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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO.
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MICROFINANCIAL INCORPORATED
(Exact name of Registrant as Specified in its Charter)
MASSACHUSETTS 04-2962824
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
10M COMMERCE WAY, WOBURN, MA 01801
(Address of Principal Executive Offices) (zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(781) 994-4800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Shares, $0.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant, computed by reference to the closing price
of such stock as of June 28 2002, was approximately $63,960,000.
As of March 31, 2003, 13,141,800 shares of the registrant's common stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE
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TABLE OF CONTENTS
PAGE
DESCRIPTION NUMBER
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PART I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 10
Item 6. Selected Financial Data..................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 7a. Quantitative and Qualitative Disclosures about Market
Risk........................................................ 19
Item 8. Financial Statements and Supplementary Data, Including
Selected Quarterly Financial Data (Unaudited)............... 20
Item 9. Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 20
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 20
Item 11. Executive Compensation...................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
Item 13. Certain Relationships and Related Transactions.............. 29
Item 14. Controls and Procedures..................................... 30
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 31
SIGNATURES................................................................ 34
CERTIFICATIONS............................................................ 35
1
PART I
ITEM 1. BUSINESS
GENERAL
MicroFinancial Incorporated ("MicroFinancial" or the "Company") was formed
as a Massachusetts corporation on January 27, 1987. 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 $15,000, with an average amount financed of approximately $1,500
and an average lease term of 44 months. Leasecomm Corporation started
originating leases in January 1986. The Company has used proprietary software in
developing a sophisticated, risk-adjusted pricing model and in automating its
credit approval and collection systems, including a fully-automated,
Internet-based application, credit scoring and approval process.
The Company provides financing to lessees which may have few other sources
of credit. The Company primarily leases and rents low-priced commercial
equipment which is used by these lessees in their daily operations. The Company
does not market its services directly to lessees, but sources leasing
transactions through a nationwide network of over 1,000 independent sales
organizations and other dealer-based origination networks ("Dealers").
The majority of the Company's leases are currently for authorization
systems for point-of-sale, card-based payments by, for example, debit, credit
and charge cards ("POS authorization systems"). POS authorization systems
require the use of a POS terminal capable of reading a cardholder's account
information from the card's magnetic strip and combining this information with
the amount of the sale entered via a POS terminal keypad, or POS software used
on a personal computer to process a sale. The terminal electronically transmits
this information over a communications network to a computer data center and
then displays the returned authorization or verification response on the POS
terminal.
As of September 30, 2002, the Company's credit facility failed to renew. As
a result, in October 2002, the Company made the decision to suspend new contract
originations until a source of funding is obtained. The Company is currently
working with a capital advisory firm in an effort to obtain a new line of credit
in order to resume funding activity. The Company remains hopeful that a new
funding facility can be in place in a reasonable period of time.
LEASING, SERVICING AND FINANCING PROGRAMS
The Company originates leases for products that typically have limited
distribution channels and high selling costs. The Company facilitates sales of
such products by making them available to Dealers' customers for a small monthly
lease payment rather than a high initial purchase price. The Company primarily
leases and rents low-priced commercial equipment to small merchants. The
majority of the Company's leases are currently for POS authorization systems;
however, the Company also leases a wide variety of other equipment including
advertising and display equipment, coffee machines, paging systems, water
coolers and restaurant equipment. In addition, the Company also acquires service
contracts and contracts in certain other financing markets. The Company
opportunistically seeks to enter various other financing markets.
The Company's residential financings include acquiring service contracts
from Dealers that provide security monitoring services, primarily.
The Company originates and services leases, contracts and loans in all 50
states of the United States and its territories. As of December 31, 2001 and
2002, leases in California, Florida, Texas, Massachusetts and New York accounted
for approximately 42% of the Company's portfolio. Only California accounted for
more than 10% of the total portfolio as of December 31, 2001 and 2002 at
approximately 14%. None of the remaining states accounted for more than 4% of
such total.
2
TERMS OF EQUIPMENT LEASES
Substantially all equipment leases originated or acquired by the Company
are non-cancelable. In a typical lease transaction, the Company originates
leases referred to it by the Dealer and buys the underlying equipment from the
referring Dealer upon the funding of an approved application. Leases are
structured with limited recourse to the Dealer, with risk of loss in the event
of default by the lessee residing with the Company in most cases. The Company
performs all processing, billing and collection functions under its leases.
During the term of a typical lease, the Company is scheduled to receive
payments sufficient, in the aggregate, to cover the Company's borrowing costs
and the costs of the underlying equipment, and to provide the Company with an
appropriate profit. Throughout the term of the lease, the Company charges late
fees, prepayment penalties, loss and damage waiver fees and other service fees,
when applicable. Initial terms of the leases in the Company's portfolio
generally range from 12 to 48 months, with an average initial term of 44 months
as of December 31, 2002.
The terms and conditions of all of the Company's leases are substantially
similar. In most cases, the contracts require lessees to: (i) maintain, service
and operate the equipment in accordance with the manufacturer's and
government-mandated procedures; (ii) insure the equipment against property and
casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make
all scheduled contract payments regardless of the performance of the equipment.
The Company's standard lease forms provide that in the event of a default by the
lessee, the Company can require payment of liquidated damages and can seize and
remove the equipment for subsequent sale, refinancing or other disposal at its
discretion. Any additions, modifications or upgrades to the equipment,
regardless of the source of payment, are automatically incorporated into, and
deemed a part of, the equipment financed.
The Company seeks to protect itself from credit exposure relating to
poor-quality Dealers by entering into limited recourse agreements with its
Dealers, under which the Dealer agrees to reimburse the Company for payment of
defaulted amounts under certain circumstances, primarily defaults within the
first month following origination, and upon evidence of Dealer errors or
misrepresentations in originating a lease or contract.
RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT
The Company typically owns a residual interest in the equipment covered by
a lease. At the end of the lease term, the lease typically converts into a
month-to-month rental contract. If the lease does not convert, the lessee either
buys the equipment at a price quoted by the Company or returns the equipment. If
the equipment is returned, the Company may either sell the equipment, or place
it into its used equipment rental or leasing program.
SERVICE CONTRACTS
In a typical transaction for the acquisition of service contracts, a
homeowner will purchase a security system and simultaneously sign a contract
with the Dealer for the monitoring of that system for a monthly fee. The Dealer
will then sell the right to payment under that contract to the Company for a
multiple of the monthly payments. The Company performs all processing, billing
and collection functions under these contracts.
DEALERS
The Company provides financing to obligors under microticket leases,
contracts and loans through its Dealers. The Company had over 1,000 different
Dealers originating 50,106 Company leases, contracts and loans in 2002. One
dealer accounted for approximately 10.6%, 4.5%, and .22% of all originations
during the years ended December 31, 2000, 2001, and 2002, respectively. Another
dealer accounted for approximately 4.89%, 7.38%, and 10.98% of all originations
during the years ended December 31, 2000, 2001, and 2002, respectively. No other
dealer accounted for more than 10% of the Company's origination volume during
the years ended December 31, 2000, 2001, or 2002.
3
The Company does not sign exclusive agreements with its Dealers. Dealers
interact with merchants directly and typically market not only POS authorization
systems, but also financing through the Company and ancillary POS processing
services.
USE OF TECHNOLOGY
The Company's business is operationally intensive, due in part to the small
average amount financed. Accordingly, technology and automated processes are
critical in keeping servicing costs to a minimum while providing quality
customer service.
The Company has developed LeasecommDirect(TM), an Internet-based
application processing, credit approval and Dealer information tool. Using
LeasecommDirect(TM), a Dealer can input an application directly to the Company
via the Internet and obtain almost instantaneous approval automatically over the
Internet through the Company's computer system, all without any contact with any
employee of the Company. The Company also offers Instalease(R), a program that
allows a Dealer to submit applications by telephone, telecopy or e-mail to a
Company representative, receive approval, and complete a sale from a lessee's
location. By assisting the Dealers in providing timely, convenient and
competitive financing for their equipment or service contracts and offering
Dealers a variety of value-added services, the Company simultaneously promotes
equipment and service contract sales and the utilization of the Company as the
finance provider, thus differentiating the Company from its competitors.
The Company has used its proprietary software to develop a multidimensional
credit-scoring model which generates pricing of its leases, contracts and loans
commensurate with the risk assumed. This software does not produce a binary "yes
or no" decision, but rather, determines the price at which the lease, contract
or loan can be profitably underwritten. The Company uses credit scoring in most,
but not all, of its extension of credit.
UNDERWRITING
The nature of the Company's business requires two levels of review: the
first focused on the ultimate end-user of the equipment or service and the
second focused on the Dealer. The approval process begins with the submission by
telephone, facsimile or electronic transmission of a credit application by the
Dealer. Upon submission, the Company, either manually or through
LeasecommDirect(TM) over the Internet, conducts its own independent credit
investigation of the lessee through its own proprietary database and recognized
commercial credit reporting agencies such as Dun & Bradstreet, Experian, Equifax
and TransUnion. The Company's software evaluates this information on a
two-dimensional scale, examining both credit depth (how much information exists
on an applicant) and credit quality (past payment history). The Company is thus
able to analyze both the quality and amount of credit history available with
respect to both obligors and Dealers and to assess the credit risk. The Company
uses this information to underwrite a broad range of credit risks and provide
financing in situations when its competitors may be unwilling to provide such
financing. The credit-scoring model is complex and automatically adjusts for
different transactions. In situations where the amount financed is over $6,000,
the Company may go beyond its own data base and recognized commercial credit
reporting agencies to obtain information from less readily available sources
such as banks. In certain instances, the Company will require the lessee to
provide verification of employment and salary.
The second aspect of the credit decision involves an assessment of the
originating Dealer. Dealers undergo both an initial screening process and
ongoing evaluation, including an examination of Dealer portfolio credit quality
and performance, lessee complaints, cases of fraud or misrepresentation, aging
studies, number of applications and conversion rates for applications. This
ongoing assessment enables the Company to manage its Dealer relationships,
including ending relationships with poorly performing Dealers.
Upon credit approval, the Company requires receipt of signed lease
documentation on the Company's, standard or other pre-approved, lease form
before funding. Once the equipment is shipped and installed, the Dealer invoices
the Company, and thereafter, the Company verifies that the lessee has received
and accepted the equipment. Upon the lessee authorizing payment to the Dealer,
the lease is forwarded to the Company's funding and documentation department for
funding, transaction accounting, and billing procedures.
4
BULK AND PORTFOLIO ACQUISITIONS
In addition to originating leases through its Dealer relationships, the
Company, from time to time, has purchased lease portfolios from Dealers. The
Company purchases leases from Dealers on an ongoing basis in packages ranging
from $20,000 to $200,000. While certain of these leases initially do not meet
the Company's underwriting standards, the Company often will purchase the leases
once the lessee demonstrates a payment history. The Company will only acquire
these smaller lease portfolios in situations where the company selling the
portfolio will continue to act as a Dealer following the acquisition. The
Company has also completed the acquisition of six large POS authorization system
lease and rental portfolios: two in 1996, one in 1998, one in 1999, one in 2000
and the acquisition of the rental and lease portfolio of Resource Leasing in
2001. The acquisition, completed in September of 1999, consisted of 2,148 leases
with fundings of $3.2 million. The acquisition, completed in April of 2000,
consisted of 7,085 rental contracts and 1,996 lease contracts, together totaling
fundings of $5.5 million. On January 3, 2001, the Company acquired the rental
and lease portfolio of Resource Leasing Corporation ("Resource") along with
certain other assets. The acquisition consisted of 7,862 rental contracts and
326 lease contracts.
SERVICING AND COLLECTIONS
The Company performs all servicing functions on its leases, contracts and
loans, including its securitized leases, through its automated servicing and
collection system. Servicing responsibilities generally include billing,
processing payments, remitting payments to Dealers and investors in the
Company's securitization programs (the "Securitizations"), preparing investor
reports, paying taxes and insurance and performing collection and liquidation
functions.
The Company's automated lease administration system handles application
tracking, invoicing, payment processing, automated collection queuing, portfolio
evaluation and report writing. The system is linked with bank accounts for
payment processing and provides for direct withdrawal of lease, contract and
loan payments. The Company monitors delinquent accounts using its automated
collection process. The Company uses several computerized processes in its
customer service and collection efforts, including the generation of daily
priority call lists and scrolling for daily delinquent account servicing,
generation and mailing of delinquency letters, and routing of incoming customer
service calls to appropriate employees with instant computerized access to
account details. The Company's collection efforts include one or more of the
following: sending collection letters, making collection calls, reporting
delinquent accounts to credit reporting agencies, and litigating delinquent
accounts when necessary and obtaining and enforcing judgments. The Company also
has started to use a collectability scoring model to determine if the benefits
from further collection efforts will out weigh the costs associated with those
efforts.
COMPETITION
The microticket leasing and financing industry is highly competitive. The
Company competes for customers with a number of national, regional and local
banks and finance companies. The Company's competitors also include equipment
manufacturers that lease or finance the sale of their own products. While the
market for microticket financing has traditionally been fragmented, the Company
could also be faced with competition from small- or large-ticket leasing
companies that could use their expertise in those markets to enter and compete
in the microticket financing market. The Company's competitors include larger,
more established companies, some of which may possess substantially greater
financial, marketing and operational resources than the Company, including a
lower cost of funds and access to capital markets and to other funding sources
which may be unavailable to the Company.
EMPLOYEES
As of December 31, 2002, the Company had 203 full-time employees, of whom 7
were engaged in credit activities and Dealer service, 136 were engaged in
servicing and collection activities, 1 was engaged in marketing activities, and
59 were engaged in general administrative activities. Management believes that
its
5
relationship with its employees is good. No employees of the Company are members
of a collective bargaining unit in connection with their employment by the
Company.
AVAILABILITY OF INFORMATION
The Company will provide without charge to each of its stockholders upon
the written request of such person, a copy of the Company's Annual Report on
Form 10K for its fiscal year ended December 31, 2002, including the financial
statements and the financial statement schedules, required to be filed with the
Securities and Exchange Commission. Requests for such document should be
directed to Richard F. Latour, Chief Executive Officer, at 10M Commerce Way,
Woburn, Massachusetts 01801.
ITEM 2. PROPERTIES
The Company's corporate headquarters and operations center are located in
leased space of 44,659 square feet of office space at 10M Commerce Way, Woburn
Massachusetts 01801. The lease for this space expires on December 14, 2003. The
Company also leases 5,133 square feet of office space for its West Coast office
in Newark, California, under a lease that expires on May 1, 2005. The Company
also leases 21,656 square feet of office space in Waltham, Massachusetts, under
a lease that expires on July 31, 2004.
On January 3, 2001, the Company acquired certain assets and assumed certain
liabilities of Resource Leasing Corporation. As a result of this transaction,
the Company occupied 15,399 square feet of office space in Herndon, Virginia.
The Company is no longer utilizing the facilities in Newark, California and
Herndon, Virginia. Also, the Company is in the process of moving its
headquarters from Waltham, Massachusetts to its facility in Woburn,
Massachusetts.
ITEM 3. LEGAL PROCEEDINGS
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 proceedings, and a claim
in this amount has been filed with the bankruptcy court. 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. The Company's motion
for summary judgment seeking dismissal of the counterclaim and the award of full
damages on the Company's claims was denied by Court Order, without a written
decision. The Company's motion for the appointment of a special master was also
denied without a written decision. Because of the uncertainties inherent in
litigation, we cannot predict whether the outcome will have a material adverse
effect.
6
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 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. The Company has filed an Answer denying the claims. Because of
the uncertainties inherent in litigation, we 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 alleged
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. Leasecomm has
subsequently settled this matter with Court approval.
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.
On November 25, 2002 Leasecomm and E-Commerce Exchange agreed to settle the case
with Ms. Copitka and a class of residents of Texas who leased Quickcommerce or
QuickcommercePro software licenses from Leasecomm. The Travis County District
Court entered its order approving the class settlement and entered its final
judgement in the case on January 24, 2003. Leasecomm has satisfied its
obligations under the Settlement, and the time to appeal has expired.
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.
The Court granted final approval of the class action Settlement on December
2, 2002. Leasecomm has satisfied its obligations under the Settlement, and the
time to appeal has expired. The Court retains jurisdiction to oversee any issues
that may arise regarding administration of the settlement.
F. In October, 2002, the Company was served with a Complaint in an action
in the United States District Court for the Southern District of New York filed
by approximately 170 present and former lessees asserting individual claims. The
Complaint contains claims for violation of RICO (18 U.S.C. sec. 1964), fraud,
unfair and deceptive acts and practices, unlawful franchise offerings, and
intentional infliction of mental anguish. The claims purportedly arise from
Leasecomm's dealer relationships with Themeware, E-Commerce Exchange,
Cardservice International, Inc., and Online Exchange for the leasing of websites
and virtual terminals. The Complaint asserts that the Company is responsible for
the conduct of its dealers in trade shows,
7
infomercials and web page advertisements, seminars, direct mail, telemarketing,
all which are alleged to constitute unfair and deceptive acts and practices.
Further, the Complaint asserts that Leasecomm's lease contracts as well as its
collection practices and late fees are unconscionable. The Complaint seeks
restitution, compensatory and treble damages, and injunctive relief. The Company
filed a Motion to Dismiss the Complaint on January 31, 2003, and expects that
the Motion will be argued sometime after May 6, 2003. Because of the
uncertainties inherent in litigation, we cannot predict whether the outcome will
have a material adverse effect.
G. On March 31, 2002, plaintiffs Robert Hayden and Renono Wesley filed a
Complaint against Leasecomm Corporation alleging a violation of California
Business & Professions Code Section 17200. The Complaint was filed on behalf of
Hayden and Wesley individually, on behalf of a class of people similarly
situated, and on behalf of the general public. The case is venued in San
Francisco Superior Court. Specifically, plaintiffs allege that Leasecomm's
practice of filing suits against lessees in Massachusetts courts constitutes an
unfair business practice under California law. On March 12, 2003, the San
Francisco County Superior Court granted Leasecomm's Motion to dismiss this
action.
