1
Exhibit 99
MICROFINANCIAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-3
Consolidated Statements of Operations for the years ended December 31, 1997, 1998
and 1999 F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1998 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998
and 1999 F-6
Notes to Consolidated Financial Statements F-8
F-1
2
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 income, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of
MicroFinancial Incorporated (the "Company") at December 31, 1998 and
1999, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999 in conformity
with accounting principles generally accepted in the United States.
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 auditing standards generally
accepted in the United States, 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 21, 2000
F-2
3
MICROFINANCIAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31,
-----------------------------
1998 1999
--------- ---------
ASSETS
Net investments in leases and loans:
Receivables due in installments $251,060 $321,578
Estimated residual value 17,562 21,070
Initial direct costs 4,260 8,164
Loans receivable 12,253 20,073
Less:
Advance lease payments and deposits (1,081) (2,164)
Unearned income (74,520) (100,815)
Allowance for credit losses (24,850) (41,719)
----------------------------
Net investment in leases and loans $184,684 $226,187
Investments in service contracts 8,920 14,250
Cash and cash equivalents 6,817 11,062
Property and equipment, net 6,747 7,713
Other assets 3,086 6,644
----------------------------
Total assets $210,254 $265,856
============================
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Notes payable $130,421 $144,871
Subordinated notes payable 24,421 9,238
Capitalized lease obligations 774 1,244
Accounts payable 149 339
Dividends payable 346 514
Other liabilities 5,481 4,748
Income taxes payable 625 3,544
Deferred income taxes payable 18,554 22,520
----------------------------
Total liabilities 180,771 187,018
============================
Commitments and contingencies -- --
Redeemable convertible preferred stock
(liquidation preference $12 and $0, at
December 31, 1998 and 1999, respectively) -- --
Stockholders' equity:
Common Stock 99 133
Additional paid-in capital 1,816 47,920
Retained earnings 27,956 36,656
Treasury stock, at cost (138) (5,777)
Notes receivable from officers and employees (250) (94)
----------------------------
Total stockholders' equity 29,483 78,838
----------------------------
Total liabilities and stockholder's
equity $210,254 $265,856
============================
The accompanying notes are an integral part of the consolidated financial
statements
F-3
4
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------------
1997 1998 1999
------- ------- -------
Revenues:
Income on financing leases and loans $45,634 $47,341 $55,545
Income on service contracts 501 2,565 6,349
Rental income 10,809 16,118 21,582
Loss and damage waiver fees 5,448 5,441 5,660
Service fees 5,788 5,035 9,325
---------------------------------
Total revenues 68,180 75,500 98,461
---------------------------------
Expenses:
Selling general and administrative 17,252 20,061 24,416
Provision for credit losses 21,713 19,075 37,836
Depreciation and amortization 3,787 5,076 7,597
Interest 11,890 12,154 10,375
---------------------------------
Total expenses 54,642 53,366 80,224
---------------------------------
Income before provision for income taxes 13,538 20,134 18,237
Provision for income taxes 5,886 8,210 7,509
---------------------------------
Net Income $ 7,652 $11,924 $10,728
=================================
Net Income per common share - basic $ 0.78 $ 1.21 $ 0.84
=================================
Net Income pre common share - diluted $ 0.76 $ 1.19 $ 0.83
=================================
Dividends per common share $ 0.115 $ 0.135 $ 0.155
=================================
The accompanying notes are an integral part of the consolidated financial
statements
F-4
5
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended December 31, 1997, 1998, and 1999
(in thousands, except share data)
NOTES
COMMON STOCK ADDITIONAL TREASURY STOCK RECEIVABLE TOTAL
-------------------- PAID-IN RETAINED ---------------- FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT OFFICERS EQUITY
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 9,683,340 $97 $ 1,442 $10,841 156,940 $ (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) 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 17,366 162,190 (138) (154) 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 27,956 162,190 (138) (250) 29,483
Initial public offering 3,400,000 34 46,082 46,116
Exercise of stock options 14,960 22 22
Common stock dividends (2,028) (2,028)
Treasury stock repurchased 505,600 (5,639) (5,639)
Notes receivable from officers
and employees 156 156
Net income 10,728 10,728
-----------------------------------------------------------------------------------------
Balance at December 31, 1999 13,347,726 133 $47,920 $36,656 667,790 $(5,777) $ (94) $78,838
=========================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
F-5
6
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
MICROFINANCIAL INCORPORATED
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
Cash flows from operating activities:
Cash received from customers $ 118,444 $ 139,215 $ 157,264
Cash paid to suppliers and employees (29,113) (31,993) (35,244)
Interest paid (12,334) (11,648) (10,740)
Interest received 396 399 3,443
--------------------------------------
Net cash provided by operating activities 77,393 95,973 114,723
--------------------------------------
Cash flows from investing activities:
Investment in lease contracts (71,943) (83,786) (116,808)
Investment in direct costs (2,354) (4,070) (8,295)
Investment in service contracts (2,972) (8,080) (9,105)
Investment in loans receivable (2,538) (11,683) (11,857)
Investment in fixed assets (288) (459) (1,319)
Issuance of notes from officers and employees (150) (145) (2)
Repayment of notes from officers 87 59 158
Investment in notes receivable (160) (228) (613)
Repayment of notes receivable 191 281 254
--------------------------------------
Net cash used in investing activities (80,127) (108,111) (147,587)
--------------------------------------
Cash flows from financing activities:
