1
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 March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
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 May 10, 2001, 12,748,946 shares of the registrant's common stock
were outstanding.
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MICROFINANCIAL INCORPORATED
TABLE OF CONTENTS
Page
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
December 31, 2000 and March 31, 2001 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2000 and 2001 4
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 2001 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 14
Part II OTHER INFORMATION
Item 1 Legal Proceedings 15
Item 6 Exhibits and Reports on Form 8-K 18
Signatures 19
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3
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 31, March 31,
---------------- -----------------
2000 2001
---- ----
ASSETS
Net investment in leases and loans:
Receivables due in installments $ 405,437 $ 401,607
Estimated residual value 35,368 36,826
Initial direct costs 9,321 9,070
Loans receivable 12,080 4,690
Less:
Advance lease payments and deposits (400) (424)
Unearned income (132,687) (128,038)
Allowance for credit losses (40,924) (31,603)
--------- ---------
Net investment in leases and loans $ 288,195 $ 292,128
Investment in service contracts 12,553 12,680
Cash and cash equivalents 17,957 19,729
Property and equipment, net 11,505 21,111
Other assets 12,392 10,808
--------- ---------
Total assets $ 342,602 $ 356,456
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 201,991 $ 206,246
Subordinated notes payable 4,785 3,586
Capitalized lease obligations 859 1,060
Accounts payable 1,605 2,811
Dividends payable 573 573
Other liabilities 5,433 6,160
Income taxes payable 2,333 2,212
Deferred income taxes payable 29,000 32,939
--------- ---------
Total liabilities 246,579 255,587
--------- ---------
Commitments and contingencies -- --
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized;
0 shares issued at 12/31/00; 0 shares issued at 3/31/01 -- --
Common stock, $.01 par value; 25,000,000 shares authorized; 13,410,646
shares issued at 12/31/00; 13,410,646 shares issued at 3/31/01 134 134
Additional paid-in capital 47,900 47,900
Retained earnings 55,291 60,137
Treasury stock (669,700 shares of common stock at 12/31/00,
669,700 shares of common stock at 3/31/01), at cost (7,234) (7,234)
Notes receivable from officers and employees (68) (68)
--------- ---------
Total stockholders' equity 96,023 100,869
--------- ---------
Total liabilities and stockholders' equity $ 342,602 $ 356,456
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
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4
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
For the quarters ended
March 31,
---------------------------------
2000 2001
----------- -----------
Revenues:
Income on financing leases and loans $ 15,544 $ 18,731
Income on service contracts 2,190 2,135
Rental income 5,810 9,135
Loss and damage waiver fees and other 1,470 2,842
Service fees 3,627 3,951
-------------------------------
Total revenues 28,641 36,794
-------------------------------
Expenses:
Selling general and administrative 6,329 9,604
Provision for credit losses 8,529 10,266
Depreciation and amortization 2,033 3,442
Interest 3,075 4,121
-------------------------------
Total expenses 19,966 27,433
-------------------------------
Income before provision for income taxes 8,675 9,361
Provision for income taxes 3,705 3,942
-------------------------------
Net income $ 4,970 $ 5,419
===============================
Net income per common share - basic $ 0.39 $ 0.43
===============================
Net income per common share - diluted $ 0.39 $ 0.42
===============================
Weighted-average shares used to compute:
Basic net income per share 12,788,578 12,740,946
-------------------------------
Fully diluted net income per share 12,893,559 12,940,094
-------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
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5
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the quarter ended
March 31,
----------------------------
2000 2001
--------- ---------
Cash flows from operating activities:
Cash received from customers $ 41,887 $ 47,627
Cash paid to suppliers and employees (11,066) (10,036)
Cash paid for income taxes (3,845) (136)
Interest paid (3,097) (4,435)
Interest received 365 404
----------------------------
Net cash provided by operating activities 24,244 33,424
----------------------------
Cash flows from investing activities:
Investment in lease contracts (35,226) (23,838)
Investment in direct costs (2,520) (1,484)
Investment in service contracts (1,314) (1,328)
Investment in Resource Leasing Corporation 0 (6,900)
Investment in fixed assets (399) (425)
Repayment of notes from officers 2 0
Investment in notes receivable (31) (23)
Repayment of notes receivable 239 4
----------------------------
Net cash used in investing activities (39,249) (33,994)
----------------------------
Cash flows from financing activities:
Proceeds from secured debt 63,618 35,379
Repayment of secured debt (24,899) (31,124)
Proceeds from refinancing of secured debt 141,557 104,500
Prepayment of secured debt (156,557) (104,500)
Proceeds from short term demand notes payable 112 0
Repayment of short term demand notes payable (367) 0
Proceeds from issuance of subordinated debt 0 1,800
Repayment of subordinated debt (1,000) (3,000)
Proceeds from exercise of common stock options 49 0
Repayment of capital leases (139) (140)
Purchase of treasury stock (1,545) 0
Payment of dividends (514) (573)
----------------------------
Net cash provided by financing activities 20,315 2,342
----------------------------
Net increase in cash and cash equivalents: 5,310 1,772
Cash and cash equivalents, beginning of period: 11,062 17,957
----------------------------
Cash and cash equivalents, end of period: $ 16,372 $ 19,729
============================
(continued on following page)
The accompanying notes are an integral part of the consolidated
financial statements.
