Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.
MICROFINANCIAL INCORPORATED
(Exact name of Registrant as Specified in its Charter)
Massachusetts 04-2962824
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
950 Winter Street Waltham, MA 02451
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number, Including Area Code: (781) 890-0177
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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the closing price of such stock as of March
12, 1999, was approximately $85,060,444.
As of March 12, 1999, 13,313,166 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Table of Contents
Description Page Number
Part I Item 1 Business............................................3
Item 2 Properties..........................................7
Item 3 Legal Proceedings...................................7
Item 4 Submission of Matters to a Vote of
Security Holders...................................7
Part II Item 5 Market for the Registrant's Common Stock
and Related Stockholders Matters...................7
Item 6 Selected Financial Data............................10
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..............................................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.............................23
Item 12 Security Ownership of Certain Beneficial
Owners and Management.............................28
Item 13 Certain Relationships and Related
Transactions......................................30
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K...........................31
Signatures...................................................34
-2-
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 $900 to $2,500, with an average amount financed of approximately $1,400 and
an average lease term of 45 months. Leasecomm Corporation started originating
leases in January 1986. The Company has used proprietary software in developing
a sophisticated, risk-adjusted pricing model and automating its credit approval
and collection systems, including a fully-automated Internet-based application,
credit scoring and approval process.
The Company targets owner-operated or other small commercial enterprises,
with little business credit history and limited or poor personal credit history
at the owner level. The Company provides financing to these lessees who may have
few other sources of credit. The Company primarily leases and rents low-priced
commercial equipment with limited residual value 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
1,100 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 stripe and combining this information with the amount
of the sale entered via a POS terminal keypad. 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.
The Company continues to develop other product lines, including leasing
other commercial products and acquiring payment streams from service contracts.
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 with limited residual value to
small merchants. The Company purchases or originates monthly payment streams
without regard to the residual value of the leased product. 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
opportunistically seeks to enter various other financing markets.
The Company's residential financings include acquiring service contracts
from Dealers that provide security monitoring services and various other types
of residential finance products. The Company's residential portfolio in past
years primarily included leases of satellite television equipment. Despite
significant origination volume in this market, the Company made a strategic
decision in July 1996 to de-emphasize the satellite television equipment
business and has greatly reduced originations of these leases since that time.
-3-
The Company originates and services leases, contracts and loans in all 50
states of the United States and its territories. As of December 31, 1998, leases
in California, Florida, Texas and New York accounted for approximately 35% of
the Company's portfolio, with none of the remaining states accounting for more
than 3% of such total.
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 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, which enhance the profitability of the lease. The initial
non-cancelable term of the lease is equal to or less than the equipment's
estimated economic life. Initial terms of the leases in the Company's portfolio
generally range from 12 to 48 months, with an average initial term of 45 months
as of December 31, 1998.
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 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. In case of Dealer error or
misrepresentation, the Company will charge-back the Dealer for both the lessee's
delinquent amounts and attorney and court fees.
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 place the equipment into its used
equipment rental and leasing program. The Company may also sell the used
equipment through equipment brokers and remarketers in order to maximize the net
proceeds from such sale.
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.
-4-
Dealers
The Company provides financing to obligors under microticket leases,
contracts and loans through its Dealers. Since the Company relies primarily on
its network of Dealers for its origination volume, the Company considers them
its customers. The Company had over 1,242 different Dealers originating 67,080
Company leases, contracts and loans in 1998. E-Commerce accounted for
approximately 11.6% of all originations in 1998. No other Dealer accounted for
more than 10% of the Company's origination volume during such year.
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
multi-dimensional 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 data base and recognized
commercial credit reporting agencies such as Dun & Bradstreet, TRW, 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 where 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 $3,000,
the Company may go beyond its own data base and recognized commercial credit
reporting agencies and 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.
-5-
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 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 poor-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.
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 will often 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 also completed the acquisition of three large POS authorization system
lease and rental portfolios, two in 1996 and one in 1998. The first acquisition,
completed in May 1996, consisted of over 8,000 rental contracts with total
fundings of $1.9 million. The second acquisition was for approximately 8,200
leases in December 1996 with fundings of $7.9 million. The Company acquired
4,841 rental contracts in July 1998 with fundings of $2.8 million.
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 differentiates itself from its competitors in the way in which
it pursues delinquent accounts that it believes its competitors would not pursue
due to the costs of collection. 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 collection efforts, including the generation of
daily priority call lists and scrolling for daily delinquent account servicing,
generation and mailing of delinquency letters, routing of incoming calls to
appropriate employees with instant computerized access to account details,
generation of delinquent account lists eligible for litigation, generation of
pleadings and litigation monitoring. Collection efforts commence immediately,
with repeated reminder letters and telephone calls upon payments becoming 10
days past due, with a lawsuit generally filed if an account is more than 85 days
past due. 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 where
necessary and obtaining and enforcing judgments.
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
-6-
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, 1998, the Company had 248 full-time employees, of which
51 were engaged in the credit activities and Dealer service, 123 were engaged in
servicing and collection activities, 9 were engaged in marketing activities, and
65 were engaged in general administrative activities. Management believes that
its 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.
ITEM 2. PROPERTIES
The Company's corporate headquarters and operations center are located in
leased space of 34,851 square feet at 950 Winter Street, Waltham, Massachusetts
02451. The lease for this space expires on June 30, 1999. The Company plans to
renew 21,656 square feet at 950 Winter Street, Waltham, Massachusetts 02451 for
an additional 5 years which will expire on July 31, 2004. The Company also
leases 2,933 square feet of office space for its West Coast office in Newark,
California under a lease which expires on August 31, 2001. The Company recently
signed a lease for 44,659 square feet of office space in Woburn, Massachusetts
which commenced on December 15, 1998 and expires on December 14, 2003. The
Company plans to relocate, from corporate headquarters, its collection, credit
and computer operations to the Woburn location and plans to utilize this
location for any further employee expansion.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are frequently parties to various claims,
lawsuits and administrative proceeding arising in the ordinary course of
business. Although the outcome of these lawsuits cannot be predicted with
certainty, the Company does not expect such matters to have material adverse
effect on the financial condition or results of operations of the Company. There
are no material pending legal proceedings to which the Company or its
subsidiaries or their respective properties are a party or were a party during
the fourth quarter of the Company's fiscal year ended December 31, 1998.
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, 1998.
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."
The Common Stock was listed on the New York Stock Exchange in February
1999. Accordingly, the high and low sales price for the Common Stock on such
exchange for each full quarter in the Company's fiscal years ending December 31,
1997 and 1998 is not available.
-7-
(b) Holders
At March 12, 1999, there were approximately 91 stockholders of record of
the Common Stock.
(c) Dividends
The Company paid the following quarterly cash dividends on the Common
Stock. The amounts indicated give effect to the 10-for-1 stock split of the
Common Stock effected on June 16, 1997 and the 2-for-1 stock split of the Common
Stock effected on February 10, 1999.
Year ended December 31, 1997 Year ended December 31, 1998
First Quarter $0.025 $0.030
Second Quarter $0.030 $0.035
Third Quarter $0.030 $0.035
Fourth Quarter $0.030 $0.035
The Company currently intends to pay dividends in the future. 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
Except as set forth below, the Company did not sell any equity securities
which were not registered under the Securities Act of 1933, as amended, during
its fiscal year ended December 31, 1998.
