Exhibit 99
MICROFINANCIAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2000 and 2001 F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 2000, and 2001 F-5
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 2000, and 2001 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 2000, and 2001 F-7
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MicroFinancial Incorporated
We have audited the accompanying consolidated balance sheets MicroFinancial
Incorporated and subsidiaries (the "Company") as of December 31, 2000 and 2001,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the years 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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 2000
and 2001, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 21, 2002
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of MicroFinancial Incorporated:
In our opinion, the accompanying consolidated statements of operations, of
stockholders' equity and of cash flows present fairly, in all material respects,
the results of operations and cash flows of MicroFinancial Incorporated and its
subsidiaries (the "Company") for the year 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 audit. We conducted our audit 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 audit provides a
reasonable basis for our opinion. We have not audited the consolidated financial
statements of MicroFinancial Incorporated for any period subsequent to December
31, 1999.
PricewaterhouseCoopers LLP
Boston, Massachusetts
February 21, 2000
F-3
MICROFINANCIAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31,
---------------------
2000 2001
---- ----
ASSETS
Net investment in leases and loans:
Receivables due in installments $405,437 $399,361
Estimated residual value 35,368 37,114
Initial direct costs 9,321 7,090
Loans receivable 12,080 2,248
Less:
Advance lease payments and deposits (400) (287)
Unearned income (132,687) (104,538)
Allowance for credit losses (40,924) (45,026)
---------------------
Net investment in leases and loans $288,195 $295,962
Investment in service contracts 12,553 14,126
Cash and cash equivalents 17,957 20,645
Property and equipment, net 11,505 16,034
Other assets 12,392 14,961
---------------------
Total assets $342,602 $361,728
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $201,991 $203,053
Subordinated notes payable 4,785 3,262
Capitalized lease obligations 859 833
Accounts payable 1,605 2,517
Dividends payable 573 642
Other liabilities 5,433 6,182
Income taxes payable 2,333 4,211
Deferred income taxes payable 29,000 30,472
---------------------
Total liabilities 246,579 251,172
---------------------
Commitments and contingencies (Note I) - -
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
none issued at 12/31/00 and 12/31/01 - -
Common stock, $.01 par value; 25,000,000 shares authorized;
13,410,646 shares issued at 12/31/00 and 12/31/01 134 134
Additional paid-in capital 47,900 47,723
Retained earnings 55,291 69,110
Treasury stock (669,700 shares of common stock at 12/31/00,
588,700 shares of common stock at 12/31/01), at cost (7,234) (6,343)
Notes receivable from officers and employees (68) (68)
---------------------
Total stockholders' equity 96,023 110,556
---------------------
Total liabilities and stockholders' equity $342,602 $361,728
=====================
The accompanying notes are an integral part of the consolidated
financial statements.
F-4
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
For the Years Ended
December 31,
-------------------------------
1999 2000 2001
---- ---- ----
Revenues:
Income on financing leases and loans $55,545 $69,847 $70,932
Income on service contracts 6,349 8,687 8,665
Rental income 21,582 27,638 37,664
Loss and damage waiver fees 5,660 6,034 6,344
Service fees and other 19,142 27,271 30,486
-------------------------------
Total revenues 108,278 139,477 154,091
-------------------------------
Expenses:
Selling general and administrative 33,827 38,371 44,899
Provision for credit losses 37,836 38,912 54,092
Depreciation and amortization 7,597 10,227 14,378
Interest 10,781 15,858 14,301
-------------------------------
Total expenses 90,041 103,368 127,670
-------------------------------
Income before provision for income taxes 18,237 36,109 26,421
Provision for income taxes 7,509 15,249 10,104
-------------------------------
Net income $10,728 $20,860 $16,317
===============================
Net income per common share-basic $0.84 $1.64 $1.28
===============================
Net income per common share-diluted $0.83 $1.63 $1.26
===============================
Dividends per common share $0.155 $0.175 $0.195
===============================
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 2000 and 2001
(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, 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
Exercise of stock options,
net of tax benefit (177) (96,000) 1,037 860
Common stock dividends (2,498) (2,498)
Treasury stock repurchased 15,000 (146) (146)
Net income 16,317 16,317
----------------------------------------------------------------------------------------------
Balance at December 31, 2001 13,410,646 $134 $47,723 $69,110 588,700 ($6,343) ($68) $110,556
==============================================================================================
The accompanying notes a re an integral part of the consolidated
financial statements.
