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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File No.
MICROFINANCIAL INCORPORATED
(Exact name of Registrant as Specified in its Charter)
Massachusetts 04-2962824
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
950 Winter Street, Waltham, MA 02451
(Address of Principal Executive Offices) (zip code)
Registrant's Telephone Number, Including Area Code: (781) 890-0177
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on
which registered
Common Shares, $0.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock as
of March 22, 2000, was approximately $67,478,834.
As of March 22, 2000, 12,683,126 shares of the registrant's common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for the 2000 Special Meeting in lieu of the Annual
Meeting of Stockholders (to be filed with the Securities and Exchange Commission
on or before April 29, 2000) is incorporated by reference in Part III hereof.
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TABLE OF CONTENTS
DESCRIPTION PAGE NUMBER
----------- -----------
PART I ..........................................................................................1
Item 1. Business..................................................................................1
Item 2. Properties................................................................................7
Item 3. Legal Proceedings.........................................................................7
Item 4. Submission of Matters to a Vote of Security Holders......................................10
PART II .........................................................................................11
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................11
Item 6. Selected Financial Data..................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results Of Operations................................................................15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk...............................23
Item 8. Financial Statements and Supplementary Data Including
Selected Quarterly Financial Data (Unaudited)............................................24
Item 9. Changes In and Disagreements with Accountants on
Accounting and Financial Disclosure......................................................24
PART III .........................................................................................25
Item 10. Directors and Executive Officers of the Registrant.......................................25
Item 11. Executive Compensation...................................................................25
Item 12. Security Ownership of Certain Beneficial Owners and Management...........................25
Item 13. Certain Relationships and Related Transactions...........................................25
PART IV .........................................................................................26
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.........................26
SIGNATURES .........................................................................................29
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PART I
ITEM 1. BUSINESS
GENERAL
MicroFinancial Incorporated ("MicroFinancial" or the "Company") was formed
as a Massachusetts corporation on January 27, 1987. The Company, which operates
primarily through its wholly-owned subsidiary, Leasecomm Corporation, is a
specialized commercial finance company that leases and rents "microticket"
equipment and provides other financing services in amounts generally ranging
from $900 to $2,500, with an average amount financed of approximately $1,500 and
an average lease term of 44 months. Leasecomm Corporation started originating
leases in January 1986. The Company has used proprietary software in developing
a sophisticated, risk-adjusted pricing model and automating its credit approval
and collection systems, including a fully automated Internet-based application,
credit scoring and approval process.
The Company targets owner-operated or other small commercial enterprises,
with little business credit history and limited or poor personal credit history
at the owner level. The Company provides financing to these lessees who may have
few other sources of credit. The Company primarily leases and rents low-priced
commercial equipment with limited residual value which is used by these lessees
in their daily operations. The Company does not market its services directly to
lessees, but sources leasing transactions through a nationwide network of over
1,200 independent sales organizations and other dealer-based origination
networks ("Dealers").
The majority of the Company's leases are currently for authorization
systems for point-of-sale card-based payments by, for example, debit, credit and
charge cards ("POS authorization systems"). POS authorization systems require
the use of a POS terminal capable of reading a cardholder's account information
from the card's magnetic stripe and combining this information with the amount
of the sale entered via a POS terminal keypad or POS software used on a personal
computer to process a sale. The terminal electronically transmits this
information over a communications network to a computer data center and then
displays the returned authorization or verification response on the POS
terminal.
The Company continues to develop other product lines, including leasing
other commercial products and acquiring payment streams from service contracts.
LEASING, SERVICING AND FINANCING PROGRAMS
The Company originates leases for products that typically have limited
distribution channels and high selling costs. The Company facilitates sales of
such products by making them available to Dealers' customers for a small monthly
lease payment rather than a high initial purchase price. The Company primarily
leases and rents low-priced commercial equipment with limited residual value to
small merchants. The Company purchases or originates monthly payment streams
without regard to the residual value of the leased product. The majority of the
Company's leases are currently for POS authorization systems, however, the
Company also leases a wide variety of other equipment including advertising and
display equipment, coffee machines, paging systems, water coolers and restaurant
equipment. In addition, the
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Company also acquires service contracts and contracts in certain other financing
markets. The Company opportunistically seeks to enter various other financing
markets.
The Company's residential financings include acquiring service contracts
from Dealers that provide security monitoring services and various other types
of residential finance products.
The Company originates and services leases, contracts and loans in all 50
states of the United States and its territories. As of December 31, 1999, leases
in California, Florida, Texas, Massachusetts and New York accounted for
approximately 45% of the Company's portfolio, with only California accounting
for more than 10% of the total portfolio, at approximately 15%. None of the
remaining states accounting for more than 4% of such total.
TERMS OF EQUIPMENT LEASES
Substantially all equipment leases originated or acquired by the Company
are non-cancelable. In a typical lease transaction, the Company originates
leases referred to it by the Dealer and buys the underlying equipment from the
referring Dealer upon funding of an approved application. Leases are structured
with limited recourse to the Dealer, with risk of loss in the event of default
by the lessee residing with the Company in most cases. The Company performs all
processing, billing and collection functions under its leases.
During the term of a typical lease, the Company is scheduled to receive
payments sufficient, in the aggregate, to cover the Company's borrowing costs
and the costs of the underlying equipment, and to provide the Company with an
appropriate profit. Throughout the term of the lease, the Company charges late
fees, prepayment penalties, loss and damage waiver fees and other service fees,
when applicable, which enhance the profitability of the lease. The initial
non-cancelable term of the lease is equal to or less than the equipment's
estimated economic life. Initial terms of the leases in the Company's portfolio
generally range from 12 to 48 months, with an average initial term of 44 months
as of December 31, 1999.
The terms and conditions of all of the Company's leases are substantially
similar. In most cases, the contracts require lessees to: (i) maintain, service
and operate the equipment in accordance with the manufacturer's and
government-mandated procedures; (ii) insure the equipment against property and
casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make
all scheduled contract payments regardless of the performance of the equipment.
The Company's standard lease forms provide that in the event of a default by the
lessee, the Company can require payment of liquidated damages and can seize and
remove the equipment for subsequent sale, refinancing or other disposal at its
discretion. Any additions, modifications or upgrades to the equipment,
regardless of the source of payment, are automatically incorporated into and
deemed a part of the equipment financed.
The Company seeks to protect itself from credit exposure relating to poor
quality Dealers by entering into limited recourse agreements with its Dealers,
under which the Dealer agrees to reimburse the Company for payment of defaulted
amounts under certain circumstances, primarily defaults within the first month
following origination and upon evidence of Dealer errors or misrepresentations
in originating a lease or contract. In case of Dealer error or
misrepresentation, the Company will charge-back the Dealer for both the lessee's
delinquent amounts and attorney and court fees.
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RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT
The Company typically owns a residual interest in the equipment covered by
a lease. At the end of the lease term, the lease typically converts into a
month-to-month rental contract. If the lease does not convert, the lessee either
buys the equipment at a price quoted by the Company or returns the equipment. If
the equipment is returned, the Company may place the equipment into its used
equipment rental and leasing program. The Company may also sell the used
equipment through equipment brokers and remarketers in order to maximize the net
proceeds from such sale.
SERVICE CONTRACTS
In a typical transaction for the acquisition of service contracts, a
homeowner will purchase a security system and simultaneously sign a contract
with the Dealer for the monitoring of that system for a monthly fee. The Dealer
will then sell the right to payment under that contract to the Company for a
multiple of the monthly payments. The Company performs all processing, billing
and collection functions under these contracts.