No. of Shares of Aggregate Exemption
Purchaser Issuance Date Common Stock Consideration Claimed*
Richard F. Latour March, 1998 458 $ 291.98 Rule 701
Richard F. Latour March, 1998 21,198 41,336.10 Rule 701
Maureen Curran March, 1998 7,486 14,597.70 Rule 701
John Plumlee March, 1998 7,486 14,597.70 Rule 701
J. Gregory Hines March, 1998 7,486 14,597.70 Rule 701
Stephen Obana March, 1998 7,486 14,597.70 Rule 701
James Andersen March, 1998 7,486 14,597.70 Rule 701
Stephen Constantino March, 1998 3,732 7,277.40 Rule 701
Carol Salvo March, 1998 7,486 14,597.70 Rule 701
Kerry Frost March, 1998 3,732 7,277.40 Rule 701
Richard F. Latour June, 1998 2,762 1,760.78 Rule 701
J. Gregory Hines September, 1998 1,480 943.50 Rule 701
Richard F. Latour September, 1998 3,222 2,054.03 Rule 701
John Plumlee September, 1998 3,008 5,865.60 Rule 701
Carol Salvo September, 1998 3,008 5,865.60 Rule 701
Richard F. Latour December, 1998 12,622 24,612.90 Rule 701
J. Gregory Hines December, 1998 4,454 8,685.30 Rule 701
Stephen Obana December, 1998 4,454 8,685.30 Rule 701
John Plumlee December, 1998 1,446 2,819.70 Rule 701
Carol Salvo December, 1998 1,446 2,819.70 Rule 701
Stephen Constantino December, 1998 2,228 4,344.60 Rule 701
*Shares issued pursuant to exercises of options under the Company's 1987 Stock
Option Plan.
-8-
(e) Use of Proceeds from Registered Securities
The Company filed a registration statement on Form S-1 (registration
statement number 333-56639) with the Securities and Exchange Commission to
register its offering of 4,000,000 shares of Common Stock (as amended, the
"Registration Statement") (the "Offering") which included 600,000 shares offered
by existing stockholders. The Registration Statement was declared effective on
February 4, 1999. The Offering commenced on February 10, 1999 and terminated on
such date after all of the registered shares of Common Stock had been sold. The
managing underwriters for the Offering were Piper Jaffray Inc. and CIBC
Oppenheimer Corp.
- --------------------------------------------------------- -----------------------------------------------------------
For the account of the Company For the account of the selling stockholders
- ---------------- ------------- ------------- ------------- ------------- --------------- ------------- --------------
Aggregate Aggregate
price of Aggregate Offering Aggregate
Offering Offering price of Offering
Amount amount Amount price of Amount amount Amount price of
registered registered sold amount sold registered registered sold amount sold
- ---------------- ------------- ------------- ------------- ------------- --------------- ------------- --------------
$3,400,000 $51,000,000 3,400,000 $51,000,000 1,200,000 $9,000,000 600,000 $9,000,000
- ---------------- ------------- ------------- ------------- ------------- --------------- ------------- --------------
The following table sets forth certain expenses incurred by the Company in
connection with the Offering. None of such expenses constituted direct or
indirect payments to directors or officers of the Company, to persons owning ten
percent or more of any class of equity securities of the Company, or to
affiliates of the Company.
Expense Amount
Underwriting discount and commissions........................... $4,200,000
Finders' Fees................................................... $0
Other Expenses.................................................. $1,313,891
Total Expenses.................................................. $5,513,891
The net proceeds of the Offering to the Company after deducting all the
expenses of the Offering were $45,486,109, which was used to repay indebtedness.
This amount does not include the $8,370,000 paid to the selling stockholders.
The Company applied its net proceeds of the Offering as set forth in the
following table. None of such proceeds constituted direct or indirect payments
to directors officers of the Company or their associates, to persons owning ten
percent or more of any class of equity securities of the Company, or to
affiliates of the Company.
Construction of plant building and facilities................... $0
Purchase and installation of machinery and equipment............ $0
Purchase of real estate......................................... $0
Acquisition of other business(es)............................... $0
Repayment of indebtedness.......................................$45,486,109
Working capital................................................. $0
Temporary investment............................................ $0
Other purposes (specify)........................................ $0
-9-
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,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------
Income Statement Data:
(Dollars in thousands except per share data)
Revenues
Income on financing leases and loans
$ 15,949 $ 27,011 $ 38,654 $ 45,634 $ 47,341
Income on service contracts (1) 6 501 2,565
Rental income 2,058 3,688 8,250 10,809 16,118
Fee income (2) 3,840 5,446 8,675 11,236 10,476
--------------------------------------------------------------
Total revenues 21,847 36,145 55,585 68,180 76,500
--------------------------------------------------------------
Expenses:
Selling, general and administrative 4,975 8,485 14,073 17,252 20,061
Provision for credit losses 8,179 13,388 19,822 (3) 21,713 (3) 19,075
Depreciation and amortization 827 1,503 2,981 3,787 5,076
Interest 5,009 8,560 10,163 11,890 12,154
--------------------------------------------------------------
Total expenses 18,990 31,936 47,039 54,642 56,366
--------------------------------------------------------------
Income before provision for
income taxes 2,857 4,209 8,546 13,538 20,134
Net income 1,643 2,524 5,080 7,652 11,924
==============================================================
Net income per common share
Basic (4) $ 0.33 $ 0.34 $ 0.52 $ 0.78 $ 1.21
Diluted (5) 0.19 0.27 0.52 0.76 1.19
Dividends per common share 0.00 0.06 0.10 0.12 0.14
December 31,
------------------------------------------------------------------
1994 1995 1996 1997 1998
------------------------------------------------------------------
Balance Sheet Data:
(Dollars in thousands)
Gross investment in leases and loans (6) $115,286 $ 189,698 $ 247,633 $258,230 $ 280,875
Unearned Income (33,807) (60,265) (76,951) (73,060) (74,520)
Allowance for credit losses (7,992) (15,952) (23,826) (26,319) (24,850)
Investment in service contracts (1) -- -- -- 2,145 8,920
Total Assets 83,484 126,479 170,192 179,701 210,254
Notes Payable 57,594 94,900 116,202 116,830 130,421
Subordinated notes payable 13,436 13,170 27,006 26,382 24,421
Total liabilities 77,652 118,568 158,013 160,935 180,771
Total stockholders' equity 5,750 7,911 12,179 18,766 29,483
-10-
Years Ended December 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
----------------------------------------------------------------
Other Data:
(Dollars in thousands, except statistical data)
Operating Data:
Total leases and loans originated (7) $ 85,627 $ 134,546 $ 143,200 $ 129,064 $ 153,819
Total service contracts acquired (8) --- 3,635 2,431 2,972 8,080
Dealer fundings (9) $ 52,745 $ 76,502 $ 73,659 $ 77,590 $ 105,200
Average yield on leases and loans (10) 29.9% 30.7% 32.4% 33.9% 35.2%
Cash flows from (used in):
Operating activities $ 26,288 41,959 60,104 77,393 95,973
Investing activities (51,528) (76,353) (86,682) (80,127) (108,111)
Financing activities 27,803 36,155 33,711 (1,789) 9,703
-----------------------------------------------------------------
Total 2,563 1,761 7,133 (4,523) (2,435)
Selected Ratios:
Return on average assets 2.45% 2.40% 3.42% 4.37% 6.12%
Return on average stockholders'
equity 28.73 36.95 50.57 49.46 49.43
Operating margin (11) 50.51 48.68 51.04 51.70 51.25
Credit Quality Statistics:
Net charge-offs $ 4,961 $ 5,428 $ 11,948 (12) $ 19,220 (12) $ 20,544
Net charge-offs as a percentage of
average gross investment (13) 5.37% 3.56% 5.46%(12) 7.57%(12) 7.47%
Provision for credit losses as a
percentage of average gross
investment (14) 8.85 8.78 9.07 8.55 6.93
Allowance for credit losses as a
percentage of gross investment (15) 6.93 8.41 9.62 10.14 8.58
- ----------
(1) The Company began acquiring fixed-term service contracts in 1995. Until
December 1996, the Company treated these fixed-term contracts as leases for
accounting purposes. Accordingly, income from these service contracts is
included in income on financing leases and loans for all periods prior to
December 1996 and investments in service contracts were recorded as
receivables due in installments on the balance sheet at December 31, 1996.