F-6
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the year ended
December 31,
-----------------------------------------
1999 2000 2001
---- ---- ----
Cash flows from operating activities:
Cash received from customers $ 157,264 $ 174,501 $ 185,939
Cash paid to suppliers and employees (33,905) (34,405) (44,060)
Cash paid for income taxes (1,339) (9,726) (6,767)
Interest paid (10,740) (15,649) (14,186)
Interest received 3,443 1,639 1,354
-----------------------------------------
Net cash provided by operating activities 114,723 116,360 122,280
-----------------------------------------
Cash flows from investing activities:
Investment in lease contracts (116,808) (141,076) (92,118)
Investment in inventory - - (4,198)
Investment in direct costs (8,295) (7,812) (5,200)
Investment in service contracts (9,105) (4,138) (6,658)
Investment in loans receivable (11,857) - -
Investment in Resource Leasing Corporation - (2,800) (6,900)
Investment in fixed assets (1,319) (2,354) (1,722)
Issuance of notes from officers and employees (2) - -
Repayment of notes from officers 158 25 -
Investment in notes receivable (613) (117) (70)
Repayment of notes receivable 254 325 6
-----------------------------------------
Net cash used in investing activities (147,587) (157,947) (116,860)
-----------------------------------------
Cash flows from financing activities:
Proceeds from secured debt 121,680 195,917 84,750
Repayment of secured debt (108,003) (123,075) (90,839)
Proceeds from refinancing of secured debt 460,381 473,118 515,897
Prepayment of secured debt (460,381) (488,118) (509,555)
Proceeds from short-term demand notes payable 890 259 902
Repayment of short-term demand notes payable (117) (983) (93)
Proceeds from issuance of subordinated debt - - 2,975
Repayment of subordinated debt (15,247) (4,500) (4,500)
Proceeds from sale of common stock 46,116 - -
Proceeds from exercise of common stock options 22 119 810
Repayment of capital leases (733) (494) (505)
Purchase of treasury stock (5,639) (1,595) (146)
Payment of dividends (1,860) (2,166) (2,428)
-----------------------------------------
Net cash provided by (used in ) financing activities 37,109 48,482 (2,732)
-----------------------------------------
Net increase in cash and cash equivalents 4,245 6,895 2,688
Cash and cash equivalents, beginning of period 6,817 11,062 17,957
-----------------------------------------
Cash and cash equivalents, end of period $ 11,062 $ 17,957 $ 20,645
=========================================
(Continued)
The accompanying notes are an integral part of the consolidated
financial statements.
F-7
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
For the Year Ended
December 31,
---------------------------------
1999 2000 2001
---- ---- ----
Reconciliation of net income to net cash provided
by operating activities:
Net income $ 10,728 $ 20,860 $ 16,317
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,597 10,227 14,378
Provision for credit losses 37,836 38,912 54,092
Recovery of equipment cost and residual
value, net of revenue recognized 52,029 40,288 34,685
Increase (decrease) in current taxes 2,919 (1,211) 1,878
Increase in deferred income taxes 3,966 6,480 1,472
Changes in assets and liabilities:
Decrease (increase) in other assets 232 (934) (1,200)
Increase (decrease) in accounts payable 190 1,267 (129)
Increase (decrease) in accrued liabilities (774) 471 787
---------------------------------
Net cash provided by operating activities $ 114,723 $ 116,360 $ 122,280
=================================
Supplemental disclosure of noncash activities:
Property acquired under capital leases $ 1,203 $ 109 $ 479
=================================
Accrual of common stock dividends $ 514 $ 573 $ 642
=================================
The accompanying notes are an integral part of the consolidated
financial statements.
(Concluded)
F-8
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 $1,100 and an average lease term of 43 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, March 2000, and September
2001 Leasecomm Corporation created wholly owned subsidiaries, BLT Finance
Corporation I ("BLT I"), BLT Finance Corporation II ("BLT II") BLT Finance
Corporation III ("BLT III"), MFI Finance Corporation I ("MFI I"), and MFI
Finance Corp II LLC ("MFI II LLC") 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 ("SFAS") No.
125 as replaced by SFAS No. 140, is not allowed, and does not occur.
Accordingly, the lease receivable and related liability remain on the
balance sheet.
During 1997, 1996, and 2001 the credit facilities related to the
securitization on BLT I, BLT II, and BLT III were paid off, respectively.
BLT I and BLT II were dissolved on December 31, 1997. BLT III was
dissolved on December 31, 2001.
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.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America,
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. A
significant area requiring the use of management estimates is the
Allowance for Credit Losses. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers all highly liquid instruments purchased with
initial maturities of less than three months to be cash equivalents. Cash
equivalents consist principally of overnight investments.
