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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File No. 1-14771
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)
(781) 890-0177
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(b) of the Securities and 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. [X] Yes [ ] No
As of August 11, 2000, 12,704,946 shares of the registrant's common
stock were outstanding.
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MICROFINANCIAL INCORPORATED
Table of Contents
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
December 31, 1999 and June 30, 2000 3
Condensed Consolidated Statements of Operations
Three months ended June 30, 1999 and 2000
Six months ended June 30, 1999 and 2000 4
Condensed Consolidated Statements of Cash Flows
Three months ended June 30, 1999 and 2000
Six months ended June 30, 1999 and 2000 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operation 12
Item 3 Quantitative and Qualitative Disclosures about Market Risk 17
Part II OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 6 Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
2
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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
------------ --------
ASSETS
<S> <C> <C>
Net investment in leases and loans:
Receivables due in installments $ 321,578 $ 381,574
Estimated residual value 21,070 29,569
Initial direct costs 8,164 9,597
Loans receivable 20,073 19,167
Less:
Advance lease payments and deposits (2,164) (435)
Unearned income (100,815) (129,306)
Allowance for credit losses (41,719) (42,090)
--------- ---------
Net investment in leases and loans 226,187 268,076
Investment in service contracts 14,250 13,232
Cash and cash equivalents 11,062 18,836
Property and equipment, net 7,713 13,335
Other assets 6,644 6,843
--------- ---------
Total assets $ 265,856 $ 320,322
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 144,871 $ 193,643
Subordinated notes payable 9,238 7,261
Capitalized lease obligations 1,244 1,058
Accounts payable 339 569
Dividends payable 514 572
Other liabilities 4,748 4,765
Income taxes payable 3,544 3,385
Deferred income taxes payable 22,520 22,752
--------- ---------
Total liabilities 187,018 234,005
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 authorized;
13,347,726 shares issued at 12/31/99; 13,374,646
issued at 6/30/00 133 134
Additional paid-in capital 47,920 47,968
Retained earnings 36,656 45,678
Treasury stock (667,790 shares of common stock at
12/31/99, 831,890 shares of common stock at
6/30/00), at cost (5,777) (7,372)
Notes receivable from officers and employees (94) (91)
--------- ---------
Total stockholders' equity 78,838 86,317
--------- ---------
Total liabilities and stockholders' equity $ 265,856 $ 320,322
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
3
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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1999 2000 1999 2000
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Income on financing leases and loans $ 13,661 $ 16,946 $ 26,038 $ 32,490
Income on service contracts 1,369 2,183 2,553 4,373
Rental income 5,036 6,861 10,717 12,671
Loss and damage waiver fees 1,399 1,485 2,795 2,955
Service fees 2,246 3,467 4,063 7,094
-------------------------- ---------------------------
Total revenues 23,711 30,942 46,166 59,583
Expenses:
Selling general and administrative 5,708 6,839 11,712 13,168
Provision for credit losses 6,064 9,040 11,463 17,569
Depreciation and amortization 1,767 2,554 3,455 4,587
Interest 2,366 3,650 4,985 6,725
-------------------------- ---------------------------
Total expenses 15,905 22,083 31,615 42,049
-------------------------- ---------------------------
Income before provision for income taxes 7,806 8,859 14,551 17,534
Provision for income taxes 3,263 3,728 6,039 7,433
-------------------------- ---------------------------
Net Income $ 4,543 $ 5,131 $ 8,512 $ 10,101
========================== ===========================
Net Income per common share - basic $ 0.34 $ 0.40 $ 0.67 $ 0.79
========================== ===========================
Net Income per common share - diluted $ 0.34 $ 0.40 $ 0.67 $ 0.78
========================== ===========================
Dividends per common share $ 0.040 $ 0.045 $ 0.075 $ 0.085
========================== ===========================
Weighted average shares used to compute:
Basic Net Income per share 13,295,416 12,707,898 12,649,169 12,748,238
-------------------------- ---------------------------
Fully diluted Net Income per share 13,533,369 12,780,334 12,811,471 12,941,357
-------------------------- ---------------------------
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
4
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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1999 2000 1999 2000
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 38,446 $ 43,941 $ 76,727 $ 85,828
Cash paid to suppliers and employees (12,375) (7,191) (18,261) (18,257)
Cash paid for income taxes (267) (3,792) (797) (7,637)
Interest paid (2,089) (3,862) (4,984) (6,959)
Interest received 1,040 406 1,856 771
------------------------ ------------------------
Net cash provided by operating activities 24,755 29,502 54,541 53,746
Cash flows from investing activities:
Investment in lease contracts (28,285) (46,716) (49,520) (81,942)
Investment in direct costs (2,050) (2,162) (3,029) (4,682)
Investment in service contracts (2,343) (1,054) (4,188) (2,368)
Investment in loans receivable (2,698) 0 (11,129) 0
Investment in fixed assets (435) (722) (572) (1,121)
Issuance of notes from officers and employees (1) 0 (2) 0
Repayment of notes from officers 4 1 106 3
Investment in notes receivable (119) (39) (417) (70)
Repayment of notes receivable 115 23 202 262
------------------------ ------------------------
Net cash used in investing activities (35,812) (50,669) (68,549) (89,918)
------------------------ ------------------------
Cash flows from financing activities:
Proceeds from secured debt 24,312 51,764 53,271 115,382
Repayment of secured debt (9,631) (26,410) (66,575) (51,309)
Proceeds from refinancing of secured debt 65,452 92,000 159,000 233,557
Prepayment of secured debt (65,452) (92,000) (159,000) (248,557)
Proceeds from short term demand notes payable 155 0 840 144
Repayment of short term demand notes payable (3) (47) (29) (446)
Repayment of subordinated debt (1,000) (1,000) (11,747) (2,000)
Proceeds from sale of common stock 0 0 46,116 0
Proceeds from exercise of common stock options 13 0 13 49
Repayment of capital leases (200) (118) (389) (257)
Purchase of treasury stock (1,808) (50) (1,808) (1,595)
Payment of dividends (466) (508) (813) (1,022)
------------------------ ------------------------
Net cash provided by (used in)
financing activities 11,372 23,631 18,879 43,946
------------------------ ------------------------
Net increase (decrease) in cash and cash
equivalents: 315 2,464 4,871 7,774
Cash and cash equivalents, beginning
of period: 11,373 16,372 6,817 11,062
------------------------ ------------------------
