FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
TOGETHER WITH AUDITORS' REPORT
-13-
[ARTHUR ANDERSEN LLP LETTERHEAD]
Report of Independent Public Accountants
To the Stockholders of
Firestone Financial Corp.:
We have audited the accompanying consolidated balance sheets of Firestone
Financial Corp. and Subsidiary as of December 31, 1996 and 1995, and the related
consolidated statements of income and retained earnings 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 generally accepted auditing
standards. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of Firestone Financial Corp. and
Subsidiary as of December 31, 1996 and 1995, and the results of their operations
and their cash flows for the years then ended, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts
January 31, 1997
-14-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
ASSETS
CASH $ 193,652 $ 102,625
----------- -----------
NOTES RECEIVABLE (Notes 3, 4 and 10) $79,622,175 $77,653,062
FINANCE LEASE RECEIVABLES (Notes 3,4 and 10) 2,810,578 3,208,024
----------- -----------
TOTAL RECEIVABLES $82,432,753 $80,861,086
LESS - ALLOWANCE FOR CREDIT LOSSES (Notes 3 and 7) 1,779,750 1,861,535
----------- -----------
NET RECEIVABLES $80,653,003 $78,999,551
----------- -----------
OTHER ASSETS (Notes 3 and 8) $ 1,966,777 $ 1,596,036
----------- -----------
$82,813,432 $80,698,212
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
NOTES PAYABLE TO BANKS (Notes 5 and 10) $61,775,719 $60,677,801
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,178,730 3,460,458
ACCRUED INCOME TAXES (Notes 3 and 8) 82,027 291,558
DEALER RESERVES 344,930 932,441
SUBORDINATED NOTES PAYABLE (Notes 6 and 10) 4,000,000 4,000,000
----------- -----------
TOTAL LIABILITIES $69,381,406 $69,362,258
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY (Notes 2 and 9):
Common stock, $.01 par value, 2,750,000 shares
authorized, 2,000,000 shares outstanding $ 20,000 $ 20,000
Additional paid-in-capital 1,231,000 1,231,000
Retained earnings 12,181,026 10,084,954
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $13,432,026 $11,335,954
----------- -----------
$82,813,432 $80,698,212
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
-15-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
INTEREST AND FEE INCOME (Notes 3 and 10):
Interest and fees on loans $10,411,713 $ 9,754,162
Finance lease income and related fees 493,107 541,666
----------- -----------
Total interest income $10,904,820 $10,295,828
INTEREST EXPENSE (Notes 5 and 6) 5,074,422 5,070,387
----------- -----------
Net interest income $ 5,830,398 $ 5,225,441
PROVISION FOR CREDIT LOSSES (Notes 3 and 7) -- 280,000
----------- -----------
Net interest income after
provision for credit losses $ 5,830,398 $ 4,945,441
----------- -----------
NONINTEREST INCOME:
Accretion of purchase discount (Note 2) $ -- $ 1,223,501
Other income 1,115,843 939,368
----------- -----------
Total noninterest income $ 1,115,843 $ 2,162,869
----------- -----------
NONINTEREST EXPENSE:
Salaries and wages (Note 3) $ 2,523,236 $ 2,394,478
Other operating expenses 1,207,070 1,250,797
----------- -----------
Total noninterest expense $ 3,730,306 $ 3,645,275
----------- -----------
Income before provision for income taxes $ 3,215,935 $ 3,463,035
PROVISION FOR INCOME TAXES (Notes 3 and 8) 1,119,863 667,218
----------- -----------
Net income $ 2,096,072 $ 2,795,817
RETAINED EARNINGS, beginning of year 10,084,954 $ 7,289,137
----------- -----------
RETAINED EARNINGS, end of year $12,181,026 $10,084,954
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
-16-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,096,072 $ 2,795,817
Adjustments to reconcile net income to net cash
provided by operating activities -
Accretion of purchase discount -- (1,223,501)
Depreciation and amortization 97,584 117,014
Amortization of residual value (343,762) (427,382)
Provision for credit losses -- 280,000
Provision (benefit) for deferred income taxes 69,628 (162,302)
Loss on write-down of assets 4,473 --
Changes in assets and liabilities -
(Increase) decrease in other assets (153,326) 49,966
Decrease in accounts payable and
accrued expenses (281,728) (405,404)