Leases and Loans
The Company's lease contracts are accounted for as financing leases.
At origination, the Company records the gross lease receivable, the
estimated residual value of the leased equipment, initial direct costs
incurred, and the unearned lease income. Unearned lease income is the
amount by which the gross lease receivable plus the
F-9
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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 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.
F-10
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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.
Derivative Financial Instruments
On January 1, 2001, the Company adopted SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" as amended by SFAS No.
138. SFAS No. 133, as amended, requires that all derivative instruments be
measured at fair value and recognized in the consolidated balance sheet as
either assets or liabilities. The Company has assessed the effects of SFAS
No. 133 and has determined that the adoption of SFAS No. 133 does not have
a material impact on its results of operations or consolidated financial
position. The Company did not hold any derivative instruments at either
December 31, 2000 or 2001.
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 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations." SFAS No. 141 addresses
financial accounting and reporting for business combinations and amends or
supersedes a number of interpretations concerning business combinations.
SFAS No. 141 requires companies to use the purchase method of accounting
for all business combinations, whereas previous interpretations provided
for the use of another method (pooling-of-interests method) if certain
criteria were met. This statement also amends the recognition policies of
intangible assets and goodwill and provides for additional disclosure
requirements for business combinations. The provisions for this statement
apply to all business combinations initiated after June 30, 2001.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets". This statement supersedes APB Opinion No. 17,
"Intangible Assets" ("APB No. 17") and addresses financial accounting and
reporting for intangible assets, but not those acquired in a business
combination at acquisition. SFAS No. 142 addresses financial accounting
and reporting of goodwill and other intangible assets subsequent to their
acquisition, assigning a definite or indefinite useful life to these
assets. Goodwill and other intangible assets having an indefinite useful
life will not be amortized, but rather tested at least annually for
impairment. It also provides guidance on how to define, measure and record
impairment losses on goodwill and other intangible assets and provides for
additional disclosures regarding these assets in years subsequent to their
acquisition. The provisions for this statement are required to be applied
for fiscal years beginning after December 15, 2001, although earlier
adoption is permitted.
In June 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations." SFAS No. 143 provides new accounting standards
for recording of liabilities related to legal obligations to retire
tangible long-lived assets. The Statement requires an entity to recognize
at fair value a liability associated with an asset retirement obligation
in the period in which the liability is both incurred and in which the
fair value is determinable. The
F-11
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
provisions of this Statement are effective for the Company's fiscal year
ended December 31, 2003, although earlier application is permitted.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of a
long-lived asset or group of assets. This pronouncement, which supersedes
and amends several earlier interpretations, establishes a single
comprehensive statement to provide impairment accounting guidance for
tangible long-lived assets to be either held and continued to be used by
the entity or disposed of by sale or by some other means. This Statement
will be effective for the first quarter of the Company's fiscal year
ending December 31, 2002, although earlier application is permitted.
The Company has not completed its evaluation of SFAS Nos. 141, 142,
143 and 144 and has not yet determined their effect on its consolidated
financial statements.
Reclassification of Prior Year Balances
Certain reclassifications have been made to prior years'
consolidated financial statements to conform to the current presentation.
Net Income Per Common Share
Basic net income per common share is computed based on the
weighted-average number of common shares outstanding during the period.
Dilutive net income per common share gives effect to all dilutive
potential common shares outstanding during the period. 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 120,609, 830,000 and 440,609 shares of common stock were not
included in the computation of diluted earnings per share for the years
ended December 31, 1999, 2000, and 2001, respectively, because their
effects were antidilutive.
For the years ended December 31,
1999 2000 2001
-----------------------------------------
Net income $ 10,728 $ 20,860 $ 16,317
-----------------------------------------
Shares used in computation:
Weighted-average common shares outstanding used in
computation of net income per common share 12,795,809 12,728,441 12,789,605
Dilutive effect of common stock options 108,422 79,373 155,638
-----------------------------------------
Shares used in computation of net income
per common share - assuming dilution 12,904,231 12,807,814 12,945,243
=========================================
Net income per common share - basic $ 0.84 $ 1.64 $ 1.28
=========================================
Net income per common share - diluted $ 0.83 $ 1.63 $ 1.26
=========================================
F-12
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
C. Net Investment in Leases and Loans
At December 31, 2001, future minimum payments on the Company's lease
receivables are as follows:
For the year ended
December 31,
- ------------------
2002 $ 250,486
2003 93,770
2004 43,595
2005 10,819
2006 691
----------
Total $ 399,361
==========
At December 31, 2001, 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 35.4%.