H. On August 22, 2002 plaintiff Aaron Cobb filed a Complaint against
Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as
Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit;
Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of
Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb
individually, and on behalf of a class of persons and entities similarly
situated in the State of Alabama. More specifically, the Plaintiff purports to
represent a class of persons and small business in the State of Alabama who
allegedly were induced to purchase services and/or goods from any of the
Defendants named in the Complaint. The case is venued in Bullock County,
Alabama. On March 31, 2003 the trial court entered an Order denying the
Company's Motion to Dismiss. This Order is currently being reviewed and in all
likelihood will be appealed to the Alabama Supreme Court. The appeal must be
filed within 45 days of the entry of the Order. Should the appeal not be filed
or should the Company otherwise be unsuccessful with its appeal the discovery in
this case would commence with the first efforts being directed toward the Class
Certification issues. The Company continues to deny any wrongdoing and plans to
vigorously defend this claim. Because of the uncertainties inherent in
litigation, the company cannot predict whether the outcome will have a material
adverse affect.
I. In March, 2003, an action was filed by a shareholder against the
Company in United States District Court asserting a single count of common law
fraud and constructive fraud. The complaint alleges that the shareholder was
defrauded by untrue statements made to him by management, upon which he relied
in the purchase of Company stock for himself and for others. The complaint seeks
damages in an unspecified amount. Because of the uncertainties inherent in
litigation, we cannot predict whether the outcome will have a material adverse
effect.
J. In March, 2003, a purported class action was filed in Superior Court in
Massachusetts against Leasecomm and one of its dealers. The class sought to be
certified is a nationwide class (excluding certain residents of the State of
Texas) who signed identical or substantially similar lease agreements with
Leasecomm covering the same product. The complaint asserts claims for
declaratory relief, rescission, civil conspiracy, usury, breach of fiduciary
duty, and violation of Massachusetts General Laws Chapter 93A, Section 11
("Chapter 93A"). The claims concern the validity, enforceability, and alleged
unconscionability of agreements provided through the dealer, including a
Leasecomm lease, to acquire on line credit card processing services. The
complaint seeks rescission of the lease agreements with Leasecomm, restitution,
multiple damages and attorneys fees under Chapter 93A, and injunctive relief.
Because of the uncertainties inherent in litigation we cannot predict whether
the outcome will have a material adverse effect.
Leasecomm has been served with Civil Investigative Demands by the Offices
of the Attorney General for the states of Kansas, Illinois, Florida, and Texas,
and for the Commonwealth of Massachusetts. Those Offices of the Attorney
General, in conjunction with the Northwest Region Office of the Federal Trade
Commission, the Offices of the Attorney General for North Carolina and North
Dakota, and the Ventura County, California, District Attorney's Office, have
informed Leasecomm that they are seeking to coordinate their investigations
(collectively, the "Government Investigators"). At this time, the principal
focus of the
8
investigations appears to be software license leases (principally virtual
terminals) and leases from certain vendor/dealers whose activities included
business opportunity seminars. Leasecomm has further been informed that the
investigations cover certain lease provisions, including the forum selection
clause and language concerning the non-cancellability of the lease. In addition,
the investigations include, among other things, whether Leasecomm's lease
termination, or rollover, provisions, are legally sufficient; whether a
Leasecomm lease is an enforceable lease; whether there were potential problems
with its leases of which Leasecomm had knowledge; whether the leases are
enforceable in accordance with their terms; whether three day right of
rescission notices were required and, if required, whether proper notices were
given; whether any lease prices were unconscionable; whether the lease of a
software license is the lease of a service, not a good; whether any lease of
satellites or computers are leases to consumers which must comply with certain
consumer statutes; whether electronic fund transfer payments pursuant to a lease
violate Reg. E; whether any Leasecomm billing and collection practices or
charges are unreasonable, or constitute unfair or deceptive trade practices;
whether Leasecomm's course of dealings with its vendors/dealers makes Leasecomm
liable for any of the activities of its vendors/dealers. In April, 2002,
Leasecomm and the Government Investigators entered into provisional relief and
tolling agreements which provide for Leasecomm to take certain interim actions,
temporarily stop the running of the statute of limitations as of January 29,
2002, and require advance notice by Leasecomm of its withdrawal from the
provisional relief agreement and advance notice by each of the Government
Investigators of its intention to commence legal action. The tolling agreement
has been extended several times and is set to expire in May, 2003.
In February, 2003, Leasecomm received a Civil Investigative Demand from the
Office of the Attorney General, State of Washington, to which a response is
currently due in April, 2003. The Civil Investigative Demand concerns an
investigation of monitoring agreements between Priority One, Inc. and various
State of Washington consumers, as to which Leasecomm appears to be the assignee
of the right to receive monthly payments.
Since the investigations are in process, and no legal action has been
commenced against Leasecomm, there can be no assurance as to the eventual
outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of its fiscal year ended December 31, 2002.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's common stock, par value $0.01 per share (the "Common Stock"),
is listed on the New York Stock Exchange under the symbol "MFI."
2001 2002
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
BY QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ------- ------- ------- ------- ------- ------- ------- -------
Stock Price
High................. 14.00 17.00 16.75 14.00 10.50 10.93 9.30 4.44
Low.................. 10.50 11.00 12.40 9.48 6.40 7.24 4.01 .99
(b) Holders
At March 14, 2003, there were approximately 825 stockholders of record of
the Common Stock.
(c) Dividends
The Company paid the following quarterly cash dividends on the Common
Stock.
YEAR ENDED YEAR ENDED
DECEMBER 31, 2001 DECEMBER 31, 2002
----------------- -----------------
First Quarter....................................... $0.045 $0.050
Second Quarter...................................... $0.050 $0.050
Third Quarter....................................... $0.050 $0.050
Fourth Quarter...................................... $0.050 --
During the fourth quarter of 2002, the Board of Directors suspended the
future payment of dividends to comply with the Company's banking agreements.
Provisions in certain of the Company's credit facilities and agreements
governing its subordinated debt contain, and the terms of any indebtedness
issued by the Company in the future are likely to contain, certain restrictions
on the payment of dividends on the Common Stock. The decision as to the amount
and timing of future dividends paid by the Company, if any, will be made at the
discretion of the Company's Board of Directors in light of the financial
condition, capital requirements, earnings and prospects of the Company and any
restrictions under the Company's credit facilities or subordinated debt
agreements, as well as other factors the Board of Directors may deem relevant,
and there can be no assurance as to the amount and timing of payment of future
dividends.
(d) Recent Sales of Unregistered Securities
Not applicable
(e) Use of Proceeds from Registered Securities
Not applicable
10
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
operating data for the Company and its subsidiaries for the periods and at the
dates indicated. The selected financial data were derived from the financial
statements and accounting records of the Company. The data presented below
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1998 1999 2000 2001 2002
------- ------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Income Statement Data:
Revenues
Income on financing leases and loans.... $47,341 $55,545 $ 69,847 $ 70,932 $ 53,012
Income on service contracts............. 2,565 6,349 8,687 8,665 9,734
Rental income........................... 16,118 21,582 27,638 37,664 37,154
Other income(1)......................... 18,248 24,802 33,305 36,830 26,922
------- ------- -------- -------- --------
Total revenues.................. 84,272 108,278 139,477 154,091 126,822
------- ------- -------- -------- --------
Expenses:
Selling, general and administrative..... 27,434 33,827 38,371 44,899 45,535
Provision for credit losses............. 19,075 37,836(2) 38,912 54,092 88,948(3)
Depreciation and amortization........... 5,076 7,597 10,227 14,378 18,385
Interest................................ 12,553 10,781 15,858 14,301 10,787
------- ------- -------- -------- --------
Total expenses.................. 64,138 90,041 103,368 127,670 163,655
------- ------- -------- -------- --------
Income (loss) before provision (benefit)
for income taxes........................ $20,134 $18,237 $ 36,109 $ 26,421 $(36,833)
======= ======= ======== ======== ========
Net income (loss)......................... $11,924 $10,728 $ 20,860 $ 16,317 $(22,098)
======= ======= ======== ======== ========
Net income (loss) per common share
Basic(4)................................ $ 1.21 $ 0.84 $ 1.64 $ 1.28 $ (1.72)
Diluted(5).............................. 1.19 0.83 1.63 1.26 (1.72)
Dividends per common share................ 0.14 0.16 0.18 0.20 0.15
DECEMBER 31,
-------------------------------------------------------
1998 1999 2000 2001 2002
-------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS)
Balance Sheet Data:
Gross investment in leases and
loans(6)........................... $280,875 $ 362,721 $ 452,885 $ 438,723 $367,173
Unearned income...................... (74,520) (100,815) (132,687) (104,538) (67,574)
Allowance for credit losses.......... (24,850) (41,719) (40,924) (45,026) (69,294)
Investment in service contracts...... 8,920 14,250 12,553 14,126 14,463
Total assets............... 210,254 265,856 342,602 361,728 295,085
Notes payable........................ 130,421 144,871 201,991 203,053 168,927
Subordinated notes payable........... 24,421 9,238 4,785 3,262 3,262
Total liabilities.......... 180,771 187,018 246,579 251,172 208,482
Total stockholders'
equity................... 29,483 78,838 96,023 110,556 86,603
11
DECEMBER 31,
----------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT STATISTICAL DATA)
Other Data:
Operating Data:
Total leases and loans
originated(7)................. $ 153,819 $ 223,446 $ 236,763 $ 155,308 $111,829
Total service contracts
acquired(8)................... 8,080 9,105 4,138 6,658 6,773
Total rental contracts
originated.................... 4,306 220 5,686 12,379 677
Dealer fundings(9)............... 105,200 137,300 145,400 111,100 74,000
Average yield on leases and
loans(10)..................... 35.2% 36.8% 38.0% 38.1% 36.9%
Cash Flows From (used in):
Operating activities............. $ 95,973 $ 114,723 $ 116,360 $ 122,280 $120,628
Investing activities............. (108,111) (147,587) (157,947) (116,860) (80,141)
Financing activities............. 10,529 33,123 43,081 (10,104) (35,139)
--------- --------- --------- --------- --------
Total.................... (1,609) 259 1,494 (4,684) 5,348
Selected Ratios:
Return on average assets......... 6.12% 4.51% 6.86% 4.63% (6.73)%
Return on average stockholders'
equity........................ 49.43 19.81 23.86 15.80 (22.42)
Operating margin(11)............. 46.53 51.79 53.79 52.25 41.09
Credit Quality Statistics:
Net charge-offs.................. $ 20,544 $ 20,967 $ 37,888(2) $ 51,408(2) $ 65,081(3)
Net charge-offs as a percentage
of average gross
investment(12)................ 7.47% 6.29% 9.00% 11.20% 15.60%
Provision for credit losses as a
percentage of average gross
investment(13)................ 6.93 11.35 9.24 11.78 21.32
Allowance for credit losses as a
percentage of gross
investment(14)................ 8.58 11.07 8.79 9.94 18.16
---------------
(1) Includes loss and damage waiver fees, service fees, interest income, and
equipment sales revenue.
(2) The provision for 1999 includes a special provision of $12.7 million for a
loan made to one company, collateralized by approximately 3,500 microticket
consumer contracts, and guaranteed by, among other security, an insurance
performance bond. MicroFinancial is currently involved in litigation with
the Company and the insurance company. Charge-offs against the special
reserve were $6.4 and $7.1 million for the years ended December 31, 2000
and 2001, respectively.
(3) The provision for 2002 includes an additional provision of $35.0 million to
reserve against certain dealer receivables as well as delinquent portfolio
assets. In the past, dealer receivables had been offset, in some instances,
against the funding of new contracts. Since the Company has suspended the
funding of new deals, Management feels that the collection of these
receivables will be more difficult. Although the Company will continue to
pursue collections on these accounts, management believes that the cost
associated with the legal enforcement would outweigh the benefits realized.
(4) Net income per common share (basic) is calculated based on weighted-average
common shares outstanding of 9,859,127, 12,795,809, 12,728,441, 12,789,605,
and 12,821,946 for the years ended December 31, 1998, 1999, 2000, 2001, and
2002, respectively.
(5) Net income per common share (diluted) is calculated based on
weighted-average common shares outstanding on a diluted basis of
10,031,975, 12,904,231, 12,807,814, 12,945,243, and 12,862,834 for the
years ended December 31, 1998, 1999, 2000, 2001, and 2002 respectively.
(6) Consists of receivables due in installments, estimated residual value, and
loans receivable.
12
(7) Represents the amount paid to Dealers upon funding of leases and loans,
plus the associated unearned income.
(8) Represents the amount paid to Dealers upon the acquisition of service
contracts, including both noncancelable service contracts and
month-to-month service contracts.
(9) Represents the amount paid to Dealers upon funding of leases, contracts and
loans.
(10) Represents the aggregate of the implied interest rate on each lease and
loan originated during the period weighted by the amount funded at
origination for each such lease and loan.
(11) Represents income before provision for income taxes and provision for
credit losses as a percentage of total revenues.
(12) Represents net charge-offs as a percentage of average gross investment in
leases and loans and investment in service contracts.
(13) Represents provision for credit losses as a percentage of average gross
investment in leases and loans and investment in service contracts.
(14) Represents allowance for credit losses as a percentage of gross investment
in leases and loans and investment in service contracts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion includes forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995). When used
in this discussion, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: the Company's dependence on POS authorization
systems and expansion into new markets; the Company's significant capital
requirements; the risks of defaults on the Company's leases; adverse
consequences associated with the Company's collection policy; risks associated
with economic downturns; the effect on the Company's portfolio of higher
interest rates; intense competition; increased governmental regulation of the
rates and methods used by the Company in financing and collecting its leases and
loans; risks associated with acquiring other portfolios and companies;
dependence on key personnel; and other factors, many of which are beyond the
Company's control. The Company expressly disclaims any obligation or undertaking
to disseminate any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained herein will in fact
transpire.
OVERVIEW
The Company is a specialized commercial finance company that provides
"microticket" equipment leasing and other financing services in amounts
generally ranging from $400 to $15,000, with an average amount financed of
approximately $1,500. The Company primarily leases POS authorization systems and
other small business equipment to small commercial enterprises. For the years
ended December 31, 2001 and 2002, the Company had fundings to Dealers upon
origination of leases, contracts and loans ("Dealer Fundings") of $111.1 million
and $74.0 million, respectively, and revenues of $154.0 million and $126.4
million, respectively.
The Company derives the majority of its revenues from leases originated and
held by the Company, payments on service contracts, rental payments, and fee
income. The Company funds the majority of leases, contracts and loans through
its revolving-credit and term loan facilities (the "Credit Facilities") and on-
balance sheet securitizations, and to a lesser extent, its subordinated debt
program ("Subordinated Debt") and internally generated funds. As of September
30, 2002, the credit facility failed to renew and the Company
13
has been paying down the balance on the basis of a 36 month amortization plus
interest. At December 31, 2002, the Company was in default of certain of its
debt covenants in its credit facility and securitization agreements. The
covenants that were in default with respect to the credit facility, require that
the Company maintain a fixed charge ratio in an amount not less than 130% of
consolidated earnings, a consolidated tangible net worth minimum of $77.5
million plus 50% of net income quarterly beginning with September 30, 2000 and
compliance with the borrowing base. The covenants that were in default with
respect to the securitization agreements, require that the Company maintain a
fixed charge ratio in an amount not less than 125% of consolidated earnings and
a consolidated tangible net worth greater than $90 million plus 50% of net
income for each fiscal quarter after June 30, 2001. On April 14, 2003, the
Company entered into a long-term agreement with its lenders. This long-term
agreement waives the defaults described above, and in consideration for this
waiver, requires the outstanding balance of the loan to be repaid over a term of
22 months beginning in April 2003 at an interest rate of prime plus 2.0%. The
Company received a waiver, which was set to expire on April 15, 2003, for the
covenant violations in connection with the securitization agreement.
Subsequently, the Company received a permanent waiver of the covenant defaults
and the securitization agreement was amended so that going forward, the
covenants are the same as those contained in the long-term agreement entered
into on April 14, 2003, for the senior credit facility. In October 2002, the
Company made the decision to suspend new contract originations until a source of
funding is obtained. The Company is currently in the process of pursuing
alternative financing sources.
The Company has been advised by the New York Stock Exchange (NYSE) that it
is currently not in compliance with the NYSE's continued listing standards.
Specifically, the Company does not meet the following requirements based on a
consecutive thirty (30) day trading period; average market capitalization of not
less than $15 million and a share price of not less than $1.00. In accordance
with the continued listing criteria set forth by the NYSE, the Company has
presented a plan which management believes has the potential to bring the
Company back into compliance with the listing standards within the required
timeframes. The NYSE is currently reviewing the plan that was submitted on April
1, 2003.
In a typical lease transaction, the Company originates leases through its
network of independent Dealers. Upon approval of a lease application by the
Company and verification that the lessee has both received the equipment and
signed the lease, the Company pays the Dealer the cost of the equipment, plus
the Dealer's profit margin. In a typical transaction for the acquisition of
service contracts, a homeowner purchases a security system and simultaneously
signs a contract with the Dealer for the monitoring of that system for a monthly
fee. Upon credit approval of the monitoring application and verification with
the homeowner that the system is installed, the Company purchases from the
Dealer the right to the payment stream under that monitoring contract at a
negotiated multiple of the monthly payments.
Substantially all leases originated or acquired by the Company are
noncancelable. During the term of the lease, the Company is scheduled to receive
payments sufficient, in the aggregate, to cover the Company's borrowing costs
and the costs of the underlying equipment, and to provide the Company with an
appropriate profit. The Company enhances the profitability of its leases,
contracts and loans by charging late fees, prepayment penalties, loss and damage
waiver fees and other service fees, when applicable. The initial noncancelable
term of the lease is equal to or less than the equipment's estimated economic
life and often provides the Company with additional revenues based on the
residual value of the equipment financed at the end of the initial term of the
lease. Initial terms of the leases in the Company's portfolio generally range
from 12 to 48 months, with an average initial term of 44 months as of December
31, 2002. Substantially all service and rental contracts are month-to-month
contracts with expected terms of 7 years for service contracts, 15 months for
lessees that continue to rent their equipment beyond the original term, and 22
months for other types of rental contracts.