(Decrease) increase in accrued income taxes (598,631) 182,359
(Decrease) increase in dealer reserves (587,511) 562,096
------------- ------------
Net cash provided by operating activities $ 302,799 $ 1,768,663
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of leases and loans $ 1,079,157 $ 1,697,817
Leases funded to customers (2,588,523) (2,726,443)
Loans made to customers (120,219,192) (98,775,904)
Lease principal repayments 3,330,199 2,863,464
Loan principal repayments 117,088,669 85,905,132
------------- ------------
Net cash used in investing activities $ (1,309,690) $(11,035,934)
------------- ------------
The accompanying notes are an integral
part of these consolidated financial statements
-17-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(Continued)
1996 1995
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks $ 84,706,692 $ 71,406,447
Proceeds from issuance of the 1995 subordinated
notes payable -- 1,192,000
Repayment of notes payable to banks (83,608,774) (58,127,433)
Repayment of subordinated notes payable to bank -- (4,000,000)
Repayment of 1992 subordinated notes payable -- (1,192,000)
------------ ------------
Net cash provided by financing activities $ 1,097,918 $ 9,279,014
------------ ------------
NET INCREASE IN CASH $ 91,027 $ 11,743
CASH, BEGINNING OF YEAR 102,625 90,882
------------ ------------
CASH, END OF YEAR $ 193,652 $ 102,625
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest $ 5,039,756 $ 4,906,409
Income taxes 1,936,156 841,670
============ ============
Noncash financing activities--
Rollover of 1992 subordinated notes payable into
1995 subordinated notes payable $ -- $ 2,808,000
============ ============
The accompanying notes are an integral
part of these consolidated financial statements
-18-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(1) Company Overview
Firestone Financial Corp. (the Corporation) was founded in 1965. The Corporation
and its wholly owned subsidiary, Firestone Financial Canada Ltd. (collectively
referred to as the Company), provide primarily secured installment loan and
lease financing to customers primarily throughout the United States and within
various provinces of Canada. The Company has, over the years, built a long
history of growth and profitability by focusing on a specific customer base.
This customer base is composed of the "route operators" throughout North America
that own (or lease) and maintain various types of coin-operated amusement
equipment and vending machines, park and ride equipment, video lottery and
gaming devices, as well as owner/operators of dry-cleaning stores and
coin-operated laundry equipment. Vending machines include coin-operated snack,
juice, cigarette, coffee and candy vending machines, while amusement equipment
includes various types of coin-operated music, pinball and video amusement
games, as well as pool tables, shuffleboard and electronic dart games.
(2) Acquisition of the Corporation
In January 1992, Stonefire Financial Corp., a Massachusetts corporation, was
formed for the purpose of acquiring the Corporation. On August 21, 1992,
Stonefire Financial Corp. purchased all of the outstanding stock of the
Corporation for $5,250,000. On August 25, 1992, Stonefire Financial Corp. and
the Corporation merged, and Firestone Financial Corp. was the surviving entity.
The Corporation accounted for the acquisition by allocating the purchase price
paid by Stonefire Financial Corp. to the Corporation's net assets based upon
relative fair values. The fair value of the net assets acquired exceeded the
purchase price by approximately $5,700,000. This purchase discount was accreted
on a straight-line basis over a period of 36 months ended August 1995.
(3) Summary of Significant Accounting Policies
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and practices applicable to the finance company
industry. The following is a summary of significant accounting policies:
Principles of Consolidation
The consolidated financial statements include the accounts of the parent company
and its wholly owned subsidiary. Intercompany accounts and transactions have
been eliminated in consolidation.
