1
Exhibit 99
MICROFINANCIAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and 2000 F-4
Consolidated Statements of Operations For The Years Ended
December 31, 1998, 1999, and 2000 F-5
Consolidated Statements of Stockholders' Equity For The
Years Ended
December 31, 1998, 1999, and 2000 F-6
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1998, 1999, and 2000 F-7
Notes To Consolidated Financial Statements F-9
F-1
2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
MicroFinancial Incorporated
We have audited the accompanying consolidated balance sheet of MicroFinancial
Incorporated (the "Company") as of December 31, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. 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 audit. The financial statements of the Company
for the years ended December 31, 1999 and 1998 were audited by other auditors
whose report, dated February 21, 2000, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2000 financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2000, and the
results of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 1, 2001
F-2
3
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, 1999, and the
results of their operations and their cash flows for each of the two years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States of America. 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 of America, 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 our opinion.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 21, 2000
F-3
4
MICROFINANCIAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
--------------------
1999 2000
---- ----
ASSETS
Net investment in leases and loans:
Receivables due in installments $ 321,578 $ 405,437
Estimated residual value 21,070 35,368
Initial direct costs 8,164 9,321
Loans receivable 20,073 12,080
Less:
Advance lease payments and deposits (2,164) (400)
Unearned income (100,815) (132,687)
Allowance for credit losses (41,719) (40,924)
--------- ---------
Net investment in leases and loans $ 226,187 $ 288,195
Investment in service contracts 14,250 12,553
Cash and cash equivalents 11,062 17,957
Property and equipment, net 7,713 11,505
Other assets 6,644 12,392
--------- ---------
Total assets $ 265,856 $ 342,602
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 144,871 $ 201,991
Subordinated notes payable 9,238 4,785
Capitalized lease obligations 1,244 859
Accounts payable 339 1,605
Dividends payable 514 573
Other liabilities 4,748 5,433
Income taxes payable 3,544 2,333
Deferred income taxes payable 22,520 29,000
--------- ---------
Total liabilities 187,018 246,579
--------- ---------
Commitments and contingencies (Note I) -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
0 shares issued at 12/31/99; 0 shares issued at 12/31/00 -- --
Common stock, $.01 par value; 25,000,000 shares authorized; 13,347,726
shares issued at 12/31/99; 13,410,646 shares issued at 12/31/00 133 134
Additional paid-in capital 47,920 47,900
Retained earnings 36,656 55,291
Treasury stock (667,790 shares of common stock at 12/31/99,
669,700 shares of common stock at 12/31/00), at cost (5,777) (7,234)
Notes receivable from officers and employees (94) (68)
--------- ---------
Total stockholders' equity 78,838 96,023
--------- ---------
Total liabilities and stockholders' equity $ 265,856 $ 342,602
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
5
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
For the years ended
December 31,
--------------------------------------------------
1998 1999 2000
---- ---- ----
Revenues:
Income on financing leases and loans $ 47,341 $ 55,545 $ 69,847
Income on service contracts 2,565 6,349 8,687
Rental income 16,118 21,582 27,638
Loss and damage waiver fees 5,441 5,660 6,034
Service fees 5,035 9,325 15,100
-------- -------- --------
Total revenues 76,500 98,461 127,306
-------- -------- --------
Expenses:
Selling general and administrative 20,061 24,416 26,988
Provision for credit losses 19,075 37,836 38,912
Depreciation and amortization 5,076 7,597 10,227
Interest 12,154 10,375 15,070
-------- -------- --------
Total expenses 56,366 80,224 91,197
-------- -------- --------
Income before provision for income taxes 20,134 18,237 36,109
Provision for income taxes 8,210 7,509 15,249
-------- -------- --------
Net income $ 11,924 $ 10,728 $ 20,860
======== ======== ========
Net income per common share - basic $ 1.21 $ 0.84 $ 1.64
======== ======== ========
Net income per common share - diluted $ 1.19 $ 0.83 $ 1.63
======== ======== ========
Dividends per common share $ 0.135 $ 0.155 $ 0.175
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
6
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended
December 31, 1998, 1999 and 2000
(In thousands, except share data)
Notes
Additional Receivable Total
Common Stock Paid-in Retained Treasury Stock From Stockholders'
Shares Amount Capital Earnings Shares Amount Officers Equity
-------------------------------------------------------------------------------------------------
Balance at January 1, 1998 9,799,000 $98 $1,604 $17,366 162,190 ($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 27,956 162,190 (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
Exercise of stock options 62,920 1 118 119
Common stock dividends (2,225) (2,225)
Treasury stock repurchased 164,100 (1,595) (1,595)
Treasury stock retired (138) (162,190) 138 -
Notes receivable from officers
and employees 26 26
Net income 20,860 20,860
-------------------------------------------------------------------------------------------------
Balance at December 31, 2000 13,410,646 $134 $47,900 $55,291 669,700 ($7,234) ($68) $96,023
=================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
7
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended
December 31,
--------------------------------------------------
1998 1999 2000
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 139,215 $ 157,264 $ 174,501
Cash paid to suppliers and employees (31,847) (33,905) (34,405)
Cash paid for income taxes (146) (1,339) (9,726)
Interest paid (11,648) (10,740) (15,649)
Interest received 399 3,443 1,639
--------- --------- ---------
Net cash provided by operating activities 95,973 114,723 116,360
--------- --------- ---------
Cash flows from investing activities:
Investment in lease contracts (83,786) (116,808) (141,076)
Investment in direct costs (4,070) (8,295) (7,812)
Investment in service contracts (8,080) (9,105) (4,138)
Investment in loans receivable (11,683) (11,857) 0