The Company's business is characterized by a high incidence of
delinquencies that 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 and no contact has been made with the
lessee for 12 months. Cumulative net charge-offs after recoveries from the
Company's inception to December 31, 2001 have totaled 10.62% 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, 1999, 2000, and 2001 and the related provisions,
charge-offs and recoveries for the years ended December 31, 1999, 2000,
and 2001.
F-13
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
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 charge-offs) 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
-------
Provision for leases and loans credit losses 54,092
Total provisions for credit losses 54,092
Charge-offs (including $1,418 in other asset charge-offs) 68,882
Recoveries 17,474
------
Charge-offs, net of recoveries 51,408
-------
Balance of allowance for credit losses at December 31, 2001 $45,026
=======
Balance of other asset reserve at December 31, 2001 $401
=======
At December 31, 2000 and 2001, other assets included prepayments and
deposits of $6,394,000 and $4,809,000 respectively, and receivables totaling
$7,817,000 and $10,553,000, respectively.
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, 1999, 2000, and 2001 and changes in
the Company's estimated residual value as a result of new originations, and
lease terminations for the years ended December 31, 1999, 2000, and 2001.
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 15,052
Lease Terminations (13,306)
Balance of Estimated Residual Value at December 31, 2001 $ 37,114
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 or (iii) that has been charged
off by the Company.
F-14
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
D. Property and Equipment
At December 31, 2000 and 2001, property and equipment consisted of
the following:
December 31,
----------------------
2000 2001
---- ----
Rental Equipment and Inventory $ 13,214 $ 19,196
Computer Equipment 5,536 7,251
Office Equipment 1,330 1,525
Leasehold improvements 338 381
----------------------
20,418 28,353
Less accumulated depreciation and amortization 8,913 12,319
----------------------
Total $ 11,505 $ 16,034
======================
Depreciation and amortization expense totaled $7,597,000,
$10,227,000, and $14,378,000 for the years ended December 31, 1999, 2000,
and 2001, respectively.
At December 31, 2000 and 2001, computer equipment includes
$1,725,000 and $1,793,000 respectively, under capital leases. Accumulated
amortization related to capital leases amounted to $912,000 and $988,000,
in 2000 and 2001, respectively.
E. Notes Payable and Subordinated Debt
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 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, 1999, 2000, and 2001 were 8.50%, 9.50%, and 4.75% respectively. The
90-day Eurodollar rate at December 31, 1999 was 5.9375%. The 90-day LIBOR
rates at December 31, 2000 and 2001 were 6.403% and 1.938% respectively.
The 7-day Money Market Rates at December 31, 2000 and 2001 were 6.63% and
1.88% respectively.
At December 31, 2000 and 2001, the Company had borrowings outstanding
under this agreement with the following terms:
F-15
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
2000 2001
-------------------- -------------------
Type Rate Amount Rate Amount
- ---- ---- ------ ---- ------
Prime 9.5000% $ 17,260 4.5000% $ 4,640
Swing Line 8.8100% 5,076
LIBOR 8.2500% 12,000 3.8750% 100,000
LIBOR 8.2500% 50,000
LIBOR 8.5625% 17,500
--------- ---------
Total Outstanding $ 101,836 $ 104,640
========= =========
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.
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 in October 1999. All outstanding amounts under the 1997-A Notes
were repaid in September 2000. All outstanding amounts under the 1998-A
notes were repaid in September 2001. MFI I has three series of notes, the
2000-1 Notes, the 2000-2 Notes, and the 2001-3 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. In September 2001, MFI I issued the 2001-3 Notes in
aggregate principal amount of $39,397,354. Outstanding borrowings are
collateralized by a specific pool of lease receivables. In September 2001,
MFI II, LLC was formed and issued one series of notes, the 2001-1 Notes in
aggregate principal amount of $10,000,000. Outstanding borrowings are
collateralized by a specific pool of lease receivables as well as the
excess cash flow from the MFI I collateral. These notes are subordinated
to the three series of notes issued by MFI I.