DEALERS
The Company provides financing to obligors under microticket leases,
contracts and loans through its Dealers. Since the Company relies primarily on
its network of Dealers for its origination volume, the Company considers them
its customers. The Company had over 1,240 different Dealers originating 79,720
Company leases, contracts and loans in 1999. One dealer accounted for
approximately 10.7%, 11.6% and 14.7% of all dealer funding during the year ended
December 31, 1997, 1998 and 1999, respectively. Another dealer accounted for
approximately 2.6%, 3.5% and 10.1% of all dealer funding during the year ended
December 31, 1997, 1998 and 1999, respectively. No other dealer accounted for
more than 10% of the Company's funding volume during the years ended December
31, 1997, 1998, or 1999.
The Company does not sign exclusive agreements with its Dealers. Dealers
interact with merchants directly and typically market not only POS authorization
systems but also financing through the Company and ancillary POS processing
services.
USE OF TECHNOLOGY
The Company's business is operationally intensive, due in part to the small
average amount financed. Accordingly, technology and automated processes are
critical in keeping servicing costs to a minimum while providing quality
customer service.
The Company has developed LeasecommDirect(TM), an Internet-based
application processing, credit approval and Dealer information tool. Using
LeasecommDirect(TM), a Dealer can input an application directly to the Company
via the Internet and obtain almost instantaneous approval automatically over the
Internet through the Company's computer system, all without any contact with any
employee of the Company. The Company also offers Instalease(R), a program that
allows a Dealer to submit applications by telephone, telecopy or e-mail to a
Company representative, receive approval, and complete a sale from a
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lessee's location. By assisting the Dealers in providing timely, convenient and
competitive financing for their equipment or service contracts and offering
Dealers a variety of value-added services, the Company simultaneously promotes
equipment and service contract sales and the utilization of the Company as the
finance provider, thus differentiating the Company from its competitors.
The Company has used its proprietary software to develop a
multi-dimensional credit scoring model which generates pricing of its leases,
contracts and loans commensurate with the risk assumed. This software does not
produce a binary "yes or no" decision, but rather determines the price at which
the lease, contract or loan can be profitably underwritten. The Company uses
credit scoring in most, but not all, of its extension of credit.
UNDERWRITING
The nature of the Company's business requires two levels of review, the
first focused on the ultimate end-user of the equipment or service and the
second focused on the Dealer. The approval process begins with the submission by
telephone, facsimile or electronic transmission of a credit application by the
Dealer. Upon submission, the Company, either manually or through
LeasecommDirect(TM) over the Internet, conducts its own independent credit
investigation of the lessee through its own proprietary data base and recognized
commercial credit reporting agencies such as Dun & Bradstreet, TRW, Equifax and
TransUnion. The Company's software evaluates this information on a
two-dimensional scale, examining both credit depth (how much information exists
on an applicant) and credit quality (past payment history). The Company is thus
able to analyze both the quality and amount of credit history available with
respect to both obligors and Dealers and to assess the credit risk. The Company
uses this information to underwrite a broad range of credit risks and provide
financing in situations where its competitors may be unwilling to provide such
financing. The credit scoring model is complex and automatically adjusts for
different transactions. In situations where the amount financed is over $3,000,
the Company may go beyond its own data base and recognized commercial credit
reporting agencies and obtain information from less readily available sources
such as banks. In certain instances, the Company will require the lessee to
provide verification of employment and salary.
The second aspect of the credit decision involves an assessment of the
originating Dealer. Dealers undergo both an initial screening process and
ongoing evaluation, including an examination of Dealer portfolio performance,
lessee complaints, cases of fraud or misrepresentation, aging studies, number of
applications and conversion rates for applications. This ongoing assessment
enables the Company to manage its Dealer relationships, including ending
relationships with poor-performing Dealers.
Upon credit approval, the Company requires receipt of signed lease
documentation on the Company's standard or other pre-approved lease form before
funding. Once the equipment is shipped and installed, the Dealer invoices the
Company, and thereafter the Company verifies that the lessee has received and
accepted the equipment. Upon the lessee authorizing payment to the Dealer, the
lease is forwarded to the Company's funding and documentation department for
funding, transaction accounting and billing procedures.
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BULK AND PORTFOLIO ACQUISITIONS
In addition to originating leases through its Dealer relationships, the
Company from time to time has purchased lease portfolios from Dealers. The
Company purchases leases from Dealers on an ongoing basis in packages ranging
from $20,000 to $200,000. While certain of these leases initially do not meet
the Company's underwriting standards, the Company will often purchase the leases
once the lessee demonstrates a payment history. The Company will only acquire
these smaller lease portfolios in situations where the company selling the
portfolio will continue to act as a Dealer following the acquisition. The
Company also completed the acquisition of four large POS authorization system
lease and rental portfolios, two in 1996, one in 1998 and one in 1999. The first
acquisition, completed in May 1996, consisted of over 8,000 rental contracts
with total fundings of $1.9 million. The second acquisition was for
approximately 8,200 leases in December 1996 with fundings of $7.9 million. In
the third acquisition, the Company acquired 4,841 rental contracts in July 1998
with fundings of $2.8 million. The fourth acquisition, completed in September of
1999, consisted of 2,148 leases with fundings of $3.2 million.
SERVICING AND COLLECTIONS
The Company performs all servicing functions on its leases, contracts and
loans, including its securitized leases, through its automated servicing and
collection system. Servicing responsibilities generally include billing,
processing payments, remitting payments to Dealers and investors in the
Company's securitization programs (the "Securitizations"), preparing investor
reports, paying taxes and insurance and performing collection and liquidation
functions.
The Company differentiates itself from its competitors in the way in which
it pursues delinquent accounts that it believes its competitors would not pursue
due to the costs of collection. The Company's automated lease administration
system handles application tracking, invoicing, payment processing, automated
collection queuing, portfolio evaluation and report writing. The system is
linked with bank accounts for payment processing and provides for direct
withdrawal of lease, contract and loan payments. The Company monitors delinquent
accounts using its automated collection process. The Company uses several
computerized processes in its collection efforts, including the generation of
daily priority call lists and scrolling for daily delinquent account servicing,
generation and mailing of delinquency letters, routing of incoming calls to
appropriate employees with instant computerized access to account details,
generation of delinquent account lists eligible for litigation, generation of
pleadings and litigation monitoring. Collection efforts commence immediately,
with repeated reminder letters and telephone calls upon payments becoming 10
days past due, with a lawsuit generally filed if an account is more than 85 days
past due. The Company's collection efforts include one or more of the following:
sending collection letters, making collection calls, reporting delinquent
accounts to credit reporting agencies and litigating delinquent accounts where
necessary and obtaining and enforcing judgments.
COMPETITION
The microticket leasing and financing industry is highly competitive. The
Company competes for customers with a number of national, regional and local
banks and finance companies. The Company's competitors also include equipment
manufacturers that lease or finance the sale of their own products. While the
market for microticket financing has traditionally been fragmented, the Company
could also be
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faced with competition from small or large-ticket leasing companies that could
use their expertise in those markets to enter and compete in the microticket
financing market. The Company's competitors include larger, more established
companies, some of which may possess substantially greater financial, marketing
and operational resources than the Company, including a lower cost of funds and
access to capital markets and to other funding sources which may be unavailable
to the Company.