CRITICAL ACCOUNTING POLICIES
In response to the SEC's release No. 33-8040, "Cautionary Advice regarding
Disclosure About Critical Accounting Policies," Management identified the most
critical accounting principles upon which our financial status depends. The
Company determined the critical principles by considering accounting policies
that involve the most complex or subjective decisions or assessments. We
identified our most critical accounting
14
policies to be those related to revenue recognition and maintaining the
allowance for credit losses. These accounting policies are discussed below as
well as within the notes to the consolidated financial statements.
The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and initial direct costs incurred are amortized
over the related lease term using the interest method. Amortization of unearned
lease income and initial direct costs is suspended if, in the opinion of
management, full payment of the contractual amount due under the lease agreement
is doubtful. 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. Other revenues such as loss and damage
waiver fees, service fees relating to the leases, contracts and loans, and
rental revenues are recognized as they are earned.
The Company's investments in cancelable service contracts are recorded at
cost and amortized over the expected life of the service period. Income on
service contracts from monthly billings is recognized 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. Rental equipment is either recorded at
estimated residual value and depreciated using the straight-line method over a
period of 12 months or at the acquisition cost and depreciated using the
straight line method over a period of 36 months. Loans are reported at their
outstanding principal balance. Interest income on loans is recognized as it is
earned.
The Company maintains an allowance for credit losses on its investment in
leases, service contracts, rental 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, rental 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, rental contracts and loans. Such provisions generally represent a
percentage of funded amounts of leases, contracts and loans. The resulting
charge is included in the provision for credit losses.
Leases, service contracts, rental contracts and loans are charged against
the allowance for credit losses and are put on non-accrual when they are deemed
to be uncollectable. Generally, the Company deems leases, service contracts,
rental contracts and loans to be uncollectable when one of the following occurs:
(i) the obligor files for bankruptcy; (ii) the obligor dies, and the equipment
is returned; or (iii) when an account has become 360 days delinquent without
contact with the lessee. The typical monthly payment under the Company's leases
is between $30 and $50 per month. As a result of these small monthly payments,
the Company's experience is that lessees will pay past due amounts later in the
process because of the small amount necessary to bring an account current (at
360 days past due, a lessee will only owe lease payments of between $360 and
$600).
The Company has developed and regularly updates proprietary credit scoring
systems designed to improve its risk-based pricing. The Company uses credit
scoring in most, but not all, of its extensions of credit. In addition, the
Company aggressively employs collection procedures and a legal process to
resolve any credit problems.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Total revenues for the year ended December 31, 2002 were $126.8 million, a
decrease of $27.3 million, or 17.7%, from the year ended December 31, 2001, due
primarily to decreases of $17.9 million, or 25.3%, in
15
income on financing leases and loans and $9.8 million, or 32.2%, in service fee
and other income; offset by an increase of $559,000, or 1.2% in rental and
service contract income over such amounts in the previous year's period. The
decrease in income on financing leases and loans was due to the decreased number
of leases originated primarily resulting from the Company's decision during the
third quarter of 2002 to suspend the funding of new contracts. The decrease in
fee income and other income is the result of decreased fees from the lessees
related to the collection and legal process employed by the Company. The
increase in rental and service contract income is a result of the increased
number of lessees that have continued to rent their equipment beyond their
original lease term, the acquisition of the rental portfolio of Resource Leasing
Corporation, and increased originations in rental and service contracts.
Selling, general and administrative expenses increased by $636,000 or 1.4%,
for the year ended December 31, 2002 as compared to the year ended December 31,
2001. Marketing programs increased by $1.4 million or 117.2%, due to increased
dealer payments made on a portfolio of leases acquired in 2002. Legal services
increased by $2.2 million or 198.2%, primarily due to costs incurred for the
different class actions and investigations and in conjunction with the workout
on the Company's credit facility and securitization covenant defaults.
Compensation expenses decreased by $2.1 million or 11.3% primarily due to staff
reductions.
The Company's provision for credit losses increased by $34.9 million, or
64.4%, for the year ended December 31, 2002 as compared to the year ended
December 31, 2001, while net charge-offs increased 26.6% to $65.1 million. This
provision was based on the Company's historical policy, based on experience, of
providing a provision for credit losses based upon the dealer fundings and
revenue recognized in any period and reflects management's judgement of loss
potential considering current economic conditions and the nature of the
underlying receivables. The Company took an additional provision of $35 million
during the third quarter of 2002 to reserve against certain dealer receivables
as well as delinquent portfolio assets. In the past, dealer receivables had been
offset, in some instances, against the funding of new contracts. Since the
Company has suspended the funding of new deals, the Company feels that the
collection of these receivables will be more difficult. Although the Company
will continue to pursue collections on these accounts, management believes that
the cost associated with the legal enforcement would outweigh the benefits
realized.
Depreciation and amortization increased by $4.0 million, or 27.9%, due to
the increased number of rental contracts and amortization of the Company's
investment in service contracts.
Interest expense decreased by $3.5 million, or 24.6%, for the year ended
December 31, 2002 as compared to the year ended December 31, 2001. This decrease
resulted primarily from the Company's declining cost of funds as well as a
decreased level of borrowings.
Dealer Fundings were $74.0 million during the year ended December 31, 2002,
a decrease of $37.1 million, or 33.4%, compared to the year ended December 31,
2001. This decrease is a result of the Company's decision during the third
quarter of 2002 to suspend new contract originations until a new line of credit
is obtained. Receivables due in installments, estimated residual values, loans
receivable, investment in service contracts, and investment in rental equipment
also decreased from $470.6 million for the year ended December 31, 2001 to
$396.5 million for the year ended December 31, 2002, representing a decrease of
$74.1 million, or 15.7%. Net cash provided by operating activities decreased by
$1.7 million to $120.6 million during the year ended December 31, 2002, or 1.4%,
from the year ended December 31, 2001 because of the decrease in the size of the
Company's overall portfolio. Unearned income decreased by $37.0 million, or
35.4%, from $104.5 million at December 31, 2001 to $67.6 million at December 31,
2002. This decrease was primarily due to the 33.4% decrease in dealer fundings
during 2002.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Total revenues for the year ended December 31, 2001 were $154.1 million, an
increase of $14.6 million, or 10.5%, from the year ended December 31, 2000, due
primarily to increases of $1.1 million, or 1.6%, in income on financing leases
and loans; $10.0 million, or 27.5%, in rental and service contract income, and
$3.2 million, or 11.8%, in service fee and other income over such amounts in the
previous year's period. The increase in income on financing leases and loans was
due to the increased number of leases originated. The
16
increase in rental and service contract income is a result of the increased
number of lessees that have continued to rent their equipment beyond their
original lease term, the acquisition of the rental portfolio of Resource Leasing
Corporation, and increased originations in rental and service contracts. The
increase in fee income and other income is the result of increased fees from the
lessees related to the collection and legal process employed by the Company, and
the addition of a new line of business of selling equipment out of existing
inventory.
Selling, general and administrative expenses increased by $6.5 million or
17%, for the year ended December 31, 2001 as compared to the year ended December
31, 2000. Compensation and personnel-related expenses increased by $3.4 million,
due to an increase in overall compensation levels and an increase in the number
of employees needed to maintain the Company's portfolio, including the addition
of the personnel employed by Resource Leasing Corporation. Management expects
that salaries and employee-related expenses, marketing expenses and other
selling, general and administrative expenses will continue to increase as the
portfolio grows because of the requirements of maintaining the Company's
microticket portfolio and the Company's focus on collections. Also, cost of
goods sold increased by $3.6 million, or 100%, due to the Company's acquisition
of the assets of Resource Leasing Corporation, and the addition of a new line of
business of selling equipment.
The Company's provision for credit losses increased by $15.2 million, or
39.0%, for the year ended December 31, 2001 as compared to the year ended
December 31, 2000. This increase is a result of the Company's historical policy,
based on experience, of providing a provision for credit losses based upon the
dealer fundings and revenue recognized in any period and reflects management's
judgement of loss potential considering current economic conditions and the
nature of the underlying receivables.
Depreciation and amortization increased by $4.2 million, or 40.6%, due to
the increased number of rental contracts, including the addition of the Resource
Leasing portfolio of rental contracts, and amortization of the Company's
investment in service contracts.
Interest expense decreased by $1.6 million, or 9.8%, for the year ended
December 31, 2001 as compared to the year ended December 31, 2000. This decrease
resulted primarily from the Company's declining cost of funds, offset by an
increased level of borrowings.
Dealer Fundings were $111.1 million during the year ended December 31,
2001, a decrease of $34.3 million, or 23.6%, compared to the year ended December
31, 2000. This decrease is a result of the Company's decision during the second
quarter of 2000 to increase pricing and tighten its credit approval standards.
The new credit policies were put into place in August of 2000. This is an
ongoing effort, and is expected to continue going forward. Receivables due in
installments, estimated residual values, loans receivable, investment in service
contracts, and investment in rental equipment also decreased from $477.4 million
for the year ended December 31, 2000 to $470.6 million for the year ended
December 31, 2001, representing an decrease of $6.8 million, or 1.4%. Net cash
provided by operating activities increased by $5.9 million to $122.3 million
during the year ended December 31, 2001, or 5.1%, from the year ended December
31, 2000 because of the increase in the size of the Company's overall portfolio
as well as the Company's continued emphasis on collections. Unearned income
decreased by $28.2 million, or 21.2%, from $132.7 million at December 31, 2000
to $104.5 million at December 31, 2001. This decrease was primarily due to the
23.6% decrease in dealer fundings during 2001.
The terrorist attacks of September 11, 2001 caused a significant loss of
life and property. Fortunately, the Company has not experienced any significant
losses as a direct result of the September 11 events. There can be no assurance
that any potential impact associated with the September 11 events would not have
a material adverse effect on the Company's business, financial condition, or
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company's lease and finance business is capital-intensive and requires
access to substantial short-term and long-term credit to fund new leases,
contracts and loans. Since inception, the Company has funded
17
its operations primarily through borrowings under its credit facilities, its
on-balance sheet securitizations, the issuance of subordinated debt and an
initial public offering completed in February of 1999. The Company will continue
to require significant additional capital to maintain and expand its volume of
leases, contracts and loans funded, as well as to fund any future acquisitions
of leasing companies or portfolios.
The Company's uses of cash include the origination and acquisition of
leases, contracts and loans, payment of interest expenses, repayment of
borrowings under its credit facilities, subordinated debt and securitizations,
payment of selling, general and administrative expenses, income taxes and
capital expenditures.
The Company utilizes its credit facilities to fund the origination and
acquisition of leases that satisfy the eligibility requirements established
pursuant to each facility. On August 22, 2000, the Company entered into a new
$192 million credit facility with seven banks, expiring on September 30, 2002.
As of September 30, 2002 the credit facility failed to renew and the Company has
been paying down the balance on the basis of a 36 month amortization plus
interest. Based on the terms of the agreement, interest rates increased from
Prime minus 0.25% to Prime plus 0.50% for prime based loans and from LIBOR plus
1.75% to LIBOR plus 2.50% for LIBOR based loans. In addition, based on the
covenant defaults described below, the outstanding borrowings on all loans bear
an additional 2.00% default interest. On January 3, 2003, the Company entered
into a Forbearance and Modification Agreement from the senior credit facility
which expired on February 7, 2003. Based on the terms of the Forbearance and
Modification Agreement, interest rates increased again on the prime based loans
to prime plus 1.00%. At December 31, 2002, the Company had approximately $126.6
million outstanding under the facility. The Company also may use its
subordinated debt program as a source of funding for potential acquisitions of
portfolios and leases which otherwise are not eligible for funding under the
credit facilities and for potential portfolio purchases. To date, cash flows
from its portfolio and other fees have been sufficient to repay amounts borrowed
under the credit facilities and subordinated debt, however, in October 2002, the
Company made the decision to suspend new contract originations until a source of
funding is obtained.
At December 31, 2002, the Company was in default of certain of its debt
covenants in its credit facility and securitization agreements. The covenants
that were in default with respect to the credit facility, require that the
Company maintain a fixed charge ratio in an amount not less than 130% of
consolidated earnings, a consolidated tangible net worth minimum of $77.5
million plus 50% of net income quarterly beginning with September 30, 2000, and
compliance with the borrowing base. On April 14, 2003, the Company entered into
a long-term agreement with its lenders. This long-term agreement waives the
defaults described above, and in consideration for this waiver, requires the
outstanding balance of the loan to be repaid over a term of 22 months beginning
in April 2003 at an interest rate of prime plus 2.0%. Based on the amortization
schedule in the new agreement, the Company is obligated to repay a minimum of
$54 million, plus applicable interest, over the next twelve months. The
covenants that were in default with respect to the securitization agreements,
require that the Company maintain a fixed charge ratio in an amount not less
than 125% of consolidated earnings and a consolidated tangible net worth greater
than $90 million plus 50% of net income for each fiscal quarter after June 30,
2001. The Company received a waiver, which was set to expire on April 15, 2003,
for the covenant violations in connection with the securitization agreement.
Subsequently, the Company received a permanent waiver of the covenant defaults
and the securitization agreement was amended so that going forward, the
covenants are the same as those contained in the long-term agreement entered
into on April 14, 2003, for the senior credit facility.
The Company believes that cash flows from its operations will be sufficient
to fund the Company's operations for the foreseeable future, given the
satisfactory resolution of the Company's discussions with the lenders involved
in the senior credit facility and the securitized notes.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has entered into various agreements, such as the long-term debt
agreements, capital lease agreements and operating lease agreements that require
future payments be made. Long-term debt agree-
18
ments include all debt outstanding under the credit facility, securitizations,
subordinated notes, demand notes and other notes payable.
At December 31, 2002 the repayment schedules for outstanding long-term
debt, minimum lease payments under noncancelable operating leases and future
minimum lease payments under capital leases were as follows:
FOR THE YEAR ENDED LONG-TERM OPERATING CAPITAL
DECEMBER 31, DEBT LEASES LEASES TOTAL
------------------ --------- --------- ------- --------
2003.......................................... $ 83,677 $1,776 $272 $ 85,725
2004.......................................... 51,397 867 180 52,444
2005.......................................... 34,515 227 55 34,797
2006.......................................... 2,600 -- -- 2,600
Thereafter.................................... -- -- -- --
-------- ------ ---- --------
Total....................................... $172,189 $2,870 $507 $175,566
======== ====== ==== ========
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
See Note B of the notes to the consolidated financial statements included
herein for a discussion of the impact of recently issued accounting
pronouncements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL RISKS
MicroFinancial incurred net losses of $22.1 million for the year ended
December 31, 2002. The net losses incurred by the Company during the third and
fourth quarters caused the Company to be in default of certain debt covenants in
its credit facility and securitization agreements. In addition, as of September
30, 2002, the Company's credit facility failed to renew and consequently, the
Company was forced to suspend new origination activity as of October 11, 2002.
On April 14, 2003, the Company entered into a long-term agreement with its
lenders. This long-term agreement waives the covenant defaults as of December
31, 2002, and in consideration for this waiver, requires the outstanding balance
of the loan to be repaid over a term of 22 months beginning in April 2003 at an
interest rate of prime plus 2.0%. The Company received a waiver, which was set
to expire on April 15, 2003, for the covenant violations in connection with the
securitization agreement. Subsequently, the Company received a permanent waiver
of the covenant defaults and the securitization agreement was amended so that
going forward, the covenants are the same as those contained in the long-term
agreement entered into on April 14, 2003, for the senior credit facility. To
date, the Company has fulfilled all of its debt obligations, as agreed to by the
bank group, in a timely manner.
In an effort to improve its financial position, MicroFinancial has taken
certain steps including the engagement of a financial and strategic advisory
firm, Triax Capital Advisors, LLC. Management and its advisors are actively
considering various financing, restructuring and strategic alternatives as well
as continuing to work closely with the Company's lenders to obtain long-term
agreements. In addition, Management has taken steps to reduce overhead,
including a reduction in headcount from 380 to 203. The failure or inability of
MicroFinancial to successfully carry out these plans could ultimately have a
material adverse effect on the Company's financial position and its ability to
meet its obligations when due. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
MARKET-RATE-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT
The following discussion about the Company's risk management activities
includes forward-looking statements that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
This analysis presents the hypothetical loss in earnings, cash flows, and
fair value of the financial instruments held by the Company at December 31, 2002
that are sensitive to changes in interest rates. The Company has used
interest-rate swaps to manage the primary market exposures associated with
underlying
19
liabilities and anticipated transactions. The Company used these instruments to
reduce risk by creating offsetting market exposures. The instruments held by the
Company are not held for trading purposes.
In the normal course of operations, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk, and legal risk, and are not represented in the analysis that
follows.
INTEREST RATE RISK MANAGEMENT
The implicit yield to the Company on all of its leases, contracts and loans
is on a fixed interest rate basis due to the leases, contracts and loans having
scheduled payments that are fixed at the time of origination of the lease. When
the Company originates or acquires leases, contracts, and loans it bases its
pricing in part on the spread it expects to achieve between the implicit yield
rate to the Company on each lease and the effective interest cost it will pay
when it finances such leases, contracts and loans through its credit facility.
Increases in interest rates during the term of each lease, contract or loan
could narrow or eliminate the spread, or result in a negative spread. The
Company has adopted a policy designed to protect itself against interest rate
volatility during the term of each lease, contract or loan.
Given the relatively short average life of the Company's leases, contracts
and loans, the Company's goal is to maintain a blend of fixed and variable
interest rate obligations. As of December 31, 2002, the Company's outstanding
fixed-rate indebtedness outstanding under the Company's securitizations and
subordinated debt represented 26.5% of the Company's total outstanding
indebtedness. In July 1997, the Company entered into an interest rate swap
arrangement with one of its banks. This arrangement expired in July 2000.