Cash and cash equivalents, end of period: $ 11,688 $ 18,836 $ 11,688 $ 18,836
======================== ========================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
5
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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Continued)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
June 30, June 30,
-------------------------- -------------------------
1999 2000 1999 2000
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Reconciliation of net income to net cash
provided by operating activities:
Net Income $ 4,543 $ 5,131 $ 8,512 $ 10,101
Adjustments to reconcile net income to
cash provided by operating activities
Depreciation and amortization 1,767 2,554 3,455 4,587
Provision for credit losses 6,064 9,040 11,463 17,569
Recovery of equipment cost and residual
value, net of revenue recognized 9,627 12,031 25,163 22,824
Increase (decrease) in current taxes 0 (40) (500) (159)
Increase in deferred income taxes 3,014 78 5,789 232
Change in assets and liabilities:
Decrease (increase) in other assets (357) 379 69 (1,594)
(Decrease) increase in accounts payable 145 362 135 230
Increase (decrease) in accrued liabilities (48) (33) 455 (44)
------------------------ -----------------------
Net cash provided by operating activities $ 24,755 $ 29,502 $ 54,541 $ 53,746
======================== =======================
Supplemental disclosure of noncash activities:
Property acquired under capital leases $ 606 $ 71 $ 819 $ 71
Accrual of common stock dividends $ 534 $ 572 $ 534 $ 572
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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MICROFINANCIAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except share and per share data)
(Unaudited)
(A) Nature of Business:
MicroFinancial Incorporated (the "Company") which operates primarily
through its wholly owned subsidiary, Leasecomm Corporation, is a specialized
finance company that primarily leases and rents commercial "microticket"
equipment and provides other financing services in amounts generally ranging
from $900 to $10,000 with an average amount financed of approximately $1,500 and
an average lease term of 42 months. The Company does not market its services
directly to lessees but sources leasing transactions through a network of
independent sales organizations and other dealer based origination networks
nationwide. The Company funds its operations primarily through borrowings under
its credit facilities, issuances of subordinated debt and on balance sheet
securitizations.
(B) Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission for interim
financial statements. Accordingly, the interim statements do not include all of
the information and disclosures required for the annual financial statements. In
the opinion of the Company's management, the consolidated financial statements
contain all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of these interim results. These
financial statements should be read in conjunction with the consolidated
financial statements and notes included in the Company's Annual Report and Form
10-K for the year ended December 31, 1999. The results for the six-month period
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the full year ended December 31, 2000.
The balance sheet at December 31, 1999 has been derived from the audited
financial statements included in the Company's Annual Report and Form 10-K for
the year ended December 31,1999.
Provision for Credit Losses:
The Company maintains an allowance for credit losses on its investment in
leases, loans and service contracts at an amount that it believes is sufficient
to provide an adequate provision 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 leases, loans and service
contracts, if any. In addition, the allowance reflects management's judgment of
the additional loss potential considering future economic conditions and the
nature and characteristics
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of the underlying lease portfolio. The Company determines the necessary
periodic provision for the 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, loans and service contracts.
The following table sets forth the Company's allowance for credit losses as
of December 31, 1998 and, 1999 and June 30, 2000 and the related provision,
charge-offs and recoveries for the year ended December 31, 1999 and the six
months ended June 30, 2000.
Balance at December 31, 1998................... $24,850
Provision for credit losses.................... 37,836
Charge-offs.................................... 35,957
Recoveries..................................... 14,990
-------
Charge-offs, net of recoveries............... 20,967
-------
Balance at December 31, 1999................... $41,719
=======
Provision for credit losses.................... 17,569
Charge-offs.................................... 22,573
Recoveries..................................... 7,308
-------
Charge-offs, net of recoveries............... 15,265
Transfer to other asset reserve................ 1,933
-------
Balance at June 30, 2000....................... $42,090
=======
For the six months ended June 30, 2000, the Company reserved $1.9 million
against other receivables. The allowance reflects management's judgement of loss
potential considering future economic conditions and the nature of the
underlying receivables.
The following table sets forth the Company's other asset reserve as of
December 31, 1999 and June 30, 2000 and the related provision, charge-offs and
recoveries for the six months ended June 30, 2000.
Balance at December 31, 1999................... $ 0
=======
Transfer from allowance for credit losses...... 1,933
-------
Charge-offs.................................... 698
Recoveries..................................... 0
------
Charge-offs, net of recoveries............... 698
Balance at June 30, 2000....................... $ 1,235
=======
8
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Earnings Per Share:
The Company applies the principles set forth in Statement of Financial
Accounting Standard No. 128, "Earnings Per Share." ("SFAS No.128") which
specifies the computation, presentation and disclosure requirements for net
income per share. Basic net income per common share is computed based upon the
weighted average number of common shares outstanding during the period. Dilutive
net income per common share gives effect to all dilutive potential common shares
outstanding during the period. Under SFAS No. 128, the computation of dilutive
earnings per share does not assume the issuance of common shares that have an
antidilutive effect on the net income per share. Options to purchase zero and
830,000 shares of common stock were not included in the computation of diluted
earnings per share for the three months ended June 30, 1999 and 2000
respectively because their effects were antidilutive. Options to purchase zero
and 830,000 shares of common stock were not included in the computation of
diluted earnings per share for the six months ended June 30, 1999 and 2000
respectively because their effects were antidilutive.
