10-Q 1 b37240mie10-q.txt MICROFINANCIAL INCORPORATED 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 SEPTEMBER 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 November 10, 2000, 12,710,946 shares of the registrant's common stock were outstanding. 2 MICROFINANCIAL INCORPORATED Table of Contents Page Part I FINANCIAL INFORMATION Item 1 Financial Statements (unaudited): Condensed Consolidated Balance Sheets December 31, 1999 and September 30, 2000 3 Condensed Consolidated Statements of Operations Three months ended September 30, 1999 and 2000 Nine months ended September 30, 1999 and 2000 4 Condensed Consolidated Statements of Cash Flows Three months ended September 30, 1999 and 2000 Nine months ended September 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 18 Item 6 Exhibits and Reports on Form 8-K 26 Signatures 27 2 3 MICROFINANCIAL INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (Unaudited) December 31, September 30, 1999 2000 ------------ ------------- ASSETS Net investment in leases and loans: Receivables due in installments $ 321,578 $ 406,392 Estimated residual value 21,070 33,528 Initial direct costs 8,164 9,471 Loans receivable 20,073 15,817 Less: Advance lease payments and deposits (2,164) (414) Unearned income (100,815) (137,313) Allowance for credit losses (41,719) (44,693) --------- --------- Net investment in leases and loans 226,187 282,788 Investment in service contracts 14,250 12,861 Cash and cash equivalents 11,062 18,557 Property and equipment, net 7,713 12,608 Other assets, net of 0 and 2,046 of reserves 6,644 8,381 --------- --------- Total assets $ 265,856 $ 335,195 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Notes payable $ 144,871 $ 202,525 Subordinated notes payable 9,238 5,023 Capitalized lease obligations 1,244 964 Accounts payable 339 909 Dividends payable 514 572 Other liabilities 4,748 5,143 Income taxes payable 3,544 3,385 Deferred income taxes payable 22,520 25,594 --------- --------- Total liabilities 187,018 244,115 --------- --------- Commitments and contingencies Stockholders' equity: Common stock, $.01 par value; 25,000,000 authorized; 13,347,726 shares issued at 12/31/99; 13,380,646 issued at 9/30/00 133 134 Additional paid-in capital 47,920 47,842 Retained earnings 36,656 50,406 Treasury stock (667,790 shares of common stock at 12/31/99, 669,700 shares of common stock at 9/30/00), at cost (5,777) (7,234) Notes receivable from officers and employees (94) (68) --------- --------- Total stockholders' equity 78,838 91,080 --------- --------- Total liabilities and stockholders' equity $ 265,856 $ 335,195 ========= ========= The accompanying notes are an integral part of the consolidated financial statements 3 4 MICROFINANCIAL INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share data) (Unaudited)
For the three months ended For the nine months ended September 30, September 30, ------------------------------------ ------------------------------------- 1999 2000 1999 2000 ---- ---- ---- ---- Revenues: Income on financing leases and loans $14,232 $18,435 $40,270 $50,925 Income on service contracts 1,584 2,184 4,137 6,557 Rental income 5,242 7,564 15,959 20,235 Loss and damage waiver fees 1,414 1,519 4,209 4,474 Service fees 2,351 3,837 6,414 10,931 ---------------------------- ----------------------------- Total revenues 24,823 33,539 70,989 93,122 ---------------------------- ----------------------------- Expenses: Selling general and administrative 6,232 6,879 17,944 20,047 Provision for credit losses 5,888 10,576 17,351 28,145 Depreciation and amortization 2,038 2,808 5,493 7,395 Interest 2,602 4,124 7,587 10,849 ---------------------------- ----------------------------- Total expenses 16,760 24,387 48,375 66,436 ---------------------------- ----------------------------- Income before provision for income taxes 8,063 9,152 22,614 26,686 Provision for income taxes 3,322 3,851 9,361 11,284 ---------------------------- ----------------------------- Net Income $4,741 $5,301 $13,253 $15,402 ============================ ============================= Net Income per common share - basic $0.36 $0.42 $1.04 $1.21 ============================ ============================= Net Income per common share - diluted $0.36 $0.42 $1.03 $1.20 ============================ ============================= Dividends per common share $0.040 $0.045 $0.115 $0.130 ============================ ============================= Weighted average shares used to compute: Basic Net Income per share 13,032,832 12,705,337 12,778,937 12,733,833 ---------------------------- ----------------------------- Fully diluted Net Income per share 13,121,291 12,760,298 12,908,665 12,808,371 ---------------------------- -----------------------------
The accompanying notes are an integral part of the consolidated financial statements 4 5 MICROFINANCIAL INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited)