Beginning in December 1996, the Company began acquiring month-to-month
service contracts, the income from which is included as a separate category
in the Consolidated Statements of Operations and the investment in which
are recorded separately on the balance sheet.
(2) Includes loss and damage waiver fees and service fees.
(3) The provision for 1996 includes $5.0 million resulting from a reduction in
the time period for charging off the Company's receivables from 360 to 240
days. The provision for 1997 includes a one-time write-off of securitized
receivables of $9.5 million and $5.1 million in write-offs of satellite
television equipment receivables.
(4) Net income per common share (basic) is calculated based on weighted average
common shares outstanding of 5,003,880, 7,352,189, 9,682,851, 9,793,140,
and 9,859,127 for the years ended December 31, 1994, 1995, 1996, 1997, and
1998, respectively.
(5) Net income per common share (diluted) is calculated based on weighted
average common shares outstanding on a diluted basis of 8,713,065,
9,448,206, 9,770,613, 9,925,329 and 10,031,975 for the years ended December
31, 1994, 1995, 1996, 1997 and 1998, respectively.
(6) Consists of receivables due in installments, estimated residual value, and
loans receivable.
-11-
- ----------
(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 non-cancelable 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) Charge-offs in 1996 and 1997 were higher due to write-offs related to
satellite television equipment lease receivables and due to a change in the
write-off period from 360 to 240 days in the third quarter of 1996.
(13) Represents net charge-offs as a percentage of average gross investment in
leases and loans and investment in service contracts.
(14) Represents provision for credit losses as a percentage of average gross
investment in leases and loans and investment in service contracts.
(15) Represents allowance for credit losses as a percentage of gross investment
in leases and loans and investment in service contracts.
-12-
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; higher interest rates, intense competition, year 2000
non-compliance, governmental regulation, acquiring other portfolios and
companies, dependence on key personnel, effect of sales of substantial amounts
of the Common Stock, control by existing shareholders and certain anti-takeover
provisions; risks associated with acquisitions; 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 $900 to $2,500, with an average amount financed of
approximately $1,400. The Company primarily leases POS authorization systems and
other small business equipment to small commercial enterprises. For years ended
December 31, 1997 and 1998, the Company had fundings to Dealers upon origination
of leases, contracts and loans ("Dealer Fundings") of $77.6 million and $105.2
million, respectively, and revenues of $68.2 million and $76.5 million,
respectively.
The Company derives the majority of its revenues from leases originated and
held by the Company, payments on service contracts, rental payments from lessees
who continue to rent the equipment beyond the original lease term, 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.
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.
-13-
Substantially all leases originated or acquired by the Company are
non-cancelable. 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 non-cancelable
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 45 months as of December
31, 1998. Substantially all service and rental contracts are month-to-month
contracts with an expected term of seven years for service contracts and 15
months for rental contracts.
Certain Accounting Considerations
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 recorded at estimated
residual value and depreciated using the straight-line method over a period of
twelve 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 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 future 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. 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.
-14-
Leases, service 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 and loans
to be uncollectable when one of the following occur: (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. 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, 1998 Compared to Year Ended December 31, 1997
Total revenues for the year ended December 31, 1998 were $76.5 million, an
increase of $8.3 million, or 12.2%, from the year ended December 31, 1997, due
primarily to increases of $7.4 million, or 65.5%, in rental and service contract
income and $1.7 million, or 3.7%, in income on financing leases and loans over
such amounts in the previous year's period. The increase in rental and service
contract income came from an increase in the number of lessees that have
continued renting the equipment beyond the original lease term and the increase
in the number of service contracts in the Company's portfolio. The increase in
income on financing leases and loans arose from the continued growth in the
Company's lease and loan portfolio.
Selling, general and administrative expenses increased $2.8 million, or
16.2%, for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. The increase was primarily attributable to an increase in
personnel, resulting in a 19.8% increase in employee-related expenses, as the
number of employees needed to maintain and manage the Company's growing
portfolio and the general expansion of the Company's operations grew. 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.
The Company's provision for credit losses decreased $2.6 million from the
year ended December 31, 1997 to $19.1 million for the year ended December 31,
1998. This decrease resulted from an increase in recoveries and the Company's
estimate of future losses.
Depreciation and amortization expense increased by $1.3 million, or 34%,
due to the increased number of rental contracts and the amortization of the
investment associated with service contracts.
Interest expense increased by $264,000, or 2.2%, from $11.9 million for the
year ended December 31, 1997 to $12.2 million for the year ended December 31,
1998. This increase resulted from an increase in the average outstanding balance
of the Company's Credit Facilities.
As a result of the foregoing, the Company's net income increased by $4.3
million, or 55.8%, from $7.7 million for the year ended December 31, 1997 to
$11.9 million for the year ended December 31, 1998.
-15-
Dealer Fundings were $105.2 million during the year ended December 31,
1998, an increase of $27.6 million, or 35.6%, compared to the year ended
December 31, 1997. This increase primarily resulted from continued growth in
leases of equipment other than POS authorization systems, acquisitions of
service contracts and loans to commercial businesses. Receivable due in
installments, estimated residual values, loans receivable and investment in
service contracts also increased from $260 million for the year ended December
31, 1997 to $288.7 million for the year ended December 31, 1998, representing an
increase of $28.7 million, or 11%. Cash collections increased by $20.8 million
to $139.2 million during the year ended December 31, 1998, or 17.6%, from the
year ended December 31, 1997 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 increased $1.4 million, or 1.9%, from $73.1 million
at December 31, 1997 to $74.5 million at December 31, 1998. This increase was
due to the increased number of leases originated during 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Total revenues for the year ended December 31, 1997 were $68.2 million, an
increase of $12.6 million, or 22.7%, from the year ended December 31, 1996, due
to increases of $7.0 million, or 18.1%, in income on financing leases and loans,
$2.6 million, or 31.0%, in rental income and $2.6 million, or 29.5%, in fee
income. The increase in income on leases and loans was primarily the result of
the continued growth in the Company's lease portfolio. The increase in rental
income is due to the increased number of lessees who continued to rent the
equipment beyond the original lease term. The increase in fee income was a
result of the increase in the overall portfolio serviced by the Company.
The Company completed two portfolio acquisitions, one in May 1996 for $1.9
million of rental contracts and a second in December 1996 for $7.9 million of
leases. The income attributable to these acquired leases and rental contracts
represented approximately $2.2 million, or 4.7%, of total income on leases and
loans and rental income for 1996 and approximately $4.4 million, or 7.8%, of
total income on leases and loans and rental income for 1997.
Selling, general and administrative expenses increased $3.2 million, or
22.6%, for the year ended December 31, 1997 as compared to the year ended
December 31, 1996. Such increase was primarily attributable to a 20% increase in
the number of employees needed to maintain and manage the Company's increased
portfolio, the general expansion of the Company's operations and the more
competitive employment environment.