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6
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Continued)
(Unaudited)
For the quarter ended
March 31,
---------------------
2000 2000
-------- --------
Reconciliation of net income to net cash
provided by operating activities:
Net Income $ 4,970 $ 5,419
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 2,033 3,442
Provision for credit losses 8,529 10,266
Recovery of equipment cost and residual value,
net of revenue recognized 10,793 9,267
Decrease in current taxes (119) (121)
Increase in deferred income taxes 154 3,939
Change in assets and liabilities:
Decrease (increase) in other assets (1,973) 101
(Decrease) increase in accounts payable (132) 165
Increase (decrease) in accrued liabilities (11) 946
-------- --------
Net cash provided by operating activities $ 24,244 $ 33,424
======== ========
Supplemental disclosure of noncash activities:
Property acquired under capital leases $ 0 $ 341
Accrual of common stock dividends $ 508 $ 573
(Concluded)
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
commercial finance company that primarily leases and rents "microticket"
equipment and provides other financing services in amounts generally ranging
from $400 to $3,000 with an average amount financed of approximately $1,500 and
an average lease term of 44 months. The Company does not market its services
directly to lessees but sources leasing transactions through a network of
independent sales organizations and other dealer based origination networks
nationwide. The Company 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 condensed 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, 2000. The results for the
three-month period ended March 31, 2001 are not necessarily indicative of the
results that may be expected for the full year ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
Allowance 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 current economic conditions and the
nature and characteristics 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, 1999, 2000 and March 31, 2001 and the related provision,
charge-offs and recoveries for the year ended December 31, 2000 and the three
months ended March 31, 2001.
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MICROFINANCIAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except share and per share data)
(Unaudited)
Balance at December 31, 1999 $41,719
Provision for credit losses 36,029
Provision for other asset credit losses 2,883
-----------
Total provisions for credit losses 38,912
Charge-offs (including $1,064 in other asset charge-offs) 57,145
Recoveries 19,257
-----------
Charge-offs, net of recoveries 37,888
-----------
Balance of allowance for credit losses at December 31, 2000 $40,924
===========
Balance of other asset reserve at December 31, 2000 $1,819
===========
Provision for credit losses 10,266
Provision for other asset credit losses 0
-----------
Total provisions for credit losses 10,266
Charge-offs (including $27 in other asset charge-offs) 25,071
Recoveries 5,457
-----------
Charge-offs, net of recoveries 19,614
-----------
Balance of allowance for credit losses at March 31, 2001 $31,603
===========
Balance of other asset reserve at March 31, 2001 $1,792
===========
At December 31, 2000 and March 31, 2001, other assets included prepayments
and deposits of $6,394,000 and $3,508,000 respectively, and receivables totaling
$7,817,000 and $9,091,000, respectively. The other asset reserve reflects
management's judgement of loss potential considering current economic conditions
and the nature of the underlying receivables.
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 830,000 and
641,218 shares of common stock were not included in the computation of diluted
earnings per share for the three months ended March 31, 2000 and 2001
respectively because their effects were antidilutive.