For the three months ended For the nine months ended September 30, September 30, -------------------------- ------------------------- 1999 2000 1999 2000 ---- ---- ---- ---- Cash flows from operating activities: Cash received from customers $ 39,198 $ 44,709 $ 115,926 $ 130,537 Cash paid to suppliers and employees (5,251) (7,139) (23,513) (25,396) Cash paid for income taxes (49) (1,064) (846) (8,701) Interest paid (2,563) (4,401) (7,547) (11,360) Interest received 1,448 421 3,304 1,192 ----------------------- ------------------------ Net cash provided by operating activities 32,783 32,526 87,324 86,272 ----------------------- ------------------------ Cash flows from investing activities: Investment in lease contracts (33,409) (35,554) (82,929) (117,496) Investment in direct costs (2,717) (1,654) (5,746) (6,336) Investment in service contracts (2,571) (865) (6,759) (3,233) Investment in loans receivable (502) 0 (11,631) 0 Investment in fixed assets (486) (695) (1,058) (1,816) Issuance of notes from officers and employees 0 0 (2) 0 Repayment of notes from officers 26 22 132 25 Investment in notes receivable (176) (23) (593) (93) Repayment of notes receivable 32 23 234 285 ----------------------- ------------------------ Net cash used in investing activities (39,803) (38,746) (108,352) (128,664) ----------------------- ------------------------ Cash flows from financing activities: Proceeds from secured debt 45,204 30,995 98,475 146,378 Repayment of secured debt (29,994) (22,112) (96,569) (73,421) Proceeds from refinancing of secured debt 109,315 109,500 268,315 343,057 Prepayment of secured debt (109,315) (109,500) (268,315) (358,057) Proceeds from short term demand notes payable 0 0 840 144 Repayment of short term demand notes payable (38) 0 (67) (446) Repayment of subordinated debt (2,500) (2,250) (14,247) (4,250) Proceeds from sale of common stock 0 0 46,116 0 Proceeds from exercise of common stock options 7 12 20 60 Repayment of capital leases (203) (132) (592) (389) Purchase of treasury stock (3,625) 0 (5,433) (1,595) Payment of dividends (534) (572) (1,347) (1,594) ----------------------- ------------------------ Net cash provided by financing activities 8,317 5,941 27,196 49,887 ----------------------- ------------------------ Net increase (decrease) in cash and cash equivalents: 1,297 (279) 6,168 7,495 Cash and cash equivalents, beginning of period: 11,688 18,836 6,817 11,062 ----------------------- ------------------------ Cash and cash equivalents, end of period: $ 12,985 $ 18,557 $ 12,985 $ 18,557 ======================= =======================
(continued on following page) The accompanying notes are an integral part of the consolidated financial statements. 5 6 MICROFINANCIAL INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Continued) (Unaudited)
For the three months ended For the nine months ended September 30, September 30, -------------------------- ------------------------- 1999 2000 1999 2000 ---- ---- ---- ---- Reconciliation of net income to net cash provided by operating activities: Net Income $ 4,741 $ 5,301 $ 13,253 $ 15,402 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 2,038 2,808 5,493 7,395 Provision for credit losses 5,888 10,576 17,351 28,145 Recovery of equipment cost and residual value, net of revenue recognized 17,021 9,813 42,184 32,637 Increase (decrease) in current taxes (26) 0 (526) (159) Increase in deferred income taxes 3,120 2,842 8,909 3,074 Change in assets and liabilities: Decrease (increase) in other assets 520 419 589 (1,174) (Decrease) increase in accounts payable (262) 340 (127) 570 Increase (decrease) in accrued liabilities (257) 427 198 383 ----------------------- ---------------------- Net cash provided by operating activities $ 32,783 $ 32,526 $ 87,324 $ 86,273 ======================= ====================== Supplemental disclosure of noncash activities: Property acquired under capital leases $ 384 $ 38 $ 1,203 $ 109 Accrual of common stock dividends $ 514 $ 572 $ 514 $ 572
The accompanying notes are an integral part of the consolidated financial statements. 6 7 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 $1,700 and an average lease term of 45 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 nine-month period ended September 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 current economic conditions and the nature and 7 8 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, 1998, 1999 and September 30, 2000 and the related provision, charge-offs and recoveries for the year ended December 31, 1999 and the nine months ended September 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..................... 28,145 Charge-offs..................................... 35,530 Recoveries...................................... 13,242 ------ Charge-offs, net of recoveries................ 22,288 Transfer to other asset reserve................. 2,883 ------- Balance at September 30, 2000................... $44,693 ======= For the nine months ended September 30, 2000, the Company reserved $2.9 million against other receivables, offset by $837,000 in charge-offs. The allowance reflects management's judgement of loss potential considering current 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 September 30, 2000 and the related provision, charge-offs and recoveries for the nine months ended September 30, 2000. Balance at December 31, 1999.................... $0 Transfer from allowance for credit losses....... 2,883 ------ Charge-offs..................................... 837 Recoveries...................................... 0 ------ Charge-offs, net of recoveries................ 837 Balance at September 30, 2000................... $2,046 ====== 8 9 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 September 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 nine months ended September 30, 1999 and 2000 respectively because their effects were antidilutive.
