e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
or
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
Commission File No. 1-14771
MICROFINANCIAL INCORPORATED
(Exact name of registrant as specified in its charter)
|
|
|
Massachusetts
(State or other jurisdiction of
incorporation or organization)
|
|
04-2962824
(I.R.S. Employer Identification No.) |
10 M Commerce Way, Woburn, MA 01801
(Address of principal executive offices)
(781) 994-4800
(Registrants 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. þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site,
if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post
such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definition of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act (check one).
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company þ |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of April 30, 2009, 14,141,192 shares of the registrants common stock were outstanding.
MICROFINANCIAL INCORPORATED
TABLE OF CONTENTS
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS
|
Cash and cash equivalents |
|
$ |
2,109 |
|
|
$ |
5,047 |
|
Restricted cash |
|
|
769 |
|
|
|
528 |
|
Net investment in leases: |
|
|
|
|
|
|
|
|
Receivables due in installments |
|
|
150,314 |
|
|
|
142,881 |
|
Estimated residual value |
|
|
16,188 |
|
|
|
15,257 |
|
Initial direct costs |
|
|
1,286 |
|
|
|
1,211 |
|
Less: |
|
|
|
|
|
|
|
|
Advance lease payments and deposits |
|
|
(1,262 |
) |
|
|
(982 |
) |
Unearned income |
|
|
(50,996 |
) |
|
|
(49,384 |
) |
Allowance for credit losses |
|
|
(12,726 |
) |
|
|
(11,722 |
) |
|
|
|
|
|
|
|
Net investment in leases |
|
|
102,804 |
|
|
|
97,261 |
|
Investment in service contracts, net |
|
|
13 |
|
|
|
32 |
|
Investment in rental contracts, net |
|
|
313 |
|
|
|
240 |
|
Property and equipment, net |
|
|
761 |
|
|
|
759 |
|
Other assets |
|
|
1,028 |
|
|
|
983 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
107,797 |
|
|
$ |
104,850 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Revolving line of credit |
|
$ |
35,768 |
|
|
$ |
33,325 |
|
Accounts payable |
|
|
1,406 |
|
|
|
1,648 |
|
Capital lease obligation |
|
|
140 |
|
|
|
125 |
|
Dividends payable |
|
|
|
|
|
|
702 |
|
Other liabilities |
|
|
1,545 |
|
|
|
1,308 |
|
Income taxes payable |
|
|
211 |
|
|
|
8 |
|
Deferred income taxes |
|
|
3,525 |
|
|
|
3,396 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
42,595 |
|
|
|
40,512 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at March 31, 2009 and December 31, 2008 |
|
|
|
|
|
|
|
|
Common stock, $.01 par value; 25,000,000 shares authorized;
14,139,942 and 14,038,257 shares issued at March 31, 2009 and December 31,
2008, respectively |
|
|
141 |
|
|
|
140 |
|
Additional paid-in capital |
|
|
46,034 |
|
|
|
45,774 |
|
Retained earnings |
|
|
19,027 |
|
|
|
18,424 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
65,202 |
|
|
|
64,338 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
107,797 |
|
|
$ |
104,850 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
3
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Revenues: |
|
|
|
|
|
|
|
|
Income on financing leases |
|
$ |
6,789 |
|
|
$ |
4,940 |
|
Rental income |
|
|
2,209 |
|
|
|
2,752 |
|
Income on service contracts |
|
|
189 |
|
|
|
259 |
|
Loss and damage waiver fees |
|
|
986 |
|
|
|
688 |
|
Service fees and other |
|
|
671 |
|
|
|
549 |
|
Interest income |
|
|
13 |
|
|
|
60 |
|
|
|
|
Total revenues |
|
|
10,857 |
|
|
|
9,248 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses: |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
3,572 |
|
|
|
3,239 |
|
Provision for credit losses |
|
|
5,453 |
|
|
|
3,357 |
|
Depreciation and amortization |
|
|
335 |
|
|
|
230 |
|
Interest |
|
|
516 |
|
|
|
152 |
|
|
|
|
Total expenses |
|
|
9,876 |
|
|
|
6,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
981 |
|
|
|
2,270 |