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MICROFINANCIAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except share and per share data)
(Unaudited)
For three months ended
March 31,
---------
2000 2001
---- ----
Net Income $ 4,970 $ 5,419
Shares used in computation:
Weighted average common shares
outstanding used in computation
of net income per common share 12,788,578 12,740,946
Dilutive effect of common stock
options 104,981 199,148
Shares used in computation of net
income per common share -
assuming dilution 12,893,559 12,940,094
---------- ----------
Net income per common share $ 0.39 $ 0.43
Net income per common share
assuming dilution $ 0.39 $ 0.42
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. On August 22, 2000, the revolving line of credit
and term loan facility was amended and restated where by the Company may now
borrow a maximum of $192,000,000 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 minus 0.25% for Prime Rate
Loans, the prevailing rate per annum as offered in the London Interbank Offered
Rate (LIBOR) plus 1.75% for LIBOR Loans or the seven day Money Market rate plus
2.00% for Swing Line advances. If the LIBOR Loans are not renewed upon their
maturity they automatically convert into prime rate loans. 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 $10 million. The prime rates at
December 31, 2000, and March 31, 2001 were 9.50% and 8.00% respectively. The
90-day LIBOR rates December 31, 2000, and March 31, 2001 were 6.403% and
4.9375%, respectively. The 7-day Money Market rates December 31, 2000, and March
31, 2001 were 6.63% and 5.31%, respectively.
The Company had borrowings outstanding under these agreements with the following
terms:
December 31, 2000 March 31, 2001
----------------- --------------
Type Rate Amount Rate Amount
- ---- ---- ------ ---- ------
(in thousands) (in thousands)
Prime 9.2500% $ 17,260 7.7500% $ 9,900
Swing Line 8.8100% 5,076 7.3100% 4,188
LIBOR 8.2500% 12,000 6.6250% 87,000
LIBOR 8.5625% 17,500 7.8125% 17,500
LIBOR 8.2500% 50,000
------------- ------------
Total Outstanding $ 101,836 $ 118,588
============= ============
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MICROFINANCIAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except share and per share data)
(Unaudited)
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, 2002 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 one series of notes outstanding, the 1998-A Notes. In November
1998, BLT III issued the 1998-A Notes in aggregate principal amount of
$40,769,000. MFI I has two series of notes outstanding, the 2000-1 Notes and the
2000-2 Notes. In March 2000, MFI I issued the 2000-1 Notes in aggregate
principal amount of $50,056,686. In December 2000, MFI I issued the 2000-2 Notes
in aggregate principal amount of $50,561,633. Outstanding borrowings are
collateralized by a specific pool of lease receivables.
At December 31, 2000 and March 31, 2001, BLT III and MFI I had borrowings
outstanding under the series of notes with the following terms:
December 31, 2000 March 31, 2001
----------------- --------------
Series Rate Amount Rate Amount
- ------ ---- ------ ---- ------
(in thousands) (in thousands)
BLT III
1998-A Notes 6.0300% $ 12,252 6.0300% $ 8,050
MFI I
2000-1 Notes 7.3750% 36,995 7.3750% 32,624
2000-2 Notes 6.9390% 50,562 6.9390% 46,638
------------- -----------
Total Outstanding $ 99,809 $ 87,312
============= ===========
The Company also had other notes payable which totaled $346,000 at December
31, 2000 and March 31, 2001, respectively. The notes are due on demand and bear
interest at a rate of prime minus 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. The Company granted a total of
400,000 options during the three months ended March 31, 2001. A total of
1,994,000 options were outstanding at March 31, 2001 of which 494,000 were
vested.
Dividends:
On February 20, 2001 the Company's Board of Directors approved a dividend
of $.045 per common share for all outstanding common shares as of March 31, 2001
which was paid on April 12, 2001.
Acquisition of Resource Leasing Corporation:
On January 3, 2001, the Company acquired the rental and lease portfolio,
along with certain other assets and assumed certain liabilities of Resource
Leasing Corporation ("Resource"), for $10,700,000 subject to a $1,000,000
holdback on deliverables in connection with certain software included in the
acquired assets. In December 2000, the Company made a prepayment on that
purchase of $2,800,000 which was reflected in other assets at December 31, 2000.
The remaining $6,900,000 was paid on January 3, 2001.
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MICROFINANCIAL INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tables in thousands, except share and per share data)
(Unaudited)
This transaction was accounted for under the purchase method of accounting,
and accordingly, the results of operations of Resource, for the period from the
acquisition date, are included in the consolidated financial statements. The
purchase price was allocated to the assets purchased and liabilities assumed
based on fair values at the date of acquisition and did not result in the
recording of excess costs over the fair value of assets acquired.