For three months ended For nine months ended September 30, September 30, ---------------------- --------------------- 1999 2000 1999 2000 ---- ---- ---- ---- Net Income $4,741 $5,301 $13,253 $15,402 Shares used in computation: Weighted average common shares outstanding used in computation of net income per common share 13,032,832 12,705,337 12,778,937 12,733,833 Dilutive effect of common stock options 88,459 54,961 129,728 74,537 Shares used in computation of net income per common share - assuming dilution 13,121,291 12,760,298 12,908,665 12,808,370 ---------- ---------- ---------- ---------- Net income per common share $0.36 $0.42 $1.04 $1.21 Net income per common share assuming dilution $0.36 $0.42 $1.03 $1.20
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 9 10 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, 1999, and September 30, 2000 were 8.50% and 9.50% respectively. The 90-day LIBOR rates December 31, 1999, and September 30, 2000 were 5.9375% and 6.66%, respectively. The 7-day Money Market rates December 31, 1999, and September 30, 2000 were 5.6875% and 6.66%, respectively. The Company had borrowings outstanding under these agreements with the following terms: DECEMBER 31, 1999 SEPTEMBER 30, 2000 ----------------- ------------------ TYPE RATE AMOUNT RATE AMOUNT ---- ---- ------ ---- ------ (in thousands) (in thousands) Prime 8.5000% $ 14,330 9.2500% $ 32,999 LIBOR 8.4375% 30,000 LIBOR 7.9375% 17,500 8.4700% 17,500 LIBOR 7.8125% 12,000 8.4375% 12,000 LIBOR 8.0000% 65,000 8.4375% 50,000 -------- -------- Total Outstanding $108,830 $142,499 -------- -------- 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 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 September 30, 2000, BLT and MFI I had borrowings outstanding under the series of notes with the following terms: 10 11 DECEMBER 31, 1999 SEPTEMBER 30, 2000 ----------------- ------------------ SERIES RATE AMOUNT RATE AMOUNT ------ ---- ------ ---- ------ (in thousands) (in thousands) BLT III 1997-A Notes 6.4200% $ 9,498 6.4200% $ - 1998-A Notes 6.0300% $25,473 6.0300% $17,893 MFI I 2000-1 Notes $ - 7.3750% $41,365 ------- ------- Total Outstanding $34,971 $59,258 ------- ------- The Company also had other notes payable which totaled $1,070,000 and $768,000 December 31, 1999 and September 30, 2000, 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. No options were granted during the three months ended September 30, 2000. A total of 1,624,000 options were outstanding at September 30, 2000 of which 183,000 were vested. Dividends: On September 11, 2000 the Company's Board of Directors approved a dividend of $.045 per common share for all outstanding common shares as of September 30, 2000 which was paid on October 13, 2000. Reclassification of Prior Year Balances: Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current presentation. 11 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three months ended September 30, 2000 as compared to the three months ended September 30, 1999. Net income for the three months ended September 30, 2000 was approximately $5.3 million, an increase of $560,000 or 12% from the three months ended September 30, 1999. This represents diluted earnings per share for the three months ended September 30, 2000 of $0.42 per share on weighted average outstanding shares of 12,760,298 as compared to $0.36 per share on weighted average outstanding shares of 13,121,291 for the three months ended September 30, 1999. Total revenues for the three months ended September 30, 2000 were $33.5 million, an increase of $8.7 million, or 35%, from the three months ended September 30, 1999. The increase was primarily due to an increase of $4.2 million, or 30%, in income on financing leases and loans, $2.9 million, or 43%, in rental and service contract income and $1.6 million, or 42%, 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 second quarter of 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 $600,000 or 10%, for the three months ended September 30, 2000, as compared to the three months ended September 30, 1999. Compensation and personnel related expenses increased by $700,000 or 19%, due to an increase in overall compensation levels and an increase in the number of employees needed to maintain the Company's portfolio. Additionally, the Company accrued approximately $352,000 for company contributions to the employee 401(k) plan and discretionary management bonuses which are contingent upon Board of Director approval after the close of the fiscal year. Depreciation and amortization increased by $770,000, or 38%, 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 $4.7 million or 80%, for the three months ended September 30, 2000 as compared to the three months ended September 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 $8.7 million, or 35% for the three months ended September 30, 2000 as compared to the three months ended September 30, 1999. 12 13 Net interest expense increased by $1.5 million, or 58%, for the three months ended September 30, 2000 as compared to the three months ended September 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 $36.7 million for the three months ended September 30, 2000, down $200,000, or 1% as compared to the three months ended September 30, 1999. 