Income Recognition
The Company recognizes income from installment loans and finance leases over the
term of the loan or lease using the effective-interest method.
When, in the judgment of management, collection of any portion of the interest
or principal amount of a receivable is in doubt, accrual of income is
discontinued and income is recorded when received.
-19-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts 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 reporting period.
Actual results could differ from those estimates.
Allowance for Credit Losses
The allowance for credit losses is maintained at a level that represents the
Company's best judgment of the loan and lease loss exposure based upon
management's evaluation of the combined loan and lease portfolio and actual
historical loss experience. The allowance for credit losses is based on
estimates; ultimate losses may vary from the current estimates. These estimates
are reviewed periodically, with any necessary adjustments reported in earnings
in the period in which they become known.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." A
note receivable or finance lease receivable (loan) is considered impaired when
it is probable that a creditor will be unable to collect all principal and
interest due according to the contractual terms of the financing agreement. SFAS
No. 114 requires, among other things, that creditors measure impaired loans at
the present value of expected future cash flows, discounted at the loan's
effective interest rate or, as a practical expedient, at the loan's observable
market price or the fair value of the collateral if the loan is collateral
dependent. The Company recognizes interest income on impaired loans on a cash
basis only when the ultimate collectibility of principal is no longer considered
doubtful.
The Company has determined based on its policies that loans recognized as
nonaccrual are equivalent to "impaired loans" as defined by SFAS No. 114. The
Company has also determined that the allowance for credit losses as of December
31, 1996 and 1995 does not require an additional provision as a result of the
adoption of this standard. The components of impaired loans as of December 31,
1996 and 1995 are as follows (in thousands):
1996 1995
---- ----
Total impaired loans $527 $322
Total impaired loans requiring allocation of
allowance for credit losses 105 112
Allocation of allowance for credit losses
for impaired loans 83 112
The average outstanding impaired loans during the years ended December 31, 1996
and 1995 was approximately $394,000 and $597,000, respectively.
-20-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Leases
The Company accounts for its leases under the direct finance method of
accounting.
Equipment Held for Re-lease or Sale
When the Company repossesses equipment under direct financing leases, it records
the equipment at the lower of the net investment in the lease or the estimated
fair value of the equipment less estimated selling costs. Equipment held for
re-lease or sale included in "Other Assets" in the accompanying consolidated
financial statements amounted to $31,751 and $13,723 at December 31, 1996 and
1995, respectively.
401(k) Plan
The Company has a 401(k) plan (the Plan), established in January 1993, which
covers substantially all employees. Under the Plan, employees may contribute a
portion of their earnings to the Plan to be invested in various savings
alternatives. The Company makes matching contributions at a rate of 100% of an
employee's contribution, not to exceed 5% of an employee's salary. The matching
contributions vest ratably over five years. Company contributions ($74,216 in
1996 and $71,465 in 1995) were charged to expense.
Income Taxes
The Company accounts for income taxes in accordance with the liability method of
accounting for income taxes. The liability method provides that deferred tax
assets and liabilities are recorded based on the estimated future tax effects of
the difference between the tax bases of assets and liabilities and their
carrying amounts for financial reporting purposes.
Foreign Currency
The functional currency of the subsidiary is the U.S. dollar. The subsidiary's
assets, liabilities and results of operations are transacted in U.S. dollars,
and hence, the subsidiary is not required to translate any amounts at the
financial statement date. Translation gains and losses are charged directly to
operations as incurred.
Certain receivables of the subsidiary, however, are denominated in Canadian
dollars. The Company, therefore, enters into forward exchange contracts to hedge
against changes in the Canadian exchange rate.