The Company's provision for credit losses increased by $1.9 million, or
9.5%, from $19.8 million in 1996 to $21.7 million in 1997. The higher provision
was due to a one-time write-off of securitized receivables of $9.5 million, $5.1
million in one-time write-offs of satellite television equipment receivables and
growth in the overall size of the Company's portfolio. The Company's 1997
provision reflected a cumulative write-off of non-accruing fully reserved
receivables in the Company's securitized portfolio. The Company wrote off the
$5.1 million in satellite television equipment receivables in 1997 sooner than
its normal 360-day policy because it was the Company's experience that certain
characteristics of consumer receivables which were different from commercial
receivables would render such receivables uncollectable under the Company's
normal collection procedures.
Depreciation and amortization expense increased by $806,000, or 27.0%, from
1996 to 1997 due to the increased number of rental contracts and the
amortization of the investment costs associated with service contracts.
Interest expense increased by $1.7 million, from $10.2 million for the year
ended December 31, 1996 to $11.9 million in 1997. This increase was primarily
due to an increase in the average outstanding balances of the Company's Credit
Facilities and Subordinated Debt.
-16-
As a result of these factors, net income increased by $2.6 million, or
50.6%, from $5.1 million in the year ended December 31, 1996 to $7.7 million in
the year ended December 31, 1997.
Dealer Fundings were $77.6 million for the fiscal year ended December 31,
1997, an increase of $3.9 million, or 5.3%, compared to $73.7 million for the
fiscal year ended December 31, 1996. The Company decided in July 1996 to scale
back its Dealer Fundings of consumer satellite television equipment leases,
funding to Dealers only $0.8 million of such leases in 1997 compared to $4.7
million in 1996. Excluding this factor, the Company had an increase in Dealer
Fundings of $7.8 million, or 11.3%, over 1996. This increase primarily resulted
from continued growth in leases of equipment other than POS authorization
systems, acquisitions of service contracts and loans to commercial businesses.
Gross investment in leases and loans also increased from $247.6 million in 1996
to $258.2 million at December 31, 1997, representing an increase of $10.6
million, or 4.3%. Cash collections increased by $31.3 million, or 35.9%, from
$87.1 million in 1996 to $118.4 million in 1997 due to the increase in the size
of the Company's overall portfolio, as well as the Company's continued emphasis
on collections. Unearned income decreased $3.9 million, or 5.1%, from $77.0
million at December 31, 1996 to $73.1 million at December 31, 1997. This
decrease resulted primarily from increased acquisitions of service contracts and
originations of loans which are accounted for on a cost basis and as a result do
not have any unearned income associated with them, as well as one-time
write-offs in 1997 of approximately $5.0 million in consumer satellite
television equipment lease receivables and $9.5 million of securitized
receivables and the corresponding unearned income associated with those leases.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995.
Total revenues for fiscal year 1996 were $55.6 million, an increase of
$19.4 million, or 53.8% over fiscal year 1995, due to increases of $11.6
million, or 43.1%, in income on financing leases and loans, $4.6 million, or
123.9%, in rental income and $3.2 million, or 59.3%, in total fee income. The
increase in income on leases and loans was the result of the continued growth in
the Company's lease portfolio in 1996, while the increase in rental income was
due to the increased number of lessees who continue to rent the equipment beyond
the original lease term including as a result of two lease and rental portfolio
acquisitions with fundings of $1.9 million in May 1996 and $7.9 million in
December 1996. The income attributable to these acquired leases and rental
contracts represented approximately $2.2 million, or 4.7%, of total income on
leases and loans and rental income for 1996. Fee income increased as a result of
the continued growth in the overall portfolio serviced by the Company.
Selling, general and administrative expenses were $14.1 million in 1996,
representing an increase of 65.9% over such expenses in 1995, due primarily to a
34% increase in the number of personnel and the significant growth in the
Company's lease portfolio from 1995 to 1996.
The Company's provision for credit losses increased by $6.4 million from
$13.4 million in 1995 to $19.8 million in 1996. Approximately $5.0 million of
the increase was to replenish the allowance for credit losses due to the change
in the write-off period from 360 days to 240 days in the third quarter of 1996.
Depreciation and amortization expense increased by $1.5 million from $1.5
million in 1995 to $3.0 million in 1996. This increase was due to the increased
number of rental contracts in the Company's portfolio.
Interest expense increased by $1.6 million, or 18.7%, from $8.6 million in
1995 to $10.2 million in 1996. This increase was primarily due to an increase in
the average outstanding balances of the Company's Credit Facilities and
Subordinated Debt.
As a result of these factors, net income increased by $2.6 million, or
101.3%, from $2.5 million for the year ended December 31, 1995 to $5.1 million
in the year ended December 31, 1996.
-17-
Dealer Fundings were $73.7 million in 1996, a decrease of $2.8 million, or
3.7%, over the $76.5 million funded during 1995. The decrease in Dealer Fundings
in 1996, excluding portfolio purchases, was primarily attributable to
management's focus on maintaining higher rates of return on POS authorization
systems, exiting the business of origination of consumer satellite television
equipment leases and performing developmental work to reposition the Company's
efforts in other commercial and residential markets, including the design of
more competitive products, a product-specific sales approach, and a renewed
focus on service contracts. Gross investment in leases and loans also increased
from $189.7 million at December 31, 1995, to $247.6 million at December 31,
1996, representing a 30.5% increase. Cash collected was $87.1 million during
1996, an increase of $26.5 million, or 43.7%, over the $60.6 million collected
in 1995. This increase was due to the increase in the size of the Company's
overall portfolio, as well as the Company's continued emphasis on collections.
Unearned income increased $16.7 million, or 27.7%, from $60.3 million at
December 31, 1995 to $77.0 million at December 31, 1996. This increase resulted
from an increase in the size of the Company's lease portfolio.
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 its operations
primarily through borrowings under its Credit Facilities, issuances of
Subordinated Debt and its on-balance sheet Securitizations. 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. At December 31, 1998, the Company had an aggregate
maximum of $140 million available for borrowing under two Credit Facilities, of
which approximately $62.7 million was outstanding as of such date. On January
27, 1999, the Company reduced the amount available under the Credit Facilities
to $110 million. The Company also uses 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. The Company used the proceeds from its initial public
offering to repay $45,486,109 million owed under the Credit Facilities. To date,
cash flow from its portfolio and other fees have been sufficient to repay
amounts borrowed under the Credit Facilities and Subordinated Debt.
The Company believes that cash flow from its operations, the net proceeds
to the Company of the Offering and amounts available under its Credit Facilities
will be sufficient to fund the Company's operations for the foreseeable future.
Although the Company is not currently involved in negotiations and has no
current commitments or agreements with respect to any acquisitions, to the
extent that the Company successfully consummates acquisitions, it may be
necessary to finance such acquisitions through the issuance of additional debt
or equity securities, the incurrence of indebtedness or a combination of both.
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.
Year 2000
Many computer programs and microprocessors were designed and developed
without consideration of the impact of the transition to the year 2000. As a
result, these programs and microprocessors may not be able to differentiate
between the year "1900" and "2000"; the year 2000 may be recognized as the
two-digit number "00". If not corrected, this could cause difficulties in
obtaining accurate system data and support.
-18-
The Company has designed and purchased numerous computer systems since its
inception. The Company's owned software and hardware is substantially Year 2000
compliant. The costs associated with such compliance will not be material to the
Company's liquidity or results of operations. The Company believes, based on
written and verbal advice from its vendors, that its critical third party
software is generally Year 2000 compliant, with minor issues, and will be
capable of functioning after December 31, 1999. However, the Company does and
will continue to interconnect certain portions of its network and systems with
other companies' networks and systems, certain of which may not be as Year 2000
compliant as those installed by the Company. While the Company has discussed
these matters with, and/or obtained written certifications from, such other
companies as to their Year 2000 compliance, there can be no assurance that any
potential impact associated with incompatible systems after December 31, 1999
would not have a material adverse effect on the Company's business, financial
condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, or
fair value of the financial instrument and derivative instruments held by the
Company at December 31, 1998, that are sensitive to changes in interest rates.
