tax return purposes are the
treatment of leased assets, accumulated depreciation and provisions for doubtful
accounts. The deferred tax liability is reduced by loss carryforwards and
alternative minimum tax credits available to reduce future income taxes.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement requires that changes in comprehensive income be shown in a financial
statement that is displayed with the same prominence as other financial
statements. The statement is effective for fiscal years beginning after December
15, 1997 and the Company has adopted its provisions in 1998. The Company has
evaluated the impact this statement will have on its financial statements and
determined that no additional disclosure is required.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Internal Use Software," ("SOP 98-1") which
provides guidance on the accounting for the costs of software developed or
obtained for internal use. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. The Company does not expect the statement to have a
material impact on its financial position or results of operations.
F-11
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data
(Continued)
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards for derivative instruments and requires that an entity
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. SFAS No. 133 is effective for
companies with fiscal years beginning after June 15, 1999 and the Company will
adopt its provisions in 2000. The Company has not yet evaluated the impact this
statement will have on its financial position or results of operations.
Reclassification of Prior Year Balances
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current presentation.
Net Income Per Common Share
The Company has adopted Statement of Financial Accounting Standard No. 128,
"Earnings Per Share," ("SFAS No. 128") which specifies the computation,
presentation and disclosure requirements for net income per common share. Basic
net income per common share is computed based on the weighted average number of
common shares outstanding during the period, adjusted for a 10-to-1 stock split
effected in 1997 and a 2-to-1 stock split which became effective with the
Company's initial public offering on February 5, 1999, each as described in Note
H. Dilutive net income per common share gives effect to all dilutive potential
common shares outstanding during the period. Under SFAS No. 128, the computation
of diluted earnings per share does not assume the issuance of common shares that
have an antidilutive effect on net income per common share.
For the year ended December 31,
---------------------------------------------------
1996 1997 1998
---------------------------------------------------
Net income $ 5,080 $ 7,652 $ 11,924
---------------------------------------------------
Shares used in computation:
Weighted average common shares
outstanding used in computation of
net income per common share 9,682,851 9,793,140 9,859,127
Dilutive effect of redeemable
convertible preferred stock 39,200 19,600 19,600
Dilutive effect of common stock
options 48,562 112,589 153,248
---------------------------------------------------
Shares used in computation of net income
per common share - assuming
dilution 9,770,613 9,925,329 10,031,975
===================================================
Net income per common share $ 0.52 $ 0.78 $ 1.21
===================================================
Net income per common share -
assuming dilution $ 0.52 $ 0.76 $ 1.19
===================================================
F-12
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
C. Leases and Loans
At December 31, 1998, future minimum payments on the Company's lease
receivables are as follows:
For the year ended
December 31,
1999 ............................. $117,315
2000 ............................. 75,220
2001 ............................. 44,229
2002 ............................. 13,633
2003 ............................. 600
Thereafter ........................ 63
========
Total ........................... $251,060
========
At December 31, 1998, the weighted average remaining life of leases in the
Company's lease portfolio is approximately 45 months and the implicit rate of
interest is approximately 35%.
The Company's business is characterized by a high incidence of delinquencies
which in turn may lead to significant levels of defaults. The Company evaluates
the collectibility of leases and loans based on the level of recourse provided,
if any, delinquency statistics, historical lease experience, current economic
conditions and other relevant factors. The Company provides an allowance for
credit losses for leases which are considered impaired.
The Company historically took charge-offs against its receivables when such
receivables were 360 days past due. During this period, cumulative net
charge-offs after recoveries from the Company's inception to December 31, 1998
have totaled 7.8% of total cumulative receivables plus total billed fees over
such period. In September and October 1996, the Company reduced the time period
for charging off its non-securitized receivables from 360 to 240 days and, as a
result, increased its charge-offs by a total of approximately $5.0 million. As a
result of this change, recoveries increased significantly, indicating that a
240-day charge-off period was too early in the collection process to determine
ultimate collectibility. As such, during 1997 net charge-offs after recoveries
were not significantly different than the Company's historical net charge-off
experience. For this reason, in January 1998, the Company changed its charge-off
policy for its receivables back to 360 days to better reflect the Company's
collection experience.