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. Total cash from customers increased by $5.5 million or 14% to a total of $44.7 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 $377.0 million in December of 1999 to $468.6 million in September of 2000, representing a 24% increase. Nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. Net income for the nine months ended September 30, 2000 was approximately $15.4 million, an increase of $2.1 million or 16% from the nine months ended September 30, 1999. This represents diluted earnings per share for the nine months ended September 30, 2000 of $1.20 per share, or an increase of 17%, on weighted average outstanding shares of 12,808,371 as compared to $1.03 per share on weighted average outstanding shares of 12,908,665 for the nine months ended September 30, 1999. Total revenues for the nine months ended September 30, 2000 were $93.1 million, an increase of $22.1 million, or 31%, from the nine months ended September 30, 1999. The increase was primarily due to an increase of $10.7 million, or 27%, in income on financing leases and loans, $6.7 million, or 34%, in rental and service contract income and $4.8 million, or 45%, 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 second quarter of 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 $2.1 million, or 12%, for the nine months ended September 30, 2000, as compared to the nine months ended September 30, 1999. Compensation and personnel related expenses increased by $2.1 million, or 20%, 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 $158,000 in contract labor. Additionally, the Company accrued approximately $704,000 for discretionary management bonuses and company contributions to the employee 401(k) plan. Payment of the management bonuses is contingent upon Board of Director approval after the close of the fiscal year. 13 14 Depreciation and amortization increased by $1.9 million, or 35%, 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 $10.8 million or 62%, for the nine months ended September 30, 2000 as compared to the nine months ended September 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 $22.1 million, or 31% for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. Net interest expense increased by $3.3 million, or 43%, for the nine months ended September 30, 2000 as compared to the nine months ended September 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 $121.4 million for the nine months ended September 30, 2000, up $20.5 million, or 20% as compared to the nine months ended September 30, 1999. This increase is a result of a 57% 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 $14.6 million or 13% to a total of $130.5 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 September 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 15 As of As of December 31 September 30 ----------- ------------ 1998 1999 2000 ---- ---- ---- Cumulative amounts billed (in thousands) $317,034 $380,380 $438,766 31-60 days past due 1.3% 1.7% 1.9% 61-90 days past due 1.3% 1.3% 2.3% over 90 days past due 7.8% 7.4% 8.8% -------- -------- -------- Total past due 10.4% 10.4% 13.0% ======== ======== ======== 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 September 30, 2000, the Company had an aggregate maximum of $192 million available for borrowing under its credit facility, of which approximately $142.5 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. 15 16 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. 16 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. 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 September 30, 2000, the Company's outstanding fixed rate indebtedness, including indebtedness outstanding under the Company's securitizations, represented 29% of the Company's outstanding indebtedness 17 18 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 18 19 moneys collected in 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. 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 of the Court's rulings on the motions to dismiss, the only claim that remains is the Plaintiffs' 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' Motion for Class Certification is pending, and the Court has scheduled a hearing for November 8, 2000. 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. 19 20 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. 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, which Leasecomm has opposed. A hearing on the motion for class certification is scheduled for November 15, 2000. 20 21 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"). 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 Company, Leasecomm, and the individual defendants all served motions to dismiss on September 15, 2000. Oppositions to the motions to dismiss are currently due to late October. 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"). 21 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 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 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 Company, Leasecomm, and the individual defendants all served motions to dismiss on September 15, 2000. Oppositions to the motions to dismiss are currently due in late October. 