The Company uses interest-rate swaps to manage the primary market exposures
associated with underlying liabilities and anticipated transactions. The Company
uses 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
This analysis presents the hypothetical loss in earnings of the financial
instruments and derivative instruments held by the Company at December 31, 1998
that are sensitive to changes in interest rates. The Company enters into
interest rate swaps to reduce exposure to interest-rate risk connected to
existing liabilities. The Company does not hold or issue derivative financial
instruments for trading purposes.
Because the Company's net-earnings exposure under the combined debt and
interest-rate swap was to 90-day LIBOR, the hypothetical loss was modeled by
calculating the 10 percent adverse change in 90-day LIBOR and then multiplying
it by the face amount of the debt (which equaled the face amount of the interest
rate swap).
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 Facilities.
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.
-19-
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, 1998, the Company's outstanding
fixed rate indebtedness, including indebtedness outstanding under the Company's
Securitizations and indebtedness subject to the swap described below,
represented 60.4% of the Company's outstanding indebtedness. In July 1997, the
Company entered into an interest rate swap arrangement with one of its banks.
This arrangement, which expires in July 2000, has a notional amount of $17.5
million which represented 9.5% of the Company's fixed rate indebtedness
outstanding at December 31, 1998. The interest rate associated with the swap is
capped at 6.6%. During the term of the swap, the Company has agreed to match the
swap amount with 90-day LIBOR loans. If at any time the 90-day LIBOR rate
exceeds the swap cap of 6.6%, the bank would pay the Company the difference.
Through December 31, 1998, the Company had entered into LIBOR loans with
interest rates ranging from 7.1938% to 7.4103%. This arrangement effectively
changes the Company's floating interest rate exposure on the $17.5 million
notional amount to a fixed rate of 8.45%.
The aggregate hypothetical loss in earnings on an annual basis on all
financial instruments and derivative instruments that would have resulted from a
hypothetical increase of 10 percent in 90-day LIBOR, sustained for one month, is
estimated to be $32,200.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included in Exhibit 99 incorporated by reference herein.
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
Name Age Position
Peter R. Bleyleben 45 President, Chief Executive Officer and Director
Brian E. Boyle(1)(2) 50 Director
Torrence C. Harder(1)(2) 55 Director
Jeffrey P. Parker 55 Director
Alan J. Zakon(1)(2) 63 Director
Richard F. Latour 45 Executive Vice President, Chief Operating Officer,
Chief Financial Officer, Treasurer, Clerk and
Secretary
J. Gregory Hines 38 Vice President, Funding
John Plumlee 47 Vice President, MIS
Carol A. Salvo 32 Vice President, Legal
(1) Member of Audit Committee
(2) Member of Compensation Committee
Set forth below is a brief description of the business experience of the
directors and executive officers of the Company.
-20-
Peter R. Bleyleben has served as President, Chief Executive Officer and
Director of the Company or its predecessor since June 1987. Before joining the
Company, 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.
Brian E. Boyle, the Chief Executive Officer of the Company from 1985 to
1987 and Chairman of the Board of Directors from 1985 to 1995, has served as a
Director of the Company or its predecessor since 1985. He is currently the Vice
Chairman and a Director of Boston Communications Group, Inc. ("Communications"),
a Boston-based provider of switch-based call processing to the global wireless
industry. 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. He is
also a Director of Saville Systems, a global telecommunications billing software
company, with its United States headquarters in Burlington, Massachusetts, as
well as 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.
Torrence C. Harder has served as a Director of the Company since 1986 and
has served as Chairman of the Compensation Committee since 1997. He has been the
President and Director of Harder Management Company, Inc., a registered
investment advisory firm, since its establishment in 1971. He has also been the
President and Director of Entrepreneurial Ventures, Inc., a venture capital
investment firm, since its founding in 1986. Mr. Harder is a Director of
Lightbridge, Inc., a wireless industry software services provider, Dent-A-Med,
Inc., RentGrow, Inc., GWA Information Systems, Inc., Trade Credit Corporation
and UpToDate in Medicine, Inc. Mr. Harder earned an M.B.A. from the Wharton
School of the University of Pennsylvania, and a B.A. with honors in the
Philosophy of Economic Thought from Cornell University.
Jeffrey P. Parker has served as a Director of the Company since 1992. He is
the founder and has served since 1997 as the Chief Executive Officer of
CCBN.COM, a world wide web information services company based in Boston. He is
also the founder and has served since 1991 as the managing director of Private
Equity Investments, a venture capital firm focusing on start-up and early stage
companies. Mr. Parker is a Director of Boston Treasury Systems, FaxNet
Corporation, Pacific Sun Industries, Vintage Partners and XcelleNet, Inc. Mr.
Parker earned a B.A., an M.A. in Engineering and an M.B.A. from Cornell
University.
Alan J. Zakon has served as a Director of the Company 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 Autotote Corporation, a New York-based global gaming and
simulcasting company. He 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. Dr. Zakon holds a
B.A. from Harvard University, an M.S. in Industrial Management from the Sloane
School at the Massachusetts Institute of Technology and a Ph.D. in Economics and
Finance from the University of California at Los Angeles.
-21-
Richard F. Latour has served as Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Treasurer, Clerk and Secretary of the Company
since 1995. From 1986 to 1995, Mr. Latour was Vice President of Finance and
Chief Financial Officer of the Company. Prior to joining the Company, Mr. Latour
was Vice President, Finance for TRAK, Incorporated, an international
manufacturer and distributor of consumer products, where he was responsible for
all financial and related administrative functions.
J. Gregory Hines has served as Vice President, Funding since 1993. From the
time he joined the Company in 1992 until 1993, Mr. Hines served as funds manager
of the Company. Prior to joining the Company, Mr. Hines was an assistant vice
president in the Equipment Finance Division at the Bank of New England, N.A. and
Fleet National Bank.
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 1992 to 1995, Ms. Salvo served as Litigation Supervisor of the
Company. From 1995 to 1996, Ms. Salvo served as Director of Legal Collection
Services of the Company. Prior to joining the Company, Ms. Salvo was a junior
accountant with InfoPlus Inc.
The directors of the Company have been divided, with respect to the time
for which they severally hold office, into three classes, as nearly equal in
number as possible, with the term of office of the first class to expire at the
1999 annual meeting of the stockholders of the Company, the term of office of
the second class to expire at the 2000 annual meeting of the stockholders of the
Company and the term of office of the third class to expire at the 2001 annual
meeting of the stockholders of the Company, with each director to hold office
until his or her successor shall have been duly elected and qualified or until
his or her earlier removal or resignation. At each annual meeting of
stockholders of the Company, commencing with the 1999 annual meeting, directors
elected to succeed those directors whose terms then expire shall be elected for
a term of office to expire at the third succeeding annual meeting of the
stockholders of the Company after their election. In accordance with the
foregoing, Peter Bleyleben's term as a director of the Company expires at the
2001 annual meeting of the stockholders of the Company, Brian Boyle and Alan
Zakon's respective terms as directors of the Company expire at the 2000 annual
meeting of the stockholders of the Company and Torrence Harder and Jeffrey
Parker's respective terms as directors of the Company expire at the 1999 annual
meeting of the stockholders of the Company.
-22-
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the Chief Executive
Officer and the four most highly compensated executive officers for the years
ended December 31, 1998, 1997 and 1996 (the "Named Executive Officers").