|
Provision for income taxes |
|
|
378 |
|
|
|
713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
603 |
|
|
$ |
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.04 |
|
|
$ |
0.11 |
|
|
|
|
Net income per common share diluted |
|
$ |
0.04 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares: |
|
|
|
|
|
|
|
|
Basic |
|
|
14,103,116 |
|
|
|
13,974,904 |
|
|
|
|
Diluted |
|
|
14,249,712 |
|
|
|
14,160,139 |
|
|
|
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
4
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Cash received from customers |
|
$ |
17,356 |
|
|
$ |
13,163 |
|
Cash paid to suppliers and employees |
|
|
(4,074 |
) |
|
|
(4,022 |
) |
Cash paid for income taxes |
|
|
(46 |
) |
|
|
(125 |
) |
Interest paid |
|
|
(409 |
) |
|
|
(151 |
) |
Interest received |
|
|
13 |
|
|
|
60 |
|
|
|
|
Net cash provided by operating activities |
|
|
12,840 |
|
|
|
8,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Investment in lease and rental contracts |
|
|
(16,892 |
) |
|
|
(17,177 |
) |
Investment in direct costs |
|
|
(295 |
) |
|
|
(265 |
) |
Investment in property and equipment |
|
|
(106 |
) |
|
|
(111 |
) |
|
|
|
Net cash used in investing activities |
|
|
(17,293 |
) |
|
|
(17,553 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from secured debt |
|
|
18,361 |
|
|
|
18,648 |
|
Repayment of secured debt |
|
|
(15,918 |
) |
|
|
(10,672 |
) |
(Increase) decrease in restricted cash |
|
|
(241 |
) |
|
|
62 |
|
Proceeds from capital lease obligation |
|
|
31 |
|
|
|
46 |
|
Repayment of capital lease obligations |
|
|
(16 |
) |
|
|
(3 |
) |
Payment of dividends |
|
|
(702 |
) |
|
|
(698 |
) |
|
|
|
Net cash provided by financing activities |
|
|
1,515 |
|
|
|
7,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(2,938 |
) |
|
|
(1,245 |
) |
Cash and cash equivalents, beginning of period |
|
|
5,047 |
|
|
|
7,080 |
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
2,109 |
|
|
$ |
5,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
|
603 |
|
|
|
1,557 |
|
Adjustments to reconcile net income to net
cash provided by operating activities: |
|
|
|
|
|
|
|
|
Amortization of unearned income, net of initial direct costs |
|
|
(6,789 |
) |
|
|
(4,940 |
) |
Depreciation and amortization |
|
|
335 |
|
|
|
230 |
|
Provision for credit losses |
|
|
5,453 |
|
|
|
3,357 |
|
Recovery of equipment cost and residual value |
|
|
12,696 |
|
|
|
8,089 |
|
Stock-based compensation expense |
|
|
29 |
|
|
|
22 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Current taxes payable |
|
|
203 |
|
|
|
(13 |
) |
Deferred income taxes |
|
|
129 |
|
|
|
706 |
|
(Increase) decrease in other assets |
|
|
(45 |
) |
|
|
58 |
|
(Decrease) in accounts payable |
|
|
(11 |
) |
|
|
(350 |
) |
Increase in other liabilities |
|
|
237 |
|
|
|
209 |
|
|
|
|
Net cash provided by operating activities |
|
$ |
12,840 |
|
|
$ |
8,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
Fair market value of stock issued for compensation |
|
$ |
231 |
|
|
$ |
128 |
|
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.
5
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
A. Nature of Business
MicroFinancial Incorporated (referred to as Microfinancial, we, us or our) operates
primarily through its wholly-owned subsidiaries, TimePayment Corp. and Leasecomm Corporation.
TimePayment is a specialized commercial finance company that leases and rents microticket
equipment and provides other financing services. The average amount financed by TimePayment during
2008 was approximately $5,500 while Leasecomm historically financed contracts of approximately
$1,900. We primarily source our originations through a nationwide network of independent equipment
vendors, sales organizations and other dealer-based origination networks. We fund our operations
through cash provided by operating activities and borrowings under our revolving line of credit.
B. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America and the
rules and regulations of the Securities and Exchange Commission for interim financial statements.
Accordingly, our interim statements do not include all of the information and disclosures required
for our annual financial statements. In the opinion of our management, the condensed consolidated
financial statements contain all adjustments, consisting only of normal recurring adjustments,
considered necessary for a fair presentation of these interim results. These financial statements
should be read in conjunction with our consolidated financial statements and notes included in our
Annual Report on Form 10-K for the year ended December 31, 2008. The results for the three months
ended March 31, 2009 are not necessarily indicative of the results that may be expected for the
full year ending December 31, 2009.
The balance sheet at December 31, 2008 has been derived from the audited financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2008.
Allowance for Credit Losses
We maintain an allowance for credit losses on our investment in leases, service contracts and
rental contracts at an amount that we believe is sufficient to provide adequate protection against
losses in our portfolio. Given the nature of the microticket market and the individual size of
each transaction, the business does not warrant the creation of a formal credit review committee to
review individual transactions. As a result of approving a wide range of credits, we experience a
relatively high level of delinquency and write-offs in our portfolio. We periodically review the
credit scoring and approval process to ensure that the automated system is making appropriate
credit decisions. Given the nature of the microticket market and the individual size of each
transaction, we do not evaluate transactions individually for the purpose of determining the
adequacy of the allowance for credit losses. Contracts in our portfolio are not re-graded
subsequent to the initial extension of credit and the allowance is not allocated to specific
contracts. Rather, we view the contracts as having common characteristics and maintain a general
allowance against our entire portfolio utilizing historical collection statistics and an assessment
of current credit risk in the portfolio as the basis for the amount.
We have adopted a consistent, systematic procedure for establishing and maintaining an
appropriate allowance for credit losses for our microticket transactions. We estimate the
likelihood of credit losses net of recoveries in the portfolio at each reporting period based upon
a combination of the lessees bureau reported credit score at lease inception and the current
delinquency status of the account. In addition to these elements, we also consider other relevant
factors including general economic trends, trends in delinquencies and credit losses, static pool
analysis of our portfolio, trends in recoveries made on charged off accounts, and other relevant
factors which might affect the performance of our portfolio. This combination of historical
experience, credit scores, delinquency levels, trends in credit losses, and the review of current
factors provide the basis for our analysis of the adequacy of the allowance for credit losses. We
take charge-offs against our receivables when such receivables are deemed uncollectible. In
general a receivable is deemed uncollectable when it is 360 days past due where no contact has been
made with the lessee for 12 months or, if earlier, when other adverse events occur with respect to
an account. Historically, the
6
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
typical monthly payment under our microticket leases has been small and as a result, our
experience is that lessees will pay past due amounts later in the process because of the small
amount necessary to bring an account current.
A summary of the activity in our allowance for credit losses for the three months ended March
31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
Allowance for credit losses at December 31, 2008 |
|
|
|
|
|
$ |
11,722 |
|
Provision for credit losses |
|
|
|
|
|
|
5,453 |
|
Charge-offs |
|
|
(5,511 |
) |
|
|
|
|
Recoveries |
|
|
1,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs, net of recoveries |
|
|
|
|
|
|
(4,449 |
) |
|
|
|
|
|
|
|
|
Allowance for credit losses at March 31, 2009 |
|
|
|
|
|
$ |
12,726 |
|
|
|
|
|
|
|
|
|
Net Income Per Share
Basic net income per common share is computed based on the weighted-average number of common
shares outstanding during the period. Diluted net income per common share gives effect to all
potentially dilutive common shares outstanding during the period. The computation of diluted net
income per share does not assume the issuance of common shares that have an antidilutive effect on
net income per common share. At March 31, 2008, 1,292,067 options were excluded from the
computation of diluted net income per share because their effect was antidilutive. At March 31,
2009, 1,213,125 options were excluded from the computation of diluted net income per share because
their effect was antidilutive.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
603 |
|
|
$ |
1,557 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
14,103,116 |
|
|
|
13,974,904 |
|
Dilutive effect of common stock
options, warrants and restricted stock |
|
|
146,596 |
|
|
|
185,235 |
|
|
|
|
Shares used in computation of net income
per common share diluted |
|
|
14,249,712 |
|
|
|
14,160,139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share basic |
|
$ |
0.04 |
|
|
$ |
0.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share diluted |
|
$ |
0.04 |
|
|
$ |
0.11 |
|
|
|
|
Stock-Based Employee Compensation
Under our 2008 Equity Incentive Plan, we reserved 1,000,000 shares of common stock for
issuance. In February 2009, under our 2008 Equity Incentive Plan we granted 10 year options to our
executive officers to purchase 321,058 shares of common stock at an exercise price of $2.30 per
share. The fair value of these awards was $0.55 per share. The options were valued at the date of
grant using the following assumptions: expected life in years of 6.50, annualized volatility of
55.54%, expected dividend yield of 8.70%, and a risk-free interest rate of 2.28%.