Proceeds from secured debt 56,639 96,817 121,680
Repayment of secured debt (56,194) (83,135) (108,003)
Proceeds from refinancing of secured debt 203,580 343,499 460,381
Prepayment of secured debt (203,580) (343,499) (460,381)
Proceeds from short term demand notes payable 497 280 890
Repayment of short term demand notes payable (315) (369) (117)
Proceeds from issuance of subordinated debt 2,123 1,200 0
Repayment of subordinated debt (2,891) (3,261) (15,247)
Proceeds from sale of common stock 0 0 46,116
Proceeds from exercise of common stock options 162 162 22
Repayment of capital leases (697) (709) (733)
Purchase of treasury stock (38) 0 (5,639)
Payment of dividends (1,075) (1,282) (1,860)
--------------------------------------
Net cash provided by (used in) financing activities (1,789) 9,703 37,109
--------------------------------------
Net increase (decrease) in cash and cash equivalents: (4,523) (2,435) 4,245
Cash and cash equivalents, beginning of period: 13,775 9,252 6,817
--------------------------------------
Cash and cash equivalents, end of period: $ 9,252 $ 6,817 $ 11,062
======================================
(continued on following page)
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
7
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1997 1998 1999
------- ------- ---------
Reconciliation of net income to net cash provided
by operating activities:
Net Income $ 7,652 $11,924 $ 10,728
Adjustments to reconcile net income to cash
provided by operating activities
Depreciation and amortization 3,787 5,076 7,597
Provision for credit losses 21,713 19,075 37,836
Recovery of equipment cost and residual value,
net of revenue recognized Income 41,334 51,271 52,029
Increase (decrease) in current taxes (1,266) 1,285 2,919
Increase in deferred income taxes 4,897 7,585 3,966
Change in assets and liabilities:
Decrease (increase) in other assets (173) (809) 232
(Decrease) increase in accounts payable 65 60 190
Increase (decrease) in accrued liabilities (616) 506 (774)
----------------------------------
Net cash provided by operating activities $77,393 $95,973 $114,723
=================================
Cash paid for income taxes $ 2,254 $146 $ 1,339
=================================
Supplemental disclosure of noncash activities:
Property acquired under capital leases $ 246 $ 412 $ 1,203
Accrual of common stock dividends $ 294 $ 346 $ 514
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
8
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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 $1,500 and an average
lease term of 44 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 and securitizations. 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.
While the Company generally does not sell its interests in leases, service
contracts or loans to third parties after origination, the Company does, 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.
During 1997 and 1996, the credit facilities related to the securitization
on 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.
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. The two-for-one stock split resulted in the issuance of 5,047,478
F-8
9
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
additional shares of common stock, including the automatic conversion of 9,800
shares of preferred stock to 19,600 shares of common stock. All share and per
share amounts have been restated to reflect these stock splits.
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. Residual value is estimated to be 5% of the gross lease
receivable. 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. Unamortized unearned lease income and
initial direct costs are written off 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
F-9
10
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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.
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, which is seven
years. Income on service contracts is recognized monthly 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, net
investment in leases and loans, accounts payable, and other liabilities, it is
assumed that the carrying amount approximates fair value due to their short
maturity.
F-10
11
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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 of 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 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 implementation of SOP 98-1 did not have a material
impact on its financial position or results of operations.
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 entities
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 does not expect the statement to have
a material impact 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.
F-11
12
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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,
1997 1998 1999
--------------------------------------------
Net income $ 7,652 $ 11,924 $ 10,728
--------------------------------------------
Shares used in computation:
Weighted average common shares
outstanding used in computation of
net income per common share 9,793,140 9,859,127 12,795,809
Dilutive effect of redeemable
convertible preferred stock 19,600 19,600 --
Dilutive effect of common stock
options 112,589 153,248 108,422
--------------------------------------------
Shares used in computation of net income
per common share - assuming
dilution 9,925,329 10,031,975 12,904,231
============================================
Net income per common share $ 0.78 $ 1.21 $ 0.84
============================================
Net income per common share -
assuming dilution $ 0.76 $ 1.19 $ 0.83
============================================
F-12
13
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
C. Net Investment in Leases and Loans
At December 31, 1999, future minimum payments on the Company's lease
receivables are as follows:
FOR THE YEAR ENDED
DECEMBER 31,
- ------------------
2000.................... $ 143,735
2001.................... 94,639
2002.................... 61,593
2003.................... 21,372
2004.................... 239
-----------------
Total................... $ 321,578
=================
At December 31, 1999, the weighted average remaining life of leases in the
Company's lease portfolio is approximately 29 months and the implicit rate of
interest is approximately 37%.