At December 31, 2001, MFI I and MFI II, LLC had borrowings
outstanding under the series of notes with the following terms:
Note Series Expiration Rate Amount
----------- ---------- ---- ------
MFI I
2000-1 Notes 9/16/05 7.38% 19,855
2000-2 Notes 6/16/06 6.94% 34,518
2001-3 Notes 2/18/08 5.58% 34,160
MFI II LLC
2001-1 Notes 2/18/08 8.00% 8,725
-------
Total Outstanding $97,258
=======
At December 31, 2000, BLT III and MFI I had borrowings outstanding
under the series of notes with the following terms:
F-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
2000-1 Notes 9/16/05 7.38% 36,995
2000-2 Notes 6/16/06 6.94% 50,562
-------
Total Outstanding $99,809
=======
At December 31, 2000 and 2001, the Company also had other notes
payable which totaled $346,000 and $1,155,000 respectively. Of these
notes, at December 2000 and 2001, $346,000 and $339,000, respectively, are
notes that are due on demand and bear interest at a rate of prime less
1.00%. At December 31, 2001, the Company also had $816,000 of notes which
were borrowed against the cash surrender value of the life insurance
policies held on key officers. The interest rates on these loans range
from 5.05% to 8.00%. Other notes payable include amounts due to
stockholders and directors of the Company at December 31, 2000 and 2001 of
$316,000 and $309,000. Interest paid to stockholders under such notes was
not material for the years ended December 31, 1999, 2000, and 2001.
Subordinated Notes Payable
At December 31, 2000 and 2001, the Company also had senior
subordinated and subordinated debt outstanding amounting to $4,785,000,
and $3,262,000, 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% to 12.5% for
fixed rate financing and prime plus 3% to 4% for variable rate financing.
These notes have maturity dates ranging from May 2002 to November 2006. The
Company had 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 required annual payments of $1,500,000 commencing on July
15, 1997 until the note matured 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 required 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 matured 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 matured 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.
At December 31, 2000 and 2001, subordinated notes payable included
$102,000 and $727,000 due to stockholders, officers and directors.
Interest paid to stockholders, officers and directors under such notes, at
rates ranging between 8% and 12%, amounted to $104,000, $8,500, and
$53,700 for the years ended December 31, 1999, 2000, and 2001,
respectively.
Repayment Schedule
At December 31, 2001, the repayment schedule for outstanding notes
and subordinated notes is as follows:
F-17
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
December 31,
- ------------
2002 $ 55,583
2003 37,550
2004 5,126
2005 0
Thereafter 3,416
---------
101,675
Outstanding balance of revolving credit facility 104,640
---------
Total $ 206,315
=========
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, 2000 and 2001, the
aggregate carrying value of the Company's fixed rate borrowings was
approximately $104,596,000 and $101,336,000, respectively, with an
estimated fair value of approximately $104,719,000 and $102,049,000,
respectively.
F. Redeemable Preferred Stock:
At December 2000 and 2001, 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 13,410,646 shares were issued and
outstanding at December 31, 2000 and 2001.
Treasury Stock
The Company had 669,700 and 588,700 shares of common stock in
treasury at December 31, 2000 and 2001, 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. 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.
F-18
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
The following summarizes the stock option activity:
Weighted-
Average
Shares Price Per Share Exercise Price
--------- ------------------ ----------------
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
Exercised (96,000) $1.95 to $13.125 $ 8.439
Canceled (112,000) $9.78125 to $13.125 $ 11.214
Granted 650,000 $9.48 to $13.10 $ 11.708
---------
Outstanding at December 31, 2001 2,036,000 $9.48 to $13.544 $ 11.337
=========
The options vest over five years and are exercisable only after they
become vested. At December 31, 2000 and 2001, 200,000 and 414,000,
respectively, of the outstanding options were fully vested.
At December 31, 2000 and 2001, 1,594,000 and 2,036,000 shares,
respectively, of common stock were reserved for common stock option
exercises.
F-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, 2001,
summarized by exercise price, is as follows:
Outstanding Exercisable
- -------------------------------------------------- --------------------------
Weighted- Weighted-
Average Average
Exercise Price Shares Life (Years) Exercise Price Shares
- -------------------------------------------------- --------------------------
$ 12.3125 687,391 7.15 $ 12.3125 267,756
$ 13.5440 40,609 7.15 $ 13.5440 16,244
$ 12.0625 10,000 7.58 $ 12.0625 2,000
$ 9.7813 648,000 8.15 $ 9.7813 128,000
$ 13.1000 400,000 9.14 $ 13.1000 -
$ 9.4800 250,000 9.87 $ 9.4800 -
--------- -------
$ 9.48 to $13.544 2,036,000 8.20 $ 11.5770 414,000
========= =======
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 SFAS No. 123, Accounting for Stock-Based Compensation.
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, 1999, 2000, and 2001 would have been $9,812,000, $19,928,000,
and $15,012,000, respectively. Pro forma net income per common share-basic
would have been $0.77, $1.57, and $1.17 rather than $0.84, $1.64 and
$1.28, as reported, for the years ended December 31, 1999, 2000, and 2001,
respectively. Pro forma net income per common share-diluted would have
been $0.76, $1.56, and $1.16 rather than $0.83, $1.63, and $1.26 as
reported, for the years ended December 31, 1999, 2000 and 2001,
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.