The options vest over five years beginning on the second
anniversary of the grant date. In February 2008, under our 1998 Equity Incentive Plan, we granted
10 year options to our executive officers to purchase 176,879 shares of common stock at an exercise
price of $5.85 per share. The fair value of these awards was $1.78 per share. The options were
valued at the date of grant using the
7
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
following assumptions: expected life in years of 6.25, annualized volatility of 41.30%,
expected dividend yield of 3.70%, and a risk-free interest rate of 2.66%. The options vest over
five years beginning on the second anniversary of the grant date. During the three months ended
March 31, 2009, 400,000 options, which were originally granted in February of 1999 with a 10 year
term, expired.
On February 4, 2004, a new non-employee director was granted 25,000 shares of restricted stock
with a fair value of $3.17 per share. On August 15, 2006, a second new non-employee director was
granted 25,000 shares of restricted stock with a fair value of $3.35 per share. In each case, the
restricted stock vested 20% upon grant and vests 5% on the first day of each quarter after the
grant date. As vesting occurs, compensation expense is recognized. As of March 31, 2009, 42,500
shares were fully vested between these two directors.
Information relating to our outstanding stock options at March 31, 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
|
Exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Average |
|
|
Intrinsic |
|
|
Average |
|
|
|
|
|
|
Intrinsic |
|
Price |
|
Shares |
|
|
Life (Years) |
|
|
Value |
|
|
Exercise Price |
|
|
Shares |
|
|
Value |
|
|
|
|
|
|
9.78 |
|
|
350,000 |
|
|
|
0.9 |
|
|
$ |
|
|
|
|
9.78 |
|
|
|
350,000 |
|
|
$ |
|
|
13.10 |
|
|
90,000 |
|
|
|
1.89 |
|
|
|
|
|
|
|
13.10 |
|
|
|
90,000 |
|
|
|
|
|
6.70 |
|
|
235,000 |
|
|
|
2.91 |
|
|
|
|
|
|
|
6.70 |
|
|
|
235,000 |
|
|
|
|
|
1.59 |
|
|
150,000 |
|
|
|
3.66 |
|
|
|
62,000 |
|
|
|
1.59 |
|
|
|
150,000 |
|
|
|
62,000 |
|
5.77 |
|
|
40,188 |
|
|
|
7.92 |
|
|
|
|
|
|
|
5.77 |
|
|
|
|
|
|
|
|
|
5.85 |
|
|
176,879 |
|
|
|
8.83 |
|
|
|
|
|
|
|
5.85 |
|
|
|
|
|
|
|
|
|
2.30 |
|
|
321,058 |
|
|
|
9.92 |
|
|
|
|
|
|
|
2.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,363,125 |
|
|
|
5.01 |
|
|
$ |
62,000 |
|
|
|
7.78 |
|
|
|
825,000 |
|
|
$ |
62,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2009 and 2008, the total share based employee
compensation cost recognized was $29,000 and $22,000, respectively.