The following table sets forth the Company's allowance for credit losses as of
December 31, 1995, 1996, 1997 and 1998 and the related provisions, charge-offs
and recoveries for the years ended December 31, 1996, 1997 and 1998.
Balance at December 31, 1995...................... $15,952
Provision for credit losses ...................... 19,822
Charge-offs ...................................... 15,675
Recoveries........................................ 3,727
--------
Charge-offs, net of recoveries................... 11,948
------
Balance at December 31, 1996...................... $23,826
Provision for credit losses....................... 21,713
Charge-offs....................................... 24,290
Recoveries........................................ 5,070
--------
Charge-offs, net of recoveries................... 19,220
-------
F-13
Balance at December 31, 1997...................... $26,319
Provision for credit losses....................... 19,075
Charge-offs....................................... 28,750
Recoveries........................................ 8,206
--------
Charge-offs, net of recoveries................... 20,544
-------
Balance at December 31, 1998...................... $24,850
=======
In conjunction with the origination of leases, the Company may retain a residual
interest in the underlying equipment upon termination of the lease. The value of
such interests is estimated at inception of the lease and evaluated periodically
for impairment. The following table sets forth the Company's estimated residual
value as of December 31, 1995, 1996, 1997 and 1998 and changes in the Company's
estimated residual value as a result of new originations, and lease terminations
for the years ended December 31, 1996, 1997 and 1998.
Balance of Estimated Residual Value at December 31, 1995... $10,967
New Originations........................................... 6,335
Lease Terminations......................................... (2,600)
Balance of Estimated Residual Value at December 31, 1996... $14,702
New Originations........................................... 6,056
Lease Terminations......................................... (3,974)
Balance of Estimated Residual Value at December 31, 1997... $16,784
New Originations........................................... 6,424
Lease Terminations......................................... (5,646)
Balance of Estimated Residual Value at December 31, 1998... $17,562
F-14
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
New originations represent the residual value added to the Company's estimated
residual value upon origination of new leases. Lease terminations represent the
residual value deducted from the Company's estimated residual value upon the
termination of a lease (i) that is bought out during or at the end of the lease
term; (ii) upon expiration of the original lease term when the lease converts to
an extended rental contract and (iii) that has been charged off by the Company.
D. Property and Equipment
At December 31, 1997 and 1998, property and equipment consisted of the
following:
December 31,
----------------------
1997 1998
Rental Equipment.................................... $ 5,588 $ 9,676
Computer Equipment.................................. 2,998 2,821
Office Equipment.................................... 634 968
Leasehold improvements.............................. 224 218
----------------------
9,444 13,683
Less accumulated depreciation and amortization....... 5,179 6,936
----------------------
Total................................................ $ 4,265 $ 6,747
======================
Depreciation and amortization expense totaled $2,981,000, $3,787,000 and
$5,076,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
At December 31, 1997 and 1998, computer equipment includes $2,339,000 and
$2,141,000 respectively, under capital leases. Accumulated amortization related
to capital leases amounted to $1,306,000 and $1,393,000, respectively.
At December 31, 1997 and 1998, accumulated depreciation related to rental
equipment amounted to $3,060,000 and $4,408,000, respectively.
E. Notes Payable
Notes Payable
The Company has a revolving line of credit and term loan facility with a group
of financial institutions whereby it may borrow a maximum of $105,000,000 based
upon qualified lease receivables. Outstanding borrowings with respect to the
revolving line of credit bear interest based either at Prime for Prime Rate
loans or London Interbank Offered Rate (LIBOR) plus 1.85% for LIBOR Loans. If
the LIBOR loans are not renewed upon their maturity then they automatically
convert into prime rate loans. The prime rates at December 31, 1996, 1997 and
1998 were 8.25%, 8.50% and 7.75% respectively. The 90-day LIBOR at December 31,
1996, 1997 and 1998 were 5.76%, 5.91% and 5.28% respectively.