1999 2000 2001
---- ---- ----
Risk-free interest rate 6.50% 6.50% 5.03%
Expected dividend yield 1.25% 1.37% 2.50%
Expected life 7 years 7 years 7 years
Volatility 49.00% 55.00% 51.00%
The weighted-average fair value at the date of for options granted during
1999, 2000, and 2001 approximated $6.46, $5.45, and $5.34 per option,
respectively.
F-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,
--------------------------------
1999 2000 2001
---- ---- ----
Current:
Federal $3,467 $7,109 $7,633
State 77 1,659 1,000
--------------------------------
3,544 8,768 8,633
--------------------------------
Deferred:
Federal 2,310 5,532 1,256
State 1,655 949 215
--------------------------------
3,965 6,481 1,471
--------------------------------
Total $7,509 $15,249 $10,104
================================
At December 31, 2000 and 2001, the components of the net deferred tax
liability were as follows:
2000 2001
--------------------
Investment in leases, other than allowance $51,302 $7,317
Allowance for credit losses (15,889) (19,181)
Depreciation (9,770) 42,336
Deferred receivables 3,357 0
--------------------
Total $29,000 $30,472
====================
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,
--------------------------------
1999 2000 2001
Federal statutory rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit 5.8% 5.6% 4.6%
Nondeductible expenses and other 0.4% 1.6% -1.4%
--------------------------------
Effective income tax rate 41.2% 42.2% 38.2%
================================
At December 31, 1998, the Company had loss carryforwards of approximately
$19,800,000, which were utilized in 1999.
F-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, and Herndon
Virginia expire 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, 2001, 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,
- -------------------
2002 $ 1,787
2003 1,754
2004 835
2005 214
--------
Total $ 4,590
========
Rental expense under operating leases totaled $1,567,000,
$1,557,000, and $1,998,000 for the years ended December 31, 1999, 2000,
and 2001, 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, 2001, future minimum lease
payments under capital leases were as follows:
For the years ended
December 31,
- -------------------
2002 $ 468
2003 267
2004 154
2005 44
------
Total minimum lease payments 933
Less amounts representing interest (84)
------
Total $ 849
======
Legal Matters
Management believes, after consultation with counsel, that the
allegations against the Company included in the lawsuits described below
are subject to substantial legal defenses, 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.
A. The Company filed an action in the United States District Court
for the District of Massachusetts against Sentinel Insurance Company,
Ltd., ("Sentinel"), Premier Holidays International, Inc., ("Premier") and
Daniel DelPiano ("DelPiano") arising from Premier's October, 1999, default
on its repayment obligations to the Company under a Twelve Million Dollar
($12,000,000) loan. Judgment has been entered in this case against
Sentinel, which had issued a business performance insurance policy
guaranteeing repayment of the loan, in the amount of Fourteen Million
Dollars ($14,000,000). This judgment has not been satisfied. Sentinel is
currently undergoing liquidation
F-22
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
proceedings, and a claim in this amount has been filed with the bankruptcy
court. As part of the Massachusetts litigation, Premier has asserted a
counterclaim against the Company for Seven Hundred Sixty Nine Million
Three Hundred Fifty Thousand dollars ($769,350,000) in actual and
consequential damages, and for Five Hundred Million Dollars ($500,000,000)
in punitive damages, plus interest, cost and attorney's fees. The
counterclaim is based upon an alleged representation by the Company that
it would lend Premier an additional Forty-Five Million Dollars
($45,000,000), when all documents evidencing the Premier loan refer only
to the Twelve Million ($12,000,000) amount actually loaned and not repaid.
The Company denies any liability on the counterclaim, which the Company is
vigorously contesting. Because of the uncertainties inherent in
litigation, the Company cannot predict whether the outcome will have a
material adverse effect.
B. On January 29, 2002, Leasecomm was served with an Amended
Complaint ("Complaint") in an action entitled People v. Roma Computer
Solutions, Inc., et al., Ventura County (California) Superior Court Case
No. CIV207490. The Complaint asserts two claims, one for violation of the
California Business Professions Code Section 17500 (false advertising),
and the other for violation of the California Business and Professions
Code Section 17200 (unfair or unlawful acts or practices). The claims
arise from the marketing and selling activities of other defendants,
including Roma Computer Solutions, Inc., and/or Maro Securities, Inc. The
Complaint seeks to have Leasecomm held liable for the acts of other
defendants, alleging that Leasecomm directly participated in those acts
and received proceeds and the assignment of lease contracts as a result of
those acts. The Complaint requests injunctive relief, rescission,
restitution, and a civil penalty. No answer or motion has been filed.