Cash and Cash Equivalents
We consider all highly liquid instruments purchased with original maturities of less than
three months to be cash equivalents. Cash equivalents consist principally of overnight
investments, collateralized repurchase agreements, commercial paper, certificates of deposit and US
government and agency securities.
Concentration of Credit Risk
We deposit our cash and invest in short-term investments primarily through national commercial
banks. Deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC)
are exposed to loss in the event of nonperformance by the institution. The Company has had cash
deposits in excess of the FDIC insurance coverage.
C. Revolving line of credit
On August 2, 2007, we entered into a three-year $30 million revolving line of credit with
Sovereign Bank (Sovereign) based on qualified TimePayment lease receivables. On July 9, 2008, we
entered into an amended agreement to increase our revolving line of credit with Sovereign to $60
million. The maturity date of the amended agreement is August 2, 2010. Outstanding borrowings are
collateralized by eligible lease contracts and a security interest in all of our other assets and,
until February 2009, bore interest at Prime or at a London Interbank Offered Rate (LIBOR) plus
2.75%. Under the terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans.
If a LIBOR Loan is not renewed at maturity it automatically converts to a Prime Rate Loan. On
February
8
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
10, 2009, we entered into an amended agreement to increase our revolving line of credit with
Sovereign to $85 million. Under the amended agreement, outstanding borrowings bear interest at
Prime plus 1.75% or LIBOR plus 3.75%, in each case subject to a minimum interest rate of 5%. All
other terms of the facility remained the same. At March 31, 2009 and 2008 all of our loans were
Prime Rate Loans. The interest rate on our revolving line of credit was 5.00% at March 31, 2009.
The amount available on our revolving line of credit at March 31, 2009 was $49,232,000. The
revolving line of credit has financial covenants that we must comply with to obtain funding and
avoid an event of default. As of March 31, 2009, we were in compliance with all covenants under
the revolving line of credit.
The
fair value of the revolving line of credit is calculated based on
incremental borrowing rates currently available on loans with similar
terms and maturities. The fair value of our revolving line of credit
at March 31, 2009 approximates its carrying value.
D. Commitments and Contingencies
Legal Matters
We are 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 our results of operation or financial
position.
Lease Commitments
We accept lease applications on a daily basis and, as a result, we have a pipeline of
applications that have been approved, where a lease has not been originated. Our commitment to
lend does not become binding until all of the steps in the lease origination process have been
completed, including the receipt of the lease, supporting documentation and verification with the
lessee. Since we fund on the same day a lease is verified, we do not
have any outstanding commitments to
lend.
Dividends
On April 16, 2009, we declared a dividend of $0.05 payable on May 8, 2009 to shareholders of
record on April 30, 2009.
E. Recent Accounting Pronouncements
In December 2007,
the FASB issued SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements An Amendment of ARB No. 51. This statement addresses consolidation rules for
noncontrolling interests. The objective is to improve the relevance, comparability, and
transparency of the financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. It applies to all entities,
but will affect only entities that have an outstanding noncontrolling interest in one or more
subsidiaries or that deconsolidate a subsidiary. Statement 160 is effective as of the beginning of
fiscal years that begin on or after December 15, 2008. The adoption of SFAS No. 160 did not have a
material effect on our consolidated financial position or results of
operations.
In March 2008,
the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activities an amendment of FASB statement No. 133. This statement applies to all
derivative instruments and related hedge items accounted for under SFAS No. 133. Entities are
required to provide enhanced disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how and why an entity
uses derivative instruments, (b) how derivative instruments and related hedge items are accounted
for under Statement 133 and its related interpretations, and (c) how derivative instruments and
related hedge items affect an entitys financial position, financial performance, and cash flows.
SFAS No. 161 is effective for fiscal years and interim periods beginning after November 15, 2008.
The adoption of SFAS No. 161 did not have a material effect on our consolidated financial position
or results of operations.
In December 2007, the FASB issued SFAS No. 141(R) Business Combinations (SFAS 141R). SFAS
141R establishes principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any non-controlling interest in the acquiree.
9
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
SFAS 141R also provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business combination. The guidance
applies prospectively to business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2008.