<TABLE>
<CAPTION>
For three months ended For six months ended
June 30, June 30,
-------------------------- ---------------------------
1999 2000 1999 2000
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Net Income $ 4,543 $ 5,131 $ 8,512 $ 10,101
Shares used in computation:
Weighted average common
shares outstanding used
in computation of net
income per common share 13,295,416 12,707,898 12,649,169 12,748,238
Dilutive effect of common
stock options 237,953 72,437 162,302 193,119
Shares used in computation
net income per common
share - assuming dilution 13,533,369 12,780,335 12,811,471 12,941,357
----------- ----------- ----------- -----------
Net income per common share $ 0.34 $ 0.40 $ 0.67 $ 0.79
Net income per common share
assuming dilution $ 0.34 $ 0.40 $ 0.67 $ 0.78
</TABLE>
Notes Payable:
On December 21, 1999, the Company entered into a revolving line of credit
and term loan facility with a group of financial institutions whereby it may
borrow a maximum of $150,000,000 based upon qualified lease receivables, loans,
rentals and service contracts. Outstanding borrowings with respect to the
revolving line of credit bear interest based at Prime for Prime Rate Loans, the
prevailing rate per annum as offered in the interbank Eurodollar market
(Eurodollar) plus 1.75% for Eurodollar Loans or the seven day Money Market rate
plus 2.00% for Swing Line
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advances. If the Eurodollar Loans are not renewed upon their maturity they
automatically convert into prime rate loans. Swing Line advances have a 7 day
maturity and upon their maturity they automatically convert into prime rate
loans. In addition, the Company's aggregate outstanding principal amount of
Swing Line advances shall not exceed $5 million. The prime rates at December 31,
1999, and June 30, 2000 were 8.50% and 9.50% respectively. The 90-day Eurodollar
rates December 31, 1999, and June 30, 2000 were 5.9375% and 6.72%, respectively.
The 7-day Money Market rates December 31, 1999, and June 30, 2000 were 5.6875%
and 6.84%, respectively.
The Company had borrowings outstanding under these agreements with the following
terms:
December 31, 1999 June 30, 2000
---------------------- -------------------
Type Rate Amount Rate Amount
---------- ------- -------- ------ -------
(in thousands) (in thousands)
Prime 8.5000% $ 14,330 9.5000% $ 9,752
Swing Line 8.7800% 1,914
Swing Line 8.8800% 2,511
Eurodollar 8.4700% 30,000
Eurodollar 7.9375% 17,500 7.9700% 17,500
Eurodollar 7.8125% 12,000 8.5000% 12,000
Eurodollar 8.0000% 65,000 8.5000% 50,000
-------- --------
Total Outstanding $108,830 $123,677
-------- --------
Outstanding borrowings are collateralized by leases, loans, rentals and
service contracts pledged specifically to the financial institutions. All
balances under the revolving line of credit will be automatically converted to a
term loan on September 30, 2001 provided the line of credit is not renewed and
no event of default exists at that date. All converted term loans are payable
over the term of the underlying leases, loans, rentals and service contracts,
but in any event not to exceed 36 monthly installments. The most restrictive
covenants of the agreement have minimum net worth and income requirements.
BLT III has two series of notes outstanding, the 1997-A Notes and the
1998-A Notes. In August 1997, BLT III issued the 1997-A Notes in aggregate
principal amount of $44,763,000 and in November 1998, BLT III issued the 1998-A
Notes in aggregate principal amount of $40,769,000. In March 2000, MFI I issued
the 2000-1 Notes in aggregate principal amount of $50,056,686. Outstanding
borrowings are collateralized by a specific pool of lease receivables.
At December 31, 1999 and June 30, 2000, BLT and MFI I had borrowings
outstanding under the series of notes with the following terms:
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December 31, 1999 June 30, 2000
---------------------- -------------------
Series Rate Amount Rate Amount
---------- ------- -------- ------- -------
(in thousands) (in thousands)
BLT III
1997-A Notes 6.4200% $ 9,498 6.4200% $ 2,744
1998-A Notes 6.0300% $25,473 6.0300% $20,723
MFI I
2000-1 Notes $ -- 7.3750% $45,730
------- -------
$34,971 $69,197
------- -------
The Company also had other notes payable which totaled $769,000 and
$1,070,000, at June 30, 2000 and December 31,1999, respectively. The notes are
due on demand and bear interest at a rate of prime less 1.00%.
Stock Options:
Under the 1998 Equity Incentive Plan (the "1998 Plan") which was adopted on
July 9, 1998 the Company had reserved 2,000,000 shares of the Company's common
stock for issuance pursuant to the 1998 Plan. No options were granted during the
three months ended June 30, 2000. A total of 1,630,000 options were outstanding
at June 30, 2000 of which 171,000 were vested.
Dividends:
On June 19, 2000 the Company's Board of Directors approved a dividend of
$.045 per common share for all outstanding common shares as of June 30, 2000
which was paid on July 14, 2000.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Three months ended June 30, 2000 as compared to the three months ended June 30,
1999.
Net income for the three months ended June 30, 2000 was approximately $5.1
million, an increase of $600,000 or 13% from the three months ended June 30,
1999. This represents diluted earnings per share for the three months ended June
30, 2000 of $0.40 per share on weighted average outstanding shares of 12,780,334
as compared to $0.34 per share on weighted average outstanding shares of
13,533,369 for the three months ended June 30, 1999.
Total revenues for the three months ended June 30, 2000 were $30.9 million,
an increase of $7.2 million, or 30%, from the three months ended June 30, 1999.
The increase was primarily due to an increase of $3.3 million, or 24%, in income
on financing leases and loans, $2.6 million, or 41%, in rental and service
contract income and $1.3 million, or 36%, in fee income. The increase in income
on financing leases and loans was due to the increased number of leases
originated. The increase in rental and service contract income is a result of
the increased number of lessees that have continued to rent their equipment
beyond their original lease term, a rental portfolio of 7,085 accounts purchased
during the three months ended June 30, 2000 and the increased number of service
contracts originated. The increase in fee income is the result of increased fees
from the lessees related to the collection and legal process employed by the
Company.