F-15
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
At December 31, 1998, the Company had borrowings outstanding under the agreement
with the following terms:
Type Rate Amount
Prime.......................... 7.7500% $572
LIBOR.......................... 7.4068% 15,000
LIBOR.......................... 7.3939% 20,000
Fixed.......................... 7.7500% 3,709
----------
Total Outstanding $39,281
==========
At December 31, 1997, the Company had borrowings outstanding under the agreement
with the following terms:
Type Rate Amount
Prime.......................... 8.5000% $6,634
LIBOR.......................... 7.7250% 12,000
Fixed.......................... 8.3000% 5,798
Fixed.......................... 7.7500% 9,273
----------
Total Outstanding $33,705
==========
Outstanding borrowings are collateralized by leases and service contracts
pledged specifically to the financial institutions. All balances under the
revolving line of credit will be automatically converted to a term loan on July
31, 1999 provided the line of credit is not renewed and no event of default
exists at that date. All converted term loans are repayable over the term of the
underlying leases, but not in any event to exceed 48 monthly installments. The
most restrictive covenants of the agreement have minimum net worth and income
requirements and limit payment of dividends to no more than 50% of consolidated
net income, as defined, for the immediately preceding fiscal year.
F-16
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
The Company has an additional revolving credit agreement and term loan with a
group of financial institutions whereby it may borrow up to a maximum of
$35,000,000 based on eligible lease receivables. Outstanding borrowings with
respect to the revolving line of credit bear interest based either at prime for
prime rate loans or LIBOR plus 1.85% for LIBOR Loans. If the LIBOR loans are not
renewed upon their maturity then they automatically convert into prime rate
loans.
At December 31, 1998, the Company had borrowings outstanding under the agreement
with the following terms:
Type Rate Amount
Prime.......................... 7.7500% $5,943
LIBOR.......................... 7.1938% 10,001
LIBOR.......................... 7.4103% 7,499
----------
Total Outstanding $23,443
==========
At December 31, 1997, the Company had borrowings outstanding under the agreement
with the following terms:
Type Rate Amount
Prime.......................... 8.5000% $2,816
LIBOR.......................... 7.5688% 17,500
LIBOR.......................... 8.4375% 5,000
LIBOR.......................... 7.6273% 3,000
Fixed.......................... 8.3000% 68
Fixed.......................... 7.7500% 797
----------
Total Outstanding $29,181
==========
F-17
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
Outstanding borrowings are collateralized by leases and service contracts
pledged specifically to the financial institutions. All balances under the
revolving line of credit will be automatically converted to a term loan on July
31, 1999 provided the line of credit is not renewed and no event of default
exists at that date. All converted term loans are repayable over the term of the
underlying leases, but not in any event to exceed 24 monthly installments. The
most restrictive covenants of the agreement have minimum net worth and income
requirements and limit payment of dividends to no more than 50% of consolidated
net income, as defined, for the immediately preceding fiscal year.
BLT III has five series of notes, the 1994-A Notes, the 1996-A Notes and the
1997-A Notes the 1998-A Notes and the Warehouse Notes. In November 1994, BLT III
issued the 1994-A Notes in aggregate principal amount of $18,885,000. In May
1996, BLT III issued the 1996-A Notes in aggregate principal amount of
$23,406,563. In August 1997, BLT III issued the 1997-A Notes in aggregate
principal amount of $44,763,000 and in November 1998, BLT III issued the 1998-A
Notes in aggregate principal amount of $40,769,000.
Pursuant to the Master Financing Indenture the Company may issue one additional
series of Term Notes, the warehouse notes, with a maximum principal amount of
$20,000,000. The warehouse notes expired in August of 1997, at which time they
were converted to BLT III 1997-A Notes.