EMPLOYEES
As of December 31, 1999, the Company had 319 full-time employees, of which
54 were engaged in the credit activities and Dealer service, 169 were engaged in
servicing and collection activities, 15 were engaged in marketing activities,
and 81 were engaged in general administrative activities. Management believes
that its relationship with its employees is good. No employees of the Company
are members of a collective bargaining unit in connection with their employment
by the Company.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE POSITION
- ---- --- --------
Peter R. Bleyleben....................... 46 President, Chief Executive Officer and Director
Richard F. Latour........................ 46 Executive Vice President, Chief Operating Officer, Chief
Financial Officer, Treasurer, Clerk and Secretary
John Miller.............................. 42 Senior Vice President, Sales and Marketing
John Plumlee............................. 48 Vice President, MIS
Carol A. Salvo........................... 33 Vice President, Legal
Set forth below is a brief description of the business experience of the
executive officers of the Company.
Peter R. Bleyleben has served as President, Chief Executive Officer and
Director of the Company or its predecessor since June 1987. Before joining the
Company, Dr. Bleyleben was Vice President and Director of the Boston Consulting
Group, Inc. ("BCG") in Boston. During his more than eight years with BCG, Dr.
Bleyleben focused his professional strategic consulting practice on the
financial services and telecommunications industries. Dr. Bleyleben is also a
Director of UpToDate in Medicine, Inc. He earned an M.B.A. with distinction and
honors from the Harvard Business School, an M.B.A. and a Ph.D. in Business
Administration and Economics, respectively, from the Vienna Business School in
Vienna, Austria and a B.S. in Computer Science from the Vienna Institute of
Technology.
Richard F. Latour has served as Executive Vice President, Chief Operating
Officer, Chief Financial Officer, Treasurer, Clerk and Secretary of the Company
since 1995. From 1986 to 1995, Mr. Latour was Vice President of Finance and
Chief Financial Officer of the Company. Prior to joining the Company, Mr. Latour
was Vice President, Finance for TRAK, Incorporated, an international
manufacturer and distributor of consumer products, where he was responsible for
all financial and related administrative functions.
John Miller has served as Senior Vice President, Sales and Marketing since
April of 1999. Prior to joining the Company Mr. Miller served as Vice President,
National and New York Yellow Pages Sales
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from April 1998 to March 1999 and as Vice President Strategy, Planning and
Business Development, Information Services Group from August 1997 to March 1998,
each for Bell Atlantic. Prior to that time, Mr. Miller served in various
marketing and strategic planning positions for Nynex.
John Plumlee has served as Vice President, MIS, of the Company since 1990.
Prior to joining the Company, Mr. Plumlee was Vice President of M.M.C., Inc., a
firm focusing on the delivery of software services to local governments.
Carol A. Salvo has served as Vice President, Legal, of the Company since
1996. From 1992 to 1995, Ms. Salvo served as Litigation Supervisor of the
Company. From 1995 to 1996, Ms. Salvo served as Director of Legal Collection
Services of the Company. Prior to joining the Company, Ms. Salvo was a junior
accountant with InfoPlus Inc.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in leased space of 21,656
square feet at 950 Winter Street, Waltham, Massachusetts 02451. The lease for
this space expires on July 31, 2004. The Company also leases 2,933 square feet
of office space for its West Coast office in Newark, California under a lease
which expires on August 31, 2001. The Company also leases 44,659 square feet of
office space in Woburn, Massachusetts under a lease which expires on December
14, 2003. The Company's collection, credit, marketing, computer operations and
other administrative functions are located in the Woburn location.
ITEM 3. 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. 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
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Agreements; had no more than three employees as of the date of the Lease
Agreement; had been in existence for no more than three years as of the date of
the Lease Agreement; and had entered into Lease Agreements with scheduled
monthly lease payments which aggregated to less than $5,000.
The Clark Complaint alleges that enforcement of the forum selection clause
is not fair or reasonable because, among other things, litigation in
Massachusetts is prohibitively costly and time consuming for purported class
members, purported class members have no choice but to enter into the Lease
Agreement because of Leasecomm's greater bargaining power, and purported class
members allegedly have valid defenses to the claims asserted against them by
Leasecomm. The Plaintiffs seek: a declaration that the forum selection clause is
not fair or reasonable as to purported class members and that the Massachusetts
courts lack personal jurisdiction over purported class members; dismissal
without prejudice of all cases pending in Massachusetts against purported class
members; a permanent injunction preventing Leasecomm and its affiliates from
bringing suit in Massachusetts against purported class members; a permanent
injunction preventing Leasecomm or its affiliates from entering into Lease
Agreements containing the forum selection clause; unspecified monetary damages
against Leasecomm and the Company in favor of purported class members equal to
double or treble the moneys collected in 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, which will be heard
by the Court within the next several months.
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
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Massachusetts Consumer Credit Cost Disclosure Act; and that Leasecomm has
engaged in unfair trade practices in violation of the Massachusetts consumer
protection statute.
Plaintiffs and the members of the purported class seek: unspecified damages
for monetary losses allegedly sustained by them as a result of this conduct by
Leasecomm and reimbursement of costs and attorneys' fees; treble damages and
other punitive damages; rescission of the Lease Agreements, or a declaration
that they are void, and return of all moneys paid to Leasecomm; and damages for
unjust enrichment.
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, which will be heard by the Court within the next several months.
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, which will be heard
by the Court over the next several months.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
IV. 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
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"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 approximately $13.0 million, plus post-judgment
interest and attorneys' fees.
Subsequently, 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 also 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. The parties have filed various motions with the
Court, which will be heard over the next several months. Among the Company's and
Leasecomm's motions, are motions to dismiss the Premier Complaint, or,
alternatively, to transfer this case to federal court in Massachusetts; and, a
motion for preliminary injunction regarding the Sentinel Complaint, 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.
Since this matter is in an early stage, there can be no assurance as to its
eventual outcome.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders of the Company
during the fourth quarter of its fiscal year ended December 31, 1999.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's common stock, par value $0.01 per share (the "Common Stock"),
is listed on the New York Stock Exchange under the symbol "MFI."
The Common Stock was listed on the New York Stock Exchange beginning
February 5, 1999. Accordingly, the high and low sales price for the Common Stock
on such exchange for each full quarter in the Company's fiscal year ending
December 31, 1998 is not available.
By quarter
1999
------------------------------------------
SECOND THIRD FOURTH
QUARTER QUARTER QUARTER
------- ------- -------
Stock Price
High..................... 19.8125 14.7500 13.6250
Low...................... 9.0000 9.7500 10.0000
(b) Holders
At March 22, 2000, there were approximately 64 stockholders of record of
the Common Stock.
(c) Dividends
The Company paid the following quarterly cash dividends on the Common
Stock. The amounts indicated give effect to the 2-for-1 stock split of the
Common Stock effected on February 10, 1999.
Year ended Year ended
December 31, 1998 December 31, 1999
----------------- -----------------
First Quarter................. $0.030 $0.035
Second Quarter................ $0.035 $0.040
Third Quarter................. $0.035 $0.040
Fourth Quarter................ $0.035 $0.040
The Company currently intends to pay dividends in the future. Provisions in
certain of the Company's credit facilities and agreements governing its
subordinated debt contain, and the terms of any indebtedness issued by the
Company in the future are likely to contain, certain restrictions on the payment
of dividends on the Common Stock. The decision as to the amount and timing of
future dividends paid by the Company, if any, will be made at the discretion of
the Company's Board of Directors in light of the financial condition, capital
requirements, earnings and prospects of the Company and any restrictions under
the Company's credit facilities or subordinated debt agreements, as well as
other factors the Board of
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Directors may deem relevant, and there can be no assurance as to the amount and
timing of payment of future dividends.
