FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
28
[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, 1995 and 1994, 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, 1995 and 1994, 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 26, 1996
29
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET - ASSETS
AS OF DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
CASH $ 102,256 $ 90,882
----------- -----------
NOTES RECEIVABLE (Notes 3, 4 and 10) $77,653,062 $66,534,179
FINANCE LEASE RECEIVABLES (Notes 3,4 and 10) 3,208,024 2,912,623
----------- -----------
TOTAL RECEIVABLES $80,861,086 $69,446,802
LESS - ALLOWANCE FOR CREDIT LOSSES (Notes 3 and 7) 1,861,535 1,630,567
----------- -----------
NET RECEIVABLES $78,999,551 $67,816,235
----------- -----------
OTHER ASSETS (Notes 3 and 8) $ 1,596,036 1,600,714
----------- -----------
$80,698,212 $69,507,831
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
30
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - LIABILITIES AND STOCKHOLDERS' EQUITY
AS OF DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
NOTES PAYABLE TO BANKS (Note 5) $60,677,801 $47,398,787
ACCOUNTS PAYABLE AND ACCRUED EXPENSES 3,460,458 3,865,862
ACCRUED INCOME TAXES (Notes 3 and 8) 291,558 109,199
DEALER RESERVES 932,441 370,345
SUBORDINATED NOTES PAYABLE (Notes 6 and 10) 4,000,000 8,000,000
----------- -----------
TOTAL LIABILITIES $69,362,258 $59,744,193
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 9)
EXCESS OF FAIR VALUE OVER
NET ASSETS ACQUIRED (Note 2) $ -- $ 1,223,501
----------- -----------
STOCKHOLDERS EQUITY (Notes 2 and 9):
Common stock, $.0l 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 10,084,954 7,289,137
----------- -----------
TOTAL STOCKHOLDERS' EQUITY $11,335,954 $ 8,540,137
----------- -----------
$80,698,212 $69,507,831
=========== ===========
The accompanying notes are an integral
part of these consolidated financial statements
31
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
INTEREST AND FEE INCOME (Note 3 and 10):
Interest and fees on loans $ 9,754,162 $8,102,121
Finance lease income and related fees 541,666 469,117
----------- ----------
Total interest income $10,295,828 $8,571,238
INTEREST EXPENSE (Notes 5 and 6) 5,070,387 3,866,822
----------- ----------
Net interest income $ 5,225,441 $4,704,416
PROVISION FOR CREDIT LOSSES (Notes 3 and 7) 280,000 193,000
----------- ----------
Net interest income after
provision for credit losses $ 4,945,441 $4,511,416
----------- ----------
NONINTEREST INCOME:
Accretion of purchase discount (Note 2) $ 1,223,501 $1,912,356
Other income 939,368 928,905
----------- ----------
Total noninterest income $ 2,162,869 $2,841,261
----------- ----------
NONINTEREST EXPENSE:
Salaries and wages $ 2,394,478 $2,166,246
Other operating expenses 1,250,797 1,361,318
----------- ----------
Total noninterest expense $ 3,645,275 $3,527,564
----------- ----------
Income before provision for income taxes $ 3,463,035 $3,825,113
PROVISION FOR INCOME TAXES (Notes 3 and 8) 667,218 785,999
----------- ----------
Net income $ 2,795,817 $3,039,114
RETAINED EARNINGS, beginning of year 7,289,137 4,250,023
----------- ----------
RETAINED EARNINGS, end of year $10,084,954 $7,289,137
=========== ==========
The accompanying notes are an integral
part of these consolidated financial statements
32
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,795,817 $ 3,039,114
Adjustments to reconcile net income to net cash
provided by operating activities -
Accretion of purchase discount (1,223,501) (1,912,356)
Depreciation and amortization 117,014 216,569
Amortization of residual value (427,382) (186,445)
Provision for credit losses 280,000 193,000
Provision for prepaid income taxes (162,302) (82,971)
Loss on write-down of assets -- 1,878
Changes in assets and liabilities -
Decrease (increase) in other assets 49,966 (757)
(Decrease) increase in accounts payable and
accrued expenses (405,404) 1,308,216
Increase in accrued income taxes 182,359 137,125
Increase in dealer reserves 562,096 94,428
------------ ------------
Net cash provided by operating activities $ 1,768,663 $ 2,807,801
============ ============
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of leases and loans $ 1,697,817 $ 3,151,486
Leases funded to customers (2,726,443) (1,847,492)
Loans made to customers (98,775,904) (90,414,013)
Lease principal repayments 2,863,464 2,070,674
Loan principal repayments 85,905,132 74,294,895
------------ ------------
Net cash used in investing activities $(11,035,934) $(12,744,450)
============ ============
The accompanying notes are an integral
part of these consolidated financial statements
33
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
(Continued)
1995 1994
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to banks $ 71,406,447 $ 154,919,123
Proceeds from issuance of the 1995
subordinated notes payable 1,192,000 --
Repayment of notes payable to banks (58,127,433) (144,908,143)
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 $ 9,279,014 $ 10,010,980
------------ -------------
NET INCREASE IN CASH $ 11,743 $ 74,331
CASH AT BEGINNING OF YEAR 90,882 16,551
------------ -------------
CASH AT END OF YEAR $ 102,625 $ 90,882
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,906,409 $ 3,696,437
Income taxes 841,670 731,845
============ =============
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
34
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(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 and Formation of a Subsidiary
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.