The Company's credit facility bears interest at rates, which fluctuate with
changes in the prime rate or the 90-day LIBOR. The Company's interest expense on
its credit facility and the fair value of its fixed rate debt is sensitive to
changes in market interest rates. The effect of a 10% adverse change in market
interest rates, sustained for one year, on the Company's interest expense and
the fair value of its fixed rate debt would be $801,000 and $428,000,
respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, INCLUDING SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
MicroFinancial Incorporated's Financial Statements, together with the
related Independent Auditors' Report, appear at pages F-1 through F-31 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
NAME AND AGE OF DIRECTORS
AND EXECUTIVE OFFICERS TITLE
------------------------- -----
Peter R. Bleyleben, 50........ Chairman of the Board and Director
Brian E. Boyle, 55............ Director, Member of Audit and Compensation Committees
Torrence C. Harder, 59........ Director, Chairman of Compensation Committee and Member of
Audit Committee
Richard F. Latour, 49......... Director, President, Chief Executive Officer, Treasurer,
Secretary and Clerk
Alan J. Zakon, 67............. Director, Chairman of Audit Committee and Member of
Compensation Committee
20
NAME AND AGE OF DIRECTORS
AND EXECUTIVE OFFICERS TITLE
------------------------- -----
James R. Jackson, Jr., 41..... Vice President and Chief Financial Officer
John Plumlee, 51.............. Vice President, MIS
Carol Salvo, 36............... Vice President, Legal
Mark Belinsky, 41............. Vice President, Marketing and Sales
BACKGROUNDS OF DIRECTORS AND EXECUTIVE OFFICERS
Peter R. Bleyleben serves as Chairman of the Board of Directors of the
Corporation. He served as President, Chief Executive Officer and Director of the
Corporation or its predecessor since June 1987 until January 2002, and Chief
Executive Officer until October 2002. He is also a director of UpToDate in
Medicine, Inc. Before joining the Corporation, Dr. Bleyleben was Vice President
and Director of the Boston Consulting Group, Inc. ("BCG") in Boston. During his
more than eight years with BCG, Dr. Bleyleben focused his professional strategic
consulting practice on the financial services and telecommunications industries.
Prior to joining BCG, Dr. Bleyleben earned an M.B.A. with distinction and honors
from the Harvard Business School, an M.B.A. and a Ph.D. in Business
Administration and Economics, respectively, from the Vienna Business School in
Vienna, Austria and a B.S. in Computer Science from the Vienna Institute of
Technology. Dr. Bleyleben's term as a Director expires in 2004.
Brian E. Boyle, the Chief Executive Officer of the Corporation from 1985 to
1987 and Chairman of the MicroFinancial Board from 1985 to 1995, has served as a
Director of the Corporation or its predecessor since 1985 and has been a member
of the Audit Committee and the Compensation Committee since 1997. He is
currently the Vice Chairman and a Director of Boston Communications Group, Inc.
("Communications"), a Boston-based provider of call processing to the global
wireless industry. He has also served as Chairman of GoldK, Inc. since 1999 and
was the Chief Executive Officer of GoldK, Inc. from 1999 until November 2002.
Prior to joining Communications, Dr. Boyle was the Chairman and Chief Executive
Officer of Credit Technologies, Inc., a Massachusetts-based provider of credit
decision and customer acquisition software, from 1989 to 1993. From 1995 to 1999
he was a Director of Saville Systems, a global telecommunications billing
software company, with its United States headquarters in Burlington,
Massachusetts, and served as a member of its Compensation Committee from 1995 to
October 1999. Dr. Boyle is also a director of several private companies. Dr.
Boyle earned his A.B. in Mathematics and Economics from Amherst College and a
B.S. in Electrical Engineering and Computer Science, an M.S. in Operations
Research, an E.E. in Electrical Engineering and Computer Science and a Ph.D. in
Operations Research, all from the Massachusetts Institute of Technology. Mr.
Boyle's term as a Director expires in 2003.
Torrence C. Harder has served as a Director of the Corporation since 1986,
served as Chairman of the Compensation Committee since 1997 and has been a
member of the Audit Committee since 1997. He has been the President and Director
of Harder Management Corporation, Inc., a registered investment advisory firm,
since its establishment in 1971. He has also been the President and Director of
Entrepreneurial Ventures, Inc., a private equity investment firm, since its
founding in 1986. Mr. Harder is a Director of RentGrow, Inc., Trade Credit
Corporation and UpToDate in Medicine, Inc., a privately held company. Mr. Harder
earned an M.B.A. from the Wharton School of the University of Pennsylvania, and
a B.A. with honors from Cornell University. Mr. Harder's term as a Director
expires in 2005.
Richard F. Latour has served as President, Chief Executive Officer, Chief
Financial Officer, Treasurer, Clerk and Secretary of the Company since October
2002 and as President, Chief Operating Officer, Chief Financial Officer,
Treasurer, Clerk and Secretary, as well as a director of the Corporation, since
February 2002. From 1995 to January 2002, he served as Executive Vice President,
Chief Operating Officer, Chief Financial Officer, Treasurer, Clerk and
Secretary. From 1986 to 1995 Mr. Latour served as Vice President of Finance and
Chief Financial Officer. Prior to joining the Company, Mr. Latour was Vice
President of Finance for eleven years with Trak Incorporated, an international
manufacturer and distributor of consumer goods, where he was responsible for all
financial and operational functions. Mr. Latour earned a B.S. in accounting from
Bentley College in Waltham, Massachusetts. Mr. Latour's term as a Director
expires in 2004.
21
Alan J. Zakon has served as a Director of the Corporation since 1988 and
has served as Chairman of the Audit Committee since 1997. Since 1995, he has
been the Vice Chairman and a Director, and since November 1997, Chairman of the
Executive Committee, of Scientific Games Corporation, a New York-based global
gaming and simulcasting company. Dr. Zakon served as Managing Director of
Bankers Trust Corporation from 1989 to 1995 where he was Chairman of the
Strategic Policy Committee. Dr. Zakon is a Director of Arkansas-Best Freight
Corporation, a nationwide commercial transportation and trucking company and a
Director of InfraRedx, a privately held medical research and development
company. Dr. Zakon holds a B.A. from Harvard University, an M.S. in Industrial
Management from the Sloan School at the Massachusetts Institute of Technology
and a Ph.D. in Economics and Finance from the University of California at Los
Angeles. Mr. Zakon's term as a Director expires in 2003.
James R. Jackson Jr. has served as Vice President and Chief Financial
Officer of the Company since April 2002. Prior to joining the Company, from 1999
to 2001, Mr. Jackson was Vice President of Finance for Deutsche Financial
Services Technology Leasing Group. From 1992 to 1999, Mr. Jackson held positions
as Manager of Pricing and Structured Finance and Manager of Business Planning
with AT&T Capital Corporation.
John Plumlee has served as Vice President, MIS of the Company since 1990.
Prior to joining the Company, Mr. Plumlee was Vice President of M.M.C., Inc., a
firm focusing on the delivery of software services to local governments.
Carol A. Salvo has served as Vice President, Legal of the Company since
1996. From 1995 to 1996, Ms. Salvo served as Director of Legal Collection
Services of the Company. From 1992 to 1995, Ms. Salvo served as Litigation
Supervisor of the Company. Prior to joining the Company, Ms. Salvo was a junior
accountant with InfoPlus Inc.
Mark S. Belinsky has served as Vice President, Sales and Marketing of the
Company since June 2001. Prior to joining the Company, from June 1999 to April
2001 Mr. Belinsky was the Vice President of Marketing and Business Development
for Iwant.com, an Internet-based Application Service Provider, which owns a
patent for Online advertising technology, used by the Internet's top websites.
Prior to that, he served as President, Club Development for TransNational Group,
an affinity marketing company.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934 (as amended, the
"Exchange Act") requires the Corporation's directors, officers and persons who
beneficially own more than ten percent (10%) of the Common Shares (each, a
"Reporting Person") to file reports of ownership and changes of ownership with
the Securities and Exchange Commission. Copies of all filed reports are required
to be furnished to the Corporation pursuant to Section 16(a) of the Exchange
Act. Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Corporation pursuant to Rule 16a-3(e) of the Exchange Act
during fiscal year ending December 31, 2002 and on written representations from
Reporting Persons, the Corporation believes that each Reporting Person complied
with all applicable filing requirements during its fiscal year ended December
31, 2002, with the exception of Dr. Boyle, who inadvertently failed to report
the sales of 39,000 shares from June to September 2002. These transactions were
subsequently reported by the Reporting Person.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth the compensation of (i) Messrs. Bleyleben
and Latour, both of whom served as the Chief Executive Officer of the
Corporation during 2002, (ii) the four most highly compensated executive
officers, other than Messrs. Bleyleben and Latour who were serving as executive
officers of the Corporation as of December 31, 2002 (collectively, the "Named
Executive Officers"), in each case for the years ended December 31, 2002, 2001
and 2000. Determination of the most highly compensated executive officers is
based upon compensation for the Corporation's fiscal year ended December 31,
2002 and does not
22
necessarily reflect the most highly compensated executive officers for the
Corporation's fiscal years ended December 31, 2001 and 2000.
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION
----------------------------------
ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(2) COMPENSATION
--------------------------- ---- -------- -------- ------------
PETER R. BLEYLEBEN.......................... 2002 $239,038 $ 0 $12,227(3)
Chairman and Director 2001 $277,116 $469,997 $97,636
2000 $270,000 $436,873 $72,004
RICHARD F. LATOUR........................... 2002 $232,077 $236,560 $ 6,291(4)
President, Chief Executive Officer,
Treasurer, Clerk, Secretary and Director 2001 $230,000 $306,643 $54,856
2000 $220,000 $278,042 $53,515
JAMES R. JACKSON, JR........................ 2002 $104,769 $ 0 $ 3,143(5)
Vice President and Chief Financial Officer
JOHN PLUMLEE................................ 2002 $169,029 $ 70,351 $ 5,229(6)
Vice President, MIS 2001 $165,000 $ 73,753 $19,456
2000 $155,769 $ 63,819 $20,888
CAROL SALVO................................. 2002 $138,183 $ 73,698 $ 4,359(7)
Vice President, Legal 2001 $135,000 $ 73,753 $ 4,098
2000 $115,269 $ 63,819 $ 4,701
MARK BELINSKY............................... 2002 $175,000 $ 10,040 $ 6,317(8)
Vice President, Marketing and Sales 2001 $ 88,173 $ 30,000 $ 0
---------------
(1) Columns required by the rules and regulations of the Securities and Exchange
Commission that contain no entries have been omitted.
(2) Bonuses are paid over a three-year period, with one-third payable each year.
The remaining two-thirds is subject to discretionary review by the
Corporation and, therefore, does not vest to the employee. The bonus amount
set forth for each fiscal year thus represents the amount actually paid for
such fiscal year, plus amounts relating to the prior two fiscal years.
(3) Amounts for Dr. Bleyleben include: (a) contributions by the Corporation
under the Corporation's 401(k) retirement/profit sharing plan in 2002
($4,411), 2001 ($3,200) and 2000 ($3,199); (b) split dollar life insurance
premiums paid by the Corporation in 2001 ($90,382) and 2000 ($65,259) (this
policy was terminated in 2002 and the Corporation was repaid the cash value
under the policy) and (c) executive disability insurance policy premiums
paid by the Corporation in 2002 ($7,816), 2001 ($4,054) and 2000 ($3,546).
(4) Amounts for Mr. Latour include: (a) contributions by the Corporation under
the Corporation's 401(k) retirement/profit sharing plan in 2002 ($3,200),
2001 ($3,200) and 2000 ($3,323); (b) split dollar life insurance premiums
paid by the Corporation in 2001 ($50,782) and 2000 ($49,318) (this policy
was terminated in 2002 and the Corporation was repaid the cash value under
the policy) and (c) executive disability insurance policy premiums paid by
the Corporation in 2002 ($3,091), 2001 ($874) and 2000 ($874).
(5) Mr. Jackson joined the Company in 2002. Amounts for Mr. Jackson include
contributions by the Corporation under the Corporation's 401(k)
retirement/profit sharing plan in 2002 ($3,143).
(6) Amounts for Mr. Plumlee include: (a) contributions by the Corporation under
the Corporation's 401(k) retirement/profit sharing plan in 2002 ($4,213),
2001 ($3,440), and 2000 ($4,111); (b) split dollar life insurance premiums
paid by the Corporation in 2001 ($15,000), and 2000 ($15,084) (this policy
was
23
terminated in 2002 and the Corporation was repaid the cash value under the
policy) and (c) executive disability insurance policy premiums paid by the
Corporation in 2002 ($1,016), 2001 ($1,016) and 2000 ($1,016).
(7) Amounts for Ms. Salvo include: (a) contributions by the Corporation under
the Corporation's 401(k) retirement/profit sharing plan in 2002 ($3,673),
2001 ($3,440) and 2000 ($3,090); (b) executive disability insurance policy
premiums paid by the Corporation in 2002 ($686), 2001 ($658) and 2000
($630); and (c) the benefit to the executive of interest-free loans from the
Corporation based on the applicable federal rate in effect on the date of
issuance of each such loan, in 2000 ($981). This loan was repaid to the
Corporation as of December 31, 2002.
(8) Mr. Belinsky joined the Corporation in 2001. Amounts for Mr. Belinsky
include: (a) contributions by the Corporation under the Corporation's 401(k)
retirement/profit sharing plan in 2002 ($5,072); and (b) executive
disability insurance policy premiums paid by the Corporation in 2002
($1,255).
1998 EQUITY INCENTIVE PLAN
The following table indicates the aggregate options granted in 2002 to the
Named Executive Officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
---------------------------------------------------------------------------------------
PERCENT OF
NUMBER OF TOTAL POTENTIAL VALUE AT ASSUMED
SECURITIES OPTIONS/SARS RATES OF STOCK APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(3)
OPTION/SARS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH) DATE 5%($) 10%($)
---- ------------- -------------- ----------- ---------- ------------ ------------
Peter R. Bleyleben... 50,000 5.15% $1.585 11/25/12 $ 129,089 $ 205,554
Richard F. Latour.... 100,000 10.31% $ 6.70 02/28/12 $1,091,360 $1,737,810
200,000 20.62% $1.585 11/25/12 $ 516,360 $ 822,216
James R. Jackson,
Jr................. 150,000 15.46% $1.585 11/25/12 $ 387,270 $ 616,665
John Plumlee......... 40,000 4.12% $ 6.70 02/28/12 $ 436,544 $ 695,123
50,000 5.15% $1.585 11/25/12 $ 129,089 $ 205,554
Carol Salvo.......... 40,000 4.12% $ 6.70 02/28/12 $ 436,544 $ 695,124
50,000 5.15% $1.585 11/25/12 $ 129,089 $ 205,554
Mark Belinsky........ 40,000 4.12% $ 6.70 02/28/12 $ 436,544 $ 695,124
---------------
(1) Stock options were granted under the Plan. No stock appreciation rights were
awarded with these grants. All options granted other than those that expire
on November 25, 2012 first become exercisable, in five equal annual
installments, beginning one year from the grant date, and have a ten-year
term. The options that expire on November 25, 2012 vested 20% on the date of
grant and 5% every three months in arrears, and have a ten-year term. If a
change of control of MicroFinancial were to occur, the options would become
immediately exercisable in full.
All options outstanding to Messrs. Jackson, Plumlee and Belinsky and Ms.
Salvo were cancelled in February 2003, and replaced by a smaller number of
shares of restricted stock which vested 20% upon grant, and vests 5% on the
first day of each quarter after the grant date, with accelerated vesting if
the price of the Corporation's common stock exceeds certain thresholds
during the vesting period. The number of shares of restricted stock for each
Names Executive Officer is included in "Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder Matters."
(2) The percentages in the table for the stock options granted in 2002 are based
on a total of 970,000 stock options granted in 2002 to MicroFinancial
employees, all of which were granted on the same material terms described in
footnote (1) above.
24
(3) The dollar amounts under these columns represent the potential realizable
value of each grant assuming that the market value of the Common Stock
appreciates from the date of grant to the expiration of the option at
annualized rates of 5% and 10%. These assumed rates of appreciation have
been specified by the SEC for illustrative purposes only and are not
intended to forecast future financial performance or possible future
appreciation in the price of the Common Stock. The actual amount the
executive officer may realize will depend on the extent to which the stock
price exceeds the exercise price of the options on the date the option is
exercised.
The following table indicates the fiscal year-end option values for options
held by the Named Executive Officers at December 31, 2002. No options were
exercised in 2002.
FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SAR'S AT FISCAL THE-MONEY OPTIONS/SAR'S
YEAR-END(#) AT FISCAL YEAR-END($)(1)(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Peter R. Bleyleben............................ 110,000 140,000 $0 $0
Richard F. Latour............................. 188,000 452,000 $0 $0
James R. Jackson, Jr.......................... 30,000 120,000 $0 $0
John Plumlee.................................. 74,000 186,000 $0 $0
Carol Salvo................................... 74,000 186,000 $0 $0
Mark Belinsky................................. 6,000 64,000 $0 $0
---------------
(1) The exercise price of all unexercised options exceeded the fair market value
of the Common Stock on December 31, 2002.
(2) The value of unexercised in-the-money stock options at December 31, 2002 is
presented to comply with regulations of the Securities and Exchange
Commission. The actual amount realized upon exercise of stock options (if
any) will depend upon the excess of the fair market value of the Common
Stock over the exercise price at the time the stock option is exercised.
There is no assurance that the values of unexercised stock options reflected
in this table will be realized.
PROFIT SHARING PLAN AND DISCRETIONARY BOARD OF DIRECTOR BONUS PROGRAMS
The Corporation pays annual bonuses and makes profit sharing payments as
determined by the Compensation Committee of the MicroFinancial Board. Each year
the Compensation Committee indicates to the executive officers the percentage of
the following year's pre-tax profits on which profit sharing plan payments will
be based. Upon the conclusion of the audit of the prior year's financial
results, the Compensation Committee determines the total percentage of pre-tax
profits eligible for profit-sharing plan payments, and awards payments to all
Named Executive Officers, as well as ten other employees. To enhance long-term
retention of these executives, only one-third of the amount awarded is paid at
that point in time. The remaining two-thirds may be paid out over the next two
years in the discretion of the Compensation Committee and are subject to
separate annual approvals of the Compensation Committee. In March 2003, the
Board of Directors voted to issue promissory notes to these executives to cover
the deferred portion of the profit-sharing plan payments.