Because of the uncertainties inherent in litigation, the Company cannot
predict whether the outcome will have a material adverse affect.
C. On May 8, 2000, Plaintiff Efraim Bason brought an action in the
Supreme Court of the State of New York, County of Nassau, seeking
compensatory damages in the amount of $450,000 and punitive damages under
various legal theories for Leasecomm's refusal to promptly release him
from an equipment lease to which he claims his name was forged (the "Bason
Complaint"). The Bason Complaint alleges that Leasecomm's failure to
promptly release him from the lease, and subsequent negative reports to
credit agencies, ruined his credit and prevented him from securing certain
financing that he allegedly needed to purchase merchandise which he claims
he could have then re-sold at a $450,000 profit. The Company has filed a
motion for summary judgment, which Bason has opposed. The Court has not
yet ruled on the motion. Because of the uncertainties inherent in
litigation, the Company cannot predict whether the outcome will have a
material adverse effect.
D. On January 29, 2002, Leasecomm was served with an Amended
Complaint ("Complaint") in an action entitled Rae Lynn Copitka v.
Leasecomm Corp., et al., Travis County (Texas) District Court Case No.
GN-102292. The Complaint asserts that the original action, filed mid-2001
by a single plaintiff should proceed as a class action. In the original
action, Ms Copitka sought to rescind her finance lease with Leasecomm and
to recover economic damages arising from prior payments under the lease.
Ms Copitka alleges that her proposed class includes all persons in Texas
who have executed Leasecomm finance leases for "virtual terminal" type
credit card software during the years 1998, 1999, 2000, and 2001.
Leasecomm intends to vigorously contest both the class certification and
the substantive merits of the lawsuit. No answer or motion has been filed.
Because of the uncertainties inherent in litigation, the Company cannot
predict whether the outcome will have a material adverse affect.
E. 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 complaint seeks certification of a subclass of
those class members who entered into any lease agreement contracts with
Leasecomm for the purposes of financing the goods or services allegedly
purchased from other defendant entities. The class action complaint
alleges multiple causes of action, including: fraud and deceit; negligent
misrepresentation; unfair competition; false advertising; unjust
enrichment; fraud in the inducement and the inception of contract; lack of
consideration for contact; and breach of the contractual covenant of good
faith and fair dealing.
On February 1, 2002, the parties entered into stipulation of
settlement to the class action litigation. The stipulation of settlement
will be effective only if and when it is approved by the San Mateo
Superior Court as fair
F-23
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
and reasonable to the members of the plaintiff class and as a good faith
settlement pursuant to Section 877.6 of the California Code of Civil
Procedure. It is unclear at this point how long this process will take.
F. On October 29,2001, a purported class action suit was filed in
Superior Court of the State of California, County of Orange against
Leasecomm and MicroFinancial and another entity known as Prospecting
Services of America, Inc. ("PSOA"). The plaintiffs purport to represent a
class of customers who were allegedly solicited by PSOA to enter into
leases with Leasecomm for the lease of a "virtual link point gateway" and
"I-phone." Plaintiffs alleged that PSOA made numerous misrepresentations
and omissions during the course of solicitation for which Leasecomm and
MicroFinancial Incorporated should be responsible. On January 25, 2002,
the trial court granted the motion of Leasecomm and MicroFinancial to stay
the claims against them, on the grounds that the forum selection clause
contained in the lease agreements required plaintiffs to litigate any
claims against those entities in Massachusetts. In the event that this
matter cannot be resolved, Leasecomm and MicroFinancial intend to
vigorously defend the action. Because of the uncertainties inherent in
litigation, the Company cannot predict whether the outcome will have a
material adverse affect.
G. On January 25, 2002, a purported class action suit was filed in
Superior Court of the State of California, County of Los Angeles against
Leasecomm. The complaint alleges that, two individuals were acting as
agents of Leasecomm, and that they solicited plaintiff to enter into a
lease agreement with Leasecomm. The complaint seeks declaratory and
injunctive relief against all defendants based upon alleged violations of
California law. The plaintiff purports to represent two subclasses
comprised of: business entities who entered into commercial lease
agreements with Leasecomm, all California residents who entered into lease
agreements with Leasecomm for consumer goods. Leasecomm intends to
vigorously defend the action. Because of the uncertainties inherent in
litigation, the Company cannot predict whether the outcome will have a
material adverse affect.