Investment in Resource Leasing Corporation 0 0 (2,800)
Investment in fixed assets (459) (1,319) (2,354)
Issuance of notes from officers and employees (145) (2) 0
Repayment of notes from officers 59 158 25
Investment in notes receivable (228) (613) (117)
Repayment of notes receivable 281 254 325
--------- --------- ---------
Net cash used in investing activities (108,111) (147,587) (157,947)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from secured debt 96,817 121,680 195,917
Repayment of secured debt (83,135) (108,003) (123,075)
Proceeds from refinancing of secured debt 343,499 460,381 473,118
Prepayment of secured debt (343,499) (460,381) (488,118)
Proceeds from short-term demand notes payable 280 890 259
Repayment of short-term demand notes payable (369) (117) (983)
Proceeds from issuance of subordinated debt 1,200 0 0
Repayment of subordinated debt (3,261) (15,247) (4,500)
Proceeds from sale of common stock 0 46,116 0
Proceeds from exercise of common stock options 162 22 119
Repayment of capital leases (709) (733) (494)
Purchase of treasury stock 0 (5,639) (1,595)
Payment of dividends (1,282) (1,860) (2,166)
--------- --------- ---------
Net cash provided by financing activities 9,703 37,109 48,482
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents (2,435) 4,245 6,895
Cash and cash equivalents, beginning of period 9,252 6,817 11,062
--------- --------- ---------
Cash and cash equivalents, end of period $ 6,817 $ 11,062 $ 17,957
========= ========= =========
(Continued)
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
8
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
For the year ended
December 31,
-------------------------------------
1998 1999 2000
---- ---- ----
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 11,924 $ 10,728 $ 20,860
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 5,076 7,597 10,227
Provision for credit losses 19,075 37,836 38,912
Recovery of equipment cost and residual value,
net of revenue recognized 51,271 52,029 40,289
Increase (decrease) in current taxes 1,285 2,919 (1,211)
Increase in deferred income taxes 7,585 3,966 6,480
Changes in assets and liabilities:
Decrease (increase) in other assets (809) 232 (934)
Increase in accounts payable 60 190 1,267
Increase (decrease) in accrued liabilities 506 (774) 471
-------- -------- --------
Net cash provided by operating activities $ 95,973 $ 114,723 $ 116,360
======== ======== ========
Supplemental disclosure of noncash activities:
Property acquired under capital leases $ 412 $ 1,203 $ 109
======== ======== ========
Accrual of common stock dividends $ 346 $ 514 $ 573
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
(Concluded)
F-8
9
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and 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
$400 to $3,000, 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, November 1994, and March 2000, Leasecomm
Corporation created wholly owned subsidiaries, BLT Finance Corporation I
("BLT I"), BLT Finance Corporation II ("BLT II") BLT Finance Corporation
III ("BLT III"), and MFI Finance Corporation I ("MFI I"), 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. Since these transfers do not result in a change in
control over the lease receivables, sale treatment and related gain
recognition under Statement of Financial Accounting Standards No. 125 as
amended by Statement of Financial Accounting Standards No. 140, 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. Intercompany accounts and
transactions have been eliminated in consolidation.
Stock Splits
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
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 this stock split.
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 amounts 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.
F-9
10
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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. 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) 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 interest 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 balances. 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 current 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
At the end of the lease term, the lease typically converts into a
month-to-month rental contract. 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
F-10
11
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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.
Interest-Rate Hedging Agreements
The Company has entered into one interest-rate hedging agreements to
hedge against potential increases in interest rates on the Company's
outstanding borrowings. That agreement expired in July 2000. 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 June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". In June 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133."
SFAS No 137 amended SFAS No 133 to defer its effective date by one year to
fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133". SFAS No. 138
Made certain changes in the hedging provisions of SFAS No, 133, and is
effective concurrent with SFAS No. 133 (collectively hereafter referred to
as the Statement). The Statement requires the Company to recognize all
derivatives as either assets or liabilities on its balance sheet at fair
value. The Company adopted the Statement on January 1, 2001, and the
implementation did not have a material impact on its financial position or
results of operations.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" ("SFAS No. 140"). SFAS No. 140 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities based on consistent application of a
financial-components approach that focuses on control. SFAS No. 140 is
effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001 and the
Company will adopt its provisions in 2001. The Company does not expect the
statement to have a material impact on its financial position or results of
operations.
F-11
12
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and 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 2-to-1 stock split which became effective with the Company's
initial public offering on February 5, 1999. 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. Options to purchase
zero, 120,609, and 830,000 shares of common stock were not included in the
computation of diluted earnings per share for the years ended December 31,
1998, 1999, and 2000, respectively because their effects were antidilutive.