EMPLOYMENT AGREEMENTS
The Corporation has entered into Employment Agreements with Dr. Bleyleben
and Mr. Latour for a three-year period commencing June 12, 1998, subject to
automatic successive one-year renewals unless terminated pursuant to the terms
thereof. In the event of a termination of the Employment Agreements by the
Corporation without cause, or by Dr. Bleyleben or Mr. Latour for specified good
reason, the Employment Agreements provide for three years of severance payments
to Dr. Bleyleben and Mr. Latour, respectively, on
25
the basis of their highest base salary during the employment period. In
addition, Dr. Bleyleben and Mr. Latour would also be entitled to a prorated
payment of base salary and bonus to the date of termination, and the
acceleration of deferred compensation and accrued but unpaid amounts under the
Corporation's bonus and/or profit sharing plans. Dr. Bleyleben's and Mr.
Latour's current base salaries, respectively, are $130,000 and $250,000. The
bonus for the current fiscal year will be determined by the MicroFinancial
Board. If, in connection with a payment under their Employment Agreement, either
Dr. Bleyleben or Mr. Latour shall incur any excise tax liability on the receipt
of "excess parachute payments" as defined in Section 280G of the Internal
Revenue Code of 1986, as amended, the Employment Agreements provide for gross-up
payments to return them to the after-tax position they would have been in if no
excise tax had been imposed. As used in each Employment Agreement, "for good
reason" means the assignment to the executive of duties inconsistent with the
executive's position, authority, duties or responsibilities; the failure by the
Corporation to pay the agreed base salary and provide the executive with
benefits; moving the executive to a location outside of the metropolitan Boston,
Massachusetts area; and the failure by the Corporation to require a successor to
assume all obligations under the Employment Agreement.
The Corporation has also entered into separate employment agreements with
Messrs. Jackson and Plumlee and Ms. Salvo, as well as six other employees, which
are designed to provide an incentive to each executive to remain with the
Corporation pending and following a Change in Control (as defined below). Each
employment agreement has an initial term of one year following a Change in
Control, with automatic extensions upon the expiration of the initial one-year
term for successive one-month periods (such date and each annual anniversary
thereof, the "Renewal Date"). Pursuant to each employment agreement, the
executive will be entitled to receive an annual base salary of not less than
twelve times the highest monthly base salary paid or payable to the executive
within the twelve months preceding the Change in Control. If the employment
agreement is terminated by the MicroFinancial Board other than for cause, death
or disability, or is terminated by the executive for specified good reason, the
Corporation shall pay to the executive, the aggregate of the following amounts:
(i) one times annual base salary in the case of Mr. Jackson and one and one-half
times the annual base salary in the case of Mr. Plumlee and Ms. Salvo; (ii) any
other compensation or bonus previously deferred by the executive, together with
any accrued interest or earnings thereon; and (iii) any accrued vacation pay.
Pursuant to each employment agreement, if the Executive's employment is
terminated during the Change of Control employment period, the Company shall pay
the amounts referenced above to the Executive in a lump sum in cash within 30
days after the date of termination. If the Executive's employment is terminated
prior to the first day of the Change of Control employment period, the Company
is obligated to pay the amounts referenced above, however, payments of the
Executive's annual base salary would be payable over twelve months, in the case
of Mr. Jackson and eighteen months in the case of Mr. Plumlee and Ms. Salvo with
payment to be made at the same time that the Company pays other peer executives
of the Company.
"Change in Control" means (i) the acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or
more of either the then outstanding shares of Common Stock or the combined
voting power of the then outstanding voting securities of the Corporation
entitled to vote generally in the election of directors; (ii) individuals who,
as of the date of the original employment agreements constitute the
MicroFinancial Board, cease for any reason to constitute at least a majority of
the MicroFinancial Board or are divested of possession by appointment of a
trustee pursuant to Chapter 7 or 11 of the United States Bankruptcy Code, except
with respect to any director who was approved by a vote of at least a majority
of the directors then comprising the MicroFinancial Board; (iii) approval by the
shareholders of the Corporation or, in the instance of proceedings for the
Corporation pursuant to Chapter 7 or Chapter 11 of the United States Bankruptcy
Code, approval by the bankruptcy judge, of a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger or
consolidation, more than 60% of, respectively, the then outstanding shares of
Common Stock of the corporation resulting from such reorganization, merger or
consolidation and the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors continues to be owned by the shareholders who were the beneficial
holders of such stock prior to such transaction; or (iv) approval by the
shareholders or, in the instance of
26
proceedings for the Company pursuant to Chapter 7 or Chapter 11 of the United
States Bankruptcy Code, approval by the bankruptcy judge, of the Corporation of
a complete liquidation or dissolution of the Corporation or the sale or other
disposition of all or substantially all of the assets of the Corporation.
DIRECTOR COMPENSATION
The MicroFinancial Board is comprised of five Directors, two of whom, Peter
Bleyleben and Richard F. Latour, are salaried employees of the Corporation who
receive no additional compensation for services rendered as Directors. The
members of the MicroFinancial Board who were not employees of the Corporation
("Non-Employee Directors") received stock options to purchase 50,000 shares of
Common Stock in 1999 and stock options to purchase 50,000 shares of Common Stock
in 2000 for their service on the MicroFinancial Board. In 2001, the Non-Employee
Directors each received stock options to purchase 25,000 shares of Common Stock.
In February 2002, the options granted in 2001 were voluntarily cancelled, and
each of the Directors received new options to purchase 45,000 shares of Common
Stock. In November 2002, the Non-Employee Directors each received stock options
to purchase 50,000 shares of Common Stock. Directors also are reimbursed for
out-of-state travel expenses incurred in connection with attendance at meetings
of the MicroFinancial Board and committees thereof. In addition, the Corporation
pays for health care insurance for each Non-Employee Director.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS AS OF
DECEMBER 31, 2002
NUMBER OF SECURITIES TO NUMBER OF SECURITIES REMAINING
BE ISSUED UPON EXERCISE WEIGHTED-AVERAGE EXERCISE AVAILABLE FOR FUTURE ISSUANCE UNDER
OF OUTSTANDING OPTIONS PRICE OF OUTSTANDING EQUITY COMPENSATION PLANS (EXCLUDING
PLAN CATEGORY WARRANTS AND RIGHTS OPTIONS, WARRANTS AND RIGHTS SECURITIES REFLECTED IN THE FIRST COLUMN)
------------- ----------------------- ---------------------------- -----------------------------------------
Equity compensation plans
approved by security
holders................ 2,995,000 $7.849 1,125,380
Equity compensation plans
not approved by
security holders....... 0 $ 0 0
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of February 28, 2003 with
respect to the beneficial ownership of Common Stock of each person known by the
Corporation to be the beneficial owner of more than 5% of the 13,141,800 shares
of Common Stock outstanding as of such date (not including treasury stock), each
director and executive officer of the Corporation and all directors and
executive officers of the Corporation as a group. Each person named has sole
voting and investment power with respect to the shares indicated, except as
otherwise stated in the notes to the table.
NUMBER OF SHARES PERCENTAGE OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK
------------------------------------ --------------------- ----------------------
Peter R. Bleyleben(2).......................... 1,532,910 11.5%
66 Norfolk Road
Chestnut Hill, Massachusetts 02464
Torrence C. Harder(4).......................... 1,683,229 12.7%
675 Sudbury Road
Concord, Massachusetts 01742
Brian E. Boyle(3).............................. 1,446,900 10.9%
11 Whispering Lane
Weston, Massachusetts 02493
27
NUMBER OF SHARES PERCENTAGE OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK
------------------------------------ --------------------- ----------------------
Wasatch Advisors, Inc.......................... 1,543,355 11.7%
150 Social Hall Avenue
Salt Lake City, Utah 84111
Key Colony Fund, L.P.(5)....................... 689,300 5.2%
10825 Financial Centre Parkway
Suite 100
Little Rock, Arkansas 72211
Royce & Associates, LLC........................ 701,700 5.3%
1414 Avenue of the Americas
New York, New York 10019
Alan J. Zakon(6)............................... 131,500 *
32 Cardinal Lane
Ocean Reef Club
Key Largo, Florida 33037
Richard F. Latour(7)........................... 601,550 4.7%
11 Stillbrook Lane
Mansfield, Massachusetts 02048
James R. Jackson, Jr.(8)....................... 85,558 *
6 Hickory Ridge Road
Plaistow, New Hampshire 03865
John Plumlee(9)................................ 49,916 *
243 Pearl Street
Manchester, New Hampshire 03104
Carol Salvo(10)................................ 64,916 *
3 Woodridge Road
Medfield, Massachusetts 02052
Mark Belinsky(11).............................. 12,721 *
237 Strasser Avenue
Westwood, Massachusetts 02090
All directors and executive officers as a group
(11 persons)................................. 5,659,200 43.1%
---------------
* Less than 1%
(1) Unless otherwise indicated in the footnotes, each of the stockholders named
in this table has sole voting and investment power with respect to the
shares of Common Stock shown as beneficially owned by such stockholder,
except to the extent that authority is shared by spouses under applicable
law.
(2) Includes 152,500 shares of Common Stock issuable upon the exercise of
options issued to Dr. Bleyleben which vest on or before May 1, 2003.
(3) Includes 91,500 shares of Common Stock issuable upon the exercise of
options issued to Dr. Boyle which vest on or before May 1, 2003 and 10,700
shares of Common Stock held in the Brian E. Boyle Charitable Foundation,
for which Dr. Boyle disclaims beneficial ownership.
(4) Includes 91,500 shares of Common Stock issuable upon the exercise of
options issued to Mr. Harder which vest on or before May 1, 2003; 92,200
shares of Common Stock held in trust for Mr. Harder's daughter, Lauren E.
Harder, over which Mr. Harder retains sole voting and investment power as
the sole trustee and for which Mr. Harder disclaims beneficial ownership;
92,200 shares of Common Stock held in trust for Mr. Harder's daughter,
Ashley J. Harder, over which Mr. Harder maintains voting and investment
power as the sole trustee and for which Mr. Harder disclaims beneficial
ownership; and 276,045 shares of Common Stock owned by Entrepreneurial
Ventures, Inc. over which Mr. Harder retains shared voting and investment
power through his ownership in, and positions as President and Director of,
Entrepreneurial Ventures, Inc.
28
(5) Alex R. Lieblong, Key Colony Fund, L.P., Key Colony Management LLC, Alex R.
Lieblong IRA and Paul Spann filed a Schedule 13G with the Securities and
Exchange Commission reporting that they held as a group 689,300 shares of
Common Stock. In the Schedule 13G, Alex R. Lieblong reported that he had
sole and shared voting and investment power over an aggregate of 689,300
shares held directly by him as well as the shares held by the Fund and the
IRA; Key Colony Fund, L.P. reported that it had sole and shared voting and
investment power over 668,900 shares held directly by it; Key Colony
Management LLC reported that it had sole voting and investment power over
the shares held by the Fund; Alex R. Lieblong IRA reported that it had sole
voting and investment power over 4,100 shares held directly by it; and Paul
Spann reported that he had sole voting and investment power over 16,900
shares held directly by him. All members of the group reported a business
address as set forth in the table above.
(6) Includes 91,500 shares of Common Stock issuable upon the exercise of
options granted to Mr. Zakon which vest on or before May 1, 2003.
(7) Includes 336,000 shares of Common Stock issuable upon the exercise of
options granted to Mr. Latour which vest on or before May 1, 2003.
(8) Consists of 85,558 shares of restricted stock over which Mr. Jackson has
sole voting power. The stock may not be transferred by the executive until
the shares are vested, and are forfeited if the executive leaves the employ
of the Corporation other than for reason of death or disability. The
restricted stock vested 20% upon grant, and vests 5% on the first day of
each quarter after the grant date, with accelerated vesting if the price of
the Corporation's Common Stock exceeds certain thresholds during the
vesting period.
(9) Consists of 49,916 shares of restricted stock over which Mr. Plumlee has
sole voting power. The stock may not be transferred by the executive until
the shares are vested, and are forfeited if the executive leaves the employ
of the Corporation other than for reason of death or disability. The
restricted stock vested 20% upon grant, and vests 5% on the first day of
each quarter after the grant date, with accelerated vesting if the price of
the Corporation's Common Stock exceeds certain thresholds during the
vesting period.
(10) Includes 49,916 shares of restricted stock over which Ms. Salvo has sole
voting power. The stock may not be transferred by the executive until the
shares are vested, and are forfeited if the executive leaves the employ of
the Corporation other than for reason of death or disability. The
restricted stock vested 20% upon grant, and vests 5% on the first day of
each quarter after the grant date, with accelerated vesting if the price of
the Corporation's Common Stock exceeds certain thresholds during the
vesting period. Also includes 15,000 shares of Common Stock held jointly by
Ms. Salvo and her husband over which Ms. Salvo shares voting and investment
power with her husband.
(11) Consists of 12,721 shares of restricted stock over which Mr. Belinsky has
sole voting power. The stock may not be transferred by the executive until
the shares are vested, and are forfeited if the executive leaves the employ
of the Corporation other than for reason of death or disability. The
restricted stock vested 20% upon grant, and vests 5% on the first day of
each quarter after the grant date, with accelerated vesting if the price of
the Corporation's Common Stock exceeds certain thresholds during the
vesting period.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dr. Bleyleben, the Chairman and a Director of the Corporation, loaned the
Corporation $100,000 in the form of a term note on November 6, 2002, which
matures on November 6, 2004 and bears interest at a rate of 7.5% per annum.
Additionally, per the terms of the note, in the event of a payment default on
the note, the interest rate will increase by 2 percentage points, for as long as
the default goes uncured. On May 1, 2001 he also loaned $200,000 in the form of
a subordinated note. This note matures on May 1, 2006 (with a one-year optional
extension by the Corporation) and bears interest at a rate of 12% per annum.
Mr. Boyle, a Director of the Corporation, loaned the Corporation $100,000
in the form of a term note on November 26, 2002, which matures on November 26,
2004 and bears interest at a rate of 7.5% per annum.
29
Additionally, per the terms of the note, in the event of a payment default on
the note, the interest rate will increase by 2 percentage points, for as long as
the default goes uncured. On May 1, 2001 he also loaned $200,000 in the form of
a subordinated note. This note matures on May 1, 2006 (with a one-year optional
extension by the Corporation) and bears interest at a rate of 12% per annum.
Mr. Harder, a Director of the Corporation, loaned the Corporation $50,000
in the form of a term note on November 13, 2002 which matures on November 13,
2004 and bears interest at a rate of 7.5% per annum. Additionally, per the terms
of the note, in the event of a payment default on the note, the interest rate
will increase by 2 percentage points, for as long as the default goes uncured.
On May 1, 2001 he also loaned $100,000 in the form of a subordinated note. This
note matures on May 1, 2006 (with a one-year optional extension by the
Corporation) and bears interest at a rate of 12% per annum.
Mr. Latour President, Chief Executive Officer, Treasurer, Clerk, Secretary
and Director of the Corporation loaned the Corporation $75,000 in the form of a
subordinated note on May 1, 2001. The note matures on May 1, 2003 and bears
interest at prime plus 3% per annum.
On March 29, 1999, Ms. Ingrid Bleyleben, Dr. Bleyleben's mother, loaned the
Corporation $200,000 in the form of a demand note at an interest rate per annum
equal to a bank prime rate minus 1%. This note was repaid in full on May 16,
2002.
On March 30, 1999, Fritz Froelich, Dr. Bleyleben's father-in-law, loaned
the Corporation $85,000 in the form of a demand note at an interest rate per
annum equal to a bank prime rate minus 1%. This note was repaid in full on
February 20, 2002. On December 1, 1998, Mr. Froelich also loaned the Corporation
$35,000 in the form of a subordinated note. This note matures on December 1,
2003 and bears interest at 8% per annum.
All of the foregoing transactions are on terms at least as favorable as
those that would have been obtained through arms-length negotiations.
ITEM 14. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Within 90 days before filing this report, we evaluated the effectiveness of
the design and operation of our disclosure controls and procedures. Our
disclosure controls and procedures are the controls and other procedures that we
designed to ensure that we record, process, summarize and report in a timely
manner the information we must disclose in reports that we file with or submit
to the SEC. Richard F. Latour, our President and Chief Executive Officer, and
James R. Jackson, our Vice President and Chief Financial Officer, reviewed and
participated in this evaluation. Based on this evaluation, Messrs. Richard F.
Latour and James R. Jackson concluded that, as of the date of their evaluation,
our disclosure controls were effective.
INTERNAL CONTROLS
During the fourth quarter, a system access control deficiency was
identified. It was determined that this deficiency potentially provided the
opportunity for certain employees to gain direct access to certain data tables
stored in the Company's database. Management took immediate steps to eliminate
this issue and utilized non-system controls, which have long been in place, to
test that the information contained in the database had not been corrupted. No
discrepancies were encountered.
30
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements MicroFinancial Incorporated's Financial
Statements, together with the related Independent Auditors' Report, appear
at pages F-1 through F-31 of this Form 10-K
(2) None
(3) Exhibits Index
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Organization, as amended(1)
3.2 Bylaws(1)
10.1 Standard Terms and Condition of Indenture, dated as of March
21, 2000 governing the MFI Finance Corp. I 7.375%
Lease-Backed Notes, Series 2000-1 (the "2000-1 Notes") and
the MFI Finance Corp. I 6.939% Lease-Backed Notes, Series
2000-2 (the "2000-2 Notes")(6)
10.2 Supplement to Indenture, dated March 21, 2000, governing the
2000-1 Notes(6)
10.3 Specimen 2000-1 Note(6)
10.4 Standard Terms and Conditions of Servicing governing the
2000-1 Notes(6)
10.5 Office Lease Agreement by and between WXI/AJP Real Estate
Limited Partnership and Leasecomm Corporation dated, May 3,
2000, for facilities in Newark, California(7)
10.6 Fourth Amended and Restated Revolving Credit Agreement,
dated August 22, 2000, among Leasecomm Corporation, the
lenders parties thereto, and Fleet National Bank as agent(8)
10.8 Office Lease Agreement by and between MicroFinancial
Incorporated and Desmond Taljaard and Howard Friedman,
Trustees of London and Leeds Bay Colony I Realty Trust,
dated April 14, 1994, for facilities in Waltham,
Massachusetts(1)
10.9** 1987 Stock Option Plan(1)
10.10** Forms of Grant under 1987 Stock Option Plan(1)
10.12** 1998 Equity Incentive Plan(3)
10.13*+ Employment Agreement between the Company and Peter R.