Leasecomm has been served with Civil Investigative Demands by the
Offices of the Attorney General for the states of Kansas, Illinois, and
Florida, and for the Commonwealth of Massachusetts. Those Offices of the
Attorney General, in conjunction with the Northwest Region Office of the
Federal Trade Commission and the Offices of the Attorney General for Texas
and North Dakota, have informed Leasecomm that they are coordinating their
investigations jointly. The investigations raise a number of issues
concerning Leasecomm's vendors and Leasecomm's leases, covering without
limitation, enforceability, noncancellability, unconscionability, forum
selection, rights of rescission, lease termination provisions, electronic
funds transfer, software license leases, leases of satellites and
computers, billing and collection practices, and business opportunity
seminars.
Since the investigations are at an early stage, and no legal action
has been commenced against Leasecomm, there can be no assurance as to the
eventual outcome.
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 $102,000, $142,700, and $89,100 for the
years ended December 31, 1999, 2000, and 2001, 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 14.7%, 10.6%, and 4.5% of all
originations during the years ended December 31, 1999, 2000, and 2001,
respectively. Another dealer accounted for approximately 10.1%, 3.8%, and
F-24
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
2.4% of all originations during the years ended December 31, 1999, 2000,
and 2001, respectively. No other dealer accounted for more than 10% of the
Company's origination volume during the years ended December 31, 1999,
2000, or 2001.
The Company originates and services leases, contracts and loans in
all 50 states of the United States and its territories. As of December 31,
2000 and 2001, leases in California, Florida, Texas, Massachusetts and New
York accounted for approximately 44% and 42% of the Company's portfolio,
respectively. Only California accounted for more than 10% of the total
portfolio as of December 31, 2000 and 2001 at approximately 15% as of
December 31, 2000 and 14% as of December 31, 2001. None of the remaining
states accounted for more than 4% of such total.
L. Related-Party Transactions:
The Company had notes receivable from officers and employees of
$68,000 at December 31, 2000 and 2001. 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 2000 or 2001.
Other notes payable includes amounts due to stockholders of the
Company at December 31, 2000 and 2001 of $316,000 and $309,000
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, 1999, 2000 and 2001.
At December 31, 2000 and 2001, subordinated notes payable included
$102,000 and $727,000 due to stockholders, officers and directors.
Interest paid to stockholders, officers and directors under such notes, at
rates ranging between 8% and 12%, amounted to $104,000, $8,500, and
$53,700 for the years ended December 31, 1999, 2000, and 2001,
respectively.
F-25
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per-share data)
M. Selected Quarterly Data (Unaudited):
The following is a summary of the unaudited quarterly results of
operations of the Company for 2000 and 2001.
2000 2001
---------------------------------------- ----------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
------- ------- ------- ------- ------- ------- ------- -------
Revenues:
Income on leases and loans $15,544 $16,946 $18,435 $18,922 $18,731 $18,060 $18,105 $16,036
Income on service contracts
rental and fees 16,406 16,677 18,117 18,430 20,611 20,491 21,204 20,853
------- ------- ------- ------- ------- ------- ------- -------
Total revenues 31,950 33,623 36,552 37,352 39,342 38,551 39,309 36,889
------- ------- ------- ------- ------- ------- ------- -------
Expenses:
Selling general and administrative 9,521 9,343 9,665 9,842 11,903 10,658 10,900 11,438
Provision for credit losses 8,529 9,040 10,576 10,767 10,266 11,819 15,064 16,943
Depreciation and amortization 2,033 2,554 2,808 2,832 3,442 3,640 3,618 3,678
Interest 3,192 3,827 4,351 4,488 4,370 3,493 3,444 2,994
------- ------- ------- ------- ------- ------- ------- -------
Total expenses 23,275 24,764 27,400 27,929 29,981 29,610 33,026 35,053
------- ------- ------- ------- ------- ------- ------- -------
Income before provision for income taxes 8,675 8,859 9,152 9,424 9,361 8,941 6,283 1,836
------- ------- ------- ------- ------- ------- ------- -------
Net Income $ 4,970 $ 5,131 $ 5,301 $ 5,459 $ 5,419 $ 5,179 $ 3,639 $ 2,080
------- ------- ------- ------- ------- ------- ------- -------
Net Income per common share - basic 0.39 0.40 0.42 0.43 0.43 0.41 0.28 0.16
Net Income per common share - diluted 0.39 0.40 0.42 0.43 0.42 0.40 0.28 0.16
Dividends per common share 0.040 0.045 0.045 0.045 0.045 0.050 0.050 0.050
F-26