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 originated and loans based on the
level of recourse provided, if any, delinquency statistics, historical loss
experience, current economic conditions and other relevant factors. The Company
provides an allowance for credit losses for leases which are considered
impaired.
The Company takes charge-offs against its receivables when such receivables
are 360 days past due. Cumulative net charge-offs after recoveries from the
Company's inception to December 31, 1999 have totaled 8.1% of total cumulative
receivables plus total billed fees over such period.
The following table sets forth the Company's allowance for credit losses as
of December 31, 1996, 1997, 1998 and 1999 and the related provisions,
charge-offs and recoveries for the years ended December 31, 1997, 1998 and 1999.
F-13
14
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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
-------
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
Provision for credit losses........................ 37,836
Charge-offs........................................ 35,957
Recoveries......................................... 14,990
------
Charge-offs, net of recoveries.................... 20,967
-------
Balance at December 31, 1999....................... $41,719
=======
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, 1996, 1997, 1998 and 1999 and
changes in the Company's estimated residual value as a result of new
originations, and lease terminations for the years ended December 31, 1997, 1998
and 1999.
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
New Originations................................................ 9,753
Lease Terminations.............................................. (6,245)
Balance of Estimated Residual Value at December 31, 1999........ $21,070
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
F-14
15
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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, 1998 and 1999, property and equipment consisted of the
following:
December 31,
--------------------
1998 1999
------- -------
Rental Equipment ............................. $ 9,676 $10,652
Computer Equipment ........................... 2,821 3,834
Office Equipment ............................. 968 1,137
Leasehold improvements ....................... 218 294
--------------------
13,683 15,917
Less accumulated depreciation and amortization 6,936 8,204
====================
Total ........................................ $ 6,747 $ 7,713
====================
Depreciation and amortization expense totaled $3,787,000, $5,076,000 and
$7,597,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
At December 31, 1998 and 1999, computer equipment includes $2,141,000 and
$2,055,000 respectively, under capital leases. Accumulated amortization related
to capital leases amounted to $1,393,000 and $831,000, in 1998 and 1999,
respectively.
E. Notes Payable
Notes Payable
On December 21, 1999, the Company entered into a revolving line of credit
and term loan facility with a group of financial institutions whereby it may
borrow a maximum of $150,000,000 based upon qualified lease receivables. This
agreement replaced the two revolving credit agreements in place at December 31,
1998. Outstanding borrowings with respect to the revolving line of credit bear
interest based either at Prime for Prime Rate loans or the prevailing rate per
annum as offered in the interbank Eurodollar market (Eurodollar) plus 1.75% for
Eurodollar Loans. If the Eurodollar loans are not renewed upon their maturity
they automatically convert into prime rate loans. The prime rates at December
31, 1997, 1998 and 1999 were 8.50%, 7.75%, and 8.50% respectively. The 90-day
Eurodollar rate at December 31, 1999 was 5.9375%.
F-15
16
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
At December 31, 1999, the Company had borrowings outstanding under this
agreement with the following terms:
TYPE RATE AMOUNT
- ---- ------- --------
Prime .................................................. 8.5000% $ 14,330
Eurodollar ............................................. 7.9375% 17,500
Eurodollar ............................................. 7.8125% 12,000
Eurodollar ............................................. 8.0000% 65,000
--------
Total Outstanding $108,830
========
At December 31, 1998, the Company had no borrowings outstanding under this
agreement.
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
September 30, 2001 provided the line of credit is not renewed and no event of
default exists at that date. All converted term loans are repayable over 36
monthly installments. The most restrictive covenants of the agreement have
minimum net worth and income requirements.
In 1998 the Company had a revolving line of credit and term loan facility
with a group of financial institutions whereby it could borrow a maximum of
$105,000,000 based upon qualified lease receivables. Outstanding borrowings with
respect to the revolving line of credit bore interest based either at Prime for
Prime Rate loans or London Interbank Offered Rate (LIBOR) plus 1.85% for LIBOR
Loans. The 90-day LIBOR at December 31, 1997 and 1998 were 5.91% and 5.2806%,
respectively. All outstanding amounts under this facility were repaid on
December 21, 1999.