Bleyleben
10.14*+ Employment Agreement between the Company and Richard F.
Latour
10.15 Amended and Restated Standard Terms and Condition of
Indenture dated as of September 2001 governing the MFI
Finance Corp. I, 5.5800% Lease-Backed Notes, Series 2000-3
(the "2001-3 Notes")(9)
10.16 Supplement to Indenture dated September 2001 governing the
2001-3 Notes(9)
10.17 Specimen 2001-3 Note(9)
10.18 Standard Terms and Conditions of Servicing governing the
2001-3 Notes(9)
10.19 Standard Terms and Condition of Indenture dated as of
September 2001 governing the MFI Finance Corp. II, LLC,
8.0000% Lease-Backed Notes, Series 2001-1 (the "2001-1
Notes")(9)
10.20 Supplement to Indenture dated September 2001 governing the
2001-1 Notes(9)
10.21 Specimen 2001-1 Note(9)
10.22 Standard Terms and Conditions of Servicing governing the
2001-1 Notes(9)
10.25 Commercial Lease, dated November 3, 1998, between Cummings
Properties Management, Inc. and MicroFinancial
Incorporated(3)
10.26 Amendment to Lease #1, dated November 3, 1998, between
Cummings Properties Management, Inc. and MicroFinancial
Incorporated(3)
10.30 Supplement to Indenture, dated December 1, 2000, governing
the 2000-2 Notes(9)
10.31 Specimen, 2000-2 Notes(9)
31
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.33 Third Amended and Restated Revolving Credit Agreement, dated
December 21, 1999, among Leasecomm Corporation, the lenders
parties thereto, and BankBoston, N.A. as agent(5)
10.34 Fifth Amendment to Office Lease Agreement by and between
MicroFinancial Incorporated and Leasecomm Corporation and
Bay Colony Corporate Center LLC, dated June 29, 1999, for
facilities in Waltham, Massachusetts(5)
10.40*+ Employment Agreement between the Company and John Plumlee
10.41*+ Employment Agreement between the Company and Carol Salvo
10.42*+ Employment Agreement between the Company and James R.
Jackson, Jr.
10.43*+ Employment Agreement between the Company and Stephen
Constantino
10.44* Employment Agreement between the Company and Steven LaCreta
21.1 Subsidiaries of Registrant
23.1* Consent of Deloitte & Touche LLP
99.1* Certification of Chief Executive Officer Regarding Annual
Report on Form 10-K for the Year Ended December 31, 2002
99.2* Certification of Chief Financial Officer Regarding Annual
Report on Form 10-K for the Year Ended December 31, 2002
---------------
* Filed herewith.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of this Report.
(1) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Registration Statement on Form S-1 (Registration Statement No.
333-56639) filed with the Securities and Exchange Commission on June 9,
1998.
(2) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Amendment No. 1 to Registration Statement on Form S-1
(Registration Statement No. 333-56639) filed with the Securities and
Exchange Commission on August 3, 1998.
(3) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Amendment No. 2 to Registration Statement on Form S-1
(Registration Statement No. 333-56639) filed with the Securities and
Exchange Commission on January 11, 1999.
(4) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Amendment No. 3 to Registration Statement on Form S-1
(Registration Statement No. 333-56639) filed with the Securities and
Exchange Commission on February 4, 1999.
(5) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 30, 2000.
(6) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on May 22, 2000.
(7) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on August 14, 2000.
(8) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2000.
(9) Incorporated by reference to the Exhibit with the same exhibit number in the
Registrant's Quarterly Report on Form 10-Q filed with the Securities and
Exchange Commission on November 14, 2001.
(b) One report on Form 8-K was filed on October 11, 2002 disclosing
other events, a second report on Form 8-K was filed on October 31, 2002 to
discuss the third quarter results and a third report on
32
Form 8-K was filed on March 11, 2003, to announce the results for the year
ended December 31, 2003. A fourth report on Form 8-K was filed on March 19,
2003 disclosing other events.
(c) See (a)(3) above.
(d) None.
33
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MICROFINANCIAL INCORPORATED
By: /s/ RICHARD F. LATOUR
------------------------------------
President and Chief Executive
Officer
By: /s/ JAMES R. JACKSON JR.
------------------------------------
Vice President and Chief Financial
Officer
Date: April 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ PETER R. BLEYLEBEN Chairman of the Board of Directors April 15, 2003
---------------------------------------------
Peter R. Bleyleben
/s/ RICHARD F. LATOUR President, Chief Executive Officer, April 15, 2003
--------------------------------------------- Treasurer, Clerk, Secretary and
Richard F. Latour Director
/s/ JAMES R. JACKSON JR. Vice President and Chief Financial April 15, 2003
--------------------------------------------- Officer
James R. Jackson Jr.
/s/ BRIAN E. BOYLE Director April 15, 2003
---------------------------------------------
Brian E. Boyle
/s/ TORRENCE C. HARDER Director April 15, 2003
---------------------------------------------
Torrence C. Harder
/s/ ALAN J. ZAKON Director April 15, 2003
---------------------------------------------
Alan J. Zakon
34
CERTIFICATION
I, Richard F. Latour, certify that:
1. I have reviewed this annual report on Form 10-K of MicroFinancial
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ RICHARD F. LATOUR
--------------------------------------
Richard F. Latour
President and Chief Executive Officer
Date: April 15, 2003
35
CERTIFICATION
I, James R. Jackson Jr., certify that:
1. I have reviewed this annual report on Form 10-K of MicroFinancial
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
/s/ JAMES R. JACKSON JR.
--------------------------------------
James R. Jackson Jr.
Vice President and Chief Financial
Officer
Date: April 15, 2003
36
MICROFINANCIAL INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report................................ F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and
2002...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 2001, and 2002......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2000, 2001, and 2002............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 2001, and 2002......................... F-6
Notes to Consolidated Financial Statements.................. F-8
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MicroFinancial Incorporated:
We have audited the accompanying consolidated balance sheets of
MicroFinancial Incorporated and subsidiaries (the "Company") as of December 31,
2001 and 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2002. 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 MicroFinancial Incorporated and
subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 15, 2003
F-2
MICROFINANCIAL INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------
2001 2002
--------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
ASSETS
Net investment in leases and loans:
Receivables due in installments........................... $ 399,361 $334,623
Estimated residual value.................................. 37,114 30,754
Initial direct costs...................................... 7,090 4,891
Loans receivable.......................................... 2,248 1,796
Less:
Advance lease payments and deposits.................... (287) (96)
Unearned income........................................ (104,538) (67,574)
Allowance for credit losses............................ (45,026) (69,294)
--------- --------
Net investment in leases and loans.......................... $ 295,962 $235,100
Investment in service contracts............................. 14,126 14,463
Cash and cash equivalents................................... 146 5,494
Restricted cash............................................. 20,499 18,516
Property and equipment, net................................. 16,034 9,026
Income taxes receivable..................................... -- 8,652
Other assets................................................ 14,961 3,834
--------- --------
Total assets...................................... $ 361,728 $295,085
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable............................................... $ 203,053 $168,927
Subordinated notes payable.................................. 3,262 3,262
Capitalized lease obligations............................... 833 471
Accounts payable............................................ 2,517 3,840
Dividends payable........................................... 642 --
Other liabilities........................................... 6,182 6,776
Income taxes payable........................................ 4,211 1,400
Deferred income taxes payable............................... 30,472 23,806
--------- --------
Total liabilities................................. 251,172 208,482
--------- --------
Commitments and contingencies (Note I)...................... -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares
authorized; none issued at 12/31/01 and 12/31/02....... -- --
Common stock, $.01 par value; 25,000,000 shares
authorized; 13,410,646 shares issued at 12/31/01 and
12/31/02............................................... 134 134
Additional paid-in capital................................ 47,723 47,723
Retained earnings......................................... 69,110 45,089
Treasury stock (588,700 shares of common stock at 12/31/01
and 12/31/02), at cost................................. (6,343) (6,343)
Notes receivable from officers and employees.............. (68) --
--------- --------
Total stockholders' equity........................ 110,556 86,603
--------- --------
Total liabilities and stockholders' equity........ $ 361,728 $295,085
========= ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Revenues:
Income on financing leases and loans...................... $ 69,847 $ 70,932 $ 53,012
Income on service contracts............................... 8,687 8,665 9,734
Rental income............................................. 27,638 37,664 37,154
Loss and damage waiver fees............................... 6,034 6,344 6,257
Service fees and other.................................... 27,271 30,486 20,665
-------- -------- --------
Total revenues.................................... 139,477 154,091 126,822
-------- -------- --------
Expenses:
Selling, general and administrative....................... 38,371 44,899 45,535
Provision for credit losses............................... 38,912 54,092 88,948
Depreciation and amortization............................. 10,227 14,378 18,385
Interest.................................................. 15,858 14,301 10,787
-------- -------- --------
Total expenses.................................... 103,368 127,670 163,655
-------- -------- --------
Income (loss) before provision for income taxes............. 36,109 26,421 (36,833)
Provision (benefit) for income taxes........................ 15,249 10,104 (14,735)
-------- -------- --------
Net income (loss)........................................... $ 20,860 $ 16,317 $(22,098)
======== ======== ========
Net income (loss) per common share -- basic................. $ 1.64 $ 1.28 $ (1.72)
======== ======== ========
Net income (loss) per common share -- diluted............... $ 1.63 $ 1.26 $ (1.72)
======== ======== ========
Dividends per common share.................................. $ 0.175 $ 0.195 $ 0.150
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
NOTES
COMMON STOCK ADDITIONAL TREASURY STOCK RECEIVABLE TOTAL
------------------- PAID-IN RETAINED ------------------ FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT OFFICERS EQUITY
---------- ------ ---------- -------- -------- ------- ---------- -------------
(IN THOUSANDS, EXCEPT SHARE DATA)
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
Common stock dividends..... (1,923) (1,923)
Notes receivable from
officers and employees... 68 68
Net loss................... (22,098) (22,098)
---------- ---- ------- -------- -------- ------- ----- --------
Balance at December 31,
2002..................... 13,410,646 $134 $47,723 $ 45,089 588,700 $(6,343) $ 0 $ 86,603
========== ==== ======= ======== ======== ======= ===== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Cash received from customers............................ $ 174,501 $ 185,939 $ 175,859
Cash paid to suppliers and employees.................... (34,405) (44,060) (41,573)
Cash paid for income taxes.............................. (9,726) (6,767) (3,829)
Interest paid........................................... (15,649) (14,186) (10,222)
Interest received....................................... 1,639 1,354 393
--------- --------- ---------
Net cash provided by operating activities............ 116,360 122,280 120,628
--------- --------- ---------
Cash flows from investing activities:
Investment in lease contracts........................... (141,076) (92,118) (66,042)
Investment in inventory................................. -- (4,198) (2,989)
Investment in direct costs.............................. (7,812) (5,200) (4,150)
Investment in service contracts......................... (4,138) (6,658) (6,773)
Investment in Resource Leasing Corporation.............. (2,800) (6,900) --
Investment in fixed assets.............................. (2,354) (1,722) (255)
Repayment of notes from officers........................ 25 -- 68
Investment in notes receivable.......................... (117) (70) --
Repayment of notes receivable........................... 325 6 --
--------- --------- ---------
Net cash used in investing activities................ (157,947) (116,860) (80,141)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from secured debt.............................. 195,917 84,750 33,521
Repayment of secured debt............................... (123,075) (90,839) (66,672)
Proceeds from refinancing of secured debt............... 473,118 515,897 490,000
Prepayment of secured debt.............................. (488,118) (509,555) (490,100)
Proceeds from short-term demand notes payable........... 259 902 305
Repayment of short-term demand notes payable............ (983) (93) (1,181)
Proceeds from issuance of subordinated debt............. -- 2,975 --
Repayment of subordinated debt.......................... (4,500) (4,500) --
(Increase) decrease in restricted cash.................. (5,401) (7,372) 1,983
Proceeds from exercise of common stock options.......... 119 810 --
Repayment of capital leases............................. (494) (505) (430)
Purchase of treasury stock.............................. (1,595) (146) --
Payment of dividends.................................... (2,166) (2,428) (2,565)
--------- --------- ---------
Net cash provided by (used in) financing
activities......................................... 43,081 (10,104) (35,139)
--------- --------- ---------
Net increase in cash and cash equivalents................. 1,494 (4,684) 5,348
Cash and cash equivalents, beginning of period............ 3,336 4,830 146
--------- --------- ---------
Cash and cash equivalents, end of period.................. $ 4,830 $ 146 $ 5,494
========= ========= =========
(Continued)
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
MICROFINANCIAL INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
2000 2001 2002
--------- --------- ---------
(IN THOUSANDS)
Reconciliation of net income to net cash provided by
operating activities:
Net income (loss)......................................... $ 20,860 $ 16,317 $(22,098)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 10,227 14,378 18,385
Provision for credit losses............................ 38,912 54,092 88,948
Recovery of equipment cost and residual value, net of
revenue recognized................................... 40,288 34,685 49,046
Increase (decrease) in income taxes payable............ (1,211) 1,878 (2,811)
Increase in income taxes receivable.................... -- -- (8,652)
Increase (decrease) in deferred income taxes........... 6,480 1,472 (6,666)
Changes in assets and liabilities:
Decrease (increase) in other assets.................. (934) (1,200) 3,124
Increase (decrease) in accounts payable.............. 1,267 (129) 1,323
Increase in accrued liabilities...................... 471 787 29
-------- -------- --------
Net cash provided by operating activities.............. $116,360 $122,280 $120,628
======== ======== ========
Supplemental disclosure of noncash activities:
Property acquired under capital leases.................... $ 109 $ 479 $ 68
======== ======== ========
Accrual of common stock dividends......................... $ 573 $ 642 $ --
======== ======== ========
(Concluded)
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
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 primarily leases and rents "microticket"
equipment and provides other financing services in amounts generally ranging
from $400 to $15,000 with an average amount financed of approximately $1,500 and
an average lease term of 44 months. The Company does not market its services
directly to lessees but sources leasing transactions through a network of
independent sales organizations and other dealer-based origination networks
nationwide. The Company funded its operations primarily through borrowings under
its credit facilities, issuances of subordinated debt and on balance sheet
securitizations.
MicroFinancial incurred net losses of $22.1 million for the year ended
December 31, 2002. The net losses incurred by the Company during the third and
fourth quarters caused the Company to be in default of certain debt covenants in
its credit facility and securitization agreements. In addition, as of September
30, 2002, the Company's credit facility failed to renew and consequently, the
Company was forced to suspend new origination activity as of October 11, 2002.
On April 14, 2003, the Company entered into a long-term agreement with its
lenders. This long-term agreement waives the defaults described above, and in
consideration for this waiver, requires the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. The Company received a waiver, which was set to expire on
April 15, 2003, for the covenant violations in connection with the
securitization agreement. Subsequently, the Company received a permanent waiver
of the covenant defaults and the securitization agreement was amended so that
going forward, the covenants are the same as those contained in the long-term
agreement entered into on April 14, 2003, for the senior credit facility. To
date, the Company has fulfilled all of its debt obligations, as agreed to by the
bank group, in a timely manner.
In an effort to improve its financial position, MicroFinancial has taken
certain steps including the engagement of a financial and strategic advisory
firm, Triax Capital Advisors, LLC. Management and its advisors are actively
considering various financing, restructuring and strategic alternatives as well
as continuing to work closely with the Company's lenders to obtain long-term
agreements. In addition, Management has taken steps to reduce overhead,
including a reduction in headcount from 380 to 203.
Leasecomm Corporation periodically finances its lease and service
contracts, together with unguaranteed residuals, through securitizations using
special purpose vehicles. MFI Finance Corporation I and MFI Finance Corporation
II, LLC are special purpose companies. The assets of such special purpose
vehicles and cash collateral or other accounts created in connection with the
financings in which they participate are not available to pay creditors of
Leasecomm Corporation, MicroFinancial Incorporated, or other affiliates. While
Leasecomm Corporation 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, service contracts, or loans to
special-purpose entities for purposes of obtaining financing in connection with
the related receivables. The contribution of such assets under the terms of such
financings are intended to constitute "true sales" of such assets for bankruptcy
purposes (meaning that such assets are legally isolated from Leasecomm
Corporation). However, the special purpose entities to which such assets are
contributed are not "qualifying special purpose entities" within the meaning
Statement of Financial Accounting Standards ("SFAS") SFAS No. 140, and are
required under generally accepted accounting principles to be consolidated in
the financial statements of the Company. As a result, such assets and the
related liability remain on the balance sheet and do not receive gain on sale
treatment.
F-8
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
RESTRICTED CASH
As part of its servicing obligation under the securitizations agreements,
the Company collects cash receipts for financing contracts that have been
pledged to special purpose entities, specifically MFI Finance Corporation I and
MFI Finance Corporation II, LLC. These collections are segregated into separate
accounts for the benefit of the entities to which the related contracts were
pledged or sold and are remitted to such entities on a weekly basis.
LEASES AND LOANS
The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred, and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and initial direct costs incurred are amortized
over the related lease term using the interest method, which results in a level
rate of return on the net investment in leases. Unamortized unearned lease
income and initial direct costs are written off if, in the opinion of
management, the lease agreement is determined to be impaired. It is management's
opinion, given the nature of its business and the large number of small balance
lease receivables, that a lease is impaired when one of the following occurs:
(i) the obligor files for bankruptcy; (ii) the obligor dies, and the equipment
is returned; or (iii) an account has become 360 days past due without contact
with the lessee. 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.
F-9
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments including cash and cash equivalents, restricted
cash, net investment in leases and loans, accounts payable, and other
liabilities, it is assumed that the carrying amount approximates fair value.
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 SFA 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, 2001 or 2002.
DEBT ISSUE COSTS
Debt issuance costs incurred in securing credit facility financing are
capitalized and subsequently amortized over the term of the credit facility.
F-10
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Company has determined that the adoption of this Statement does not have a
material impact on its results of operations or consolidated financial position.
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 Company has determined that the adoption of this Statement does
not have a material impact on its results of operations or consolidated
financial position.