Selling, general and administrative expenses increased by $1.1 million, or
20%, for the three months ended June 30, 2000, as compared to the three months
ended June 30, 1999. Compensation and personnel related expenses increased by
$800,000 or 22%, due to an increase in overall compensation levels, an increase
in the number of employees needed to maintain the Company's portfolio, as well
as an increase of $60,000 in contract labor. Additionally, the Company decided
to accrue approximately $352,000 for discretionary management bonuses which are
contingent upon Board of Director approval after the close of the fiscal year
and company contributions to the employee 401(k) plan.
Depreciation and amortization increased by $800,000, or 45%, due to the
increased number of rental contracts and amortization of the Company's
investment in service contracts.
The Company's provision for credit losses increased by $3.0 million or 49%,
for the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999. This increase is a result of the Company's historical policy,
based on experience, of providing a provision for credit losses based upon the
dealer fundings and revenue recognized in any period and reflects management's
judgement of loss potential considering economic conditions and the nature of
the underlying receivables. Total revenues increased by $7.2 million, or 30% for
the three months ended June 30, 2000 as compared to the three months ended June
30, 1999.
Net interest expense increased by $1.3 million, or 54%, for the three
months ended June 30, 2000 as compared to the three months ended June 30, 1999.
This increase resulted from the
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Company's increased level of borrowings on its revolving line of credit as
well as rising interest rates.
Dealer fundings were $47.3 million for the three months ended June 30,
2000, up $14.1 million, or 42.5% as compared to the three months ended June 30,
1999. This increase is a result of a 67% growth in the Company's Point Of Sale
business, as well as, continued growth in the Company's Non-Point Of Sale
business. Total cash from customers increased by $5.5 million or 14% to a total
of $43.9 million. This increase is primarily the result of an increase in the
size of the overall portfolio. Investment in lease and loan receivables due in
installments, estimated residuals, and service contracts were up from $377
million in December of 1999 to $443.5 million in June of 2000, representing an
18% increase.
Six months ended June 30, 2000 as compared to the six months ended June 30,
1999.
Net income for the six months ended June 30, 2000 was approximately $10.1
million, an increase of $1.6 million or 19% from the six months ended June 30,
1999. This represents diluted earnings per share for the six months ended June
30, 2000 of $0.78 per share on weighted average outstanding shares of 12,941,357
as compared to $0.67 per share on weighted average outstanding shares of
12,811,471 for the six months ended June 30, 1999.
Total revenues for the six months ended June 30, 2000 were $59.6 million,
an increase of $13.4 million, or 29%, from the six months ended June 30, 1999.
The increase was primarily due to an increase of $6.5 million, or 25%, in income
on financing leases and loans, $3.8 million, or 28%, in rental and service
contract income and $3.2 million, or 47%, in fee income. The increase in income
on financing leases and loans was due to the increased number of leases
originated. The increase in rental and service contract income is a result of
the increased number of lessees that have continued to rent their equipment
beyond their original lease term, a rental portfolio of 7,085 accounts purchased
during the six months ended June 30, 2000 and the increased number of service
contracts originated. The increase in fee income is the result of increased fees
from the lessees related to the collection and legal process employed by the
Company.
Selling, general and administrative expenses increased by $1.5 million, or
12%, for the six months ended June 30, 2000, as compared to the six months ended
June 30, 1999. Compensation and personnel related expenses increased by $1.4
million, or 19%, due to an increase in overall compensation levels, an increase
in the number of employees needed to maintain the Company's portfolio as well as
an increase of $200,000 in contract labor. Additionally, the Company decided to
accrue approximately $352,000 for discretionary management bonuses which are
contingent upon Board of Director approval after the close of the fiscal year
and company contributions to the employee 401(k) plan.
Depreciation and amortization increased by $1.1 million, or 33%, due to the
increased number of rental contracts and amortization of the Company's
investment in service contracts.
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The Company's provision for credit losses increased by $6.1 million or 53%,
for the six months ended June 30, 2000 as compared to the six months ended June
30, 1999. This increase is a result of the Company's historical policy, based on
experience, of providing a provision for credit losses based upon the dealer
fundings and revenue recognized in any period reflects management's judgement of
loss potential considering economic conditions and the nature of the underlying
receivables. Total revenues increased by $13.4 million, or 29% for the six
months ended June 30, 2000 as compared to the six months ended June 30, 1999.
Net interest expense increased by $1.7 million, or 35%, for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999. This
increase resulted from the Company's increased level of borrowings on its
revolving line of credit as well as rising interest rates.
Dealer fundings were $84.6 million for the six months ended June 30, 2000,
up $20.7 million, or 32% as compared to the six months ended June 30, 1999. This
increase is a result of a 87% growth in the Company's Point Of Sale business, as
well as, continued growth in the Company's Non-Point Of Sale business. Total
cash from customers increased by $9.1 million or 12% to a total of $85.8
million. This increase is primarily the result of an increase in the size of the
overall portfolio.
EXPOSURE TO CREDIT LOSSES
The following table sets forth certain information as of December 31, 1998
and 1999 and June 30, 2000 with respect to delinquent leases, service contracts
and loans. The percentages in the table below represent the aggregate on such
date of the actual amounts not paid on each invoice by the number of days past
due, rather than the entire balance of a delinquent receivable, over the
cumulative amount billed at such date from the date of origination on all leases
service contracts and loans in the Company's portfolio. For example, if a
receivable is 90 days past due, the portion of the receivable that is over 30
days past due will be placed in the 31-60 days past due category, the portion of
the receivable which is over 60 days past due will be placed in the 61-90 days
past due category and the portion of the receivable which is over 90 days past
due will be placed in the over 90 days past due category. The Company
historically used this methodology of calculating its delinquencies because of
its experience that lessees who miss a payment do not necessarily default on the
entire lease. Accordingly, the Company includes only the amount past due rather
than the entire lease receivable in each category.