F-16
17
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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
=======
In 1998, the Company had an additional revolving credit agreement and term
loan with a group of financial institutions whereby it could borrow up to a
maximum of $35,000,000 based on eligible lease receivables. Outstanding
borrowings with respect to the revolving line of credit bore interest based
either at prime for prime rate loans or LIBOR plus 1.85% for LIBOR Loans. If the
LIBOR loans were not renewed upon their maturity then they automatically
converted into prime rate loans. All outstanding amounts under this facility
were repaid on December 21, 1999.
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
=======
Outstanding borrowings were collateralized by leases and service contracts
pledged specifically to the financial institutions. The line of credit was
amended and restated in January 1999, and then replaced by the revolving credit
loan entered into on December 21, 1999.
F-17
18
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
BLT III has three series of notes, the 1996-A Notes, the 1997-A Notes and
the 1998-A Notes. 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. All
outstanding amounts under the 1996-A Notes were repaid on October 18, 1999.
Outstanding borrowings are collateralized by a specific pool of lease
receivables.
At December 31, 1999, BLT III had borrowings outstanding under the three
series of notes with the following terms:
NOTES SERIES EXPIRATION RATE AMOUNT
------------ ---------- ------- -------
1997-A Notes................ 1/16/2000 6.4200% $ 9,498
1998-A Notes................ 5/17/2004 6.0300% 25,473
=======
Total $34,971
=======
At December 31, 1998, BLT III had borrowings outstanding under the three
series of notes with the following terms:
NOTES SERIES EXPIRATION RATE AMOUNT
------------ ---------- ------- -------
1996-A Notes................ 5/16/2000 6.6900% $ 4,752
1997-A Notes................ 1/16/2000 6.4200% 23,944
1998-A Notes................ 5/17/2004 6.0300% 38,703
=======
Total $67,399
=======
At December 31, 1998 and 1999, the Company also had other notes payable
which totaled $298,000 and $1,070,000, 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, 1998 and 1999 of
$248,000 and $1,040,000, respectively. Interest paid to Stockholders under such
notes was not material for the years ended December 31, 1997, 1998 and 1999.
Subordinated Notes Payable
At December 31, 1998 and 1999, the Company also had senior subordinated and
subordinated debt outstanding amounting to $24,421,000 and $9,238,000 net of
unamortized discounts of $113,000 and $49,000, 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
F-18
19
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
rate financing. These notes have maturity dates ranging from January 2000 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. In April 1999, this note was amended to require monthly
payments of $250,000 for the period May 1, 1999 until the note matures on
September 1, 2000. 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, 1999 subordinated notes payable include $102,000 due to
stockholders. Interest paid to stockholders under such notes, at rates ranging
between 8% and 14%, amounted to $472,000, $488,000 and $104,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
Repayment Schedule
At December 31, 1999, the repayment schedule for outstanding notes and
subordinated notes is as follows:
FOR THE YEAR ENDED
DECEMBER 31,
- ------------------
2000 ........................................... $ 27,266
2001 ........................................... 15,970
2002 ........................................... 1,057
2003 ........................................... 1,035
---------
45,328
Outstanding balance of revolving credit facility 108,830
Unamortized discount on senior subordinated debt (49)
Total .......................................... $ 154,109
=========
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, 1998 and 1999, the aggregate carrying value of the Company's fixed
rate borrowings was approximately $95,500,000 and $103,786,000, respectively,
with an estimated fair value of approximately $96,000,000 and $105,082,000,
respectively.
F-19
20
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
F. Redeemable Preferred Stock:
At December 1998 and 1999, the Company had authorized 5,000,000 shares of
preferred stock ("preferred stock") with a par value of $0.01 of which zero
shares were issued and outstanding. At December 31, 1998, the Company had
authorized 9,800 shares of the Series C Convertible Preferred Stock with a par
value of $1.00 of which all were issued and outstanding. Upon completion of the
Company's initial public offering on February 5, 1999, the 9,800 Series C
preferred shares were automatically converted to 19,600 common shares.
G. Stockholders' Equity:
Common Stock
The Company had 25,000,000 authorized shares of common stock with a par
value of $.01 per share of which 9,932,766 and 13,347,726 shares (giving effect
to the two stock splits referred to above) were issued and outstanding at
December 31, 1998 and 1999, respectively.
Treasury Stock
The Company had 142,590 and 667,790 shares of common stock in treasury at
December 31, 1998 and 1999, respectively, and 9,800 shares of preferred stock in
treasury at December 31, 1998. Upon completion of the Company's initial public
offering on February 5, 1999, the 9,800 Series C preferred shares in treasury
were automatically converted to 19,600 common shares.
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 June 16, 1997 stock split.