-21-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(4) Notes Receivable and Finance Lease Receivables
The components of notes receivable as of December 31, 1996 and 1995 are as
follows (in thousands):
1996 1995
---- ----
Gross note payments receivable $ 88,163 $ 87,400
Less - Due to participants 1,576 2,173
-------- --------
Note payments receivable $ 86,587 $ 85,227
Less - Unearned finance charges 6,965 7,574
-------- --------
Net investment in notes receivable $ 79,622 $ 77,653
======== ========
The Company's notes receivable are primarily with commercial borrowers and are
typically secured by assets used by the borrowers in their businesses. At
December 31, 1996 and 1995, the Company's notes receivable are primarily
concentrated in amusement and vending equipment (approximately $72,012,000 in
1996) and inventory financing notes (approximately $7,976,000 in 1996). Included
in "Note payments receivable" are interest bearing notes receivable of
approximately $3,212,000 and $2,795,000 as of December 31, 1996 and 1995,
respectively.
The components of finance lease receivables as of December 31, 1996 and 1995 are
as follows (in thousands):
1996 1995
---- ----
Gross lease payments receivable $2,794 $3,121
Less - Due to participants 205 320
------ ------
Lease payments receivable $2,589 $2,801
Add - Estimated residual value of leased equipment 754 996
Less - Unearned finance charges 206 259
Unearned residual income 326 330
------ ------
Net investment in finance lease receivables $2,811 $3,208
====== ======
(5) Notes Payable to Banks
In October 1996, the Company amended its Revolving Credit Agreement (the
Agreement) with its U.S. Lenders and Canadian Lender. The Agreement, which
expires on October 24, 1997, provides that U.S. Lenders make U.S. Revolving
Credit Loans and Swing Line Loans to the Company for up to $75,000,000 or such
greater amount, up to a maximum of $85,000,000, as may be effected by the
addition of one or more additional commitment amounts provided by new banks, as
defined by the Agreement. The Agreement provides for interest on the U.S.
Revolving Credit Loans and the Swing Line Loans to be charged at the U.S. Base
rate or for interest on the U.S. Revolving Credit Loans to be charged on
fixed-rate borrowings at U.S Eurodollar rates. Under the terms of the Agreement,
the Banks were granted a continuing security interest in and lien on all of the
Corporation's assets and
-22-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(5) Notes Payable to Banks (Continued)
proceeds thereof. As of December 31, 1996, the Company had approximately
$58,606,000 in outstanding U.S. Revolving Credit and Swing Line Loans.
At December 31, 1996, a total of $56,500,000 of the U.S. Revolving Credit Loans
was borrowed as fixed-rate U.S. Eurodollar term loans. These term loans mature
on various dates through April 21, 1997, with fixed interest rates ranging from
6.5625% to 6.875%. The U.S. Base rate on the remaining portion of the
outstanding loans was 8.25% at December 31, 1996.
The Agreement further provides that the Canadian Lender make Canadian Revolving
Credit Loans to the subsidiary for up to $5,000,000 or such greater amount, up
to a maximum of $6,000,000, as defined by the Agreement. Interest on the
Canadian Revolving Credit Loans is charged at the Canadian Base rate or at
Canadian Eurodollar rates for fixed-rate borrowings. Under the terms of the
Agreement, the Company pledged certain assets of the subsidiary to the Canadian
Lender. As of December 31, 1996, the subsidiary had approximately $3,170,000 in
outstanding Canadian Revolving Credit Loans.
A total of $2,600,000 of the Canadian Revolving Credit Loans was borrowed as
fixed-rate Canadian Eurodollar term loans at December 31, 1996. These term loans
mature at dates through April 21, 1997, at a fixed Canadian Eurodollar rate of
6.875%. The Canadian Base rate on the remaining portion of the outstanding loans
was 8.75% at December 31, 1996.
The Agreement also calls for a commitment fee of 1/4% of the unused portion of
the facility.
The Agreement contains various restrictive covenants, including, among other
things, restrictions on indebtedness, liens, dividends and investments. The
Company is also required to maintain certain financial ratios under the
covenants. As of December 31, 1996, the Company was in compliance with all debt
covenants.