For the year ended December 31,
1998 1999 2000
-------------------------------------------------
Net income $ 11,924 $ 10,728 $ 20,860
----------- ----------- -----------
Shares used in computation:
Weighted-average common shares outstanding used in
computation of net income per common share 9,859,127 12,795,809 12,728,441
Dilutive effect of redeemable convertible preferred stock 19,600 -- --
Dilutive effect of common stock options 153,248 108,422 79,373
----------- ----------- -----------
Shares used in computation of net income
per common share - assuming dilution 10,031,975 12,904,231 12,807,814
=========== =========== ===========
Net income per common share - basic $ 1.21 $ 0.84 $ 1.64
=========== =========== ===========
Net income per common share - diluted $ 1.19 $ 0.83 $ 1.63
=========== =========== ===========
C. Net Investment in Leases and Loans
At December 31, 2000, future minimum payments on the Company's lease
receivables are as follows:
For the year ended
December 31,
------------
2001 $ 204,634
2002 113,529
2003 70,890
2004 16,259
2005 125
--------------
Total $ 405,437
==============
At December 31, 2000, the weighted average remaining life of leases in
the Company's lease portfolio is approximately 28 months and the implicit
rate of interest is approximately 38%.
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.
F-12
13
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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, 2000 have totaled
8.6% 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, 1998, 1999, and 2000 and the related provisions,
charge-offs and recoveries for the years ended December 31, 1998, 1999, and
2000.
Balance at January 1, 1998 $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
Provision for leases and loans credit losses 36,029
Provision for other asset credit losses 2,883
Total provisions for credit losses 38,912
Charge-offs (including $1,064 in other asset chargeoffs) 57,145
Recoveries 19,257
------
Charge-offs, net of recoveries 37,888
-------
Balance of allowance for credit losses at December 31, 2000 $40,924
=======
Balance of other asset reserve at December 31, 2000 $ 1,819
=======
For the twelve months ended December 31, 2000, the Company reserved
$2.9 million against other assets, offset by $1.1 million in charge-offs.
At December 31, 1999 and 2000, other assets included prepayments and
deposits of $2,813,000 and $6,394,000 respectively, and receivables
totaling $3,831,000 and $7,817,000, respectively. The other asset reserve
reflects management's judgement of loss potential considering current
economic conditions and the nature of the underlying receivables.
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, 1998, 1999, and
2000 and changes in the Company's estimated residual value as a result of
new originations, and lease terminations for the years ended December 31,
1998, 1999, and 2000.
F-13
14
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
Balance of Estimated Residual Value at January 1, 1998 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 22,893
Lease Terminations (8,595)
Balance of Estimated Residual Value at December 31, 2000 35,368
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, 1999 and 2000, property and equipment consisted of the
following:
December 31,
----------------------
1999 2000
---- ----
Rental Equipment $10,652 $13,214
Computer Equipment 3,834 5,536
Office Equipment 1,137 1,330
Leasehold improvements 294 338
----------------------
15,917 20,418
Less accumulated depreciation and amortization 8,204 8,913
----------------------
Total $ 7,713 $11,505
=======================
Depreciation and amortization expense totaled $5,076,000, $7,597,000
and $10,227,000 for the years ended December 31, 1998, 1999, and 2000,
respectively.
At December 31, 1999 and 2000, computer equipment includes $2,055,000
and $1,725,000 respectively, under capital leases. Accumulated amortization
related to capital leases amounted to $831,000 and $912,000, in 1999 and 2000,
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. 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
F-14
15
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
automatically convert into prime rate loans. On August 22, 2000, the
revolving line of credit and term loan facility was amended and restated
whereby the Company may now borrow a maximum of $192,000,000 based upon
qualified lease receivables, loans, rentals and service contracts.
Outstanding borrowings with respect to the revolving line of credit bear
interest based either at Prime minus 0.25% for Prime Rate Loans or the
prevailing rate per annum as offered in the London Interbank Offered Rate
(LIBOR) plus 1.75% for LIBOR Loans or the seven day Money Market rate plus
2.00% for Swing Line Advances. If the LIBOR loans are not renewed upon
their maturity they automatically convert into prime rate loans. The Swing
Line advances have a seven-day maturity and upon their maturity they
automatically convert into prime rate loans. In addition, the Company's
aggregate outstanding principal amount of swing Line advances shall not
exceed $10 million. The prime rates at December 31, 1998, 1999, and 2000
were 7.75%, 8.50%, and 9.50% respectively. The 90-day Eurodollar rate at
December 31, 1999 was 5.9375%. The 90-day LIBOR rate at December 31, 2000
was 6.403%. The 7-day Money Market Rate at December 31, 2000 was 6.63%.
At December 31, 2000, the Company had borrowings outstanding under
this agreement with the following terms:
Type Rate Amount
- ---- ---- ------
Prime 9.5000% $ 17,260
Swing Line 8.8100% 5,076
LIBOR 8.2500% 12,000
LIBOR 8.2500% 50,000
LIBOR 8.5625% 17,500
----------
Total Outstanding $ 101,836
==========
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, 2002 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.