(d) Recent Sales of Unregistered Securities
Not applicable
(e) Use of Proceeds from Registered Securities
Not applicable
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected consolidated financial and
operating data for the Company and its subsidiaries for the periods and at the
dates indicated. The selected financial data were derived from the financial
statements and accounting records of the Company. The data presented below
should be read in conjunction with the consolidated financial statements,
related notes and other financial information included herein.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- ------- ------- ------- -----------
(Dollars in thousands except per share data)
Income Statement Data:
Revenues
Income on financing leases and loans $27,011 $38,654 $45,634 $47,341 $55,545
Income on service contracts (1) .... -- 6 501 2,565 6,349
Rental income ...................... 3,688 8,250 10,809 16,118 21,582
Fee income (2) ..................... 5,446 8,675 11,236 10,476 14,985
------- ------- ------- ------- -------
Total revenues ..................... 36,145 55,585 68,180 76,500 98,461
------- ------- ------- ------- -------
Expenses:
Selling, general and administrative 8,485 14,073 17,252 20,061 24,416
Provision for credit losses ........ 13,388 19,822 (3) 21,713 (3) 19,075 37,836 (3)
Depreciation and amortization ...... 1,503 2,981 3,787 5,076 7,597
Interest ........................... 8,560 10,163 11,890 12,154 10,375
------- ------- ------- ------- -------
Total expenses ..................... 31,936 47,039 54,642 56,366 80,224
------- ------- ------- ------- -------
Income before provision for
income taxes ....................... 4,209 8,546 13,538 20,134 18,237
Net income .............................. 2,524 5,080 7,652 11,924 10,728
======= ======= ======= ======= =======
Net income per common share
Basic (4) .......................... $ 0.34 $ 0.52 $ 0.78 $ 1.21 $ 0.84
Diluted (5) ........................ 0.27 0.52 0.76 1.19 0.83
Dividends per common share .............. 0.06 0.10 0.12 0.14 0.16
DECEMBER 31,
--------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Balance Sheet Data:
Gross investment in leases and loans (6) $ 189,698 $ 247,633 $ 258,230 $ 280,875 $ 362,721
Unearned Income ........................ (60,265) (76,951) (73,060) (74,520) (100,815)
Allowance for credit losses ............ (15,952) (23,826) (26,319) (24,850) (41,719)
Investment in service contracts (1) .... -- -- 2,145 8,920 14,250
Total Assets ...................... 126,479 170,192 179,701 210,254 265,856
Notes Payable .......................... 94,900 116,202 116,830 130,421 144,871
Subordinated notes payable ............. 13,170 27,006 26,382 24,421 9,238
Total liabilities ................. 118,568 158,013 160,935 180,771 187,018
Total stockholders' equity ........ 7,911 12,179 18,766 29,483 78,838
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DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- --------- ---------- ----------
(Dollars in thousands, except statistical data)
Other Data:
Operating Data:
Total leases and loans originated (7) .. $ 134,546 $ 143,200 $ 129,064 $ 153,819 $ 223,446
Total service contracts acquired (8) ... 3,635 2,431 2,972 8,080 9,105
Dealer fundings (9) .................... $ 76,502 $ 73,659 $ 77,590 $ 105,200 137,300
Average yield on leases and loans (10) . 30.7% 32.4% 33.9% 35.2% 36.8%
Cash flows from (used in):
Operating activities ................... $ 41,959 60,104 77,393 95,973 114,723
Investing activities ................... (76,353) (86,682) (80,127) (108,111) (147,587)
Financing activities ................... 36,155 33,711 (1,789) 9,703 37,109
--------- --------- --------- --------- ---------
Total .................................. 1,761 7,133 (4,523) (2,435) 4,245
Selected Ratios:
Return on average assets ............... 2.40% 3.42% 4.37% 6.12% 4.51%
Return on average stockholders'
equity .............................. 36.95 50.57 49.46 49.43 19.81
Operating margin (11) .................. 48.68 51.04 51.70 51.25 56.95
Credit Quality Statistics:
Net charge-offs ........................ $ 5,428 $ 11,948 (12) $ 19,220 (12) $ 20,544 $ 20,968
Net charge-offs as a percentage of
average gross investment (13) ....... 3.56% 5.46%(12) 7.57%(12) 7.47% 6.29%
Provision for credit losses as a
percentage of average gross
investment (14) ..................... 8.78 9.07 8.55 6.93 11.35
Allowance for credit losses as a
percentage of gross investment (15) . 8.41 9.62 10.14 8.58 11.07
- --------------
(1) The Company began acquiring fixed-term service contracts in 1995. Until
December 1996, the Company treated these fixed-term contracts as leases
for accounting purposes. Accordingly, income from these service
contracts is included in income on financing leases and loans for all
periods prior to December 1996 and investments in service contracts
were recorded as receivables due in installments on the balance sheet
at December 31, 1996. Beginning in December 1996, the Company began
acquiring month-to-month service contracts, the income from which is
included as a separate category in the Consolidated Statements of
Operations and the investment in which are recorded separately on the
balance sheet.
(2) Includes loss and damage waiver fees and service fees.
(3) The provision for 1996 includes $5.0 million resulting from a reduction
in the time period for charging off the Company's receivables from 360
to 240 days. The write-off period was changed back to 360 days in
January 1998. The provision for 1997 includes a one-time write-off of
securitized receivables of $9.5 million and $5.1 million in write-offs
of satellite television equipment receivables. The provision for 1999
includes a special provision of $12.7 million for a loan made to one
company, collateralized by approximately 3,500 microticket consumer
contracts and guaranteed by, among other security, an insurance
performance bond. MicroFinancial is currently involved in litigation
with the company and the insurance company.
(4) Net income per common share (basic) is calculated based on weighted
average common shares outstanding of 7,352,189, 9,682,851, 9,793,140,
9,859,127 and 12,795,809 for the years ended December 31, 1995, 1996,
1997, 1998, and 1999 respectively.
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17
(5) Net income per common share (diluted) is calculated based on weighted
average common shares outstanding on a diluted basis of 9,448,206,
9,770,613, 9,925,329, 10,031,975 and 12,904,231 for the years ended
December 31, 1995, 1996, 1997, 1998 and 1999, respectively.
(6) Consists of receivables due in installments, estimated residual value,
and loans receivable.
(7) Represents the amount paid to Dealers upon funding of leases and loans
plus the associated unearned income.
(8) Represents the amount paid to Dealers upon the acquisition of service
contracts, including both non-cancelable service contracts and
month-to-month service contracts.
(9) Represents the amount paid to Dealers upon funding of leases, contracts
and loans.
(10) Represents the aggregate of the implied interest rate on each lease and
loan originated during the period weighted by the amount funded at
origination for each such lease and loan.
(11) Represents income before provision for income taxes and provision for
credit losses as a percentage of total revenues.
(12) Charge-offs in 1996 and 1997 were higher due to write-offs related to
satellite television equipment lease receivables and due to a change in
the write-off period from 360 to 240 days in the third quarter of 1996.
The write-off period was changed back to 360 days in January 1998.
(13) Represents net charge-offs as a percentage of average gross investment
in leases and loans and investment in service contracts.
(14) Represents provision for credit losses as a percentage of average gross
investment in leases and loans and investment in service contracts.