14
<PAGE> 15
<TABLE>
<CAPTION>
As of As of
December 31 June 30
--------------------- --------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Cumulative amounts billed (in thousands) $317,034 $380,380 $422,705
31-60 days past due 1.3% 1.7% 1.9%
61-90 days past due 1.3% 1.3% 1.7%
over 90 days past due 7.8% 7.4% 8.4%
-------- -------- --------
Total past due 10.4% 10.4% 12.0%
======== ======== ========
</TABLE>
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, loans
and service contracts. 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, loans, rentals and service contracts, as well as to fund
future acquisitions of leasing companies or portfolios.
The Company's uses of cash include the origination and acquisition of
leases, loans, rentals and service contracts, payment of interest expenses,
repayment of borrowings under its credit facilities, subordinated debt and
securitizations, payment of selling, general and administrative expenses, income
taxes, capital expenditures, and the Company's stock repurchase program.
The Company utilizes its credit facility to fund the origination and
acquisition of leases, loans, rentals and service contracts that satisfy the
eligibility requirements established pursuant to each facility. At June 30,
2000, the Company had an aggregate maximum of $150 million available for
borrowing under its credit facility, of which approximately $123.7 million was
outstanding as of such date. To date, cash flow from its portfolio and other
fees have been sufficient to repay current amounts due under the credit
facilities and subordinated debt.
The Company believes that the cash flow from its operations and the 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 acquisition, 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.
Note on Forward Looking Information
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<PAGE> 16
Statements in this document that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Such statements contain a number of risks and uncertainties, including but not
limited to: the Company's dependence on point-of-sale authorization systems and
expansion into new markets; the Company's significant capital requirements;
risks associated with economic downturns; higher interest rates; intense
competition; change in regulatory environment and risks associated with
acquisitions. Readers should not place undue reliance on forward-looking
statements, which reflect the management's view only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances. The Company cannot
assure that it will be able to anticipate or respond timely to changes which
could adversely affect its operating results in one or more fiscal quarters.
Results of operations in any past period should not be considered indicative of
results to be expected in future periods. Fluctuations in operating results may
result in fluctuations in the price of the Company's common stock. For a more
complete description of the prominent risks and uncertainties inherent in the
Company's business, see the risks factors described in the Company's Form S-1
Registration Statement and other documents filed from time to time with the
Securities and Exchange Commission.
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<PAGE> 17
ITEM 3 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 June 30, 2000, that are sensitive to changes in interest rates. The
Company has used interest-rate swaps to manage the primary market exposures
associated with underlying liabilities and anticipated transactions. The Company
used these instruments to reduce risk by creating offsetting market exposures.
The instruments held by the Company are not held for trading purposes and
expired on July 10, 2000.
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 June 30, 2000 that
are sensitive to changes in interest rates. The Company has entered 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 Eurodollar Rate, the hypothetical loss was
modeled by calculating the 10 percent adverse change in 90-day Eurodollar Rate
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, loans, rentals and
service contracts is on a fixed interest rate basis due to the leases, loans,
rentals and service contracts having scheduled payments that are fixed at the
time of origination of the lease, loan, rentals or service contract. When the
Company originates or acquires leases, loans and service contracts it bases its
pricing in part on the "spread" it expects to achieve between the implicit yield
rate to the Company on each lease, loan or service contract and the effective
interest cost it will pay when it finances such leases, loans and service
contracts through its credit facilities. Increases in the interest rates during
the term of each lease, loan or service contract 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, loan or service contract.
Given the relatively short average life of the Company's leases, loans,
rentals and service contracts, the Company's goal is to maintain a blend of
fixed and variable interest rate obligations.
17
<PAGE> 18
As of June 30, 2000, the Company's outstanding fixed rate indebtedness,
including indebtedness outstanding under the Company's securitizations and
indebtedness subject to the swap described below, represented 45% of the
Company's outstanding indebtedness. In July 1997, the Company entered into an
interest rate swap agreement with one of its banks. This agreement, which
expired on July 10, 2000, has a notional amount of $17.5 million, which
represented 20% of the Company's fixed rate indebtedness outstanding at June 30,
2000. 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
Eurodollar loans. If at any time the 90-day Eurodollar rate exceeds the swap cap
of 6.6%, the bank would pay the Company the difference. Through June 30, 2000,
the Company had entered into Eurodollar loans with interest rates ranging from
7.97% to 8.50%. This arrangement effectively changes the Company's floating
interest rate exposure on the $17.5 million notional amount to a fixed rate of
8.35%.
The aggregate hypothetical loss in earnings on an annual basis on the
financial instruments and derivative instruments that would have resulted from a
hypothetical increase of 10% in the 90-day Eurodollar rate, sustained for one
month, is estimated to be $12,175.
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<PAGE> 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Management believes, after consultation with counsel, that the allegations
against the Company included in the lawsuits described below are without merit,
and the Company is vigorously defending each of the allegations. Four (4) of the
first five (5) actions described below have been filed by the same attorney, on
behalf of various plaintiffs. The Company also is subject to claims and suits
arising in the ordinary course of business. At this time, it is not possible to
estimate the ultimate loss or gain, if any, related to these lawsuits, nor if
any such loss will have a material adverse effect on the Company's results of
operations or financial position.
I. On August 24, 1999, a purported class action lawsuit was filed in
Middlesex Superior Court for The Commonwealth of Massachusetts against the
Company and its wholly-owned subsidiary Leasecomm Corporation ("Leasecomm").
The complaint has been amended four times, most recently by the Fourth
Amended Complaint and Jury Claim filed on or about November 4, 1999 (as amended,
the "Clark Complaint").