Pursuant to this amendment, the aggregate number of shares issued could not
exceed 1,220,000 and the exercise price of any outstanding options issued
pursuant to the Plan would be reduced by a factor of ten and the number of
outstanding options issued pursuant to the Plan would 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 reserved 2,000,000 shares of its
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
F-20
21
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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, 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
Exercised (14,960) $ 0.6375 to $ 1.95 $ 1.531
Canceled (58,500) $ 1.95 to $12.313 $10.807
Granted 890,000 $12.063 to $13.544 $12.447
Outstanding at December 31, 1999 936,920 $ 0.6375 to $13.544 $11.357
The options vest over five years and are exercisable only after they become
fully vested. At December 31, 1998 and 1999, 6,682 and 47,920, respectively of
the outstanding options were fully vested.
At December 31, 1998 and 1999, 139,980 and 936,920 shares, respectively of
common stock were reserved for conversion of redeemable convertible preferred
stock and common stock option exercises.
F-21
22
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
Information relating to stock options at December 31, 1999, summarized by
exercise price is as follows:
OUTSTANDING EXERCISABLE
- ---------------------------------------------------- -----------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE PRICE SHARES LIFE (YEARS) EXERCISE PRICE SHARES
- ---------------------------------------------------- -----------------------------
$ 0.6375 2,920 2.25 $ 0.6375 920
$ 1.9500 94,000 3.00 $ 1.95 47,000
$ 12.3130 709,391 6.25 $ 12.3130 0
$ 13.5440 40,609 6.25 $ 13.5440 0
$ 13.1250 80,000 6.30 $ 13.1250 0
$ 12.0630 10,000 6.70 $ 12.0630 0
------- ------
$0.6375 to $13.544 936,920 5.92 $ 1.925 47,920
======= ======
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. The Company follows 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, 1997, 1998 and 1999 would have been $7,644,000, $11,918,000, and
$9,812,000 respectively. Pro forma net income per common share for the year
ended December 31, 1999, would have been $0.76 rather than $0.83 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. For grants in 1999: an expected life of the options of seven years,
a risk-free interest rate of approximately 6.5%, a dividend yield of 1.25%, and
volatility of 48.68%. The weighted average fair value at date of grant for
options granted during 1995 approximated $.27 per option and the weighted
average fair value at date of grant for options granted during 1999 approximated
$6.46 per option. There were no options granted in 1996, 1997 or 1998.
F-22
23
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
H. Income Taxes
The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1997 1998 1999
Current:
Federal $ 898 $ 500 $3,467
State 91 125 77
----------------------------------
989 625 3,544
----------------------------------
Deferred:
Federal 3,703 6,447 2,310
State 1,194 1,138 1,655
----------------------------------
4,897 7,585 3,965
----------------------------------
Total $5,886 $8,210 $7,509
==================================
At December 31, 1998 and 1999, the components of the net deferred tax
liability were as follows:
1998 1999
------------------------
Investment in leases, other than allowance $ 35,257 $ 89,031
Allowance for credit losses (986) (11,289)
Debt issue costs 391 209
Depreciation (11,887) (55,122)
Alternative minimum tax (4,483) (6,530)
Loss carryforwards (8,151) 0
Deferred receivables 8,413 6,221
========================
Total $ 18,554 $ 22,520
========================
F-23
24
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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,
--------------------------------
1997 1998 1999
Federal statutory rate 34.0% 35.0% 35.0%
State income taxes, net of federal benefit 6.7% 5.7% 5.8%
Nondeductible expenses and other 2.8% 0.1% 0.4%
--------------------------------
Effective income tax rate 43.5% 40.8% 41.2%
================================
At December 31, 1998, the Company had loss carryforwards of approximately
$19,800,000 which were utilized in 1999.
I. Commitments and Contingencies
Operating and Capital Leases
The Company's lease for its facility in Waltham, Massachusetts expires in
2004. 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's lease for its
facilities in Woburn, Massachusetts expires in 2003.
The Company also has entered into various operating lease agreements
ranging from three to four years for additional office equipment. At December
31, 1999, 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,
------------------
2000 .................. $1,457
2001 .................. 1,443
2002 .................. 1,387
2003 .................. 1,343
------
Total ................. $5,630
======
Rental expense under operating leases totaled $991,000, $1,131,000, and
$1,567,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
F-24
25
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
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, 1999 future minimum lease payments
under capital leases were as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------------
2000 ............................. $ 567
2001 ............................. 446
2002 ............................. 297
2003 ............................. 96
-------
Total minimum lease payments ..... 1,406
Less amounts representing interest (162)
-------
Total ............................ $ 1,244
=======
Legal Matters
Management believes, after consultation with counsel, that the allegations
against the Company included in the lawsuits described below are without merit,
and the Company is vigorously defending each of the allegations. The Company
also is subject to claims and suits arising in the ordinary course of business.