(15) Represents allowance for credit losses as a percentage of gross
investment in leases and loans and investment in service contracts.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion includes forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995). When used
in this discussion, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other important factors that could cause the actual results, performance or
achievements of the Company, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other important
factors include, among others: the Company's dependence on POS authorization
systems and expansion into new markets; the Company's significant capital
requirements; the risks of defaults on the Company's leases; adverse
consequences associated with the Company's collection policy; risks associated
with economic downturns; the effect on the Company's portfolio of higher
interest rates, intense competition; increased governmental regulation of the
rates and methods used by the Company in financing and collecting its leases and
loans; risks associated with acquiring other portfolios and companies;
dependence on key personnel; and other factors many of which are beyond the
Company's control. The Company expressly disclaims any obligation or undertaking
to disseminate any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based. In light of these risks and uncertainties, there can be no
assurance that the forward-looking information contained herein will in fact
transpire.
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OVERVIEW
The Company is a specialized commercial finance company that provides
"microticket" equipment leasing and other financing services in amounts
generally ranging from $900 to $2,500, with an average amount financed of
approximately $1,500. The Company primarily leases POS authorization systems and
other small business equipment to small commercial enterprises. For years ended
December 31, 1998 and 1999, the Company had fundings to Dealers upon origination
of leases, contracts and loans ("Dealer Fundings") of $105.2 million and $137.3
million, respectively, and revenues of $76.5 million and $98.5 million,
respectively.
The Company derives the majority of its revenues from leases originated and
held by the Company, payments on service contracts, rental payments from lessees
who continue to rent the equipment beyond the original lease term, and fee
income. The Company funds the majority of leases, contracts and loans through
its revolving credit and term loan facilities (the "Credit Facilities") and
on-balance sheet Securitizations, and to a lesser extent, its subordinated debt
program ("Subordinated Debt") and internally generated funds.
In a typical lease transaction, the Company originates leases through its
network of independent Dealers. Upon approval of a lease application by the
Company and verification that the lessee has both received the equipment and
signed the lease, the Company pays the Dealer the cost of the equipment plus the
Dealer's profit margin. In a typical transaction for the acquisition of service
contracts, a homeowner purchases a security system and simultaneously signs a
contract with the Dealer for the monitoring of that system for a monthly fee.
Upon credit approval of the monitoring application and verification with the
homeowner that the system is installed, the Company purchases from the Dealer
the right to the payment stream under that monitoring contract at a negotiated
multiple of the monthly payments.
Substantially all leases originated or acquired by the Company are
non-cancelable. During the term of the lease, the Company is scheduled to
receive payments sufficient, in the aggregate, to cover the Company's borrowing
costs and the costs of the underlying equipment, and to provide the Company with
an appropriate profit. The Company enhances the profitability of its leases,
contracts and loans by charging late fees, prepayment penalties, loss and damage
waiver fees and other service fees, when applicable. The initial non-cancelable
term of the lease is equal to or less than, the equipment's estimated economic
life, and often provides the Company with additional revenues based on the
residual value of the equipment financed at the end of the initial term of the
lease. Initial terms of the leases in the Company's portfolio generally range
from 12 to 48 months, with an average initial term of 44 months as of December
31, 1999. Substantially all service and rental contracts are month-to-month
contracts with an expected term of seven years for service contracts and 15
months for rental contracts.
CERTAIN ACCOUNTING CONSIDERATIONS
The Company's lease contracts are accounted for as financing leases. At
origination, the Company records the gross lease receivable, the estimated
residual value of the leased equipment, initial direct costs incurred and the
unearned lease income. Unearned lease income is the amount by which the gross
lease receivable plus the estimated residual value exceeds the cost of the
equipment. Unearned lease income and
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19
initial direct costs incurred are amortized over the related lease term using
the interest method. Amortization of unearned lease income and initial direct
costs is suspended if, in the opinion of management, full payment of the
contractual amount due under the lease agreement is doubtful. In conjunction
with the origination of leases, the Company may retain a residual interest in
the underlying equipment upon termination of the lease. The value of such
interests is estimated at inception of the lease and evaluated periodically for
impairment. Other revenues such as loss and damage waiver fees, service fees
relating to the leases, contracts and loans and rental revenues are recognized
as they are earned.
The Company's investments in cancelable service contracts are recorded at
cost and amortized over the expected life of the service period. Income on
service contracts from monthly billings is recognized as the related services
are provided. The Company periodically evaluates whether events or circumstances
have occurred that may affect the estimated useful life or recoverability of the
investment in service contracts. Rental equipment is recorded at estimated
residual value and depreciated using the straight-line method over a period of
twelve months. Loans are reported at their outstanding principal balance.
Interest income on loans is recognized as it is earned.
The Company maintains an allowance for credit losses on its investment in
leases, service contracts and loans at an amount that it believes is sufficient
to provide adequate protection against losses in its portfolio. The allowance is
determined principally on the basis of the historical loss experience of the
Company and the level of recourse provided by such lease, service contract or
loan, if any, and reflects management's judgment of additional loss potential
considering future economic conditions and the nature and characteristics of the
underlying lease portfolio. The Company determines the necessary periodic
provision for credit losses taking into account actual and expected losses in
the portfolio as a whole and the relationship of the allowance to the net
investment in leases, service contracts and loans. Such provisions generally
represent a percentage of funded amounts of leases, contracts and loans. The
resulting charge is included in the provision for credit losses.
Leases, service contracts, and loans are charged against the allowance for
credit losses and are put on non-accrual when they are deemed to be
uncollectable. Generally, the Company deems leases, service contracts and loans
to be uncollectable when one of the following occur: (i) the obligor files for
bankruptcy; (ii) the obligor dies and the equipment is returned; or (iii) when
an account has become 360 days delinquent. The typical monthly payment under the
Company's leases is between $30 and $50 per month. As a result of these small
monthly payments, the Company's experience is that lessees will pay past due
amounts later in the process because of the small amount necessary to bring an
account current (at 360 days past due, a lessee will only owe lease payments of
between $360 and $600).
The Company has developed and regularly updates proprietary credit scoring
systems designed to improve its risk based pricing. The Company uses credit
scoring in most, but not all, of its extensions of credit. In addition, the
Company aggressively employs collection procedures and a legal process to
resolve any credit problems.
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RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Total revenues for the year ended December 31, 1999 were $98.5 million, an
increase of $22 million, or 28.8%, from the year ended December 31, 1998, due
primarily to increases of $9.2 million, or 49.5%, in rental and service contract
income; $8.2 million, or 17.3%, in income on financing leases and loans and $4.3
million, or 85% in service fee income over such amounts in the previous year's
period. The increase in rental and service contract income came from an increase
in the number of lessees that have continued renting the equipment beyond the
original lease term and the increase in the number of service contracts in the
Company's portfolio. The increase in income on financing leases and loans arose
from the continued growth in the Company's lease portfolio.
Selling, general and administrative expenses increased $4.4 million, or
21.7%, for the year ended December 31, 1999 as compared to the year ended
December 31, 1998. The increase was primarily attributable to an increase in
personnel, resulting in a 22.4% increase in employee-related expenses, as the
number of employees needed to maintain and manage the Company's growing
portfolio and the general expansion of the Company's operations grew. Management
expects that salaries and employee-related expenses, marketing expenses and
other selling, general and administrative expenses will continue to increase as
the portfolio grows because of the requirements of maintaining the Company's
microticket portfolio and the Company's focus on collections.
The Company's provision for credit losses, including a special provision of
$12.7 million, increased $18.8 million from the year ended December 31, 1998 to
$37.8 million for the year ended December 31, 1999. Excluding the special
provision, the Company's provision for credit losses increased $6.1 million from
the year ended December 31, 1998 to $25.1 million for the year ended December
31, 1999. This increase is primarily the result of the Company's policy of
providing a provision for credit losses based in part upon the level of dealer
fundings and revenue recognized in any period. Dealer fundings increased $32.1
million or 30.5% and total revenues increased by $22 million or 28.8% for the
year ended December 31, 1999 as compared to the year ended December 31, 1998.