The purported class consists of individuals and businesses that have been
sued by Leasecomm in a Massachusetts court for allegedly breaching Leasecomm's
Non Cancellable Equipment Lease Agreement or Non Cancellable Lease Agreement
(the "Lease Agreements") containing a forum selection clause. The forum
selection clause is an agreement between the parties to the Lease Agreements to
submit to the jurisdiction of the courts of The Commonwealth of Massachusetts
for the bringing of any suit or other proceeding. The purported class would be
limited to individuals and businesses that: have no place of business or
residence in New England; have been sued in a Massachusetts court for breach of
the Lease Agreements; had no more than three employees as of the date of the
Lease Agreement; had been in existence for no more than three years as of the
date of the Lease Agreement; and had entered into Lease Agreements with
scheduled monthly lease payments which aggregated to less than $5,000.
The Clark Complaint alleges that enforcement of the forum selection clause
is not fair or reasonable because, among other things, litigation in
Massachusetts is prohibitively costly and time consuming for purported class
members, purported class members have no choice but to enter into the Lease
Agreement because of Leasecomm's greater bargaining power, and purported class
members allegedly have valid defenses to the claims asserted against them by
Leasecomm. The Plaintiffs seek: a declaration that the forum selection clause is
not fair or reasonable as to purported class members and that the Massachusetts
courts lack personal jurisdiction over purported class members; dismissal
without prejudice of all cases pending in Massachusetts against purported class
members; a permanent injunction preventing Leasecomm and its affiliates from
bringing suit in Massachusetts against purported class members; a permanent
injunction preventing Leasecomm or its affiliates from entering into Lease
Agreements containing the forum selection clause; unspecified monetary damages
against Leasecomm and the Company in favor of purported class members equal to
double or treble the moneys collected in
19
<PAGE> 20
connection with lawsuits filed against purported class members in
Massachusetts courts, together with attorneys' fees and costs.
The parties have filed various motions with the Court. Two of these
motions, namely Leasecomm and the Company's motions to Dismiss the Fourth
Amended Complaint, have been heard by the Court and are awaiting decision. The
Plaintiffs' Motion for Class Certification is pending, and the Court has not yet
scheduled a hearing.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome. However, the forum selection clause at issue in this
litigation has been enforced in other cases.
II. On June 3, 1999 a purported class action lawsuit was filed in Middlesex
Superior Court in the Commonwealth of Massachusetts against Leasecomm. The
complaint was amended on or about July 26, 1999 (as amended, the
"McKenzie-Pollock Complaint"). On September 3, 1999 Leasecomm removed the action
to the United States District Court for the District of Massachusetts.
The purported class consists of individuals who entered into a Lease
Agreement with Leasecomm between June 4, 1993 and the date of the
McKenzie-Pollock Complaint.
Plaintiffs allege: that Leasecomm causes individuals to enter into
non-cancellable, long-term leases when there is no reasonable expectation that
most of the individuals would need or use the equipment for the duration of the
lease term; that Leasecomm conceals or misrepresents the nature of the terms of
its Lease Agreements; that the Lease Agreements are non-negotiable adhesion
contracts which are oppressive and unfair; that the cost of acquiring the
equipment through Leasecomm is often double or triple the retail cost of the
equipment; that Leasecomm violates state usury laws; that Leasecomm engages in
unfair debt collection practices; that Leasecomm brings lawsuits against
purported class members in Massachusetts even though it has no jurisdiction over
them in Massachusetts courts; that Leasecomm fails to make proper service and
then files pleadings which state that proper service was made, thereby obtaining
default judgments against certain members of the purported class; that Leasecomm
conspired with its salespersons to cause members of the purported class to enter
into unconscionable leases by concealing and misrepresenting their terms; that
Leasecomm failed to comply with the Truth in Lending Act and the Massachusetts
Consumer Credit Cost Disclosure Act; and that Leasecomm has engaged in unfair
trade practices in violation of the Massachusetts consumer protection statute.
Plaintiffs and the members of the purported class seek: unspecified damages
for monetary losses allegedly sustained by them as a result of this conduct by
Leasecomm and reimbursement of costs and attorneys' fees; treble damages and
other punitive damages; rescission of the Lease Agreements, or a declaration
that they are void, and return of all moneys paid to Leasecomm; and damages for
unjust enrichment.
20
<PAGE> 21
The parties have filed various motions with the Court. In December, 1999,
the Court granted Leasecomm's motion to dismiss in part, and ordered that the
federal Truth in Lending and Fair Debt Collection Practices claims be dismissed.
The Court then ordered the remaining claims to be remanded to the Middlesex
Superior Court for further proceedings, including decisions on the balance of
Leasecomm's motion to dismiss, since all federal claims in the case had been
dismissed. Leasecomm subsequently filed a renewed motion to dismiss in the
Superior Court, again asserting that the remaining non-federal claims are
legally insufficient and should have been presented in earlier court
proceedings. The Court has heard argument on Leasecomm's motion to dismiss, but
has not yet issued a ruling.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
III.On October 25, 1999, a purported class action lawsuit was filed in
Middlesex Superior Court in The Commonwealth of Massachusetts against Leasecomm
(the "Lamar Complaint"). The purported class consists of all individuals and
businesses who, on or after September 28, 1996, signed a Leasecomm agreement
which states that it is "non-cancelable" and/or contains certain standard
provisions relating to delivery and acceptance of the leased equipment and
warranties and servicing for the equipment. The Plaintiffs contend that these
particular lease terms are contrary to Article 2A of the Uniform Commercial Code
as adopted in Massachusetts and that Leasecomm's use of these terms constitutes
an unfair and deceptive trade practice under Chapter 93A of the Massachusetts
General Laws. The Plaintiffs seek a declaration that the lease terms in question
are unfair and deceptive and that Leasecomm's use of those terms is unfair and
deceptive. The Plaintiffs also seek a Court order requiring Leasecomm to notify
all purported class members of the Court's ruling in the case; to stop using the
lease terms or similar lease terms which allegedly misstate lessees' rights
under Massachusetts law; to refrain from enforcing those lease terms against any
of the purported class members; to refrain from providing or communicating
incorrect information regarding lessees' rights under Massachusetts law; and to
include in every lease agreement language which conspicuously describes the
rights of lessees under Massachusetts law. Finally, the Plaintiffs seek
reimbursement of their costs and attorneys' fees.