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
=========
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. All outstanding amounts under the 1997-A Notes
were repaid on September 16, 2000. MFI I has two series of notes, the
2000-1 Notes, and the 2000-2 Notes. In March 2000, MFI I issued the 2000-1
Notes in aggregate principal amount of $50,056,686. In December 2000, MFI
I issued the 2000-2 Notes in aggregate principal amount of $50,561,633.
Outstanding borrowings are collateralized by a specific pool of lease
receivables.
At December 31, 2000, BLT III and MFI I had borrowings outstanding
under the series of notes with the following terms:
F-15
16
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
Note Series Expiration Rate Amount
----------- ---------- ---- ------
BLT III
1998-A Notes 5/17/04 6.03% $12,252
MFI I
9/16/05 7.38% 36,995
2000-2 Notes 6/16/06 6.94% 50,562
--------
Total Outstanding $99,809
========
At December 31, 1999, BLT III had borrowings outstanding under the
series of notes with the following terms:
Note Series Expiration Rate Amount
----------- ---------- ---- ------
BLT III
1997-A Notes 10/16/00 6.42% $9,498
1998-A Notes 5/17/04 6.03% 25,473
--------
Total Outstanding $34,971
========
At December 31, 1999 and 2000, the Company also had other notes
payable which totaled $1,070,000 and $346,000 respectively. The notes are
due on demand and bear interest at a rate of prime less 1.00%. Other notes
payable includes amounts due to stockholders of the Company at December
31, 1999 and 2000 of $1,040,000 and $316,000 respectively. Interest paid
to stockholders under such notes was not material for the years ended
December 31, 1998, 1999, and 2000.
Subordinated Notes Payable
At December 31, 1999 and 2000, the Company also had senior
subordinated and subordinated debt outstanding amounting to $9,238,000 and
$4,785,000 net of unamortized discounts of $49,000 and $2,000
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 2001 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, 2000, the Company was in default on one of its debt
covenants in its senior subordinated notes. The covenant that was in
default requires that the Company maintain an allowance for credit losses
in an amount not less than 100% of the Delinquent Billed Lease
Receivables. The covenant default was waived as of December 31, 2000. In
consideration of the waiver, the Company repaid one of the notes in full
on March 2, 2001.
F-16
17
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
At December 31, 2000 subordinated notes payable included $102,000
due to stockholders. Interest paid to stockholders under such notes, at
rates ranging between 8% and 14%, amounted to $488,000, $104,000, and
$8,500 for the years ended December 31, 1998, 1999, and 2000,
respectively.
Repayment Schedule
At December 31, 2000, the repayment schedule for outstanding notes
and subordinated notes is as follows:
For the year ended
December 31,
- ------------------
2001 $ 48,534
2002 33,926
2003 21,153
2004 1,329
---------
104,942
Outstanding balance of revolving credit facility 101,836
Unamortized discount on senior subordinated debt (2)
---------
Total $ 206,776
=========
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, 1999 and 2000, the
aggregate carrying value of the Company's fixed rate borrowings was
approximately $44,258,000 and $104,596,000, respectively, with an
estimated fair value of approximately $43,870,000 and $104,719,000,
respectively.
F. Redeemable Preferred Stock:
At December 1999 and 2000, 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.
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 12,679,936 and 12,740,946 shares were
issued and outstanding at December 31, 1999 and 2000, respectively.
Treasury Stock
The Company had 667,790 and 669,700 shares of common stock in treasury
at December 31, 1999 and 2000, respectively.
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.
F-17
18
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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, 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
Exercised (62,920) $0.6375 to $1.95 $1.889
Canceled (10,000) $12.313 $12.313
Granted 730,000 $9.781 $9.781
Outstanding at December 31, 2000 1,594,000 $1.95 to $13.544 $11.003
The options vest over five years and are exercisable only after they
become fully vested. At December 31, 1999 and 2000, 47,920 and 200,000,
respectively of the outstanding options were fully vested.
At December 31, 1999 and 2000, 936,920 and 1,594,000 shares,
respectively of common stock were reserved for common stock option
exercises.
F-18
19
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
Information relating to stock options at December 31, 2000, summarized
by exercise price, is as follows:
Outstanding Exercisable
---------------------------------------------- -------------------------------
Weighted- Weighted-
Average Average
Exercise Price Shares Life (Years) Exercise Price Shares
---------------------------------------------- -------------------------------
$ 1.9500 34,000 5.00 $ 1.95 34,000
$ 12.3130 699,391 8.15 $ 12.3130 139,878
$ 13.5440 40,609 8.15 $ 13.5440 8,122
$ 13.1250 80,000 8.27 $ 13.1250 16,000
$ 12.0630 10,000 8.58 $ 12.0630 2,000
$ 9.7813 730,000 9.15
--------- -------
$1.95 to $13.544 1,594,000 8.55 $ 10.6637 200,000
========= =======
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
the 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, 1998,
1999, and 2000 would have been $11,918,000, $9,812,000, and $19,841,000,
respectively. Pro forma net income per common share-basic would have been
$0.77 and $1.56 rather than $0.84 and $1.64, as reported, for the years
ended December 31, 1999 and 2000, respectively. Pro forma net income per
common share-diluted would have been $0.76 and $1.55 rather than $0.83 and
$1.63, as reported, for the years ended December 31, 1999 and 2000,
respectively.