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.
Stonefire Financial Corp. was capitalized with $1,251,000 and had a net
operating loss of $33,625 prior to the acquisition of the Corporation. On August
25, 1992, Stonefire Financial Corp. and the Corporation merged, and Firestone
Financial Corp. was the surviving entity.
In February 1994, the Corporation formed a wholly owned subsidiary, Firestone
Financial Canada Ltd., whose purpose is to provide financing in all the
provinces of Canada.
(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 the significant accounting policies:
35
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
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.
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 periods in which they become known.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting 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 will recognize interest income on impaired loans on a cash basis only
when the ultimate collectibility of principal is no longer considered doubtful.
36
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(3) Summary of Significant Accounting Policies (Continued)
Allowance for Credit Losses (Continued)
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, 1995 did not require an additional provision as a result of the adoption of
this new standard. At December 31, 1995, the Company had approximately $322,000
of total impaired net receivables of which approximately $112,000 required
allocation of the allowance for credit losses of approximately $112,000. The
average outstanding impaired net receivables during the year ended December 31,
1995 was approximately $597,000.
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 estimated
market value less estimated selling costs. Equipment held for re-lease or sale
included in Other Assets amounted to $13,723 and $161,892 at December 31, 1995
and 1994, respectively.
Income Taxes
The Company accounts for income taxes in accordance with the liability method in
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
In accordance with the provisions of Statement of Financial Accounting Standards
No. 52 "Foreign Currency Translation," 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.
37
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(4) Notes Receivable and Finance Lease Receivables
The components of notes receivable as of December 31, 1995 and 1994 are as
follows (in thousands):
1995 1994
---- ----
Gross note payments receivable $87,400 $76,425
Less - Due to participants 2,173 2,884
------- -------
Note payments receivable $85,227 $73,541
Less - Unearned finance charges 7,574 7,007
------- -------
Net investment in notes receivable $77,653 $66,534
======= =======
The Company's notes receivable are primarily with commercial borrowers and are
typically secured by assets used by the borrowers in their businesses.
The contractual maturities of notes receivable as of December 31, 1995 and the
maximum terms of the loans outstanding were as follows (in thousands):
Interest-
Installment bearing Total
----------- ------- -----
Due within -
1 year $60,959 $ 1,376 $62,335
2 years 17,512 410 17,922
3 years 3,370 379 3,749
4 years 497 249 746
5 years 94 161 255
Thereafter -- 220 220
------- ------- -------
$82,432 $ 2,795 $85,227
======= ======= =======
Maximum original
term (months) 72 84
== ==
Experience has shown that a number of loans will be paid out or renewed prior to
their contractual maturity. Accordingly, the foregoing tabulation is not
regarded as a forecast of future cash collections.
38
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(4) Notes Receivable and Finance Lease Receivables (Continued)
The concentration of notes receivable at December 31, 1995 and 1994 is presented
in the following table (in thousands):
1995 1994
---- ----
Amusement and vending equipment $65,468 $55,558
Video lottery and other gaming devices 6,964 9,254
Inventory financing 6,081 645
Laundry equipment 4,312 6,978
Office coffee equipment 599 566
Other 1,803 540
------- -------
$85,227 $73,541
======= =======
A major consideration in granting loans is the value of the borrower's
collateral. The loans made by the Company generally range between $3,000 and
$500,000. The Company has aggregate loans in excess of $1,000,000 to two
borrowers for an aggregate outstanding loan balance of $3,218,358 at December
31, 1995. These contracts are secured by the equipment. The value of the
collateral has been determined based upon appraisals that have been reviewed by
Company personnel. In addition, all contracts for these borrowers are made on a
recourse basis, with the distributor of the collateral fully guaranteeing the
related debt. In the opinion of management, the current net realizable value of
the collateral supporting these contracts is adequate in relation to their
outstanding balances.