Based on the month-end balances, total borrowings during 1996 and 1995 averaged
approximately $61,015,000 and $55,129,000, respectively, for outstanding
indebtedness under the Agreement, with maximum borrowings of approximately
$64,280,000 and $60,678,000 in 1996 and 1995, respectively. The weighted average
effective interest rate for this debt was 7.67% and 8.27% for the years ended
December 31, 1996 and 1995, respectively.
(6) Subordinated Notes Payable
During October 1985 and March 1988, the Corporation entered into two
subordinated note agreements for $2,000,000 each with an investor, to mature in
October 1995 and March 1995, respectively. Under the terms of these agreements,
as amended, interest was accrued and paid monthly on the 1985 note at 9.26% and
on the 1988 note at a rate equal to a base rate as announced from time to time
by the investor. Each of the notes was repaid in full in March 1995.
-23-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(6) Subordinated Notes Payable (Continued)
On October 28, 1992, the Corporation issued $4,000,000 in subordinated notes
payable (1992 Subordinated Notes) to 37 investors, to mature on October 28,
1996. Interest on the 1992 Subordinated Notes was accrued at 12% per annum and
paid quarterly in arrears. On November 9, 1995, the outstanding balance of the
1992 Subordinated Notes was prepaid in full without penalty.
On November 10, 1995, the Corporation issued $4,000,000 in subordinated notes
payable (1995 Subordinated Notes) to 41 investors. Interest on the 1995
Subordinated Notes is floating based upon the prime rate of interest announced
from time to time by a bank, plus one and three quarters percent (1.75%) per
annum, (10% as of December 31, 1996), payable quarterly in arrears. The
Corporation will further make principal payments as follows:
1997 and 1998 $125,000 on the last day of each calendar quarter
($500,000 for each year)
1999 and 2000 $375,000 on the last day of each calendar quarter
($1,500,000 for each year)
Under the terms of the 1995 Subordinated Notes, the Corporation may prepay the
1995 Subordinated Notes, at any time, without premium or penalty.
Certain of the 1992 Subordinated Notes and the 1995 Subordinated Notes were
purchased by individuals that are related parties to the Corporation. All such
Notes were purchased on the same terms offered to nonrelated parties. Certain of
the 1992 Subordinated Notes ($2,808,000) were repaid through issuance of the
1995 Subordinated Notes.
Based on the month-end outstanding balances of notes payable to banks and
subordinated notes payable, total borrowings during the years ended December 31,
1996 and 1995 averaged approximately $65,015,000 and $59,796,000, with maximum
borrowings of approximately $68,280,000 and $64,678,000 in 1996 and 1995,
respectively. The weighted average effective interest rate for all outstanding
indebtedness was 7.89% and 8.53% for the years ended December 31, 1996 and 1995,
respectively.
(7) Allowance for Credit Losses
The following is an analysis of the allowance for credit losses for the years
ended December 31, 1996 and 1995 (in thousands):
1996 1995
---- ----
Balance, beginning of year $ 1,862 $ 1,631
Provision for credit losses -- 280
Loan and lease charge-offs, net (82) (49)
------- -------
Balance, end of year $ 1,780 $ 1,862
======= =======
-24-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(8) Income Taxes
The provision for income taxes consists of the following components (in
thousands):
1996 1995
---- ----
Currently payable-
Federal $ 841 $ 547
State 163 235
Foreign 46 47
------ -----
Total current $1,050 $ 829
------ -----
Deferred charges (credits)-
Federal $ 55 $(129)
State 15 (33)
------ -----
Total deferred $ 70 $(162)
------ -----
Provision for income taxes $1,120 $ 667
====== =====
The difference between the statutory U. S. federal income tax rate and the
Company's effective income tax rate for 1996 and 1995, respectively, as a
percentage of pretax income, is a result of the following:
1996 1995
---- ----
Federal statutory rate 34.0% 34.0%
Increase (decrease) in rate resulting from -
State taxes, net of federal benefit 3.7 3.9
Accretion of purchase discount -- (12.2)
Reversal of tax reserves in excess of
tax liabilities (3.3) (7.3)
Other .4 1.1
---- ----
Effective income tax rate 34.8% 19.5%
---- ----
---- ----
"Other Assets" in the accompanying consolidated financial statements includes an
income tax receivable of $363,000 and $0, and net deferred income tax assets of
approximately $662,000 and $731,000 as of December 31, 1996 and 1995,
respectively. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of enacted tax laws. The tax effect of
significant temporary differences representing deferred tax assets and
liabilities are as follows (in thousands):
1996 1995
---- ----
Credit losses $699 $739
Depreciation (2) 5
Leases (2) 60
Other (33) (73)
---- ----
$662 $731
==== ====
-25-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(8) Income Taxes (Continued)
The Company has not established a valuation allowance against its deferred tax
assets as of December 31, 1996 or 1995.