Determination of the most highly compensated executive officers is based upon
compensation for the Company's fiscal year ended December 31, 1998 and does not
necessarily reflect the most highly compensated executive officers for the
Company's fiscal years ended December 31, 1997 and 1996.
Summary Compensation Table (1)
Annual Compensation
-------------------------
Name and Principal Position Year Salary Bonus (2) All Other Compensation
---- ------ -------- ----------------------
Peter R. Bleyleben.................... 1998 $250,888 $364,000 $ 65,245 (3)
President, Chief Executive Officer 1997 218,798 276,730 71,072
and Director 1996 187,837 214,073 73,674
Richard F. Latour.................... 1998 198,446 244,568 45,690 (4)
Executive Vice President, Chief 1997 169,495 153,755 (5) 49,680
Operating Officer, Chief Financial 1996 134,535 43,000 44,381
Officer, Treasurer, Clerk and Secretary
J. Gregory Hines..................... 1998 106,951 42,095 4,281 (6)
Vice President, Funding 1997 87,348 26,950 3,206
1996 79,853 10,320 2,256
John Plumlee......................... 1998 141,351 44,533 21,191 (7)
Vice President, MIS 1997 124,624 29,769 20,687
1996 108,657 14,346 18,603
Carol Salvo.......................... 1998 84,677 34,734 4,022 (8)
Vice President, Legal 1997 66,368 15,781 2,170
1996 47,190 3,817 1,502
(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
Company 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.
-23-
(3) Amounts for Dr. Bleyleben include: (a) contributions by the Company under
the Company's 401(k) retirement/profit sharing plan in 1998 ($4,000), 1997
($4,470) and 1996 ($4,500); (b) split dollar life insurance premiums paid
by the Company in 1998 ($54,156), 1997 ($62,461) and 1996 ($60,515) (in the
event of the death of Dr. Bleyleben, the Company is entitled to the cash
value under such plan with the beneficiary receiving the life insurance
portion thereof); (c) executive disability insurance policy premiums paid
by the Company in 1998 ($7,089), 1997 ($3,546) and 1996($3,546); and (d)
the benefit to the executive of interest-free loans from the Company based
on the applicable federal rate in effect on the date of issuance of each
such loan, in 1997 ($595) and 1996 ($5,113).
(4) Amounts for Mr. Latour include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($4,000), 1997
($4,500) and 1996 ($4,435); (b) split dollar life insurance premiums paid
by the Company in 1998 ($34,917), 1997 ($40,501) and 1996 ($35,067) (in the
event of the death of Mr. Latour, the Company is entitled to the cash value
under such plan with the beneficiary receiving the life insurance portion
thereof); (c) executive disability insurance policy premiums paid by the
Company in 1998 ($3,028), 1997 ($1,586) and 1996 ($2,460); and (d) the
benefit to the executive of interest-free loans from the Company based on
the applicable federal rate in effect on the date of issuance of each such
loan, in 1998 ($3,745), 1997 ($3,093) and 1996 ($2,419).
(5) Does not include $179,745 which related to bonuses awarded in prior years
and deferred until 1997 at Mr. Latour's option.
(6) Amounts for Mr. Hines include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($2,738), 1997
($2,273) and 1996 ($1,963); (b) term life insurance premiums paid by the
Company in 1998 ($84), 1997 ($84) and 1996 ($76); (c) executive disability
insurance policy premiums paid by the Company in 1998 ($602), 1997 ($434)
and 1996 ($217); and (d) the benefit to the executive of interest-free
loans from the Company based on the applicable federal rate in effect on
the date of issuance of each such loan, in 1998 ($857) and 1997 ($415).
(7) Amounts for Mr. Plumlee include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($3,870), 1997
($3,722) and 1996 ($2,991); (b) split dollar life insurance premiums paid
by the Company in 1998 ($15,000), 1997 ($15,113) and 1996 ($15,104) (in the
event of the death of Mr. Plumlee, the Company is entitled to the cash
value under such plan with the beneficiary receiving the life insurance
portion thereof); (c) executive disability insurance policy premiums paid
by the Company in 1998 ($1,016), 1997 ($1,016) and 1996 ($508); and (d) the
benefit to the executive of interest-free loans from the Company based on
the applicable federal rate in effect on the date of issuance of each such
loan, in 1998 ($1,305) and 1997 ($836).
(8) Amounts for Ms. Salvo include: (a) contributions by the Company under the
Company's 401(k) retirement/profit sharing plan in 1998 ($2,597), 1997
($1,686) and 1996 ($1,447); (b) term life insurance premiums paid by the
Company in 1998 ($84), 1997 ($69) and 1996 ($55); (c) executive disability
insurance policy premiums paid by the Company in 1998 ($485); and (d) the
benefit to the executive of interest-free loans from the Company based on
the applicable federal rate in effect on the date of issuance of each such
loan, in 1998 ($857) and 1997 ($415).
-24-
The Board of Directors of the Company is comprised of five Directors, one
of whom, Peter Bleyleben, is a salaried employee of the Company who receives no
additional compensation for services rendered as a Director. The members of the
Company's Board of Directors who are not employees of the Company ("Non-Employee
Directors") received compensation under the Company's Board of Directors Stock
Unit Compensation Plan (the "Stock Unit Plan") for their service on the Board of
Directors. Directors also are reimbursed for out-of-state travel expenses
incurred in connection with attendance at meetings of the Board of Directors and
committees thereof. In addition, the Company pays for health care insurance for
each Non-Employee Director.
The Company adopted the Stock Unit Plan in February 1997. The Stock Unit
Plan was terminated effective as of February 10, 1999. Under the Stock Unit
Plan, Non-Employee Directors who did not serve as committee chairpersons
received up to $30,000 per year, payable $3,750 per meeting in cash and $3,750
per meeting in stock units (the "Stock Units"). Committee chairpersons received
up to $35,000 per year, payable $4,375 per meeting in cash and $4,375 per
meeting in Stock Units. Under the Stock Unit Plan, the Company paid the
participant the cash amount currently and credited Stock Units in the
appropriate amounts to a deferred fee account on the date of the Board of
Directors or Committee meeting. Each Stock Unit in the deferred fee account was
valued at the time each such credit was made at the then-current value of the
Common Stock, as that value was determined from time to time by the Board of
Directors. The number of Stock Units credited to each Non-Employee Director's
deferred fee account and the value placed on each Stock Unit was appropriately
adjusted in the event of a stock dividend, stock split or other similar change
affecting the Common Stock.
As of December 31, 1998, Dr. Boyle, Mr. Harder, Mr. Parker and Dr. Zakon
had 3,665.75, 4,276.71, 3,665.75 and 4,276.71 Stock Units in their respective
accounts.
Since the Stock Unit Plan has been terminated, each Non-Employee Director
will receive a cash payment, in equal quarterly installments starting with the
second quarter of 1999, in an amount equal to the number of Stock Units in their
respective accounts multiplied by $13.95.