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 1999 and 2000: 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 1999 approximated $6.46 per option and the weighted-average fair
value at date of grant for options granted during 2000 approximated $5.45
per option. There were no options granted in 1998.
F-19
20
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
H. Income Taxes:
The provision for income taxes consists of the following:
For the years ended December 31,
----------------------------------------
1998 1999 2000
Current:
Federal $ 500 $3,467 $ 7,109
State 125 77 1,659
----------------------------------------
625 3,544 8,768
----------------------------------------
Deferred:
Federal 6,447 2,310 5,532
State 1,138 1,655 948
----------------------------------------
7,585 3,965 6,480
----------------------------------------
Total $8,210 $7,509 $15,248
========================================
At December 31, 1999 and 2000, the components of the net deferred tax
liability were as follows:
1999 2000
--------------------------
Investment in leases, other than allowance $ 89,031 $ 51,302
Allowance for credit losses (11,289) (15,889)
Debt issue costs 209 0
Depreciation (55,122) (9,770)
Alternative minimum tax (6,530) 0
Loss carryforwards 0 0
Deferred receivables 6,221 3,357
-------- --------
Total $ 22,520 $ 29,000
======== ========
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,
--------------------------------
1998 1999 2000
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 5.7% 5.8% 5.6%
Nondeductible expenses and other 0.1% 0.4% 0.0%
---------------------------------
Effective income tax rate 40.8% 41.2% 40.6%
=================================
At December 31, 1998, the Company had loss carryforwards of approximately
$19,800,000, which were utilized in 1999.
F-20
21
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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 2005.
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, 2000, the future minimum lease payments under noncancelable
operating leases with remaining terms in excess of one year are as
follows:
For the years ended
December 31,
-------------------
2001 $1,515
2002 1,531
2003 1,494
2004 575
------
Total $5,115
======
Rental expense under operating leases totaled $1,131,000,
$1,567,000, and $1,557,000 for the years ended December 31, 1998, 1999,
and 2000, 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, 2000, future minimum lease
payments under capital leases were as follows:
For the years ended
December 31,
-------------------
2001 $ 477
2002 330
2003 129
2004 16
-------
Total minimum lease payments 952
Less amounts representing interest (93)
-------
Total $ 859
=======
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. Four (4) of the first five (5) actions described below have
been filed by the same attorney, on behalf of various plaintiffs. 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").
F-21
22
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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.
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. Two of these
motions, namely Leasecomm and the Company's motions to Dismiss the Fourth
Amended Complaint, have been heard by the Court. On August 16, 2000, the
Court granted the Company's motion to dismiss, resulting in the dismissal
of all claims against the Company. The Court also granted Leasecomm's
motion to dismiss as to all of the Plaintiffs' individual claims, and as
to all but one of the Plaintiffs' purported class claims. As a result of
the Court's rulings on the motions to dismiss, the only claim that remains
is the Plaintiffs' purported class claim against Leasecomm by plaintiffs
against whom Leasecomm has a pending Massachusetts action, for alleged
violations of Chapter 93A of the Massachusetts General Laws arising out of
the inclusion of a forum selection clause in Leasecomm leases. As to this
claim, the Plaintiffs' are seeking no monetary relief beyond attorneys'
fees.
The Plaintiffs filed a revised motion for class certification in light
of the Court's prior rulings. The Company has filed an opposition to the
revised motion for class certification, and argument is currently
scheduled for April 4, 2001.
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.
F-22
23
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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 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. The Court has heard
argument on Leasecomm's motion to dismiss, but has not yet issued a
ruling.
The parties have reached a settlement by which the McKenzie-Pollock
Complaint and the Company's complaints against the individual defendants
in the District Court are to be dismissed with prejudice. The settlement
does not involve the payment of any money by the Company. By Order dated
February 7, 2001, the Court approved the Stipulation and Order of
Dismissal, and dismissed the action.
Because the Court has not yet acted to approve the settlement, there
can be no assurance as to the eventual outcome of this case.
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. After the Court
denied Leasecomm's Motion to Dismiss without prejudice to its being
re-filed at a later time, plaintiffs filed a Second Amended Complaint
F-23
24
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
voluntarily withdrawing one plaintiff and substituting a new plaintiff.
Leasecomm has filed an answer to the Second Amended Complaint, and the
Plaintiffs have filed a motion for class certification, which Leasecomm
has opposed. The Court has heard argument on the motion for class
certification, but no decision has been issued.
Since this matter is in an early stage, there can be no assurance as to
its eventual outcome
IV. On or about June 16, 2000, a purported class action lawsuit
was filed in Middlesex Superior Court in the Commonwealth of Massachusetts
against Leasecomm, the Company, John Gregory Hines, Richard F. Latour,
Peter R. von Bleyleben, Cardservice International, Inc., Autorize.net
Corporation, and Humboldt Bank (the "Bradford Complaint").
The purported class consists of individuals and businesses who have
executed or will in the future execute, as lessee or guarantor, a
four-year Leasecomm "non-cancellable" lease of an Authorize.net
Corporation "virtual terminal" marketed by Cardservice International, Inc.
(the "Lease Agreements"), and the lease provides for a "base payment" of
at least $39.99 per month.