Since the acquisition did not have a material impact on the Company's
consolidated financial statements, and Resource does not meet the quantitative
thresholds for disclosure as a separate operating segment, segment reporting as
required under Statement of Financial Accounting Standards No. 131, is not
applicable.
Reclassification of Prior Year Balances:
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the current presentation.
Commitments and Contingencies:
Please refer to Part II Other Information, Item 1 Legal Proceedings for
information about pending litigation of the Company.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three months ended March 31, 2001 as compared to the three months ended March
31, 2000.
Net income for the three months ended March 31, 2001 was approximately $5.4
million, an increase of $450,000 or 9% from the three months ended March 31,
2000. This represents diluted earnings per share for the three months ended
March 31, 2001 of $0.42 per share on weighted average outstanding shares of
12,940,094 as compared to $0.39 per share on weighted average outstanding shares
of 12,893,559 for the three months ended March 31, 2000.
Total revenues for the three months ended March 31, 2001 were $36.8
million, an increase of $8.2 million, or 29%, from the three months ended March
31, 2000. The increase was primarily due to an increase of $3.2 million, or 21%,
in income on financing leases and loans, $3.2 million, or 40%, in rental and
service contract income, and $1.8 million in fee and other 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 second quarter of 2000, and the acquisition of the rental
portfolio of Resource Leasing Corporation. The increase in fee income and other
income is the result of increased fees from the lessees related to the
collection and legal process employed by the Company, and the addition of a new
line of business of selling new and refurbished equipment out of existing
inventory.
Selling, general and administrative expenses increased by $3.3 or 52%, for
the three months ended March 31, 2001, as compared to the three months ended
March 31, 2000. Compensation and personnel related expenses increased by $1.9
million or 53%, due to an increase in overall compensation levels and an
increase in the number of employees needed to maintain the Company's portfolio,
including the addition of the personnel employed by Resource Leasing
Corporation. Also, cost of goods sold increased by $1.0 million, or 100%, due to
the Company's acquisition of Resource Leasing Corporation, and the addition of a
new line of business of selling new and refurbished equipment out of existing
inventory.
Depreciation and amortization increased by $1.4 million, or 70%, due to the
increased number of rental contracts, including the addition of the Resource
Leasing portfolio of rental contracts, and amortization of the Company's
investment in service contracts.
The Company's provision for credit losses increased by $1.7 million or 20%,
for the three months ended March 31, 2001 as compared to the three months ended
March 31, 2000. This increase is a result of the Company's historical policy,
based on experience, of providing a provision for credit losses based upon the
dealer fundings and revenue recognized in any period and reflects management's
judgement of loss potential considering current economic conditions and the
nature of the underlying receivables. Total revenues increased by $8.2 million,
or 29% for the three months ended March 31, 2001 as compared to the three months
ended March 31, 2000.
Net interest expense increased by $1.0 million, or 32%, for the three
months ended March 31, 2001 as compared to the three months ended March 31,
2000. This increase resulted from the Company's increased level of borrowings on
its revolving line of credit, offset by falling interest rates.
Dealer fundings were $33.9 million for the three months ended March 31,
2001, down $3.4 million, or 9% as compared to the three months ended March 31,
2000. This decrease is a result of the Company's decision during the second
quarter of 2000 to increase pricing and tighten its credit approval standards.
This is an ongoing effort, expected to continue going forward. Total cash from
customers increased by $5.7 million or 14% to a total of $47.6 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 down from $465.4 million in
December of 2000 to $455.8 million in March of 2001, representing a 2% decrease.
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Exposure to Credit Losses
The following table sets forth certain information as of December 31, 1999
and 2000 and March 31, 2001 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.
As of
December 31 As of
--------------------- March 31
1999 2000 2001
---- ---- ----
Cumulative amounts billed ( in thousands) $ 380,380 $ 462,011 $ 473,683
31-60 days past due 1.7% 1.9% 1.6%
61-90 days past due 1.3% 1.6% 1.5%
over 90 days past due 7.4% 10.0% 12.5%
------------ ------------- ---------------
Total past due 10.4% 13.5% 15.6%
============ ============= ===============
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. All balances
under the revolving line of credit will be automatically converted to a term
loan on September 30, 2002 provided the line of credit is not renewed and no
event of default exists at that date. At March 31, 2001, the Company had an
aggregate maximum of $192 million available for borrowing under its credit
facility, of which approximately $118.6 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.