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 22 23 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 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, and supplemented that motion with an additional filing on September 5, 2000. The Court has not yet ruled on the 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. 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. 23 24 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 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 commercial leases entered into by Leasecomm with Florida residents is, in fact, a consumer lease. Leasecomm believes that its commercial leases are, in fact, commercial leases, not consumer leases, and is attempting to cooperate with the Attorney General's Office on this matter. 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. VIII. On May 8, 2000, Plaintiff Efraim Bason brought this action in the Supreme Court of the State of New York, County of Nassau, seeking compensatory damages in the amount of $450,000 and punitive damages under various legal theories for Leasecomm's refusal to promptly release him from an equipment lease to which he claims his name was forged (the "Bason Complaint"). The Bason Complaint alleges that Leasecomm's failure to promptly release him from the lease, and subsequent negative reports to credit agencies, ruined his credit and prevented him from securing certain financing that he allegedly needed to purchase merchandise which he claims he could have then re-sold at a $450,000 profit. The Company removed the action to the United States District Court for the Eastern District of New York, denied plaintiff's material allegations and has vigorously defended the action. To this date, plaintiff has failed to respond to Leasecomm's discovery, and has failed to produce other discovery required under the local rules of the Court to which the Bason Complaint was removed. As a consequence, the Company secured an order from the Court compelling plaintiff to provide the requested discovery immediately, failing which it will be subject to sanctions or the dismissal of the Bason Complaint. If the Company does not receive such discovery shortly, the Company will move for a dismissal and sanctions under Rule 11. IX. On June 16, 2000, litigation was instituted in the Superior Court of the State of Rhode Island (Providence County) entitled Gateway Healthcare, Inc. v. Metrocall, Inc. and Leasecomm Corporation, C.A. No. 00-3177. Gateway seeks declaratory and injunctive relief in order to terminate an agreement between Gateway and Metrocall for wireless telecommunications services. Gateway also seeks indemnification from Metrocall for any liability Gateway has to Leasecomm on a related lease agreement, and also seeks to enjoin Metrocall and Leasecomm from filing suit against Gateway in any other court during the pendency of this action. Gateway has moved for preliminary injunctive relief in this last regard, but on June 26, 2000, Leasecomm defeated Gateway's motion, and on October 6, 2000, moved to dismiss Gateway's complaint, on the grounds that the lease agreement's forum selection clause designates the courts of Massachusetts as the proper forum for this action. Leasecomm's motion to dismiss will be heard on January 23, 2001. Leasecomm will continue to contest this case vigorously, in order to protect its rights against Gateway under the lease agreement. Due to the existence of a valid 24 25 forum selection clause, Leasecomm is likely to prevail on its motion to dismiss, which would effectively move the action to Massachusetts. However, due to the early stage of this litigation, it is impossible to make a reasonable estimate as the outcome of this case if it is litigated in Massachusetts. X. On April 3, 2000 a purported class action suit was filed in Superior Court of the State of California, County of San Mateo against Leasecomm and MicroFinancial as well as a number of other defendants with whom Leasecomm and MicroFinancial are alleged to have done business, directly or indirectly. The 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. On May 31, 2000, Leasecomm filed a motion for an order staying all litigation in California against Leasecomm Corporation and Microfinancial Incorporated on the grounds that the lease contracts at issue contained a forum selection clause providing that any litigation concerning the leases would be brought in Massachusetts where Leasecomm Corporation is headquartered. By order dated August 22, 2000, the Court granted that motion and stayed further litigation in the California proceedings against Leasecomm Corporation and Microfinancial Incorporated. On September 27, 2000, plaintiffs filed an appeal seeking to overturn that ruling. No briefing or hearing dates have yet been scheduled for the appeal. In the meantime, the litigation is continuing against the defendants other than Leasecomm Corporation and Microfinancial Incorporated. 25 26 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Index EXHIBIT DESCRIPTION OF EXHIBIT ------- ---------------------- 10.6 Fourth Amended and Restated Revolving Credit Agreement, dated August 22, 2000, among Leasecomm Corporation, the lenders parties thereto and Fleet National Bank, as agent. 27 Financial Data Schedule (b) Not Applicable 26 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: November 14, 2000 27