The provision for 1999 includes a special provision of $12.7 million for a loan
made to one company, collateralized by approximately 3,500 microticket consumer
contracts and guaranteed by, among other security, an insurance performance
bond. The Company is currently involved in litigation with the company and the
insurance company, see "Legal Proceedings".
Depreciation and amortization expense increased by $2.5 million or 50%, due
to an increase in the number of lessees that have continued renting the
equipment beyond the original lease term and the amortization of the investment
associated with service contracts.
Interest expense decreased by $1.8 million, or 15%, from $12.2 million for
the year ended December 31, 1998 to $10.4 million for the year ended December
31, 1999. This decrease resulted from a decrease in the average outstanding
balance of the Company's Credit Facilities.
As a result of the foregoing, prior to the special provision, the Company's
net income increased by $6.3 million, or 52.9%, from $11.9 million for the year
ended December 31, 1998 to $18.2 million for the year
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ended December 31, 1999. After the special provision, the Company's net income
for the year ended December 31, 1999 was $10.7 million, a decrease of 10%.
Dealer Fundings were $137.3 million during the year ended December 31,
1999, an increase of $32.1 million, or 30.5%, compared to the year ended
December 31, 1998. This increase primarily resulted from continued growth in
leases of equipment other than POS authorization systems and acquisitions of
service contracts. Receivable due in installments, estimated residual values,
loans receivable and investment in service contracts also increased from $289.7
million for the year ended December 31, 1998 to $377 million for the year ended
December 31, 1999, representing an increase of $87.3 million, or 30.1%. Net cash
provided by operating activities increased by $18.8 million to $114.7 million
during the year ended December 31, 1999, or 19.6%, from the year ended December
31, 1998 because of the increase in the size of the Company's overall portfolio
as well as the Company's continued emphasis on collections. Unearned income
increased $26.3 million, or 35.3%, from $74.5 million at December 31, 1998 to
$100.8 million at December 31, 1999. This increase was due to the increased
number of leases originated during 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Total revenues for the year ended December 31, 1998 were $76.5 million, an
increase of $8.3 million, or 12.2%, from the year ended December 31, 1997, due
primarily to increases of $7.4 million, or 65.5%, in rental and service contract
income and $1.7 million, or 3.7%, in income on financing leases and loans over
such amounts in the previous year's period. The increase in rental and service
contract income came from an increase in the number of lessees that have
continued renting the equipment beyond the original lease term and the increase
in the number of service contracts in the Company's portfolio. The increase in
income on financing leases and loans arose from the continued growth in the
Company's lease and loan portfolio.
Selling, general and administrative expenses increased $2.8 million, or
16.2%, for the year ended December 31, 1998 as compared to the year ended
December 31, 1997. The increase was primarily attributable to an increase in
personnel, resulting in a 19.8% increase in employee-related expenses, as the
number of employees needed to maintain and manage the Company's growing
portfolio and the general expansion of the Company's operations grew. Management
expects that salaries and employee-related expenses, marketing expenses and
other selling, general and administrative expenses will continue to increase as
the portfolio grows because of the requirements of maintaining the Company's
microticket portfolio and the Company's focus on collections.
The Company's provision for credit losses decreased $2.6 million from the
year ended December 31, 1997 to $19.1 million for the year ended December 31,
1998. This decrease resulted from an increase in recoveries and the Company's
estimate of future losses.
Depreciation and amortization expense increased by $1.3 million or 34%, due
to the increased number of rental contracts and the amortization of the
investment associated with service contracts.
Interest expense increased by $264,000, or 2.2%, from $11.9 million for the
year ended December 31, 1997 to $12.2 million for the year ended December 31,
1998. This increase resulted from an increase in the average outstanding balance
of the Company's Credit Facilities.
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22
As a result of the foregoing, the Company's net income increased by $4.3
million, or 55.8%, from $7.7 million for the year ended December 31, 1997 to
$11.9 million for the year ended December 31, 1998.
Dealer Fundings were $105.2 million during the year ended December 31,
1998, an increase of $27.6 million, or 35.6%, compared to the year ended
December 31, 1997. This increase primarily resulted from continued growth in
leases of equipment other than POS authorization systems, acquisitions of
service contracts and loans to commercial businesses. Receivable due in
installments, estimated residual values, loans receivable and investment in
service contracts also increased from $260 million for the year ended December
31, 1997 to $288.7 million for the year ended December 31, 1998, representing an
increase of $28.7 million, or 11%. Net cash provided by operating activities
increased by $18.6 million to $96 million during the year ended December 31,
1998, or 24%, from the year ended December 31, 1997 because of the increase in
the size of the Company's overall portfolio as well as the Company's continued
emphasis on collections. Unearned income increased $1.4 million, or 1.9%, from
$73.1 million at December 31, 1997 to $74.5 million at December 31, 1998. This
increase was due to the increased number of leases originated during 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Total revenues for the year ended December 31, 1997 were $68.2 million, an
increase of $12.6 million, or 22.7%, from the year ended December 31, 1996, due
to increases of $7.0 million, or 18.1%, in income on financing leases and loans,
$2.6 million, or 31.0%, in rental income and $2.6 million, or 29.5%, in fee
income. The increase in income on leases and loans was primarily the result of
the continued growth in the Company's lease portfolio. The increase in rental
income is due to the increased number of lessees who continued to rent the
equipment beyond the original lease term. The increase in fee income was a
result of the increase in the overall portfolio serviced by the Company.
The Company completed two portfolio acquisitions, one in May 1996 for $1.9
million of rental contracts and a second in December 1996 for $7.9 million of
leases. The income attributable to these acquired leases and rental contracts
represented approximately $2.2 million, or 4.7%, of total income on leases and
loans and rental income for 1996 and approximately $4.4 million, or 7.8%, of
total income on leases and loans and rental income for 1997.
Selling, general and administrative expenses increased $3.2 million, or
22.6%, for the year ended December 31, 1997 as compared to the year ended
December 31, 1996. Such increase was primarily attributable to a 20% increase in
the number of employees needed to maintain and manage the Company's increased
portfolio, the general expansion of the Company's operations and the more
competitive employment environment.
The Company's provision for credit losses increased by $1.9 million, or
9.5%, from $19.8 million in 1996 to $21.7 million in 1997. The higher provision
was due to a one-time write-off of securitized receivables of $9.5 million, $5.1
million in one-time write-offs of satellite television equipment receivables and
growth in the overall size of the Company's portfolio. The Company's 1997
provision reflected a cumulative write-off of non-accruing fully reserved
receivables in the Company's securitized portfolio. The Company wrote off the
$5.1 million in satellite television equipment receivables in 1997 sooner than
its
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normal 360-day policy because it was the Company's experience that certain
characteristics of consumer receivables which were different from commercial
receivables would render such receivables uncollectable under the Company's
normal collection procedures.
Depreciation and amortization expense increased by $806,000, or 27.0%, from
1996 to 1997 due to the increased number of rental contracts and the
amortization of the investment costs associated with service contracts.
Interest expense increased by $1.7 million, from $10.2 million for the year
ended December 31, 1996 to $11.9 million in 1997. This increase was primarily
due to an increase in the average outstanding balances of the Company's Credit
Facilities and Subordinated Debt.