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Note on Forward Looking Information
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.
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.
In the normal course of operations, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk and legal risk, and are not represented in the analysis that
follows.
Interest Rate Risk Management
The implicit yield to the Company on all of its leases, 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. As of March 31, 2001, the
Company's outstanding fixed rate indebtedness, including indebtedness
outstanding under the Company's securitizations, represented 42.4% of the
Company's outstanding indebtedness.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has filed answers denying the allegations included in each of
the lawsuits described below. Four (4) of the first five (5) actions described
below have been filed by the same attorney, on behalf of various plaintiffs. The
Company is vigorously defending each of the allegations, but is unable to
predict with certainty the ultimate outcome of the proceedings. 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") (as
amended, the "Clark Complaint"). The purported class would be limited to
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"), and that,
among other things, have been sued in a Massachusetts court for breach of the
Lease Agreements. 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's because of Leasecomm's greater bargaining power, and
purported class members allegedly have valid defenses to the claims asserted
against them by Leasecomm.
On August 16, 2000, the Court granted the Company's motion to dismiss,
resulting in the dismissal of all claims against the Company. The Court also
granted Leasecomm's motion to dismiss as to all of the plaintiffs' individual
claims, and as to all but one of the plaintiffs' purported class claims. As a
result, the only claim that remains is a purported class claim against Leasecomm
by plaintiffs against whom Leasecomm has a pending Massachusetts action, for
alleged violations of Chapter 93A of the Massachusetts General Laws arising out
of the inclusion of a forum selection clause in Leasecomm leases. As to this
claim, the plaintiffs are seeking no monetary relief beyond attorneys' fees.
The plaintiffs filed a revised motion for class certification in light of
the Court's prior rulings. The Company has filed an opposition to the revised
motion for class certification, and argument is currently scheduled for May 16,
2001.
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 parties have reached a settlement by which the McKenzie-Pollock
Complaint and the Company's complaints against the individual defendants in the
District Court are to be dismissed with prejudice. The settlement does not
involve the payment of any money by the Company. By Order dated February 7,
2001, the Court approved the Stipulation and Order of Dismissal, and dismissed
the action.
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
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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. The Court has heard
argument on the motion for class certification, but no decision has been issued.
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").
By Notice of Voluntary Dismissal filed with the Court on March 13, 2001,
the plaintiffs have voluntarily dismissed their action against all defendants,
including the Company.
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").
By Notice of Voluntary Dismissal filed with the Court on March 14, 2001,
the plaintiffs have voluntarily dismissed their action against all defendants,
including the Company.
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.
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.
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On February 22, 2000, Leasecomm removed this case to federal court for the
Northern District of Georgia. Leasecomm filed a motion to dismiss the Premier
Complaint, or, alternatively, to transfer this case to federal court in
Massachusetts. Leasecomm's motion was granted on July 27, 2000, and the case was
transferred to the District of Massachusetts, where it has been consolidated
with the Massachusetts action.
The parties have reached a settlement whereby the defendant Sentinel was to
pay the Company a sum of money on or before May 25, 2001, or, alternatively,
judgment for the full amount of $14,000,000 is to be entered against Sentinel,
and the Company may also pursue its claims against other defendants.
The Company learned on or about March 20, 2001 that a Provisional
Liquidator of Sentinel Insurance Company, Ltd. has been appointed pursuant to an
order of the Supreme Court of Bermuda.
VII.On September 19, 2000, Leasecomm was served with a Subpoena Duces Tecum
from the Office of the Attorney General of the State of Florida. The nature of
the proceeding, if any, against Leasecomm is unclear at this time, but appears
to relate to alleged complaints against Leasecomm by lessees in Florida and
involves the question of whether any of the leases entered into by Leasecomm
with Florida residents is a consumer lease. Leasecomm believes that the
commercial leases it has entered into are in fact commercial leases, and is
attempting to cooperate with the Attorney General's Office on this matter.
Leasecomm has responded to the subpoena and provided documents.
Since this matter is at an early stage, and the nature of the proceedings
against Leasecomm, if any, are not known, there can be no assurance as to its
eventual outcome.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index
None
(b) Not Applicable
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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: May 15, 2001
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