Plaintiffs allege: that the Lease Agreements are, in fact, loans that
are subject to state usury laws; that the Lease Agreements are usurious;
that Leasecomm's use of the Lease Agreements constitutes an unfair and
deceptive trade practice in violation of Massachusetts General Laws
Chapter 93A; that various of the defendants have conspired with one
another to defraud the members of the purported class and have violated
Massachusetts General Laws Chapter 93A; and that the Company is liable for
any damages that might be entered in favor of the Plaintiffs and the
purported class members and against Leasecomm.
Plaintiffs and the members of the purported class seek: unspecified
damages for monetary losses allegedly sustained by them and reimbursement
of costs and attorneys' fees; treble damages; a declaration that the Lease
Agreements are loans rather than leases and that the Lease Agreements are
usurious; rescission of the Lease Agreements, or reformation of the Lease
Agreements to conform with the limitations on interest rates set forth in
the Massachusetts usury statute, and return of all moneys paid to
Leasecomm, or all monies paid in excess of amounts that would be allowable
under the Massachusetts usury statute; declarations that the alleged
conduct of the defendants constitutes unfair and deceptive trade practices
in violation of Massachusetts General Laws Chapter 93A; injunctive relief
requiring Leasecomm to notify any credit bureaus to which it may have
reported Plaintiffs or purported class members as delinquent that their
accounts are in good standing, prohibiting Leasecomm from charging
usurious interest rates, prohibiting Leasecomm from referring to the Lease
Agreements as "leases," requiring Leasecomm to display the annual
percentage rate and total finance charges on all of the Lease Agreements,
and prohibiting the Company from participating in or benefiting from any
transactions by Leasecomm involving the financing of "virtual terminals".
The Company, Leasecomm, and the individual defendants all served
motions to dismiss on September 15, 2000. The Plaintiffs filed oppositions
to those motions, and the Court has taken the motions under advisement.
However, all individual defendants have been dismissed from the case,
either voluntarily or because of Plaintiffs' failure to effect service of
process on them. The Plaintiffs have not yet filed a motion for class
certification.
By Notice of Voluntary Dismissal filed with the Courts on March 13,
2001, the plaintiffs have voluntarily dismissed their action against all
defendants, including the Company.
V. On or about June 16, 2000, a purported class action lawsuit was
filed in Middlesex Superior Court in the Commonwealth of Massachusetts
against Leasecomm, the Company, John Gregory Hines, Richard F. Latour,
Peter R. von Bleyleben, E-Commerce Exchange, LLC, Creditcards.com, and
Humboldt Bank (the "Okougbo Complaint").
The purported class consists of individuals and businesses who have
executed or will in the future execute, as lessee or guarantor, a
four-year Leasecomm "non-cancellable" lease of certain models of
"Verifone" equipment provided by or through E-Commerce Exchange, LLC (the
"Lease Agreements"), and the lease provides for "base payments" of at
least $49.95 per month.
F-24
25
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
Plaintiffs allege: that the Lease Agreements are, in fact, loans that
are subject to state usury laws; that the Lease Agreements are usurious;
that Leasecomm's use of the Lease Agreements constitutes an unfair and
deceptive trade practice in violation of Massachusetts General Laws
Chapter 93A; that various of the defendants have conspired with one
another to defraud the members of the purported class and have violated
Massachusetts General Laws Chapter 93A; and that the Company is liable for
any damages that might be entered in favor of the Plaintiffs and the
purported class members and against Leasecomm.
Plaintiffs and the members of the purported class seek: unspecified
damages for monetary losses allegedly sustained by them and reimbursement
of costs and attorneys' fees; treble damages; a declaration that the Lease
Agreements are loans rather than leases and that the Lease Agreements are
usurious; rescission of the Lease Agreements, or reformation of the Lease
Agreements to conform with the limitations on interest rates set forth in
the Massachusetts usury statute, and return of all moneys paid to
Leasecomm, or all monies paid in excess of amounts that would be allowable
under the Massachusetts usury statute; declarations that the alleged
conduct of the defendants constitutes unfair and deceptive trade practices
in violation of Massachusetts General Laws Chapter 93A; injunctive relief
requiring Leasecomm to notify any credit bureaus to which it may have
reported Plaintiffs or purported class members as delinquent that their
accounts are in good standing, prohibiting Leasecomm from charging
usurious interest rates, prohibiting Leasecomm from referring to the Lease
Agreements as "leases," requiring Leasecomm to display the annual
percentage rate and total finance charges on all of the Lease Agreements,
and prohibiting the Company from participating in or benefiting from the
alleged activities set forth in the Complaint.
The Company, Leasecomm, and the individual defendants all served
motions to dismiss on September 15, 2000. The Plaintiffs filed oppositions
to those motions, and the Court has taken the motions under advisement.
However, all individual defendants have been dismissed from the case,
either voluntarily or because of Plaintiffs' failure to effect service of
process on them. The Plaintiffs have not yet filed a motion for class
certification.
By Notice of Voluntary Dismissal filed with the Courts on March 13,
2001, the plaintiffs have voluntarily dismissed their action against all
defendants, including the Company.
VI. 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
$13,065,266, plus post-judgment interest and attorneys' fees. The Court
has not heard this motion.