At this time, it is not possible to estimate the ultimate loss or gain, if any,
related to these lawsuits, nor if any such loss will have a material adverse
effect on the Company's results of operations or financial position.
I. On August 24, 1999, a purported class action lawsuit was filed in
Middlesex Superior Court for The Commonwealth of Massachusetts against the
Company and its wholly-owned subsidiary Leasecomm Corporation ("Leasecomm").
The complaint has been amended four times, most recently by the Fourth
Amended Complaint and Jury Claim filed on or about November 4, 1999 (as amended,
the "Clark Complaint").
The purported class consists of individuals and businesses that have been sued
by Leasecomm in a Massachusetts court for allegedly breaching Leasecomm's Non
Cancellable Equipment Lease Agreement or Non Cancellable Lease Agreement (the
"Lease Agreements") containing a forum selection clause. The forum selection
clause is an agreement between the parties to the Lease Agreements to submit to
the jurisdiction of the courts of The Commonwealth of Massachusetts for the
bringing of any suit or other proceeding. The purported class would be limited
to individuals and businesses that: have no place of business or residence in
New England; have been sued in a Massachusetts court for breach of the Lease
Agreements; had no more than three employees as of the date of the Lease
Agreement; had been in existence for no more than three years as of the date of
the Lease Agreement; and had entered into Lease Agreements with scheduled
monthly lease payments which aggregated to less than $5,000.
F-25
26
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
The Clark Complaint alleges that enforcement of the forum selection clause
is not fair or reasonable because, among other things, litigation in
Massachusetts is prohibitively costly and time consuming for purported class
members, purported class members have no choice but to enter into the Lease
Agreement because of Leasecomm's greater bargaining power, and purported class
members allegedly have valid defenses to the claims asserted against them by
Leasecomm. The Plaintiffs seek: a declaration that the forum selection clause is
not fair or reasonable as to purported class members and that the Massachusetts
courts lack personal jurisdiction over purported class members; dismissal
without prejudice of all cases pending in Massachusetts against purported class
members; a permanent injunction preventing Leasecomm and its affiliates from
bringing suit in Massachusetts against purported class members; a permanent
injunction preventing Leasecomm or its affiliates from entering into Lease
Agreements containing the forum selection clause; unspecified monetary damages
against Leasecomm and the Company in favor of purported class members equal to
double or treble the moneys collected in connection with lawsuits filed against
purported class members in Massachusetts courts, together with attorneys' fees
and costs.
The parties have filed various motions with the Court, which will be heard
by the Court within the next several months.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome. However, the forum selection clause at issue in this
litigation has been enforced in other cases.
II. On June 3, 1999 a purported class action lawsuit was filed in Middlesex
Superior Court in The Commonwealth of Massachusetts against Leasecomm. The
complaint was amended on or about July 26, 1999 (as amended, the
"McKenzie-Pollock Complaint"). On September 3, 1999 Leasecomm removed the action
to the United States District Court for the District of Massachusetts.
The purported class consists of individuals who entered into a Lease
Agreement with Leasecomm between June 4, 1993 and the date of the
McKenzie-Pollock Complaint.
Plaintiffs allege: that Leasecomm causes individuals to enter into
non-cancellable, long-term leases when there is no reasonable expectation that
most of the individuals would need or use the equipment for the duration of the
lease term; that Leasecomm conceals or misrepresents the nature of the terms of
its Lease Agreements; that the Lease Agreements are non-negotiable adhesion
contracts which are oppressive and unfair; that the cost of acquiring the
equipment through Leasecomm is often double or triple the retail cost of the
equipment; that Leasecomm violates state usury laws; that Leasecomm engages in
unfair debt collection practices; that Leasecomm brings lawsuits against
purported class members in Massachusetts even though it has no jurisdiction over
them in Massachusetts courts; that Leasecomm fails to make proper service and
then files pleadings which state that proper service was made, thereby obtaining
default judgments against certain members of the purported class; that Leasecomm
conspired with its salespersons to cause members of the purported class to enter
into unconscionable leases by concealing and misrepresenting their terms; that
Leasecomm failed to comply with the Truth in Lending Act and the Massachusetts
F-26
27
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
Consumer Credit Cost Disclosure Act; and that Leasecomm has engaged in unfair
trade practices in violation of the Massachusetts consumer protection statute.
Plaintiffs and the members of the purported class seek: unspecified damages
for monetary losses allegedly sustained by them as a result of this conduct by
Leasecomm and reimbursement of costs and attorneys' fees; treble damages and
other punitive damages; rescission of the Lease Agreements, or a declaration
that they are void, and return of all moneys paid to Leasecomm; and damages for
unjust enrichment.