As a result of these factors, net income increased by $2.6 million, or
50.6%, from $5.1 million in the year ended December 31, 1996 to $7.7 million in
the year ended December 31, 1997.
Dealer Fundings were $77.6 million for the fiscal year ended December 31,
1997, an increase of $3.9 million, or 5.3%, compared to $73.7 million for the
fiscal year ended December 31, 1996. The Company decided in July 1996 to scale
back its Dealer Fundings of consumer satellite television equipment leases,
funding to Dealers only $0.8 million of such leases in 1997 compared to $4.7
million in 1996. Excluding this factor, the Company had an increase in Dealer
Fundings of $7.8 million, or 11.3%, over 1996. This increase primarily resulted
from continued growth in leases of equipment other than POS authorization
systems, acquisitions of service contracts and loans to commercial businesses.
Gross investment in leases and loans also increased from $247.6 million in 1996
to $258.2 million at December 31, 1997, representing an increase of $10.6
million, or 4.3%. Net cash provided by operating activities increased by $17.3
million to $77.4 million during the year ended December 31, 1997, or 28.8%, from
the year ended December 31, 1996 because of the increase in the size of the
Company's overall portfolio as well as the Company's continued emphasis on
collections. Unearned income decreased $3.9 million, or 5.1%, from $77.0 million
at December 31, 1996 to $73.1 million at December 31, 1997. This decrease
resulted primarily from increased acquisitions of service contracts and
originations of loans which are accounted for on a cost basis and as a result do
not have any unearned income associated with them, as well as one-time
write-offs in 1997 of approximately $5.0 million in consumer satellite
television equipment lease receivables and $9.5 million of securitized
receivables and the corresponding unearned income associated with those leases.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company's lease and finance business is capital-intensive and requires
access to substantial short-term and long-term credit to fund new leases,
contracts and loans. Since inception, the Company has funded its operations
primarily through borrowings under its Credit Facilities, its on-balance sheet
Securitizations, and an initial public offering completed in February of 1999.
The Company has also funded its operations through the issuance of Subordinated
Debt; however no new Subordinated Debt was issued in 1999. The Company will
continue to require significant additional capital to maintain and expand its
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volume of leases, contracts and loans funded, as well as to fund any future
acquisitions of leasing companies or portfolios.
The Company's uses of cash include the origination and acquisition of
leases, contracts and loans, payment of interest expenses, repayment of
borrowings under its Credit Facilities, Subordinated Debt and Securitizations,
payment of selling, general and administrative expenses, income taxes and
capital expenditures.
The Company utilizes its Credit Facilities to fund the origination and
acquisition of leases that satisfy the eligibility requirements established
pursuant to each facility. On December 21, 1999, the Company entered into a new
$150 million Credit Facility, expiring on September 30, 2001, with seven banks.
At December 31, 1999, the Company had approximately $108.8 million outstanding
under the facility. The Company also may use its Subordinated Debt program as a
source of funding for potential acquisitions of portfolios and leases which
otherwise are not eligible for funding under the Credit Facilities and for
potential portfolio purchases. To date, cash flow from its portfolio and other
fees have been sufficient to repay amounts borrowed under the Credit Facilities
and Subordinated Debt.
The Company believes that cash flow from its operations and amounts
available under its Credit Facilities will be sufficient to fund the Company's
operations for the foreseeable future. Although the Company is not currently
involved in negotiations and has no current commitments or agreements with
respect to any acquisitions, to the extent that the Company successfully
consummates acquisitions, it may be necessary to finance such acquisitions
through the issuance of additional debt or equity securities, the incurrence of
indebtedness or a combination of both.
Recently Issued Accounting Pronouncements
See Note B of the notes to the consolidated financial statements included
herein for a discussion of the impact of recently issued accounting
pronouncements.
Year 2000
Many computer programs and microprocessors were designed and developed
without consideration of the impact of the transition to the year 2000. As a
result, these programs and microprocessors may not be able to differentiate
between the year "1900" and "2000"; the year 2000 may be recognized as the
two-digit number "00". If not corrected, this could have caused difficulties in
obtaining accurate system data and support.
The Company has designed and purchased numerous computer systems since its
inception. The Company's owned software and hardware is substantially Year 2000
compliant. The costs associated with such compliance were not material to the
Company's liquidity or results of operations. Further, the Company's critical
third party software was generally Year 2000 compliant, with minor issues, and
was capable of functioning after December 31, 1999.
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AVAILABILITY OF INFORMATION
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH OF ITS STOCKHOLDERS UPON
THE WRITTEN REQUEST OF SUCH PERSON, A COPY OF THE COMPANY'S ANNUAL REPORT ON
FORM 10K FOR ITS FISCAL YEAR ENDED DECEMBER 31, 1999, INCLUDING THE FINANCIAL
STATEMENTS AND THE FINANCIAL STATEMENT SCHEDULES, REQUIRED TO BE FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. REQUESTS FOR SUCH DOCUMENT SHOULD BE
DIRECTED TO RICHARD F. LATOUR, CLERK OF MICROFINANCIAL INCORPORATED, AT 950
WINTER STREET, WALTHAM, MASSACHUSETTS 02451.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market-Rate-Sensitive Instruments and Risk Management
The following discussion about the Company's risk management activities
includes "forward-looking statements" that involve risk and uncertainties.
Actual results could differ materially from those projected in the
forward-looking statements.
This analysis presents the hypothetical loss in earnings, cash flows, or
fair value of the financial instrument and derivative instruments held by the
Company at December 31, 1999, that are sensitive to changes in interest rates.
The Company uses interest-rate swaps to manage the primary market exposures
associated with underlying liabilities and anticipated transactions. The Company
uses these instruments to reduce risk by creating offsetting market exposures.
The instruments held by the Company are not held for trading purposes.
In the normal course of operations, the Company also faces risks that are
either nonfinancial or nonquantifiable. Such risks principally include country
risk, credit risk, and legal risk, and are not represented in the analysis that
follows.
Interest Rate Risk Management
This analysis presents the hypothetical loss in earnings of the financial
instruments and derivative instruments held by the Company at December 31, 1999
that are sensitive to changes in interest rates. The Company enters into
interest rate swaps to reduce exposure to interest-rate risk connected to
existing liabilities. The Company does not hold or issue derivative financial
instruments for trading purposes.
Because the Company's net-earnings exposure under the combined debt and
interest-rate swap was to 90-day Eurodollar, the hypothetical loss was modeled
by calculating the 10 percent adverse change in 90-day Eurodollar and then
multiplying it by the face amount of the debt (which equaled the face amount of
the interest rate swap).
The implicit yield to the Company on all of its leases, contracts and loans
is on a fixed interest rate basis due to the leases, contracts and loans having
scheduled payments that are fixed at the time of origination of the lease. When
the Company originates or acquires leases, contracts and loans it bases its
pricing in part on the "spread" it expects to achieve between the implicit yield
rate to the Company on each
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lease and the effective interest cost it will pay when it finances such leases,
contracts and loans through its Credit Facilities. Increases in interest rates
during the term of each lease, contract or loan could narrow or eliminate the
spread, or result in a negative spread. The Company has adopted a policy
designed to protect itself against interest rate volatility during the term of
each lease, contract or loan.
Given the relatively short average life of the Company's leases, contracts
and loans, the Company's goal is to maintain a blend of fixed and variable
interest rate obligations. As of December 31, 1999, the Company's outstanding
fixed rate indebtedness, including indebtedness outstanding under the Company's
Securitizations and indebtedness subject to the swap described below,
represented 36.5% of the Company's outstanding indebtedness. In July 1997, the
Company entered into an interest rate swap arrangement with one of its banks.