The components of finance lease receivables as of December 31, 1995 and 1994 are
as follows (in thousands):
1995 1994
---- ----
Gross lease payments receivable $3,121 $3,156
Less - Due to participants 320 406
------ ------
Lease payments receivable $2,801 $2,750
Add - Estimated residual value of
leased equipment 996 702
Less -
Unearned finance charges 259 217
Unearned residual income 330 322
------ ------
Net investment in finance lease
receivables $3,208 $2,913
====== ======
39
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(4) Notes Receivable and Finance Lease Receivables (Continued)
The future minimum finance lease payments receivable as of December 31, 1995 are
as follows (in thousands):
1996 $ 1,799
1997 666
1998 229
1999 90
2000 17
------
$2,801
======
The concentration of minimum lease payments receivable at December 31, 1995 and
1994, by type of equipment, is presented in the following table (in thousands):
1995 1994
---- ----
Dairy equipment $1,237 $1,240
Amusement and vending equipment 1,088 894
Laundry equipment 476 616
------ ------
$2,801 $2,750
====== ======
As of December 31, 1995 and 1994, the geographical distribution of combined
notes receivable and finance lease receivables, net of unearned finance charges
and income, was as follows (in thousands):
1995 1994
---- ----
Region
- ------
Southeast $16,669 $15,567
Midwest 14,195 9,419
West 13,313 12,262
Northeast 12,749 14,156
Southwest 6,694 3,377
Mid-Atlantic 5,873 6,016
Plains States 3,385 3,015
Canada 3,624 2,754
Outside U.S.A. (excluding Canada) 4,359 2,881
------- -------
$80,861 $69,447
======= =======
40
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(5) Notes Payable to Banks
In October 1995, the Company amended its Revolving Credit Agreement (the
Agreement) with The First National Bank of Boston (FNBB), National Bank of
Canada (the Canadian Lender), and various other banks and financial institutions
(U.S. Lenders)--collectively with FNBB and the Canadian Lender (the Banks)--and
FNBB in its capacity as agent for the Banks. The Agreement, which expires on
October 25, 1996, provides that U.S. Lenders make U.S. Revolving Credit Loans
and Swing Line Loans to the Company for up to $67,500,000 or such greater
amount, up to a maximum of $77,500,000 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 proceeds thereof.
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, 1995, the amounts available and the loan balances under the
Agreement were as follows (in thousands):
Commitment Loan
Amounts Balances
------- --------
U.S. Lenders -
The First National Bank of Boston $ 23,000 $ 19,992
Fleet Bank of Massachusetts, N.A. 18,000 14,461
NatWest Bank N.A. 13,500 11,735
Citizens Bank of Massachusetts 6,500 5,650
National Bank of Canada 6,500 5,650
------- -------
$67,500 $57,488
======= =======
Canadian Lender -
National Bank of Canada 5,000 3,190
------- -------
Total $72,500 $60,678
======= =======
The Agreement also calls for a commitment fee of 3/8% of the unused portion of
the facility.
41
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(5) Notes Payable to Banks (Continued)
At December 31, 1995, a total of $54,500,000 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 24, 1996, with fixed interest rates ranging from
7.375% to 7.625%. The U.S. Base rate on the remaining portion of the outstanding
loans was 8.5% at December 31, 1995.
A total of $2,750,000 of the Canadian Revolving Credit Loans was borrowed as
fixed-rate Canadian Eurodollar term loans at December 31, 1995. These term loans
mature at dates through February 26, 1996, with fixed Canadian Eurodollar rates
ranging from 7.4375% to 7.5%. The Canadian Base rate on the remaining portion of
the outstanding loans was 9% at December 31, 1995.
The Agreement contains various restrictive covenants including, among other
things, restrictions on indebtedness, liens, dividends and investments. This
Company is also required to maintain certain financial ratios under the
covenants. As of December 1995, the Company was in compliance with all debt
covenants.
Based on the month-end balances, total borrowings during 1995 and 1994 averaged
approximately $55,129,000 and $44,842,000, respectively, for outstanding
indebtedness under the Agreement, with maximum borrowings of approximately
$60,678,000 and $48,323,000 in 1995 and 1994, respectively. The weighted average
effective interest rate for this debt was 8.27% and 6.90% for the years ended
December 31, 1995 and 1994, respectively.
(6) Subordinated Notes Payable
As of December 31, 1995 and 1994, subordinated notes payable were comprised of
the following (in thousands):
1995 1994
---- ----
Subordinated Notes Payable to
New Bedford Institution for Savings $ -- $4,000
Subordinated Notes Payable to Investors 4,000 4,000
------ ------
$4,000 $8,000
====== ======
During October 1985 and March 1988, the Corporation entered into two
subordinated note agreements for $2,000,000 each with PT Investment Corporation
to mature in October 1995 and March 1995, respectively. Under a Purchase and
Assumption agreement between New Bedford
42
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(6) Subordinated Notes Payable (Continued)
Institution for Savings (NBIS) and the Federal Deposit Insurance Corp., NBIS
assumed these subordinated notes payable as of August 21, 1992. Under the terms
of these agreements, as amended on September 30, 1993, interest was accrued and
paid monthly on the 1985 note at 9.26% and on the 1988 note at a rate equal to
the base rate as announced from time to time by NBIS. Each of the notes was
repaid in full in March 1995.