There were no stock options awarded in 1998 under the Company's 1987 Stock
Option Plan or the 1998 Equity Incentive Plan. The following table indicates the
aggregate option exercises in 1998 by the Named Executive Officers and fiscal
year-end option values:
-25-
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1998
AND FISCAL YEAR-END OPTION VALUES
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options at Fiscal
at Fiscal Year-End Year-End(1)
-------------------------------- -------------------------------
Shares
Acquired On
Exercise Value
Name Realized(1) Exercisable Unexercisable Exercisable Unexercisable
------------- ----------- ------------- --------------- ------------ ---------------
Peter R. Bleyleben.. 0 $0 0 0 $0 $0
Richard F. Latour... 40,262 354,244 0 38,778 0 395,835
J. Gregory Hines.... 13,420 116,842 0 14,920 0 153,719
John Plumlee........ 11,940 96,982 0 12,000 0 120,552
Carol Salvo......... 11,940 96,982 0 12,000 0 120,552
(1) The amounts in these columns are calculated using the difference between
the fair market value of the Company's Common Stock at exercise or at the
end of the Company's 1998 fiscal year, as the case may be, and the option
exercise prices. The Board of Directors determines the fair market value of
the Company's Common Stock in connection with the Stock Unit Plan based on
a formula which values the Company at a multiple (determined by reference
to an index of publicly traded companies) of the Company's most recent four
quarters net income, multiplied by a discount factor to take into account
the illiquidity of the Common Stock. The most recent value as so determined
by the Board of Directors was used in such calculations.
The Company pays annual bonuses and makes profit sharing payments as
determined by the Compensation Committee of the Board of Directors. These
payments are made under informal arrangements and are based on an employee's
performance during the prior fiscal year. Historically, the Board of Directors
has determined annual bonus and profit sharing payments for Dr. Bleyleben and
Mr. Latour. The Board of Directors also establishes a pool to be allocated by
Dr. Bleyleben and Mr. Latour on an annual basis among senior executives of the
Company. Each employee is paid one-third of his or her bonus and profit sharing
at the time such amount is determined. The remaining two-thirds is paid over the
next two years in the discretion of the Board of Directors or Dr. Bleyleben and
Mr. Latour based on Company and employee performance.
The Company 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
Company 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 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 Company's bonus and/or profit sharing
plans. Dr. Bleyleben's and Mr. Latour's current base salaries, respectively, are
$260,000 and $210,000. The bonus for the current fiscal year will be determined
by the Board of Directors. If, in connection with a payment under their
Employment Agreement, either Dr. Bleyleben or Mr. Latour shall incur any excise
-26-
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 Company 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 Company to require a successor to assume all obligations under the
Employment Agreement.
The Company has also entered into separate employment agreements with each
of the remaining Named Executive Officers which are designed to provide an
incentive to each executive to remain with the Company 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.
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 Board other
than for cause, death or disability, or is terminated by the executive for
specified good reason, the Company shall pay to the executive in a cash lump sum
within 30 days after the date of termination, the aggregate of the following
amounts: (i) the executive's annual base salary through the date of termination;
(ii) a special bonus in the amount of $575,000, $600,000 and $585,000 for
Messrs. Hines and Plumlee and Ms. Salvo, respectively; (iii) any other
compensation previously deferred by the executive, together with any accrued
interest or earnings thereon; and (iv) any accrued vacation pay.
"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 Company entitled
to vote generally in the election of directors; (ii) individuals who, as of the
date of the Company's 1998 Equity Incentive Plan constitute the Board of
Directors, cease for any reason to constitute at least a majority of the Board
of Directors except with respect to any director who was approved by a vote of
at least a majority of the directors then comprising the Board of Directors;
(iii) approval by the shareholders of the Company of a reorganization, merger or
consolidation, in each case, unless, following such reorganization, merger or
consolidation, more than 60% of the then outstanding shares of Common Stock
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 of
the Company of a complete liquidation or dissolution of the Company or the sale
or other disposition of all or substantially all of the assets of the Company.
-27-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 12, 1998 with
respect to the beneficial ownership of Common Stock of each person known by the
Company to be the beneficial owner of more than 5% of the 13,332,776 outstanding
shares of Common Stock, each director and executive officer of the Company and
all directors and executive officers of the Company (not including treasury
stock) 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) 1,555,410 11.66%
66 Norfolk Road
Chestnut Hill, Massachusetts 02464
Brian E. Boyle (3) 2,041,450 15.31%
11 Whispering Lane
Weston, Massachusetts 02493
Torrence C. Harder (4) 2,108,402 15.81%
Walden Woods
657 Sudbury Road
Concord, Massachusetts 01742-4321
Jeffrey P. Parker (5) 340,840 2.56%
253 Meadowbrook Road
Weston, Massachusetts 02493
Alan J. Zakon 40,000 *
31 Pumpkin Cay Road, Apartment A
Key Largo, Florida 33037
Richard F. Latour 306,772 2.30%
29 Cherubs Way
Hampstead, New Hampshire 03841
J. Gregory Hines 25,080 *
14 Tory Treasure Lane
Sharon, Massachusetts 02067
John Plumlee 30,275 *
97 By-Pass 28
Derry, New Hampshire 03038
Carol Salvo 18,000 *
164 Albemarle Road
Norwood, Massachusetts 02062
All directors and executive officers
as a group 6,466,229 48.50%
(9 persons)
*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 19,600 shares of Common Stock owned by Dr. Bleyleben's mother for
which Dr. Bleyleben disclaims beneficial ownership.
(3) Includes 636,750 shares of Common Stock owned by Dr. Boyle's former spouse
over which Dr. Boyle retains voting control, for which Dr. Boyle disclaims
beneficial ownership.
-28-
(4) Includes 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; 346,372 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.; and 34,046 shares of
Common Stock owned by Lightbridge, Inc. over which Mr. Harder retains
shared voting and investment power through his ownership in, and position
as Director of, Lightbridge, Inc., for which Mr. Harder disclaims
beneficial ownership.
(5) Owned by The Parker Family Limited Partnership over which Mr. Parker
retains shared voting and investment power through his ownership in, and
position as Director of, the general partner of the Parker Family Limited
Partnership.
-29-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 1995, 1997 and 1998, Richard F. Latour, Executive Vice President,
Chief Operating Officer and Chief Financial Officer of the Company, borrowed an
aggregate of $152,776 from the Company to exercise vested options to purchase
Common Stock (the "Exercised Options"). Mr. Latour repaid all outstanding
indebtedness to the Company upon the closing of the Offering with the proceeds
of shares of Common Stock sold by him. The loans were non-interest bearing
unless the principal amount thereof was not paid in full when due, at which time
interest accrued and was payable at a rate per annum equal to the prime rate
published by The Wall Street Journal plus 4.0%. The outstanding principal
balance of these loans was reduced by any dividends payable upon the stock
underlying the Exercised Options. All principal amounts outstanding under such
loans were due on the earlier of the end of employment or December 27, 2005.
During the fiscal year ended December 31, 1998, the largest aggregate amount
outstanding under these loans was $106,300. Mr. Latour also has an outstnading
Demand Note issued to the Company. As at December 31, 1998, the balance payable
to Mr. Latour under this Demand Note was $297,387 at an interest rate per annum
equal to a bank prime rate plus 1%.
The Parker Family Limited Partnership, controlled by Jeffrey Parker, a
director of the Company, loaned the Company an aggregate of $2.4 million in the
form of Junior Subordinated Notes, $2.2 million of which was outstanding as of
December 31, 1998, as follows: $200,000 on September 1, 1994 at an interest rate
per annum equal to the higher of 12% or a bank prime rate plus 3% maturing
September 1, 1999; $200,000 on May 1, 1995 at an interest rate per annum equal
to 12% or a bank prime rate plus 4% maturing May 1, 2000; $500,000 on June 1,
1996 at an interest rate per annum equal to the higher of 12% or a bank prime
rate plus 3% maturing June 1, 2000; $250,000 on December 1, 1996 at an interest
rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing
December 1, 1999; $500,000 on December 1, 1996 at an interest rate per annum
equal to the higher of 12% or a bank prime rate plus 3% maturing December 1,
2002; $250,000 on December 1, 1996 at an interest rate per annum equal to the
higher of 12% or a bank prime rate plus 3% maturing December 1, 2001; $125,000
on September 1, 1997 at an interest rate per annum equal to 11% maturing
September 1, 2001; and $125,000 on September 1, 1997 at an interest rate per
annum equal to 11% maturing September 1, 2003.