At December 31, 1998, BLT III had borrowings outstanding under the three series
of notes with the following terms:
Note Series Expiration Rate Amount
1996-A Notes.................. 5/16/00 6.6900% $ 4,752
1997-A Notes.................. 1/16/00 6.4200% 23,944
1998-A Notes.................. 5/17/04 6.0300% 38,703
==========
Total $ 67,399
==========
At December 31, 1997, BLT III had borrowings outstanding under the three series
of notes with the following terms:
Note Series Expiration Rate Amount
1994-A Notes................. 12/16/98 7.33% $ 721
1996-A Notes................. 5/16/00 6.69% 13,214
1997-A Notes................. 1/16/00 6.42% 39,620
=========
Total $ 53,555
=========
F-18
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
Outstanding borrowings are collateralized by a specific pool of lease
receivables.
At December 31, 1997 and 1998, the Company also had other notes payable which
totaled $389,000 and $298,000, respectively. The notes are due on demand and
bear interest at a rate of prime less 1.00%. Other notes payable include amounts
due to stockholders of the Company at December 31, 1997 and 1998 of $197,000 and
$248,000, respectively. Interest paid to Stockholders under such notes was not
material for the years ended December 31, 1996, 1997 and 1998.
Subordinated Notes Payable
At December 31, 1997 and 1998, the Company also has senior subordinated and
subordinated debt outstanding amounting to $26,382,000 and $24,421,000 net of
unamortized discounts of $213,000 and $113,000, respectively. This debt is
subordinated in the rights to the Company's assets to notes payable to the
primary lenders as described above. Outstanding borrowings bear interest ranging
from 8.5% to 14% for fixed rate financing and prime plus 3% to 4% for variable
rate financing. These notes have maturity dates ranging from January 1998 to
October 2003. The Company has three senior subordinated notes. The first was
issued in August 1994 at 12% to a financial institution with an aggregate
principal amount of $7,500,000. Cash proceeds from this note were $6,743,108,
net of a discount of $756,892 which is being amortized over the life of the
note. This senior note requires annual payments of $1,500,000 commencing on July
15, 1997 until the note matures in July 2001. The second senior subordinated
note was issued in October 1996 at 12.25% to a financial institution with an
aggregate principal amount of $5,000,000. This senior note requires monthly
payments of (i)$125,000 for the period November 1, 1998 through October 1, 2000
and (ii) $166,667 for the period November 1, 2000 until the note matures in
October 1, 2001. The third senior subordinated note was issued in October 1996
at 12.60% to a financial institution with an aggregate principal amount of
$5,000,000. This senior note requires quarterly payments of $250,000 commencing
on March 15, 1999 until the note matures in October 2003. The most restrictive
covenants of the senior subordinated note agreements have minimum net worth and
interest coverage ratio requirements and restrictions on payment of dividends.
At December 31, 1998 subordinated notes payable include $3,697,000 due to
shareholders. Interest paid to shareholders under such notes, at rates ranging
between 8% and 14%, amounted to $183,000, $472,000 and $488,000 for the years
ended December 31, 1996, 1997 and 1998, respectively.
F-19
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
At December 31, 1998, the repayment schedule, assuming conversion of the
revolving line of credit to a term loan, for outstanding notes and subordinated
notes is as follows:
Repayment Schedule
For the year ended
December 31,
------------------
1999........................................ $ 62,295
2000........................................ 49,340
2001........................................ 29,614
2002........................................ 11,295
2003........................................ 2,411
Thereafter.................................. 0
-----------
154,955
Unamortized discount on senior
subordinated debt......................... (113)
-----------
Total....................................... $ 154,842
===========
It is estimated that the carrying amounts of the Company's borrowings under its
variable rate revolving credit agreements approximate their fair value. The fair
value of the Company's short-term and long-term fixed rate borrowings is
estimated using discounted cash flow analysis, based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. At
December 31, 1997 and 1998, the aggregate carrying value of the Company's fixed
rate borrowings was approximately $96,900,000 and $95,500,000, respectively,
with an estimated fair value of approximately $92,900,000 and $96,000,000,
respectively.