The parties have filed various motions with the Court. In December, 1999,
the Court granted Leasecomm's motion to dismiss in part, and ordered that the
federal Truth in Lending and Fair Debt Collection Practices claims be dismissed.
The Court then ordered the remaining claims to be remanded to the Middlesex
Superior Court for further proceedings, including decisions on the balance of
Leasecomm's motion to dismiss, since all federal claims in the case had been
dismissed. Leasecomm subsequently filed a renewed motion to dismiss in the
Superior Court, again asserting that the remaining non-federal claims are
legally insufficient and should have been presented in earlier court
proceedings, which will be heard by the Court within the next several months.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
III.On October 25, 1999, a purported class action lawsuit was filed in
Middlesex Superior Court in The Commonwealth of Massachusetts against Leasecomm
(the "Lamar Complaint"). The purported class consists of all individuals and
businesses who, on or after September 28, 1996, signed a Leasecomm agreement
which states that it is "non-cancelable" and/or contains certain standard
provisions relating to delivery and acceptance of the leased equipment and
warranties and servicing for the equipment. The Plaintiffs contend that these
particular lease terms are contrary to Article 2A of the Uniform Commercial Code
as adopted in Massachusetts and that Leasecomm's use of these terms constitutes
an unfair and deceptive trade practice under Chapter 93A of the Massachusetts
General Laws. The Plaintiffs seek a declaration that the lease terms in question
are unfair and deceptive and that Leasecomm's use of those terms is unfair and
deceptive. The Plaintiffs also seek a Court order requiring Leasecomm to notify
all purported class members of the Court's ruling in the case; to stop using the
lease terms or similar lease terms which allegedly misstate lessees' rights
under Massachusetts law; to refrain from enforcing those lease terms against any
of the purported class members; to refrain from providing or communicating
incorrect information regarding lessees' rights under Massachusetts law; and to
include in every lease agreement language which conspicuously describes the
rights of lessees under Massachusetts law. Finally, the Plaintiffs seek
reimbursement of their costs and attorneys' fees.
The parties have filed various motions with the Court, which will be heard
by the Court over the next several months.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
F-27
28
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
IV. On January 20, 2000, the Company filed suit against Sentinel Insurance
Company Limited ("Sentinel"), in the United States District Court for the
District of Massachusetts (the "Sentinel Complaint"). On August 18, 1999,
Sentinel had issued a Business Performance Insurance Policy (the "Policy") to
the Company as collateral for a Twelve Million Dollar ($12,000,000) loan (the
"Loan") that the Company had made to Premier Holidays International, Inc.
("Premier"). The Loan was personally guaranteed by Premier's President, Daniel
DelPiano ("DelPiano"). Pursuant to the terms of the Policy, Sentinel was
obligated to make payment to the Company for any and all amounts payable under
the terms of the Loan, in the event a default by Premier occurred. After Premier
and DelPiano defaulted on their repayment obligations, the Company made demand
on Sentinel for payment under the Policy. The Company filed the Sentinel
Complaint after Sentinel refused to make payment to the Company under the
Policy. On February 3, 2000, the Company amended its Complaint to assert claims
against Premier and DelPiano arising out of their failure to make payments
required under the Loan and the personal guaranty. On March 1, 2000, the Company
filed a motion for summary judgment on its claims against Sentinel, seeking
judgment in the amount of approximately $13.0 million, plus post-judgment
interest and attorneys' fees.
Subsequently, on January 26, 2000, Premier and DelPiano filed suit against
the Company, its wholly-owned subsidiary, Leasecomm Corporation, and Sentinel in
the Superior Court of Fulton County, Georgia (the "Premier Complaint"). Premier
and DelPiano allege that, notwithstanding the plain wording of both the Loan and
the Policy, Premier agreed to borrow the full amount of the Loan only upon
alleged representations by the Company that it would loan Premier an additional
Forty-Five Million Dollars ($45,000,000). The documents evidencing the Loan, and
the documents evidencing the Policy, refer only to the amount of the Loan
($12,000,000), and not to any greater amount. Premier alleges that, as a result,
it has suffered actual and consequential damages in the amount of Seven Hundred
Sixty-Nine Million Three Hundred Fifty Thousand Dollars ($769,350,000) plus
interest, costs, and attorneys' fees. Premier also seeks punitive damages in the
amount of Five Hundred Million Dollars ($500,000,000). Premier also seeks
injunctive relief barring the Company and Leasecomm from making demand on or
commencing court action to collect on the Policy.