On March 6, 2000, Premier and DelPiano filed a motion in the
Massachusetts action to dismiss that action or, in the alternative, to
transfer to the Northern District of Georgia, based upon their contention
that they are not subject to personal jurisdiction in Massachusetts, that
the contracts containing the forum-selection clause were procured by
fraud, and that Leasecomm should have been named as a plaintiff. On April
13, 2000, the United States District Court for the District of
Massachusetts issued a Memorandum and Order denying Premier and DelPiano's
motion.
F-25
26
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
On March 9, 2000 the Company filed a motion for preliminary injunction
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. On June 13, 2000,
the Court denied the Company's motion for preliminary injunction, on the
express condition that Sentinel provide adequate assurance of its
financial condition within 30 days. Sentinel failed to do so, and the
Company filed a renewed motion for preliminary injunction on July 17,
2000, and supplemented that motion with an additional filing on September
5, 2000. The Court has not yet ruled on the motion.
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 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. Leasecomm filed a motion to dismiss the
Premier Complaint, or, alternatively, to transfer this case to federal
court in Massachusetts. Leasecomm's motion was granted on July 27, 2000,
and the case was transferred to the District of Massachusetts, where it
has been consolidated with the Massachusetts action.
The parties have reached a settlement whereby one of the defendants is
to pay the Company a sum of money on or before May 25, 2001, or,
alternatively, judgment for the full amount sued upon is to be entered
against that defendant and the Company may also pursue its claims against
the other defendants.
Discovery in the Massachusetts action is ongoing. Since this matter is
in an early stage, there can be no assurance as to its eventual outcome.
The Company learned on or about March 20, 2001 that a Provisional
Liquidator of Sentinel Insurance Company, Ltd. has been appointed pursuant
to an order of the Supreme Court of Bermuda.
VII. On September 19, 2000, Leasecomm was served with a Subpoena Duces
Tecum from the Office of the Attorney General of the State of Florida. The
nature of the proceeding, if any, against Leasecomm is unclear at this
time, but appears to relate to alleged complaints against Leasecomm by
lessees in Florida and involves the question of whether any of the leases
entered into by Leasecomm with Florida residents is a consumer lease.
Leasecomm believes that the commercial leases it has entered into are in
fact commercial leases, and is attempting to cooperate with the Attorney
General's Office on this matter. Leasecomm has responded to the subpoena
and provided documents.
Since this matter is at an early stage, and the nature of the
proceedings against Leasecomm, if any, are not known, there can be no
assurance as to its eventual outcome.
VIII. On April 3, 2000, a purported class action suit was filed in
Superior Court of the State of California, County of San Mateo against
Leasecomm and MicroFinancial as well as a number of other defendants with
whom Leasecomm and MicroFinancial are alleged to have done business,
directly or indirectly.
The action is alleged as a "consumer fraud class action on behalf of
defrauded California small businesses and their owners, who were induced
to purchase services and/or goods from Defendants through false and
misleading representations and material omissions." More specifically, the
complaint seeks certification of a class of California persons and
entities who purchased services or goods from Internet Success Systems,
Inc., Fortune Financial Systems, Inc. (previously known as Fortune 21,
Inc.), Fortune Financial Systems of Nevada, Inc., MarketComm Production;
Bizz-e Inc. (also known as Bizz-e.com, Inc.), Cardservice International
Inc. (also
F-26
27
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and pre-share data)
known as Cardservice Global Solutions) or Power Communications, Inc.,
directly or indirectly, at any time between February 7, 1997 and the
present date. The complaint seeks certification of a subclass of those
class members who entered into any lease agreement contracts with
Leasecomm Corporation for the purposes of financing the goods or services
allegedly purchased from these other entities. The class action complaint
alleges ten causes of action for: (1) fraud and deceit; (2) negligent
misrepresentation; (3) violations of California's Business & Professions
Code Sections 17200 et seq. (unfair competition); (4) violations of
California's Business & Professions Code Sections 17500 et seq.
(false advertising); (5) violations of California's Civil Code
Sections 1750 et seq. (Consumer Legal Remedies Act); (6) unjust
enrichment; (7) fraud in the inducement of contract; (8) fraud in the
inception of contract; (9) lack of consideration for contact; and (10)
breach of the contractual covenant of good faith and fair dealing.
The complaint prays for compensatory general and special damages
according to proof; restitution and disgorgement according to proof;
rescission of class member contracts with Leasecomm Corporation;
injunctive relief against enforcement of class member contracts with
Leasecomm Corporation; prejudgment interest; punitive and exemplary
damages, costs, attorneys fees and such other relief as the court deems
just.
On May 31, 2000, Leasecomm filed a motion for an order staying all
litigation in California against Leasecomm Corporation and MicroFinancial
Incorporated on the grounds that the lease contracts at issue contained a
forum selection clause providing that any litigation concerning the leases
would be brought in Massachusetts where Leasecomm Corporation is
headquartered. By order dated August 22, 2000, the Court granted that
motion and stayed further litigation in the California proceedings against
Leasecomm Corporation and MicroFinancial Incorporated. On September 27,
2000, plaintiffs filed an appeal seeking to overturn that ruling.