The parties have filed various motions with the Court. After the Court
denied Leasecomm's Motion to Dismiss without prejudice to its being re-filed at
a later time, plaintiffs filed a Second Amended Complaint voluntarily
withdrawing one plaintiff and substituting a new plaintiff. Leasecomm has filed
an answer to the Second Amended Complaint, and the Plaintiffs have filed a
motion for class certification. Leasecomm's opposition to the motion for class
certification will be due in August, and the Court has not yet scheduled a
hearing.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
IV. On or about June 16, 2000, a purported class action lawsuit was filed
in Middlesex Superior Court in the Commonwealth of Massachusetts against
Leasecomm, the Company, John Gregory Hines, Richard F. Latour, Peter R. von
Bleyleben, Cardservice International, Inc., Autorize.net Corporation, and
Humboldt Bank (the "Bradford Complaint").
21
<PAGE> 22
The purported class consists of individuals and businesses who have
executed or will in the future execute, as lessee or guarantor, a four-year
Leasecomm "non-cancellable" lease of an Authorize.net Corporation "virtual
terminal" marketed by Cardservice International, Inc. (the "Lease Agreements"),
and the lease provides for a "base payment" of at least $39.99 per month.
Plaintiffs allege: that the Lease Agreements are, in fact, loans that are
subject to state usury laws; that the Lease Agreements are usurious; that
Leasecomm's use of the Lease Agreements constitutes an unfair and deceptive
trade practice in violation of Massachusetts General Laws Chapter 93A; that
various of the defendants have conspired with one another to defraud the members
of the purported class and have violated Massachusetts General Laws Chapter 93A;
and that the Company is liable for any damages that might be entered in favor of
the Plaintiffs and the purported class members and against Leasecomm.
Plaintiffs and the members of the purported class seek: unspecified damages
for monetary losses allegedly sustained by them and reimbursement of costs and
attorneys' fees; treble damages; a declaration that the Lease Agreements are
loans rather than leases and that the Lease Agreements are usurious; rescission
of the Lease Agreements, or reformation of the Lease Agreements to conform with
the limitations on interest rates set forth in the Massachusetts usury statute,
and return of all moneys paid to Leasecomm, or all monies paid in excess of
amounts that would be allowable under the Massachusetts usury statute;
declarations that the alleged conduct of the defendants constitutes unfair and
deceptive trade practices in violation of Massachusetts General Laws Chapter
93A; injunctive relief requiring Leasecomm to notify any credit bureaus to which
it may have reported Plaintiffs or purported class members as delinquent that
their accounts are in good standing, prohibiting Leasecomm from charging
usurious interest rates, prohibiting Leasecomm from referring to the Lease
Agreements as "leases," requiring Leasecomm to display the annual percentage
rate and total finance charges on all of the Lease Agreements, and prohibiting
the Company from participating in or benefiting from any transactions by
Leasecomm involving the financing of "virtual terminals".
The defendants' responses to the Bradford Complaint are presently due in
late August, 2000.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
V. On or about June 16, 2000, a purported class action lawsuit was filed in
Middlesex Superior Court in the Commonwealth of Massachusetts against Leasecomm,
the Company, John Gregory Hines, Richard F. Latour, Peter R. von Bleyleben,
E-Commerce Exchange, LLC, Creditcards.com, and Humboldt Bank (the "Okougbo
Complaint").
The purported class consists of individuals and businesses who have
executed or will in the future execute, as lessee or guarantor, a four-year
Leasecomm "non-cancellable" lease of certain models of "Verifone" equipment
provided by or through E-Commerce Exchange, LLC (the "Lease Agreements"), and
the lease provides for "base payments" of at least $49.95 per month.
Plaintiffs allege: that the Lease Agreements are, in fact, loans that are
subject to state usury laws; that the Lease Agreements are usurious; that
Leasecomm's use of the Lease Agreements
22
<PAGE> 23
constitutes an unfair and deceptive trade practice in violation of
Massachusetts General Laws Chapter 93A; that various of the defendants have
conspired with one another to defraud the members of the purported class and
have violated Massachusetts General Laws Chapter 93A; and that the Company is
liable for any damages that might be entered in favor of the Plaintiffs and the
purported class members and against Leasecomm.
Plaintiffs and the members of the purported class seek: unspecified damages
for monetary losses allegedly sustained by them and reimbursement of costs and
attorneys' fees; treble damages; a declaration that the Lease Agreements are
loans rather than leases and that the Lease Agreements are usurious; rescission
of the Lease Agreements, or reformation of the Lease Agreements to conform with
the limitations on interest rates set forth in the Massachusetts usury statute,
and return of all moneys paid to Leasecomm, or all monies paid in excess of
amounts that would be allowable under the Massachusetts usury statute;
declarations that the alleged conduct of the defendants constitutes unfair and
deceptive trade practices in violation of Massachusetts General Laws Chapter
93A; injunctive relief requiring Leasecomm to notify any credit bureaus to which
it may have reported Plaintiffs or purported class members as delinquent that
their accounts are in good standing, prohibiting Leasecomm from charging
usurious interest rates, prohibiting Leasecomm from referring to the Lease
Agreements as "leases," requiring Leasecomm to display the annual percentage
rate and total finance charges on all of the Lease Agreements, and prohibiting
the Company from participating in or benefiting from the alleged activities set
forth in the Complaint.
The defendants responses to the Okougbo Complaint are presently due in late
August, 2000.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
VI. On January 20, 2000, the Company filed suit against Sentinel Insurance
Company Limited ("Sentinel"), in the United States District Court for the
District of Massachusetts (the "Sentinel Complaint"). On August 18, 1999,
Sentinel had issued a Business Performance Insurance Policy (the "Policy") to
the Company as collateral for a Twelve Million Dollar ($12,000,000) loan (the
"Loan") that the Company had made to Premier Holidays International, Inc.