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
provisions of this Statement are effective for the Company's fiscal year ended
December 31, 2003, although earlier application is permitted. The Company has
determined that the adoption of this Statement does not have a material impact
on its results of operations or consolidated financial position.
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. The Company has determined that the adoption of this Statement does not
have a material impact on its results of operations or consolidated financial
position.
On January 1, 2002, the Company adopted the provisions of Statement of
Position ("SOP") 01-6, Accounting by Certain Entities (Including Entities With
Trade Receivables) That Lend to or Finance the Activities of Others. The SOP was
effective for financial statements issued for the fiscal year beginning after
F-11
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 15, 2001. The Company has determined that the adoption of this SOP does
not have a material impact on its results of operations or consolidated
financial position.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64 and Technical Corrections." This Statement which rescinds and
amends several statements, improves financial reporting for extinguishment of
debt, modifies the accounting for certain leasing transactions, and makes
various technical corrections to existing pronouncements. The Statement requires
the gains and losses from the extinguishment of debt to be classified as
extraordinary items only if they meet the criteria in APB Opinion No. 30,
"Reporting the Results of Operations-Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." Also, the Statement requires that the accounting
treatment of certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. The Company has determined that the adoption of
this Statement does not have a material impact on its results of operations or
consolidated financial position.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires an entity to recognize and measure initially at fair value a liability
for a cost associated with an exit or disposal activity, when the liability is
incurred. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002 although earlier adoption
is permitted. The Company has determined that the adoption of this Statement
does not have a material impact on its historical financial statements.
In October 2002, the FASB issued SFAS 147, "Acquisitions of Certain
Financial Institutions." SFAS 147 addresses the financial accounting and
reporting for the acquisition of all or part of a financial institution except
for a transaction between two or more mutual enterprises. In addition, this
statement removes acquisitions of financial institutions, other than
transactions between two or more mutual enterprises, from the scope of FASB
Statement No. 72, "Accounting for Certain Acquisitions of Banking or Thrift
Institutions," and FASB Interpretation No. 9, "Applying APB Opinions No. 16 and
17 When a Savings and Loan Association or a Similar Institution Is Acquired in a
Business Combination Accounted for by the Purchase Method." SFAS 147 clarifies
that a branch acquisition that meets the definition of a business should be
accounted for as a business combination, otherwise the transaction should be
accounted for as an acquisition of net assets that does not result in the
recognition of goodwill. The provisions of this Statement were effective on
October 1, 2002. The Company has determined that the adoption of this Statement
does not have a material impact on its results of operations or consolidated
financial position.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of FASB Statement No.
123." This statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
has adopted the disclosure provisions under SFAS 148, but does not intend to
adopt the fair value method.
In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities an interpretation of ARB No. 51."
This interpretation clarifies the application of Accounting Research Bulletin
No. 51, Consolidated Financial Statements to certain entities in which equity
investors do not have the characteristic of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
F-12
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company has determined that the adoption of the provisions under FIN 46 does not
have a material impact on its results of operations or consolidated financial
position.
RECLASSIFICATION OF PRIOR YEAR BALANCES
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current presentation.
NET INCOME (LOSS) 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 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, 2000 and 2001, respectively, because their effects were
antidilutive. Stock options were excluded from the computation of dilutive
earnings per share for the year ended December 31, 2002, because their inclusion
would have had an antidilutive effect on earnings per share.
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------
2000 2001 2002
----------- ----------- -----------
Net income (loss)............................. $ 20,860 $ 16,317 $ (22,098)
----------- ----------- -----------
Shares used in computation:
Weighted-average common shares
outstanding used in computation of net
income per common share................ 12,728,441 12,789,605 12,821,946
Dilutive effect of common stock
options................................ 79,373 155,638 --
----------- ----------- -----------
Shares used in computation of net income per
common share -- assuming dilution........... 12,807,814 12,945,243 12,821,946
=========== =========== ===========
Net income (loss) per common share -- basic... $ 1.64 $ 1.28 $ (1.72)
=========== =========== ===========
Net income (loss) per common share --
diluted..................................... $ 1.63 $ 1.26 $ (1.72)
=========== =========== ===========
STOCK-BASED EMPLOYEE COMPENSATION
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. The Company accounts for stock-based employee compensation
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as either all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant or options granted
that result in a variable compensation costs had an exercise price greater than
the fair market value of the underlying common stock on December 31, 2002. The
methodology used to calculate the fair value of stock-based employee
compensation is described more fully in Note G. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value
F-13
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation.
YEAR ENDED DECEMBER 31
----------------------------
2000 2001 2002
------- ------- --------
Net income (loss), as reported......................... $20,860 $16,317 $(22,098)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of related tax effects................... (932) (1,305) (1,475)
------- ------- --------
Pro forma net income (loss)............................ 19,928 15,012 (23,573)
======= ======= ========
Earnings (loss) per share:
Basic -- as reported................................... $ 1.64 $ 1.28 $ (1.72)
======= ======= ========
Basic -- pro forma..................................... $ 1.57 $ 1.17 $ (1.84)
======= ======= ========
Diluted -- as reported................................. $ 1.63 $ 1.26 $ (1.72)
======= ======= ========
Diluted -- pro forma................................... $ 1.56 $ 1.16 $ (1.84)
======= ======= ========
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.
2000 2001 2002
------- ------- -------
Risk-free interest rate................................... 6.50% 5.03% 3.63%
Expected dividend yield................................... 1.37% 2.50% 0.80%
Expected life............................................. 7 years 7 years 7 years
Volatility................................................ 55.00% 51.00% 68.00%
The weighted-average fair value at the date of grant for options granted
during 2000, 2001, and 2002 approximated $5.45, $5.34, $2.03 per option,
respectively.
C. NET INVESTMENT IN LEASES AND LOANS
At December 31, 2002, future minimum payments on the Company's lease
receivables are as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------------
2003........................................................ $233,820
2004........................................................ 60,645
2005........................................................ 32,258
2006........................................................ 7,426
2007........................................................ 474
--------
Total....................................................... $334,623
========
At December 31, 2002, the weighted-average remaining life of leases in the
Company's lease portfolio is approximately 26 months and the implicit rate of
interest is approximately 34.4%.
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
F-14
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2002 have totaled 12.60% 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, 2000, 2001, and 2002 and the related provisions, charge-offs and
recoveries for the years ended December 31, 2000, 2001, and 2002.
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
-------
Provision for leases and loans credit losses................ 88,948
Total provisions for credit losses................ 88,948
Charge-offs (including $401 in other asset charge-offs)..... 76,844
Recoveries.................................................. 11,763
------
Charge-offs, net of recoveries.................... 65,081
-------
Balance of allowance for credit losses at December 31,
2002...................................................... $69,294
=======
Balance of other asset reserve at December 31, 2002......... $ --
=======
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, 2000, 2001, and 2002 and changes in
the Company's estimated residual
F-15
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value as a result of new originations, and lease terminations for the years
ended December 31, 2000, 2001, and 2002.
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............................................ 10,254
Lease Terminations.......................................... (16,614)
Balance of Estimated Residual Value at December 31, 2002.... $ 30,754
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.
D. PROPERTY AND EQUIPMENT
At December 31, 2001 and 2002, property and equipment consisted of the
following:
DECEMBER 31,
-----------------
2001 2002
------- -------
Rental Equipment and Inventory.............................. $19,196 $15,751
Computer Equipment.......................................... 7,251 7,072
Office Equipment............................................ 1,525 1,278
Leasehold improvements...................................... 381 154
------- -------
28,353 24,255
Less accumulated depreciation and amortization.............. 12,319 15,229
------- -------
Total....................................................... $16,034 $ 9,026
======= =======
Depreciation and amortization expense totaled $10,227,000, $14,378,000, and
$18,385,000 for the years ended December 31, 2000, 2001, and 2002, respectively.
At December 31, 2001 and 2002, computer equipment includes $1,793,000 and
$1,650,000 respectively, under capital leases. Accumulated amortization related
to capital leases amounted to $988,000 and $1,186,000 in 2001 and 2002,
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
F-16
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2000, 2001, and 2002
were 9.50%, 4.75%, and 4.25% respectively. The 90-day LIBOR rates at December
31, 2001 and 2002 were 1.938% and 1.40% respectively. The 7-day Money Market
Rates at December 31, 2001 was 1.88%.
At December 31, 2001 and 2002, the Company had borrowings outstanding under
this agreement with the following terms:
2001 2002
----------------- -----------------
TYPE RATE AMOUNT RATE AMOUNT
---- ------ -------- ------ --------
Prime.......................................... 4.5000% $ 4,640 4.7500% $ 31,556
LIBOR.......................................... 3.8750% 100,000 4.1875% 50,000
LIBOR.......................................... 4.1875% 45,000
-------- --------
Total Outstanding......................... $104,640 $126,556
======== ========
Outstanding borrowings are collateralized by leases, loans, rentals, and
service contracts pledged specifically to the financial institutions. As of
September 30, 2002 the revolving credit line failed to renew and the Company has
been paying down the balance on the basis of a 36 month amortization plus
interest. Based on the terms of the agreement, interest rates increased from
Prime minus 0.25% to Prime plus 0.50% for prime based loans and from LIBOR plus
1.75% to LIBOR plus 2.50% for LIBOR based loans. In addition, based on the
covenant defaults described below, the outstanding borrowings on all loans bear
an additional 2.00% default interest. On January 3, 2003, the Company entered
into a Forbearance and Modification Agreement for the senior credit facility
which expired on February 7, 2003. Based on the terms of the Forbearance and
Modification Agreement, interest rates increased again on the prime based loans
to prime plus 1.00%.
At December 31, 2002, the Company was in default of certain of its debt
covenants in its senior credit facility. The covenants that were in default with
respect to the senior credit facility require that the Company maintain a fixed
charge ratio in an amount not less than 130% of consolidated earnings, a
consolidated tangible net worth minimum of $77.5 million plus 50% of net income
quarterly beginning with September 30, 2000 and compliance with the borrowing
base. On April 14, 2003, the Company entered into a long-term agreement with its
lenders. This long-term agreement waives the defaults described above, and in
consideration for this waiver, requires the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. Based on the amortization schedule in the new agreement, the
Company is obligated to repay a minimum of $54 million, plus applicable
interest, over the next twelve months.
BLT III had 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
F-17
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2002, the Company was in default on two of its debt
covenants in its securitization agreements. The convenants that were in default
with respect to the securitization agreements require that the Company maintain
a fixed charge ratio in an amount not less than 125% of consolidated earnings
and a consolidated tangible net worth greater than $90 million plus 50% of net
income for each fiscal quarter after June 30, 2001. Additionally per the terms
of the securitization agreement, any default with respect to the senior credit
facility is considered a default under the terms of the agreement. The Company
received a waiver, which was set to expire on April 15, 2003, for the covenant
violations in connection with the securitization agreement. Subsequently, the
Company received a permanent waiver of the covenant defaults and the
securitization agreement was amended so that going forward, the covenants are
the same as those contained in the long-term agreement entered into on April 14,
2003, for the senior credit facility.
At December 31, 2002, 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............................................. 9/16/2005 7.38% $ 3,464
2000-2 Notes............................................. 6/16/2006 6.94% 17,983
2001-3 Notes............................................. 2/18/2008 5.58% 17,019
MFI II LLC
2001-1 Notes............................................. 2/18/2008 8.00% 3,625
-------
Total Outstanding................................... $42,091
=======
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............................................. 9/16/2005 7.38% $19,855
2000-2 Notes............................................. 6/16/2006 6.94% 34,518
2001-3 Notes............................................. 2/18/2008 5.58% 34,160
MFI II LLC
2001-1 Notes............................................. 2/18/2008 8.00% 8,725
-------
Total Outstanding................................... $97,258
=======
At December 31, 2001 and 2002, the Company also had other notes payable
which totaled $1,155,000 and $280,000 respectively. Of these notes, at December
2001 and 2002, $339,000 and $30,000 respectively, are notes that are due on
demand and bear interest at a rate of prime less 1.00%. As of December 31, 2002,
$250,000 are two-year term notes that carry an interest of 7.5%. As of December
31, 2001, the Company had $816,000 of notes which were borrowed against the cash
surrender value of the life insurance policies held on key officers. These notes
were all repaid as of December 31, 2002. Other notes payable included amounts
due
F-18
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to stockholders and directors of the Company at December 31, 2001 and 2002 of
$309,000 and $250,000. Interest paid to stockholders under such notes was not
material for the years ended December 31, 2001 and 2002.
SUBORDINATED NOTES PAYABLE
At December 31, 2001 and 2002, the Company also had subordinated debt
outstanding amounting to $3,262,000. 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 2003 to November 2007. 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 was
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, 2001 and 2002, subordinated notes payable included $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 $8,500, $53,700, and $84,000 for the years ended December 31, 2000,
2001, and 2002, respectively.
REPAYMENT SCHEDULE
At December 31, 2002, the repayment schedule for outstanding notes and
subordinated notes is as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------------
2003........................................................ $ 83,677
2004........................................................ 51,397
2005........................................................ 34,515
2006........................................................ 2,600
Thereafter.................................................. --
--------
Total.................................................. $172,189
========
F-19
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001 and 2002, the aggregate carrying value of the Company's fixed
rate borrowings was approximately $101,336,000, and $45,603,000 respectively,
with an estimated fair value of approximately $102,049,000, and $45,562,000
respectively.
F. REDEEMABLE PREFERRED STOCK:
At December 2001 and 2002, 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, 2001 and 2002.
TREASURY STOCK
The Company had 588,700 shares of common stock in treasury at December 31,
2001 and 2002.
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 4,120,380 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-20
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the stock option activity:
WEIGHTED-
AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
--------- ------------------- --------------
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
---------
Canceled......................................... (391,000) $6.70 to $13.544 $11.184
Granted.......................................... 1,350,000 $1.585 to $6.70 $ 3.555
---------
Outstanding at December 31, 2002................. 2,995,000 $1.585 to $13.544 $ 7.849
=========
The options vest over five years and are exercisable only after they become
vested. At December 31, 2000, 2001 and 2002, 200,000, 414,000 and 876,000,
respectively, of the outstanding options were fully vested.
At December 31, 2001 and 2002, 2,036,000 and 2,995,000 shares,
respectively, of common stock were reserved for common stock option exercises.
Information relating to stock options at December 31, 2002, summarized by
exercise price, is as follows:
OUTSTANDING EXERCISABLE
------------------------------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE PRICE SHARES LIFE (YEARS) EXERCISE PRICE SHARES
-------------------- --------- ------------ -------------- -------
$ 12.3125 581,391 6.15 $12.3125 345,635
$ 13.5440 40,609 6.15 $13.5440 24,365
$ 12.0625 10,000 6.58 $12.0625 6,000
$ 9.7813 608,000 7.15 $ 9.7813 242,000
$ 13.1000 260,000 8.14 $13.1000 52,000
$ 9.4800 200,000 8.87 $ 9.4800 40,000
$ 6.7000 465,000 9.17 $ 6.7000 --
$ 1.5850 830,000 9.91 $ 1.5850 166,000
--------- -------
$1.585 to $13.544 2,995,000 8.22 $ 9.5303 876,000
========= =======
F-21
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2000 2001 2002
-------- -------- ---------
Current:
Federal............................................. $ 7,109 $ 7,633 $ (7,198)
State............................................... 1,659 1,000 (872)
------- ------- --------
8,768 8,633 (8,070)
------- ------- --------
Deferred:
Federal............................................. 5,532 1,256 (4,685)
State............................................... 949 215 (1,980)
------- ------- --------
6,481 1,471 (6,665)
------- ------- --------
Total....................................... $15,249 $10,104 $(14,735)
======= ======= ========
At December 31, 2001 and 2002, the components of the net deferred tax
liability were as follows:
2001 2002
-------- ---------
Deferred tax assets:
Allowance for credit losses................................. $ 19,181 $ 17,353
Lease receivable and unearned income........................ 7,159 59,582
State NOL and other state attributes........................ 0 1,249
-------- ---------
Total deferred tax asset............................... $ 26,340 $ 78,184
======== =========
Deferred tax liabilities:
Residual value.............................................. $ (8,677) $ (8,428)
Initial direct cost......................................... (4,470) (4,013)
State refunds............................................... 0 (432)
Depreciation and amortization............................... (43,665) (89,117)
-------- ---------
Total deferred tax liability........................... $(56,812) $(101,990)
======== =========
Net deferred tax liability............................. $(30,472) $ (23,806)
======== =========
A valuation allowance against the deferred tax assets is not considered
necessary, because it is more likely than not that the deferred tax assets will
be fully realized.
At December 31, 2002, the Company had state loss carryforwards of
$8,800,000 which may be used to offset future income. These loss carryforwards
are available for use against future state income until they expire between the
years 2007 and 2022.
F-22
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
------------------------
2000 2001 2002
----- ----- ------
Federal statutory rate...................................... 35.00% 35.00% (35.00)%
State income taxes, net of federal benefit.................. 5.60% 4.60% (5.38)%
Nondeductible expenses and other............................ 1.60% (1.40)% 0.38%
----- ----- ------
Effective income tax rate................................... 42.20% 38.20% (40.00)%
===== ===== ======
I. COMMITMENTS AND CONTINGENCIES:
OPERATING AND CAPITAL LEASES
The Company's lease for its facility in Waltham, Massachusetts, expires in
2004. This lease contains one five-year renewal option with escalation clauses
for increases in the lessor's operating costs. The Company's lease for its
facilities in Newark, California expires in 2005. The Company's lease for its
facilities in Woburn, Massachusetts, expires in 2003. The Company has vacated
the facilities in Newark, California and Herndon, Virginia and is in the process
of negotiating early termination of the outstanding leases.
The Company also has entered into various operating lease agreements
ranging from three to four years for additional office equipment. At December
31, 2002, 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,
-------------------
2003........................................................ $1,776
2004........................................................ 867
2005........................................................ 227
2006........................................................ --
------
Total.................................................. $2,870
======
Rental expense under operating leases totaled $1,557,000, $1,998,000, and
$2,321,000 for the years ended December 31, 2000, 2001, and 2002, respectively.
Rental expense for the year ended 2002 includes $316,000 for the net present
value for the remaining lease payments on office space that is currently not
being utilized.