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 1992 Subordinated Notes were
prepaid in full without penalty. In connection with the issuance of the 1992
Subordinated Notes, the Corporation also issued to the investors warrants to
purchase an aggregate of 500,000 shares of the Corporation's common stock. On
December 9, 1995, all the warrants expired unexercised.
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 The First National Bank of Boston, plus one and three
quarters percent (1.75%) per annum, (10.25% as of December 31, 1995), 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,
1995 and 1994 averaged approximately $59,796,000 and $52,842,000 with maximum
borrowings of approximately
43
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(6) Subordinated Notes Payable (Continued)
$64,678,000 and $56,323,000 in 1995 and 1994, respectively. The weighted average
effective interest rate for all outstanding indebtedness was 8.53% and 7.40% for
the years ended December 31, 1995 and 1994.
(7) Allowance for Credit Losses
The following is an analysis of the allowance for credit losses for the years
ended December 31, 1995 and 1994 (in thousands):
1995 1994
---- ----
Balance, beginning of year $ 1,631 $1,509
Provision for credit losses 280 193
Loan and lease charge-offs,
net of amounts recovered (49) (71)
------- ------
Balance, end of year $ 1,862 $1,631
(8) Income Taxes
The provision for income taxes consists of the following components (in
thousands):
1995 1994
---- ----
Currently payable -
Federal $ 547 $ 670
State 235 196
Foreign 47 3
---- ----
Total current $ 829 $ 869
---- ----
Deferred charges (credits)-
Federal (129) (68)
State (33) (15)
---- ----
Total deferred $(162) $ (83)
---- ----
Provision for income taxes $ 667 $ 786
===== =====
44
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(8) Income Taxes (Continued)
The difference between the statutory U.S. federal income tax rate and the
Company's effective income tax rate for 1995 and 1994, respectively, as a
percentage of pretax income, is a result of the following:
1995 1994
---- ----
Federal statutory rate 34.0% 34.0%
Increase (decrease) in rate resulting from -
State taxes, net of federal benefit 3.9 3.0
Accretion of purchase discount (12.2) (17.0)
Reversal of tax reserves in excess
of tax liabilities (7.3) --
Other 1.1 0.5
---- ----
Effective income tax rate 19.5% 20.5%
==== ====
Included in "Other Assets" on the accompanying consolidated financial statements
are deferred income tax assets of approximately $731,000 and $636,000 as of
December 31, 1995 and 1994, 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):
1995 1994
---- ----
Credit losses $ 739 $ 649
Deferred expenses -- 41
Depreciation 5 13
Leases 60 (33)
Other (73) (34)
----- -----
$ 731 $ 636
===== =====
The Company did not record any valuation allowances against deferred tax assets
as of December 31, 1995 or 1994.
45
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(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):
1996 $ 183
1997 187
1998 192
1999 197
2000 171
----
$930
====
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, 1995, the
purchase price in the event of the death of certain stockholders exceeds the
insurance proceeds in aggregate by approximately $427,000 with no one individual
in excess of $88,000.
(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.
46
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(10) Financial Instruments (Continued)
Fair Value of Financial Instruments (Continued)
Most of the Company's current assets and current liabilities are financial
instruments. The carrying amounts of these financial instruments (excluding
notes and finance lease receivables and notes payable to banks) approximate
their estimated fair value. The following table summarizes estimated fair value
information for the Company's notes receivable and notes payable to banks at
December 31, 1995 (in thousands):
Estimated
Fair Value Book Basis
---------- ----------
Notes receivable $ 77,448 $ 77,653
Notes payable to banks 60,665 60,678
Notes and finance lease receivables have been valued by discounting the
projected cash flows at December 31, 1995, 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. 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, 1995 and 1994, the Company had forward exchange contracts
totaling approximately $620,000 and $405,000, 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 value of the forward exchange contracts based
on The First National Bank of Boston and National Bank of Canada's valuations
was approximately $621,000 at December 31, 1995. The market value of the forward
exchange contracts as determined by the Company based on rates quoted by The
First National Bank of Boston was approximately $400,000 at December 31, 1994.
47
FIRESTONE FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONS0LIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(Continued)
(10) Financial Instruments (Continued)
Off-Balance Sheet Risk (Continued)
In November 1995, the Company entered into an interest rate swap agreement (the
Swap Agreement) with The First National Bank of Boston for the purpose of
effectively converting a portion of the Company's interest rate exposure 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, 1995 was an unrealized loss of approximately $65,000
based on The First National Bank of Boston's market valuation.
In assessing financial instruments with off-balance-sheet risk, the Company is
exposed to potential credit loss in the event of nonperformance by The First
National Bank of Boston or National Bank of Canada. 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.
48