F. Notes Receivable from Officers and Employees
During 1997 and 1998, the Company issued notes to certain officers and
employees in connection with the exercise of common stock options amounting to
$150,000 and $144,000 respectively, in exchange for recourse loans with fixed
maturity dates prior to the expiration date of the original grant. The notes are
non- interest bearing unless the principal amount thereof is not paid in full
when due, at which time interest accrues and is payable at a rate per annum
equal to the prime rate plus 4.0%. The notes can be repaid from the application
of dividends paid on the common stock but in all cases are to be paid in full at
the maturity date or upon the employee leaving the Company. At December 31, 1997
and 1998, notes receivable outstanding from officers and employees were $164,000
and $250,000, respectively.
F-20
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
G. Redeemable Preferred Stock:
At December 1997 and 1998, the Company had authorized 88,231 shares of
convertible preferred stock ("preferred stock") with a par value of $1.00, of
which 490 shares of the Series C Convertible Preferred Stock were issued and
outstanding, respectively, at December 31, 1997 and 1998.
Shares of preferred stock are convertible into shares of common stock at
the option of the holder according to a conversion formula (which would
currently result in a one-for-forty exchange) with mandatory conversion upon the
completion of a public offering meeting certain minimum proceeds, as defined.
Holders of the preferred stock are entitled to an annual cumulative dividend of
$.765 per share, if and when declared. The holder of the preferred stock has a
liquidation preference of $25.50 for preferred stock, plus earned and unpaid
dividends. In addition, the preferred shareholder is entitled to vote as a
class, proportional to the number of common shares into which his preferred
shares are convertible.
Upon completion of the Company's initial public offering on February 5,
1999, the 490 preferred shares were automatically converted to 19,600 common
shares.
H. Stockholders' Equity:
Common Stock
The Company had 10,000,000 and 25,000,000 authorized shares of common stock
with a par value of $.01 per share of which 9,799,000 and 9,932,766 shares
(giving effect to the two stock splits referred to below) were issued and
outstanding at December 31, 1997 and 1998, respectively.
Treasury Stock
The Company had 142,590 shares of common stock in treasury at December 31,
1997 and 1998, and 490 shares of preferred stock in treasury at December 31,
1997 and 1998.
F-21
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
H. Stockholders' Equity (Continued):
Stock Options
In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan") which
provided for the issuance of qualified or nonqualified options to purchase
shares of the Company's common stock. In 1997, the Company's Board of Directors
approved an amendment to the Plan, as a result of the stock split. Pursuant to
this amendment, the aggregate number of shares issued shall not exceed 1,220,000
and the exercise price of any outstanding options issued pursuant to the Plan
shall be reduced by a factor of ten and the number of outstanding options issued
pursuant to the Plan shall be increased by a factor of ten. The Company adopted
the 1998 Equity Incentive Plan (the "1998 Plan") on July 9, 1998. The 1998 Plan
permits the Compensation Committee of the Company's Board of Directors to make
various long-term incentive awards, generally equity-based, to eligible persons.
The company intends to reserve 2,000,000 shares of the Company's common stock
for issuance pursuant to the 1998 Plan. Qualified stock options, which are
intended to qualify as "incentive stock options" under the Internal Revenue
Code, may be issued to employees at an exercise price per share not less than
the fair value of the common stock at the date granted as determined by the
Board of Directors. Nonqualified stock options may be issued to officers,
employees and directors of the Company as well as consultants and agents of the
Company at an exercise price per share not less than fifty percent of the fair
value of the common stock at the date of grant as determined by the Board. The
vesting periods and expiration dates of the grants are determined by the Board
of Directors. The option period may not exceed ten years.