(9) Commitments and Contingencies
The Company leases office premises under an operating lease that was renewed in
January 1995 for a five-year period. The future minimum lease payments due under
this lease are as follows (in thousands):
1997 $ 187
1998 192
1999 197
2000 171
----
$747
====
On February 4, 1994, the Corporation entered into a Buy-Sell Agreement with the
Stockholders of the Corporation which provides for the purchase of the shares of
the capital stock of the Corporation owned by each stockholder upon his or her
death. In order to fund the Buy-Sell Agreement, the Corporation has purchased
renewable term life insurance on each stockholder. As of December 31, 1996, the
insurance proceeds would be sufficient to cover the purchase price in the event
of the death of any stockholder.
(10) Financial Instruments
Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosures About Fair Value of Financial
Instruments," which requires that the Company disclose estimated fair values for
certain of its financial instruments. Financial instruments include such items
as loans, securities, deposits, swaps, and other instruments, as defined in the
standard.
The estimated fair value amounts have been determined based on the Company's
assessment of available market information and appropriate valuation
methodologies. However, these estimates may not necessarily be indicative of the
amount that the Company could realize in a current market exchange.
Most of the Company's current assets and current liabilities are financial
instruments. The carrying amounts of these financial instruments approximate
their estimated fair value. The fair value of notes and finance lease
receivables have been determined by discounting the projected cash flows at
December 31, 1996, using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for similar maturities. The
majority of these receivables are collateralized.
-26-
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Continued)
(10) Financial Instruments (Continued)
Fair Value of Financial Instruments (Continued)
Notes payable to banks was valued based on quoted market prices for debt of the
same remaining maturities.
Off-Balance Sheet Risk
As of December 31, 1996 and 1995, the Company had forward exchange contracts
totaling approximately $649,000 and $620,000, respectively, for purposes of
hedging certain firm commitments related to the subsidiary's collection of
Canadian notes receivable. All outstanding forward exchange contracts had
maturities of under three years. Gains and losses on these forward exchange
contracts are deferred and recognized into interest income over the term of the
underlying commitment. The market values of the forward exchange contracts were
approximately $661,000 and $621,000 at December 31, 1996 and 1995, respectively.
In November 1995, the Company entered into an interest rate swap agreement (the
Swap Agreement) with a bank for the purpose of effectively converting a portion
of the Company's interest rate obligation on 1995 Subordinated Notes from a
floating rate to a fixed rate until the expiration of the Swap Agreement in
December 1998. The Swap Agreement effectively fixes the Company's interest rate
on the 1995 Subordinated Notes to 10.42% on the notional amount of $4,000,000,
as reduced by quarterly principal payments beginning in 1997. Net quarterly
payments or quarterly receipts under the Swap Agreement are recorded as
adjustments to interest expense. The fair value of the Swap Agreement at
December 31, 1996 and 1995 was an unrealized loss of approximately $8,000 and
$65,000, respectively.
In assessing financial instruments with off-balance-sheet risk, the Company is
exposed to potential credit loss in the event of nonperformance by its
counterparties. The Company, however, does not anticipate any material adverse
affect on its financial position resulting from its involvement in these
instruments, nor does it anticipate nonperformance by the counterparties.
-27-