This arrangement, which expires in July 2000, has a notional amount of $17.5
million which represented 33.4% of the Company's fixed rate indebtedness
outstanding at December 31, 1999. The interest rate associated with the swap is
capped at 6.6%. During the term of the swap, the Company has agreed to match the
swap amount with 90-day Eurodollar loans. If at any time the 90-day Eurodollar
rate exceeds the swap cap of 6.6%, the bank would pay the Company the
difference. Through December 31, 1999, the Company had entered into Eurodollar
loans with interest rates ranging from 7.8125% to 8.00%. This arrangement
effectively changes the Company's floating interest rate exposure on the $17.5
million notional amount to a fixed rate of 8.35%.
The aggregate hypothetical loss in earnings on an annual basis on all
financial instruments and derivative instruments that would have resulted from a
hypothetical increase of 10 percent in 90-day Eurodollar, sustained for one
month, is estimated to be $12,175.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INCLUDING SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
Included in Exhibit 99 incorporated by reference herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections "Election of Directors", "Certain Information regarding the
MicroFinancial Board" and "Section 16(a) Beneficial Ownership Reporting
Compliance" included in the Company's proxy statement for its 2000 Special
Meeting in lieu of Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 29, 2000 are hereby
incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The sections "Compensation of Executive Officers" and "Certain Information
regarding the MicroFinancial Board" included in the Company's proxy statement
for its 2000 Special Meeting in lieu of Annual Meeting of Stockholders to be
filed with the Securities and Exchange Commission on or before April 29, 2000
are hereby incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section "Security Ownership of Certain Beneficial Owners and
Management" included in the Company's proxy statement for its 2000 Special
Meeting in lieu of Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 29, 2000 is hereby
incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section "Other Information Relating to Directors, Nominees and
Executive Officers" included in the Company's proxy statement for its 2000
Special Meeting in lieu of Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 29, 2000 is hereby
incorporated by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) (1) Financial Statements
Included in Exhibit 99 incorporated by reference herein.
(2) None.
(3) Exhibits Index
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Restated Articles of Organization, as amended. (1).
3.2 Bylaws. (1).
10.7 Office Lease Agreement by and between AJ Partners Limited
Partnership and Leasecomm Corporation dated July 12, 1993 for
facilities in Newark, California. (1).
10.8 Office Lease Agreement by and between MicroFinancial Incorporated
and Desmond Taljaard and Howard Friedman, Trustees of London and
Leeds Bay Colony I Realty Trust, dated April 14, 1994 for
facilities in Waltham, Massachusetts. (1).
10.9** 1987 Stock Option Plan. (1).
10.10** Forms of Grant under 1987 Stock Option Plan. (1).
10.12** 1998 Equity Incentive Plan. (3).
10.13** Employment Agreement between the Company and Peter R. Bleyleben.
(3).
10.14** Employment Agreement between the Company and Richard F. Latour.
(3).
10.15 Standard Terms and Condition of Indenture dated as of November 1,
1994 governing the BLT Finance Corp. III 6.03% Lease-Backed Notes,
Series 1998-A (the "1998-A Notes"), the BLT Finance Corp. III 6.42%
Lease-Backed Notes, Series 1997-A (the "1997-A Notes") and the BLT
Finance Corp. III 6.69% Lease-Backed Notes, Series 1996-A (the
"1996-A Notes"). (2).
10.16 Second Amended and Restated Specific Terms and Conditions of
Indenture dated as of October 1, 1998, governing the 1996-A Notes,
the 1997-A Notes and the 1998-A Notes. (3).
10.17 Supplement to Indenture dated May 1, 1996 governing the 1996-A
Notes. (2).
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10.18 Supplement to Indenture dated August 1, 1997 governing the 1997-A
Notes. (2).
10.19 Supplement to Indenture dated as of October 1, 1998 governing the
1998-A Notes. (3).
10.20 Specimen 1997-A Note. (2).
10.21 Specimen 1996-A Note. (2).
10.22 Specimen 1998-A Note. (3).
10.23 Standard Terms and Conditions of Servicing governing the 1996-A
Notes, the 1997-A Notes and the 1998-A Notes. (2).
10.24 Specific Terms and Conditions of Servicing governing the 1996-A
Notes, the 1997-A Notes and the 1998-A Notes. (2).
10.25 Commercial Lease, dated November 3, 1998, between Cummings
Properties Management, Inc. and MicroFinancial Incorporated. (3).
10.26 Amendment to Lease #1, dated November 3, 1998, between Cummings
Properties Management, Inc. and MicroFinancial Incorporated. (3).
10.28 Employment Agreement between the Company and John Plumlee. (3).
10.29 Employment Agreement between the Company and Carol Salvo. (3).
10.33* Third Amended and Restated Revolving Credit Agreement, dated
December 21, 1999, among Leasecomm Corporation, the lenders parties
thereto and BankBoston, N.A., as agent.
10.34* Fifth Amendment to Office Lease Agreement by and between
MicroFinancial Incorporated and Leasecomm Corporation and Bay
Colony Corporate Center LLC, dated June 29, 1999 for facilities in
Waltham, Massachusetts.
21.1 Subsidiaries of Registrant. (1).
23.1* Consent of PricewaterhouseCoopers LLP
27* Financial Data Schedule.
99* Consolidated Financial Statements and Notes to Consolidated
Financial Statements
- -----------------------------------
* Filed herewith.
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** Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of this Report.
(1) Incorporated by reference to the Exhibit with the same exhibit number in
the Registrant's Registration Statement on Form S-1 (Registration Statement
No. 333-56639) filed with the Securities and Exchange Commission on June 9,
1998.
(2) Incorporated by reference to the Exhibit with the same exhibit number in
the Registrant's Amendment No. 1 to Registration Statement on Form S-1
(Registration Statement No. 333-56639) filed with the Securities and
Exchange Commission on August 3, 1998.
(3) Incorporated by reference to the Exhibit with the same exhibit number in
the Registrant's Amendment No. 2 to Registration Statement on Form S-1
(Registration Statement No. 333-56639) filed with the Securities and
Exchange Commission on January 11, 1999.
(4) Incorporated by reference to the Exhibit with the same exhibit number in
the Registrant's Amendment No. 3 to Registration Statement on Form S-1
(Registration Statement No. 333-56639) filed with the Securities and
Exchange Commission on February 4, 1999.
(b) No reports have been filed on Form 8-K.
(c) See (a)(3) above.
(d) None.
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SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MICROFINANCIAL INCORPORATED.
By: /s/ Peter R. Bleyleben
----------------------------
Peter R. Bleyleben
President, Chief Executive
Officer and Director
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Peter R. Bleyleben President, Chief Executive Officer March 30, 2000
- ------------------------------------------ and Director
Peter R. Bleyleben
/s/ Richard F. Latour Executive Vice President, Chief March 30, 2000
- ------------------------------------------ Operating Officer, Chief Financial
Richard F. Latour Officer, Treasurer, Clerk and
Secretary
/s/ Brian E. Boyle Director March 30, 2000
- ------------------------------------------
Brian E. Boyle
/s/ Torrence C. Harder Director March 30, 2000
- ------------------------------------------
Torrence C. Harder
/s/ Jeffrey P. Parker Director March 30, 2000
- ------------------------------------------
Jeffrey P. Parker
/s/ Alan J. Zakon Director March 30, 2000
- ------------------------------------------
Alan J. Zakon
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