The following summarizes the stock option activity:
Weighted
Average
Shares Price Per Share Exercise Price
---------------- -------------------------- --------------------
Outstanding at December 31, 1994 1,466,680 $0.10625 to $0.6375 $ 0.275
Exercised (1,399,400) $0.10625 to $0.6375 $ 0.260
Granted 320,000 $0.6375 to $1.95 $ 1.910
Outstanding at December 31, 1995 387,280 $0.6375 to $1.95 $ 1.690
Exercised (5,620) $0.6375 $ 0.6375
Outstanding at December 31, 1996 381,660 $0.6375 to $1.95 $ 1.705
Exercised (120,910) $0.6375 to $1.95 $ 0.975
Canceled (9,750) $1.95 $ 1.950
Outstanding at December 31, 1997 251,000 $0.6375 to $1.95 $ 1.870
Exercised (114,166) $0.6375 to $1.95 $ 1.859
Canceled (16,454) $1.95 $ 1.950
Outstanding at December 31, 1998 120,380 $0.6375 to $1.95 $ 1.866
The options vest over five years and are exercisable only after they become
fully vested. At December 31, 1997 and 1998, 65,988 and 6,682 of the outstanding
options were fully vested.
At December 31, 1997 and 1998, 270,000 and 139,980 shares of common stock
were reserved for conversion of redeemable convertible preferred stock and
common stock option exercises.
F-22
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
H. Stockholders' Equity (Continued):
Stock Options (Continued):
Information relating to stock options at December 31, 1998, summarized by
exercise price is as follows:
Outstanding Exercisable
- ------------------------------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Price Shares Life (Years) Exercise Price Shares
- ------------------------------------------------- ----------------------------
$ 0.6375 7,698 2.7 $ 0.6375 0
$ 1.95 112,682 4.0 $ 1.95 6,682
------- ------
$0.6375 to $1.95 120,380 3.9 $ 1.866 6,682
======= ======
All stock options issued to employees have an exercise price not less than
the fair market value of the Company's common stock on the date of grant. In
accordance with accounting for such options utilizing the intrinsic value method
there is no related compensation expense recorded in the Company's financial
statements. Effective for fiscal 1996, the Company adopted the disclosure
requirements of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" (SFAS No. 123"). SFAS No. 123 requires that
compensation under a fair value method be determined using a Black-Scholes
option pricing model and disclosed in a pro forma effect on earnings and
earnings per share. Had compensation cost for stock based compensation been
determined based on the fair value at the grant dates consistent with the method
of SFAS No. 123, the Company's pro forma net income applicable to common stock
for the years ended December 31, 1996, 1997 and 1998 would have been $5,072,000,
$7,644,000 and $11,918,000, respectively. Pro forma net income per common share
would not have been different than net income per common share as reported.
The fair value of option grants is estimated on the date of grant utilizing
the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1995: an expected life of the options of seven years,
a risk-free interest rate of approximately 5.5%, a dividend yield of 4%, and no
volatility. The weighted average fair value at date of grant for options granted
during 1995 approximated $.27 per option. There were no options granted in 1996,
1997 or 1998.
F-23
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
I. Income Taxes
The provision for income taxes consists of the following:
For the years ended December 31,
--------------------------------------------------
1996 1997 1998
Current:
Federal 1,556 898 500
State 18 91 125
--------------------------------------------------
1,574 989 625
--------------------------------------------------
Deferred:
Federal 1,100 3,703 6,447
State 792 1,194 1,138
--------------------------------------------------
1,892 4,897 7,585
--------------------------------------------------
Total 3,466 5,886 8,210
==================================================
At December 31, 1997 and 1998, the components of the net deferred tax liability
were as follows:
1997 1998
-------------------------------
Investment in leases, other than allowance 64,405 35,257
Allowance for credit losses (108) (986)
Operating lease depreciation (45,001) (25,436)
Debt issue costs 455 391
Other 1,947 13,549
Alternative minimum tax (3,983) (4,483)
Loss carryforwards (6,746) 8,151
Deferred receivables 0 (7,889)
-------------------------------
Total 10,969 18,554
===============================
F-24
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
The following is a reconciliation between the effective income tax rate and
the applicable statutory federal income tax rate:
For the years ended December 31,
------------------------------------
1996 1997 1998
Federal statutory rate 34.0% 34.0% 35.0%
State income taxes, net of federal benefit 6.3% 6.7% 5.7%
Nondeductible expenses and other 0.3% 2.8% 0.1%
------------------------------------
Effective income tax rate 40.6% 43.5% 40.8%
====================================
At December 31, 1998, the Company had loss carryforwards of approximately
$19,800,000 which may be used to offset future income. These loss carryforwards
are available indefinitely for use against future income until they expire
between the years 2015 and 2017.