("Premier"). The Loan was personally guaranteed by Premier's President, Daniel
DelPiano ("DelPiano"). Pursuant to the terms of the Policy, Sentinel was
obligated to make payment to the Company for any and all amounts payable under
the terms of the Loan, in the event a default by Premier occurred. After Premier
and DelPiano defaulted on their repayment obligations, the Company made demand
on Sentinel for payment under the Policy. The Company filed the Sentinel
Complaint after Sentinel refused to make payment to the Company under the
Policy. On February 3, 2000, the Company amended its Complaint to assert claims
against Premier and DelPiano arising out of their failure to make payments
required under the Loan and the personal guaranty.
On March 1, 2000, the Company filed a motion for summary judgment on its
claims against Sentinel, seeking judgment in the amount of $13,065,266.49, plus
post-judgment interest and attorneys' fees. The Court has not heard this motion.
23
<PAGE> 24
On March 6, 2000, Premier and DelPiano filed a motion in the Massachusetts
action to dismiss that action or, in the alternative, to transfer to the
Northern District of Georgia, based upon their contention that they are not
subject to personal jurisdiction in Massachusetts, that the contracts containing
the forum-selection clause were procured by fraud, and that Leasecomm should
have been named as a plaintiff. On April 13, 2000, the United States District
Court for the District of Massachusetts issued a Memorandum and Order denying
Premier and DelPiano's motion.
On March 9, 2000 the Company filed a motion for preliminary injunction
seeking an order requiring Sentinel, Premier and Del Piano to turn over to the
Company any collateral in their possession or to which the Company and Leasecomm
may be entitled as a result of both Premier's and Sentinel's defaults under the
Loan and the Policy, respectively. On June 13, 2000, the Court denied the
Company's motion for preliminary injunction, on the express condition that
Sentinel provide adequate assurance of its financial condition within 30 days.
Sentinel failed to do so, and the Company filed a renewed motion for preliminary
injunction on July 17, 2000. The Court has not yet scheduled a hearing.
On January 26, 2000, Premier and DelPiano filed suit against the Company,
its wholly-owned subsidiary, Leasecomm Corporation, and Sentinel in the Superior
Court of Fulton County, Georgia (the "Premier Complaint"). Premier and DelPiano
allege that, notwithstanding the plain wording of both the Loan and the Policy,
Premier agreed to borrow the full amount of the Loan only upon alleged
representations by the Company that it would loan Premier an additional
Forty-Five Million Dollars ($45,000,000). The documents evidencing the Loan, and
the documents evidencing the Policy, refer only to the amount of the Loan
($12,000,000), and not to any greater amount. Premier alleges that, as a result,
it has suffered actual and consequential damages in the amount of Seven Hundred
Sixty-Nine Million Three Hundred Fifty Thousand Dollars ($769,350,000) plus
interest, costs, and attorneys' fees. Premier seeks punitive damages in the
amount of Five Hundred Million Dollars ($500,000,000). Premier also seeks
injunctive relief barring the Company and Leasecomm from making demand on or
commencing court action to collect on the Policy.
On February 22, 2000, Leasecomm removed this case to federal court for the
Northern District of Georgia. Leasecomm has filed a motion to dismiss the
Premier Complaint, or, alternatively, to transfer this case to federal court in
Massachusetts, and is awaiting the Court's decision.
Discovery in the Massachusetts action is in the preliminary stages. Since
this matter is in an early stage, there can be no assurance as to its eventual
outcome.
VII. On April 3, 2000 a purported class action suit was filed in Superior
Court of the State of California, County of San Mateo against Leasecomm and
MicroFinancial as well as a number of other defendants with whom Leasecomm and
MicroFinancial are alleged to have done business, directly or indirectly.
24
<PAGE> 25
The action is alleged as a "consumer fraud class action on behalf of
defrauded California small businesses and their owners, who were induced to
purchase services and/or goods from Defendants through false and misleading
representations and material omissions." More specifically, the complaint seeks
certification of a class of California persons and entities who purchased
services or goods from Internet Success Systems, Inc., Fortune Financial
Systems, Inc. (previously known as Fortune 21, Inc.), Fortune Financial Systems
of Nevada, Inc., MarketComm Production; Bizz-e Inc. (also known as Bizz-e.com,
Inc.), Cardservice International Inc. (also known as Cardservice Global
Solutions) or Power Communications, Inc., directly or indirectly, at any time
between February 7, 1997 and the present date. The complaint seeks certification
of a subclass of those class members who entered into any lease agreement
contracts with Leasecomm Corporation for the purposes of financing the goods or
services allegedly purchased from these other entities. The class action
complaint alleges ten causes of action for: (1) fraud and deceit; (2) negligent
misrepresentation; (3) violations of California's Business & Professions Code
ss.ss.17200 et seq. (unfair competition); (4) violations of California's
Business & Professions Code ss.ss.17500 et seq. (false advertising); (5)
violations of California's Civil Code ss.ss.1750 et seq. (Consumer Legal
Remedies Act); (6) unjust enrichment; (7) fraud in the inducement of contract;
(8) fraud in the inception of contract; (9) lack of consideration for contact;
and (10) breach of the contractual covenant of good faith and fair dealing.
The complaint prays for compensatory general and special damages according
to proof; restitution and disgorgement according to proof; rescission of class
member contracts with Leasecomm Corporation; injunctive relief against
enforcement of class member contracts with Leasecomm Corporation; prejudgment
interest; punitive and exemplary damages, costs, attorneys fees and such other
relief as the court deems just.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
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<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
EXHIBIT DESCRIPTION OF EXHIBIT
------- ----------------------
10.5 Office Lease Agreement by and between WXI/AJP Real Estate
Limited Partnership and Leasecomm Corporation dated May 3,
2000 for facilities in Newark, California.
27 Financial Data Schedule
(b) Not Applicable
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements 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
----------------------------
President and Chief Executive Officer
By: /s/ Richard F. Latour
--------------------------------------------
Executive Vice President, Chief
Operating and Chief
Financial Officer
Date: August 14, 2000
27