On February 22, 2000, Leasecomm removed this case to federal court for the
Northern District of Georgia. The parties have filed various motions with the
Court, which will be heard over the next several months. Among the Company's and
Leasecomm's motions, are motions to dismiss the Premier Complaint, or,
alternatively, to transfer this case to federal court in Massachusetts; and, a
motion for preliminary injunction regarding the Sentinel Complaint, seeking an
order requiring Sentinel, Premier and Del Piano to turn over to the Company any
collateral in their possession or to which the Company and Leasecomm may be
entitled as a result of both Premier's and Sentinel's defaults under the Loan
and the Policy, respectively.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
F-28
29
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
J. 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 contributions to the defined contribution plan were $106,000,
$134,000, and $102,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
K. 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 counter-parties 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
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30
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except per share data)
entitled to receive, if any. Interest rate swaps entered into by the Company may
not be readily marketable.
At December 31, 1999, 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 $150,000,000 revolving line of
credit due September 30, 2001 to a fixed 8.35%. 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, $177,000, and $215,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. At December 31, 1999, 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 $59,000,
based on dealer quotes.
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.
L. 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, credit policies are in
place for approving leases and loans, and lease pools are monitored by
management. In addition, the cash and cash equivalents are maintained with
several high quality financial institutions.
One dealer accounted for approximately 10.7%, 11.6% and 14.7% of all
originations during the year ended December 31, 1997, 1998 and 1999,
respectively. Another dealer accounted for approximately 2.6%, 3.5% and 10.1% of
all originations during the year ended December 31, 1997, 1998 and 1999,
respectively. No other dealer accounted for more than 10% of the Company's
origination volume during the years ended December 31, 1997, 1998, or 1999.
The Company originates and services leases, contracts and loans in all 50
states of the United States and its territories. As of December 31, 1999, leases
in California, Florida, Texas, Massachusetts and New York accounted for
approximately 45% of the Company's portfolio, with only California accounting
for more than 10% of the total portfolio, at approximately 15%. None of the
remaining states accounting for more than 4% of such total.
M. Subsequent Events (Unaudited)
On February 14, 2000, the Company's board of directors authorized the
Company to purchase $5,000,000 of MicroFinancial common stock. This is in
addition to the 1,000,000 shares the board
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of directors authorized the Company to buy back in 1999. As of March 22, 2000,
the company has bought back a total of 664,600 shares at a cost of approximately
$7.2 million.
On March 21, 2000 the Company closed a $50.0 million on balance sheet
securitization. The securitization is insured by AMBAC and was rated AAA by
Standard & Poors and Aaa by Moody's Investors Service. The proceeds from the
securitization were used to pay down the Company's credit facility so that as of
March 22, 2000 has an outstanding principal balance of $82.5 million.
N. Selected Quarterly Data (Unaudited)
The following is a summary of the unaudited quarterly results of operations
of the Company for 1998 and 1999.
1998 1999
---------------------------------------- -----------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
Revenues:
Income on leases and loans $11,510 $11,836 $11,939 $12,056 $12,377 $13,661 $14,232 $ 15,275
Income on service contracts
rental and fees 6,578 6,624 7,345 8,612 10,078 10,050 10,591 12,197
------- ------- ------- ------- ------- ------- ------- --------
Total revenues 18,088 18,460 19,284 20,668 22,455 23,711 24,823 27,472
------- ------- ------- ------- ------- ------- ------- --------
Expenses:
Selling general and administrative 4,281 5,062 4,940 5,778 6,004 5,708 6,232 6,472
Provision for credit losses 4,575 3,698 4,294 6,508 5,399 6,064 5,888 20,485
Depreciation and amortization 1,177 1,274 1,416 1,209 1,687 1,767 2,038 2,105
Interest 2,820 3,133 3,247 2,954 2,620 2,366 2,602 2,787
------- ------- ------- ------- ------- ------- ------- --------
Total expenses 12,853 13,167 13,897 16,449 15,710 15,905 16,760 31,849
------- ------- ------- ------- ------- ------- ------- --------
Income before provision for income taxes 5,235 5,293 5,387 4,219 6,745 7,806 8,063 (4,377)
------- ------- ------- ------- ------- ------- ------- --------
Net Income $ 3,111 $ 3,134 $ 3,215 $ 2,464 $ 3,969 $ 4,543 $ 4,741 $ (2,525)
------- ------- ------- ------- ------- ------- ------- --------
Net Income per common share - basic 0.32 0.32 0.32 0.25 0.33 0.34 0.36 (0.20)
Net Income per common share - diluted 0.31 0.31 0.32 0.25 0.33 0.34 0.36 (0.20)
Dividends per common share 0.030 0.035 0.035 0.035 0.035 0.040 0.040 0.040
During the fourth quarter of 1999, the Company recorded a special provision
of $12.7 million for a loan made to one company, collateralized by approximately
3,500 micro-ticket consumer contracts and guaranteed by, among other security,
an insurance performance bond. The Company is currently involved in litigation
with the company and the insurance company, see "Legal Proceedings".
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