J. Commitments and Contingencies
The Company's lease for its facility in Waltham, Massachusetts expires in 1999.
This lease contains one five-year renewal option with escalation clauses for
increases in the lessor's operating costs. The Company's lease for its
facilities in Newark, California expires in 2001.
The Company signed a lease for 44,659 square feet of office space in Woburn,
Massachusetts which commenced on December 15, 1998 and expires on December 14,
2003. The monthly rent under this lease is $57,000.
F-25
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
The Company has entered into various operating lease agreements ranging from
three to four years for additional office equipment. At December 31, 1998, the
future minimum lease payments under noncancelable operating leases with
remaining terms in excess of one year are as follows:
For the year ended
December 31,
-------------------
1999.................................... $ 1,252
2000.................................... 738
2001.................................... 727
2002.................................... 685
Thereafter.............................. 628
==========
Total................................... $ 4,030
==========
Rental expense under operating leases totaled $788,000, $991,000, and $1,131,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
The Company has entered into various capital lease agreements ranging from three
to four years for office equipment, computer equipment and telecommunication
systems. At December 31, 1998 future minimum lease payments under capital leases
were as follows:
For the year ended
December 31,
-------------------
1999..................................... $ 550
2000..................................... 209
2001..................................... 67
2002..................................... 0
----------
Total minimum lease payments............. 826
Less amounts representing interest....... (52)
=========
Total................................... $ 774
==========
The Company and its subsidiaries are frequent parties to various claims,
lawsuits and administrative proceedings arising in the ordinary course of
business. Although the outcome of these lawsuits cannot be predicted with
certainty, the Company does not expect such matters to have a material effect on
the financial condition or results of operations of the Company.
K. Employee Benefit Plan:
The Company has a defined contribution plan under Section 401 (k) of the
Internal Revenue Code to provide retirement and profit sharing benefits covering
substantially all full-time employees. Employees are eligible to contribute up
to 15% of their gross salary. The Company will contribute $.50 for every $1.00
contributed by an employee up to 3% of the employee's salary. Vesting in the
Company contributions is over a five-year period based upon 20% per year. The
Company's contribution to the defined contribution plan were $72,000, $106,000
and $134,000 for the years ended December 31, 1996, 1997 and 1998.
F-26
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
L. Interest Rate Swap
The Company is exposed to market risks brought on by changes in interest rates.
Derivative financial instruments are used by the Company to reduce those risks,
as explained in this note.
(a) Notional amounts and credit exposures of derivatives
The notional amount of derivatives, as summarized in section (b) below, do not
represent amounts that are exchanged by the parties, and thus are not a measure
of the Company's exposure. The amounts exchanged are calculated on the basis of
the notional or contract amounts, as well as on other terms of the interest rate
swap derivatives, and the volatility of these rates and prices.
The Company would be exposed to credit-related losses in the event of
nonperformance by the counterparties that issued the financial instruments. The
Company does not expect the counterparty to interest rate swaps to fail to meet
their obligations, given its high credit rating. The credit exposure of
derivative contracts is represented by the positive fair value of contracts at
the reporting date, reduced by the effects of the master netting agreement. The
Company does not give or receive collateral on its interest rate swaps due to
its own credit rating and that of its counterparty.