Plaintiffs filed their appeal brief on December 29, 2000, and Leasecomm
filed a response on January 29, 2001. Plaintiffs' reply brief is due on
February 20, 2001. No hearing date for the appeal has been set. In the
meantime, the litigation is continuing against the defendants other than
Leasecomm Corporation and MicroFinancial Incorporated. Management intends
to vigorously defend the appeal.
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 $134,000, $102,000, and $142,700 for
the years ended December 31, 1998, 1999, and 2000, respectively.
K. 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 11.6%, 14.7%, and 10.6% of all
originations during the years ended December 31, 1998, 1999, and 2000,
respectively. Another dealer accounted for approximately 3.5%, 10.1%, and
3.8% of all originations during the years ended December 31, 1998, 1999,
and 2000, respectively. No other dealer accounted for more than 10% of the
Company's origination volume during the years ended December 31, 1998,
1999, or 2000.
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 and 2000, leases in California, Florida, Texas, Massachusetts and New
York accounted for approximately 45% and 44% of the Company's portfolio,
respectively. Only California accounted for more than 10% of the total
portfolio as of December 31, 1999 and 2000 at approximately 15% for each
year. None of the remaining states accounted for more than 4% of such
total.
F-27
28
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
L. Related-Party Transactions:
The Company had notes receivable from officers and employees of $94,000
and $68,000 at December 31, 1999 and 2000 respectively. 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. These
notes are non-interest bearing unless the principal amount thereof is not
paid in full when due, at which time interest will accrue at a rate per
annum equal to the prime rate plus 4.0%. All principal amounts outstanding
under these notes is due in full on the earlier of the end of employment
or the expiration date. No new notes were issued during 1999 or 2000.
Other notes payable includes amounts due to stockholders of the Company
at December 31, 1999 and 2000 of $1,040,000 and $316,000 respectively.
Interest paid to stockholders under such notes, at an interest rate of
prime minus 1%, was not material for the years ended December 31, 1998,
1999, and 2000.
At December 31, 2000, subordinated notes payable included $102,000 due
to stockholders. Interest paid to stockholders under such notes, at rates
ranging between 8% and 14%, amounted to $488,000, $104,000, and $8,500 for
the years ended December 31, 1998, 1999, and 2000, respectively.
M. Subsequent Events:
On January 3, 2001, the Company acquired the rental and lease
portfolio, along with certain other assets and assumed certain liabilities
of Resource Leasing Corporation ("Resource"), for $10,700,000 subject to a
$1,000,000 holdback on deliverables in connection with certain software
included in the acquired assets. In December 2000, the Company made a
prepayment on that purchase of $2,800,000 which is reflected in other
assets at December 31, 2000.
This transaction has been accounted for under the purchase method of
accounting, and accordingly, the results of operations of Resource, for
the period from the acquisition date, will be included in the consolidated
financial statements. The purchase price has been allocated to the assets
purchased and liabilities assumed based on preliminary fair values at the
date of acquisition and did not result in the recording of excess costs
over the fair value of assets acquired. Pro-forma data is not provided
since this transaction does not have a material impact on the Company's
consolidated financial statements.
F-28
29
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
N. Selected Quarterly Data (Unaudited):
The following is a summary of the unaudited quarterly results of
operations of the Company for 1999 and 2000.
1999 2000
-------------------------------------- ------------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Revenues:
Income on leases and loans $12,377 $13,661 $14,232 $ 15,275 $15,544 $16,946 $18,435 $18,922
Income on service contracts
rental and fees 10,078 10,050 10,591 12,197 13,097 13,996 15,104 15,262
------- ------- ------- -------- ------- ------- ------- -------
Total revenues 22,455 23,711 24,823 27,472 28,641 30,942 33,539 34,184
------- ------- ------- -------- ------- ------- ------- -------
Expenses:
Selling general and administrative 6,004 5,708 6,232 6,472 6,329 6,839 6,879 6,940
Provision for credit losses 5,399 6,064 5,888 20,485 8,529 9,040 10,576 10,767
Depreciation and amortization 1,687 1,767 2,038 2,105 2,033 2,554 2,808 2,832
Interest 2,620 2,366 2,602 2,787 3,075 3,650 4,124 4,221
------- ------- ------- -------- ------- ------- ------- -------
Total expenses 15,710 15,905 16,760 31,849 19,966 22,083 24,387 24,760
------- ------- ------- -------- ------- ------- ------- -------
Income before provision for income taxes 6,745 7,806 8,063 (4,377) 8,675 8,859 9,152 9,424
------- ------- ------- -------- ------- ------- ------- -------
Net Income $ 3,969 $ 4,543 $ 4,741 ($ 2,525) $ 4,970 $ 5,131 $ 5,301 $ 5,459
------- ------- ------- -------- ------- ------- ------- -------
Net Income per common share - basic 0.33 0.34 0.36 (0.20) 0.39 0.40 0.42 0.43
Net Income per common share - diluted 0.33 0.34 0.36 (0.20) 0.39 0.40 0.42 0.43
Dividends per common share 0.035 0.040 0.040 0.040 0.040 0.045 0.045 0.045
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") Charge-offs against the special reserve
were $6.4 million for the year ended December 31, 2000.
F-29