Peter R. Bleyleben, the President and Chief Executive Officer and a
Director of the Company, loaned the Company an aggregate of $125,000 in the form
of Junior Subordinated Notes as follows: $100,000 on December 1, 1996 at 12%
interest per annum maturing December 1, 2001; and $25,000 on June 1, 1998 at
10.5% interest per annum maturing June 1, 2003. Mr. Bleyleben also loaned the
Company an aggregate of $200,000 in the form of demand notes as follows:
$100,000 on October 17, 1997 at an interest rate per annum equal to a bank prime
rate minus 1%; and $100,000 on December 1, 1998 at an interest rate per annum
equal to a bank prime rate minus 1%.
Alan J. Zakon, a director of the Company, loaned the Company an aggregate
of $200,000 in the form of Junior Subordinated Notes as follows: $100,000 on
February 1, 1995 at 12% interest per annum maturing February 1, 2000; and
$100,000 on March 18, 1998 at 10.5% interest per annum through his IRA maturing
April 1, 1999.
-30-
Ingrid R. Bleyleben, the mother of Peter R. Bleyleben, the President and
Chief Executive Officer and a Director of the Company, loaned the Company the
following amounts in the form of Junior Subordinated Notes: $120,000 on February
16, 1996 at an interest rate per annum equal to 11.5% maturing March 1, 2001;
$25,000 on December 17, 1996 at an interest rate per annum equal to 11.5%
maturing January 1, 2002; $20,000 on June 4, 1997 at an interest rate per annum
equal to 11.5% maturing May 1, 2002; and $25,000 on June 1, 1998 at an interest
rate per annum equal to 10% maturing June 1, 2003.
Torrence C. Harder, a director of the Company, loaned the Company $100,000
in the form a of Junior Subordinated Note on November 1, 1994 at an interest
rate per annum equal to 12.0% or a bank prime rate plus 3% maturing November 1,
1999. Additionally, Torrence C. Harder Cultural Foundation, a entity related to
Torrence C. Harder, loaned the Company $50,000 in the form a of Junior
Subordinated Note on January 1, 1996 at an interest rate per annum equal to
11.5% maturing January 1, 2001.
All of the foregoing transactions, with the exception of the loans to Mr.
Latour, are on terms similar to those that would have been obtained through
arms-length negotiations.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Included in Exhibit 99 incorporated by reference herein.
(2) None.
(3) Exhibits Index
Exhibit
Number Description
3.1 Restated Articles of Organization, as amended. (1).
3.2 Bylaws. (1).
10.1 Amended and Restated Revolving Credit Agreement among The First
National Bank of Boston, Commerzbank Bank AG, New York Branch, and
Leasecomm Corporation dated August 6, 1996. (1).
10.2 Agreement and Amendment No. 1 to Amended and Restated Revolving Credit
Agreement among The First National Bank of Boston, Commerzbank Bank
AG, New York Branch, and Leasecomm Corporation dated September 23,
1997. (1).
10.3 Amended and Restated Loan Agreement between Leasecomm Corporation and
NatWest Bank N.A. dated July 28, 1995. (1).
10.4 First Amendment to Amended and Restated Loan Agreement between
Leasecomm Corporation and NatWest Bank N.A. dated October 30, 1995.
(1).
10.5 Second Amendment to Amended and Restated Loan Agreement between
Leasecomm Corporation and Fleet Bank, N.A. (formerly NatWest Bank
N.A.) dated August 6, 1996. (1).
10.6 Third Amendment to Amended and Restated Loan Agreement between
Leasecomm Corporation and Fleet Bank, N.A. dated August 11, 1997. (1).
10.7 Office Lease Agreement by and between AJ Partners Limited Partnership
and Leasecomm Corporation dated July 12, 1993 for facilities in
Newark, California. (1).
-31-
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).
**10.11 Board of Directors Stock Unit Compensation Plan. (1).
**10.12 1998 Equity Incentive Plan. (3).
**10.13 Employment Agreement between the Company and Peter R. Bleyleben. (3).
**10.14 Employment Agreement between the Company and Richard F. Latour. (3).
10.15 Standard Terms and Condition of Indenture dated as of November 1, 1994
governing the BLT Finance Corp. III 6.03% Lease-Backed Notes, Series
1998-A (the "1998-A Notes"), the BLT Finance Corp. III 6.42%
Lease-Backed Notes, Series 1997-A (the "1997-A Notes") and the BLT
Finance Corp. III 6.69% Lease-Backed Notes, Series 1996-A (the "1996-A
Notes"). (2).
10.16 Second Amended and Restated Specific Terms and Conditions of Indenture
dated as of October 1, 1998, governing the 1996-A Notes, the 1997-A
Notes and the 1998-A Notes. (3).
10.17 Supplement to Indenture dated May 1, 1996 governing the 1996-A Notes.
(2).
10.18 Supplement to Indenture dated August 1, 1997 governing the 1997-A
Notes. (2).
10.19 Supplement to Indenture dated as of October 1, 1998 governing the
1998-A Notes. (3).
10.20 Specimen 1997-A Note. (2).
10.21 Specimen 1996-A Note. (2).
10.22 Specimen 1998-A Note. (3).
10.23 Standard Terms and Conditions of Servicing governing the 1996-A Notes,
the 1997-A Notes and the 1998-A Notes. (2).
10.24 Specific Terms and Conditions of Servicing governing the 1996-A Notes,
the 1997-A Notes and the 1998-A Notes. (2).
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).
10.27 Employment Agreement between the Company and J. Gregory Hines. (3).
10.28 Employment Agreement between the Company and John Plumlee. (3).
10.29 Employment Agreement between the Company and Carol Salvo. (3).
10.30 Fourth Amendment to Amended and Restated Loan Agreement, dated July
31, 1998, among Leasecomm Corporation, the lenders parties thereto and
Fleet Bank, National Association, as agent. (4)
10.31 Fifth Amendment to Amended and Restated Loan Agreement, dated January
27, 1999, among Leasecomm Corporation, the lenders parties thereto and
Fleet Bank, National Association, as agent for such lenders. (4)
10.32 Second Amended and Restated Revolving Credit Agreement, dated January
27, 1999, among Leasecomm Corporation, the lenders parties thereto and
BankBoston, N.A., as agent. (4)
-32-
21.1 Subsidiaries of Registrant. (1).
*27 Financial Data Schedule.
*99 Consolidated Financial Statements and Notes to Consolidated Financial
Statements
- ----------------
* 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.
(b) No reports have been filed on Form 8-K.
(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/ PETER R. BLEYLEBEN
----------------------------------------
Peter R. Bleyleben
President, Chief Executive
Officer and Director
Date: March 31, 1999
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 President, Chief Executive Officer March 31, 1999
- ------------------------------------- and Director
Peter R. Bleyleben
/s/ RICHARD F. LATOUR Executive Vice President, Chief March 31, 1999
- ------------------------------------- Operating Officer, Chief Financial
Richard F. Latour Officer, Treasurer, Clerk and
Secretary
/s/ BRIAN E. BOYLE Director March 31, 1999
- -------------------------------------
Brian E. Boyle
/s/ TORRENCE C. HARDER Director March 31, 1999
- -------------------------------------
Torrence C. Harder
/s/ JEFFREY P. PARKER Director March 31, 1999
- -------------------------------------
Jeffrey P. Parker
/s/ ALAN J. ZAKON Director March 31, 1999
- -------------------------------------
Alan J. Zakon
-34-