(b) Interest Rate Risk Management
Interest rate swap contracts involve the exchange by the Company with another
party of their respective commitments to pay or receive interest, e.g., and
exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal. The Company has entered into this contract to
reduce the impact of changes in interest rates on its floating rate debt.
The Company has entered into this interest rate swap agreement only on a net
basis, which means that the two payment streams are netted out, with the Company
receiving or paying, as the case may be, only the net amount of the two
payments. Interest rate swaps do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rate swaps is limited to the net amount of payments that the Company is
contractually entitled to receive, if any. Interest rate swaps entered into by
the Company may not be readily marketable.
At December 31, 1998, the Company had outstanding one interest rate swap
agreement with one of its banks, having a total notional principal amount of
$17,500,000. The agreement effectively changes the Company's interest rate
exposure on $17,500,000 of its floating rate $35,000,000 revolving line of
credit due July 31, 1999 to a fixed 8.45%. The interest rate swap matures on
July 10, 2000. The interest differential paid or received on the swap agreement
is recognized as an adjustment to interest expense. Interest expense related to
the swap was $78,000 and $177,000 for the years ended December 31, 1997 and
1998, respectively. At December 31, 1998, the fair market value of this interest
rate swap, which represents the amount the Company would receive or pay to
terminate the agreement, is a net payable of $458,000, based on dealer quotes.
F-27
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
(Continued)
The market risk exposure from the interest rate swap is assessed in light of the
underlying interest rate exposures. Credit risk exposure from the swap is
minimized as the agreement is with a major financial institution. The Company
monitors the creditworthiness of this financial institution and full performance
is anticipated.
M. Concentration of Credit Risk
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of lease and loan receivables and cash and cash
equivalent balances. To reduce the risk to the Company, stringent credit
policies are followed in approving leases and loans, and lease pools are closely
monitored by management. In addition, the cash and cash equivalents are
maintained with several high quality financial institutions.
One dealer accounted for approximately 11.6% of all originations during the
year ended December 31, 1998. No other dealer accounted for more than 10% of the
Company's origination volume during the years ended December 31, 1996, 1997, or
1998.
N. Subsequent Events
On February 5, 1999, the Company was admitted to the New York Stock
Exchange following its initial public offering of 4 million shares at $15 per
share, 600,000 of which were sold by existing stockholders. The Company's stock
trades under the ticker symbol MFI. Total costs of $1,313,891 related to the
initial public offering offset the proceeds of $51,000,000. On June 12, 1998,
the Company's Board of Directors authorized a two-for-one stock split to be
effective with the Company's initial public offering. All share and per share
amounts have been restated to reflect this stock split.
In conjunction with the Initial Public Offering in February 1999, the Board
of Directors of the Company authorized 5,000,000 shares of preferred stock, none
of which has been issued. Shares of such preferred stock may be issued from time
to time in one or more series and with such designations, voting powers,
preferences, and relative participating optional or other special rights, and
qualifications, limitations, and restrictions on such rights as the Board of
Directors may authorize.
On January 27, 1999, the Company amended and restated both of its revolving
lines of credit and term loan facilities, whereby it may borrow a maximum of
$55,000,000 under each facility based upon qualified lease receivables.
Outstanding borrowings with respect to the revolving line of credit bear
interest based either at prime for prime rate loans or LIBOR plus 1.75% for
LIBOR loans. Outstanding borrowings are collateralized by leases, service
contracts, and installment finance contracts pledged specifically to the
financial institutions. All balances under the revolving line of credit will be
automatically converted to a term loan on July 31, 2000 and September 30, 2000,
respectively, provided the line of credit is not renewed and no event of default
exists at that date. All converted term loans are repayable over the term of the
underlying leases, but not in any event to exceed 36 monthly installments. The
most restrictive covenants of the agreement have minimum net worth and income
requirements and limit payment of dividends to no more than 50% of consolidated
net income, as defined, for the immediately preceding fiscal year.
F-28