F-23
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2002, future minimum lease payments
under capital leases were as follows:
FOR THE YEARS ENDED
DECEMBER 31,
-------------------
2003........................................................ $272
2004........................................................ 180
2005........................................................ 55
2006........................................................ --
----
Total minimum lease payments................................ 507
Less amounts representing interest.......................... (36)
----
Total.................................................. $471
====
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 proceedings, and a claim
in this amount has been filed with the bankruptcy court. 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. The Company's motion
for summary judgment seeking dismissal of the counterclaim and the award of full
damages on the Company's claims was denied by Court Order, without a written
decision. The Company's motion for the appointment of a special master was also
denied without a written decision. Because of the uncertainties inherent in
litigation, we 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 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
F-24
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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. The Company has filed an
Answer denying the claims. Because of the uncertainties inherent in litigation,
we 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 alleged
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. Leasecomm has
subsequently settled this matter with Court approval.
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.
On November 25, 2002 Leasecomm and E-Commerce Exchange agreed to settle the case
with Ms. Copitka and a class of residents of Texas who leased Quickcommerce or
QuickcommercePro software licenses from Leasecomm. The Travis County District
Court entered its order approving the class settlement and entered its final
judgement in the case on January 24, 2003. Leasecomm has satisfied its
obligations under the Settlement, and the time to appeal has expired.
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.
The Court granted final approval of the class action Settlement on December
2, 2002. Leasecomm has satisfied its obligations under the Settlement, and the
time to appeal has expired. The Court retains jurisdiction to oversee any issues
that may arise regarding administration of the settlement.
F. In October, 2002, the Company was served with a Complaint in an action
in the United States District Court for the Southern District of New York filed
by approximately 170 present and former lessees asserting individual claims. The
Complaint contains claims for violation of RICO (18 U.S.C. sec. 1964), fraud,
unfair and deceptive acts and practices, unlawful franchise offerings, and
intentional infliction of mental anguish. The claims purportedly arise from
Leasecomm's dealer relationships with Themeware, E-Commerce Exchange,
Cardservice International, Inc., and Online Exchange for the leasing of websites
and virtual terminals. The Complaint asserts that the Company is responsible for
the conduct of its dealers in trade shows, infomercials and web page
advertisements, seminars, direct mail, telemarketing, all which are alleged to
constitute unfair and deceptive acts and practices. Further, the Complaint
asserts that Leasecomm's lease contracts as well as its collection practices and
late fees are unconscionable. The Complaint seeks restitution, compensatory and
treble damages, and injunctive relief. The Company filed a Motion to Dismiss the
F-25
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Complaint on January 31, 2003, and expects that the Motion will be argued
sometime after May 6, 2003. Because of the uncertainties inherent in litigation,
we cannot predict whether the outcome will have a material adverse effect.
G. On March 31, 2002, plaintiffs Robert Hayden and Renono Wesley filed a
Complaint against Leasecomm Corporation alleging a violation of California
Business & Professions Code Section 17200. The Complaint was filed on behalf of
Hayden and Wesley individually, on behalf of a class of people similarly
situated, and on behalf of the general public. The case is venued in San
Francisco Superior Court. Specifically, plaintiffs allege that Leasecomm's
practice of filing suits against lessees in Massachusetts courts constitutes an
unfair business practice under California law. On March 12, 2003, the San
Francisco County Superior Court granted Leasecomm's Motion to dismiss this
action.
H. On August 22, 2002 plaintiff Aaron Cobb filed a Complaint against
Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as
Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit;
Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of
Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb
individually, and on behalf of a class of persons and entities similarly
situated in the State of Alabama. More specifically, the Plaintiff purports to
represent a class of persons and small business in the State of Alabama who
allegedly were induced to purchase services and/or goods from any of the
Defendants named in the Complaint. The case is venued in Bullock County,
Alabama. On March 31, 2003 the trial court entered an Order denying the
Company's Motion to Dismiss. This Order is currently being reviewed and in all
likelihood will be appealed to the Alabama Supreme Court. The appeal must be
filed within 45 days of the entry of the Order. Should the appeal not be filed
or should the Company otherwise be unsuccessful with its appeal the discovery in
this case would commence with the first efforts being directed toward the Class
Certification issues. The Company continues to deny any wrongdoing and plans to
vigorously defend this claim. Because of the uncertainties inherent in
litigation, the company cannot predict whether the outcome will have a material
adverse affect.
I. In March, 2003, an action was filed by a shareholder against the
Company in United States District Court asserting a single count of common law
fraud and constructive fraud. The complaint alleges that the shareholder was
defrauded by untrue statements made to him by management, upon which he relied
in the purchase of Company stock for himself and for others. The complaint seeks
damages in an unspecified amount. Because of the uncertainties inherent in
litigation, we cannot predict whether the outcome will have a material adverse
effect.
J. In March, 2003, a purported class action was filed in Superior Court in
Massachusetts against Leasecomm and one of its dealers. The class sought to be
certified is a nationwide class (excluding certain residents of the State of
Texas) who signed identical or substantially similar lease agreements with
Leasecomm covering the same product. The complaint asserts claims for
declaratory relief, rescission, civil conspiracy, usury, breach of fiduciary
duty, and violation of Massachusetts General Laws Chapter 93A, Section 11
("Chapter 93A"). The claims concern the validity, enforceability, and alleged
unconscionability of agreements provided through the dealer, including a
Leasecomm lease, to acquire on line credit card processing services. The
complaint seeks rescission of the lease agreements with Leasecomm, restitution,
multiple damages and attorneys fees under Chapter 93A, and injunctive relief.
Because of the uncertainties inherent in litigation we cannot predict whether
the outcome will have a material adverse effect.
Leasecomm has been served with Civil Investigative Demands by the Offices
of the Attorney General for the states of Kansas, Illinois, Florida, and Texas,
and for the Commonwealth of Massachusetts. Those Offices of the Attorney
General, in conjunction with the Northwest Region Office of the Federal Trade
Commission, the Offices of the Attorney General for North Carolina and North
Dakota, and the Ventura County, California, District Attorney's Office, have
informed Leasecomm that they are seeking to coordinate their investigations
(collectively, the "Government Investigators"). At this time, the principal
focus of the investigations appears to be software license leases (principally
virtual terminals) and leases from certain
F-26
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
vendor/dealers whose activities included business opportunity seminars.
Leasecomm has further been informed that the investigations cover certain lease
provisions, including the forum selection clause and language concerning the
non-cancellability of the lease. In addition, the investigations include, among
other things, whether Leasecomm's lease termination, or rollover, provisions,
are legally sufficient; whether a Leasecomm lease is an enforceable lease;
whether there were potential problems with its leases of which Leasecomm had
knowledge; whether the leases are enforceable in accordance with their terms;
whether three day right of rescission notices were required and, if required,
whether proper notices were given; whether any lease prices were unconscionable;
whether the lease of a software license is the lease of a service, not a good;
whether any lease of satellites or computers are leases to consumers which must
comply with certain consumer statutes; whether electronic fund transfer payments
pursuant to a lease violate Reg. E; whether any Leasecomm billing and collection
practices or charges are unreasonable, or constitute unfair or deceptive trade
practices; whether Leasecomm's course of dealings with its vendors/dealers makes
Leasecomm liable for any of the activities of its vendors/dealers. In April,
2002, Leasecomm and the Government Investigators entered into provisional relief
and tolling agreements which provide for Leasecomm to take certain interim
actions, temporarily stop the running of the statute of limitations as of
January 29, 2002, and require advance notice by Leasecomm of its withdrawal from
the provisional relief agreement and advance notice by each of the Government
Investigators of its intention to commence legal action. The tolling agreement
has been extended several times and is set to expire in May, 2003.
In February, 2003, Leasecomm received a Civil Investigative Demand from the
Office of the Attorney General, State of Washington, to which a response is
currently due in April, 2003. The Civil Investigative Demand concerns an
investigation of monitoring agreements between Priority One, Inc. and various
State of Washington consumers, as to which Leasecomm appears to be the assignee
of the right to receive monthly payments.
Since the investigations are in process, and no legal action has been
commenced against Leasecomm, there can be no assurance as to the eventual
outcome.
INDEMNITIES
In the normal course of its business, the Company has entered into
agreements that include indemnities in favor of third parties, such as
engagement letters with advisors and consultants, outsourcing agreements,
underwriting and agency agreements, information technology agreements,
distribution agreements and service agreements. The foregoing agreements
generally do not contain any limits on the Company's liability and therefore, it
is not possible to estimate the Company's potential liability under these
indemnities.
The Company has entered into agreements relating to the acquisition of
assets, each of which contains indemnities in favor of third parties that are
customary to such commercial transactions. It is not possible to estimate the
Company's potential liability for these indemnities due to the nature of these
indemnities.
In certain cases, the Company has recourse against third parties with
respect to the foresaid indemnities and the Company also maintains insurance
policies that may provide coverage against certain of these claims.
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 $142,700, $89,100,
and $135,300 for the years ended December 31, 2000, 2001, and 2002,
respectively. A Director of the Company is an Officer of the company that is the
Plan custodian and record keeper.
F-27
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 10.6%, 4.5%, and .22% of all
originations during the years ended December 31, 2000, 2001, and 2002,
respectively. Another dealer accounted for approximately 4.89%, 7.38%, and
10.98% of all originations during the years ended December 31, 2000, 2001, and
2002, respectively. No other dealer accounted for more than 10% of the Company's
origination volume during the years ended December 31, 2000, 2001, or 2002.
The Company originates and services leases, contracts and loans in all 50
states of the United States and its territories. As of December 31, 2001 and
2002, leases in California, Florida, Texas, Massachusetts and New York accounted
for approximately 42% of the Company's portfolio. Only California accounted for
more than 10% of the total portfolio as of December 31, 2001 and 2002 at
approximately 14%. 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, 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. As of December 31, 2002, the notes were paid in full. No new notes were
issued during 2001 or 2002.
Other notes payable includes amounts due to stockholders of the Company at
December 31, 2001 and 2002 of $309,000 and $250,000. Interest paid to
stockholders under such notes was not material for the years ended December 31,
2001 and 2002.
At December 31, 2001 and 2002, subordinated notes payable included $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 $8,500, $53,700, and $84,000 for the years ended December 31, 2000,
2001, and 2002, respectively.
F-28
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
M. SELECTED QUARTERLY DATA (UNAUDITED):
The following is a summary of the unaudited quarterly results of operations
of the Company for 2001 and 2002.
2001 2002
------------------------------------- ---------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- --------- -------
Revenues:
Income on leases and
loans..................... $18,731 $18,060 $18,105 $16,036 $15,235 $13,791 $ 12,819 $11,167
Income on service contracts
rental and fees........... 20,611 20,491 21,204 20,853 20,050 19,170 17,730 16,860
------- ------- ------- ------- ------- ------- --------- -------
Total revenues........ 39,342 38,551 39,309 36,889 35,285 32,961 30,549 28,027
------- ------- ------- ------- ------- ------- --------- -------
Expenses:
Selling general and
administrative............ 11,903 10,658 10,900 11,438 12,574 11,409 10,306 11,246
Provision for credit
losses.................... 10,266 11,819 15,064 16,943 10,964 10,824 44,672 22,488
Depreciation and
amortization.............. 3,442 3,640 3,618 3,678 3,639 4,851 5,713 4,182
Interest.................... 4,370 3,493 3,444 2,994 2,747 2,618 2,458 2,964
------- ------- ------- ------- ------- ------- --------- -------
Total expenses........ 29,981 29,610 33,026 35,053 29,924 29,702 63,149 40,880
------- ------- ------- ------- ------- ------- --------- -------
Income (loss) before
provision for income
taxes..................... 9,361 8,941 6,283 1,836 5,361 3,259 (32,600) (12,853)
------- ------- ------- ------- ------- ------- --------- -------
Net Income (loss)........... $ 5,419 $ 5,179 $ 3,639 $ 2,080 $ 3,216 $ 1,955 ($ 19,558) ($7,711)
======= ======= ======= ======= ======= ======= ========= =======
Net Income (loss) per common
share -- basic............ 0.43 0.41 0.28 0.16 0.25 0.15 (1.53) (0.60)
Net Income (loss) per common
share -- diluted.......... 0.42 0.40 0.28 0.16 0.25 0.15 (1.53) (0.60)
Dividends per common
share..................... 0.045 0.050 0.050 0.050 0.050 0.050 0.050 --
F-29
MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
N. CONSOLIDATING BALANCE SHEET (UNAUDITED):
The following outlines the leases and other assets that have been
transferred to special purpose entities, MFI Finance Corp I and MFI Finance Corp
II, LLC.
ELIMINATING CONSOLIDATED ELIMINATING MICROFINANCIAL
LEASECOMM MFI FC I MFI FCII ENTRIES LEASECOMM MFI ENTRIES CONSOLIDATED
--------- -------- -------- ----------- ------------ ------- ----------- --------------
ASSETS:
Net investment in leases
and loans:
Receivables due in
installments........ 291,684 42,362 577 334,623 334,623
Estimated residual
value............... 30,754 30,754 30,754
Initial direct
costs............... 4,081 810 4,891 4,891
Loans receivable...... 1,501 1,501 1,028 (733) 1,796
Less:
Advance lease
payments and
deposits.......... (53) (42) (1) (96) (96)
Unearned income:.... (57,363) (10,210) (1) (67,574) (67,574)
Allowance for credit
losses............ (62,751) (6,323) (220) (69,294) (69,294)
------- ------- ------ ------- ------- ------- -------- -------
Net investment in leases
and loans:............ 207,853 26,597 355 -- 234,805 1,028 (733) 235,100
------- ------- ------ ------- ------- ------- -------- -------
Investment in service
contracts, net........ 14,463 14,463 14,463
Cash and cash
equivalents........... 5,515 5,515 (21) 5,494
Restricted cash......... 17,697 819 18,516 18,516
Property and equipment,
net................... 5,426 1,139 59 6,624 2,402 9,026
Investment in
subsidiary............ 43,974 (43,974) -- 65,115 (65,115) --
Other assets............ 2,652 871 5 3,528 43,010 (42,704) 3,834
Income taxes
receivable............ -- -- 8,652 8,652
------- ------- ------ ------- ------- ------- -------- -------
Total assets:..... 279,883 46,304 1,238 (43,974) 283,451 120,186 (108,552) 295,085
======= ======= ====== ======= ======= ======= ======== =======
LIABILITIES:
Notes payable........... 126,621 38,466 3,625 168,712 280 (65) 168,927
Subordinated notes
payable............... -- 3,262 3,262
Notes payable to
parent................ 733 733 (733) --
Capitalized lease
obligations........... -- 471 471
Accounts Payable........ 84,565 (33,690) (4,875) 46,000 544 (42,704) 3,840
Other liabilities....... 6,565 10 32 6,607 169 6,776
Income taxes payable.... (2,877) (2,877) 4,277 1,400
Deferred tax
liability............. -- 23,806 23,806
------- ------- ------ ------- ------- ------- -------- -------
Total
Liabilities:.... 215,607 4,786 (1,218) -- 219,175 32,809 (43,502) 208,482
------- ------- ------ ------- ------- ------- -------- -------
Stockholders' Equity:
Common Stock:........... 1 1 134 (1) 134
Additional
Paid-In-Capital....... 207 207 47,723 (207) 47,723
Retained Earnings....... 64,068 41,517 2,457 (43,974) 64,068 45,863 (64,842) 45,089
Treasury Stock.......... -- (6,343) (6,343)
------- ------- ------ ------- ------- ------- -------- -------
Total
Stockholders'
Equity:......... 64,276 41,517 2,457 (43,974) 64,276 87,377 (65,050) 86,603
------- ------- ------ ------- ------- ------- -------- -------
Total Equity and
Liabilities:.... 279,883 46,303 1,239 (43,974) 283,451 120,186 (108,552) 295,085
======= ======= ====== ======= ======= ======= ======== =======
Leasecomm Corporation periodically finances its lease and service
contracts, together with unguaranteed residuals, through securitizations using
special purpose vehicles. MFI Finance Corporation I and MFI Finance Corporation
II, LLC are special purpose companies. The assets of such special purpose
vehicles and cash collateral or other accounts created in connection with the
financings in which they participate are not available to pay creditors of
Leasecomm Corporation, MicroFinancial Incorporated, or other affiliates. While
Leasecomm Corporation 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, service contracts, or loans to
special-purpose entities for purposes of obtaining financing in connection with
the related receivables.
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MICROFINANCIAL INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The contribution of such assets under the terms of such financings are intended
to constitute "true sales" of such assets for bankruptcy purposes (meaning that
such assets are legally isolated from Leasecomm Corporation). However, the
special purpose entities to which such assets are contributed are not
"qualifying special purpose entities" within the meaning SFAS No. 140, and are
required under generally accepted accounting principles to be consolidated in
the financial statements of the Company. As a result, such assets and the
related liability remain on the balance sheet and do not receive gain on sale
treatment.
O. SUBSEQUENT EVENTS
On January 3, 2003 the Company entered into a Forbearance and Modification
agreement with its lenders with respect to the credit facility. This agreement
expired on February 7, 2003. The Company entered into a long-term agreement with
its lenders on April 14, 2003. This long-term agreement waives the covenant
defaults described more fully in Note E, and in consideration for this waiver,
requires the outstanding balance of the loan to be repaid over a term of 22
months beginning in April 2003 at an interest rate of prime plus 2.0%. Based on
the amortization schedule in the new agreement, the Company is obligated to
repay a minimum of $54 million, plus applicable interest, over the next twelve
months.
On February 7, 2003, the Company offered non-director employees and
executives who had been granted stock options in the past the opportunity to
cancel any of the original option agreements in exchange for a grant of shares
of restricted stock. All option awards subject to the offer were converted to
restricted stock. In connection with this offer, on February 12, 2003, 1,325,000
options converted to 319,854 shares of common stock. As of March 31, 2003,
63,971 of these shares were fully vested.
On February 18, 2003, the Company repaid $2.4 million in principal plus
accrued interest for the MFI Finance I series 2000-1 notes utilizing the clean
up call provision under its securitizations. The re-payment was made using cash
previously classified as restricted.
The Company is in the process of moving its headquarters from Waltham,
Massachusetts to its facility in Woburn, Massachusetts.
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