The Company believes that this new pronouncement will have an
impact on our accounting for future business combinations, but the effect is dependent
upon the acquisitions that are made in the future.
In June 2008, the FASB issued Staff Position EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1),
effective for fiscal years beginning after December 15, 2008. FSP EITF 03-6-1 clarifies that
unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in computation of EPS
pursuant to the two class method. The adoption of EITF 03-6-1 did not have a material effect on
our consolidated financial position or results of operations.
In June 2008, the FASB issued Staff Position EITF 07-05, Determining Whether an Instrument
(or Embedded Feature) is Indexed to an Entitys Own Stock (FSP EITF 07-05), effective for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal years. This Issue
addresses the determination of whether an instrument (or an embedded feature) is indexed to an
entitys own stock. If an instrument (or an embedded feature) that has the characteristics of a
derivative instrument under the relative paragraphs of Statement 133 is indexed to an entitys own
stock, it is still necessary to evaluate whether it is classified in stockholders equity (or would
be classified in stockholders equity if it were a freestanding instrument). The guidance in this
Issue shall be applied to outstanding instruments as of the beginning of the fiscal year in which
this Issue is initially applied. The cumulative effect of the change in accounting principle shall
be recognized as an adjustment to the opening balance of retained earnings (or other appropriate
components of equity or net assets in the statement of financial position) for that fiscal year,
presented separately. However, in circumstances in which a previously bifurcated embedded
conversion option in a convertible debt instrument no longer meets the bifurcation criteria in
Statement 133 at initial application of this Issue, the carrying amount of the liability for the
conversion option (that is, its fair value on the date of adoption) shall be reclassified to
shareholders equity. Any debt discount that was recognized when the conversion option was
initially bifurcated from the convertible debt instrument shall continue to be amortized.
The adoption of EITF 07-05 did not have a material effect on our consolidated financial
position or results of operations.
In September 2006,
the FASB issued SFAS No. 157 , Fair Value
Measurements which defines fair value, establishes a
framework for measuring fair value in accordance with generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS No. 157 was effective for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal years. In February
2008, FSP No. 157-2 delayed the effective date of SFAS No. 157 one year for all nonfinancial assets
and nonfinancial liabilities except those recognized or disclosed at fair value in the financial
statements on a recurring basis. Those assets and liabilities
measured at fair value under SFAS No.
157 in the first quarter of 2008 did not have a material impact on our consolidated financial statements. The
adoption of FSP 157-2 for nonfinancial assets and liabilities in the
first quarter of 2009 did not have a material
effect on our consolidated financial position or results of operations.
Effective January 1, 2009, we have early adopted FSP FAS 107-1 and APB 28-1, Interim
Disclosures about Fair Value of Financial Instruments an amendment to FASB Statement No. 107
(FAS 107) and APB Opinion No. 28 (APB 28). The FSP amends FAS 107, Disclosures about Fair Value of
Financial Instruments, to require disclosures about fair value of financial instruments for interim
reporting periods of publicly traded companies as well as in annual financial statements. This FSP
also amends APB 28, Interim Financial Reporting, to require those disclosures in summarized
financial information at interim reporting periods. The adoption of FSP FAS 107-1 and APB 28 has
been included in the disclosures in this Form 10-Q.
In
April 2009, the FASB issued FSP No. 157-4, Determining
Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions
That Are Not Orderly (FSP FAS 157-4), which
provides further clarification for guidance provided by SFAS
No. 157, regarding measurement of fair values of assets and
liabilities when the market activity has significantly decreased and
in identifying transactions that are not orderly. The adoption of
this staff position did not have a material effect on our
consolidated financial position or results of operations.
On
April 9, 2009, the FASB issued FSP FAS 115-2 and
FAS 124-2, Recognition and Presentation of
other-Than-Temporary Impairments. This FSP amends the
other-than-temporary impairment guidance in GAAP for debt securities
to make the guidance more operational and to improve the
presentation and disclosure of other-than-temporary impairments on debt
and equity securities in the financial statements. This FSP does not
amend existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. The adoption
of this staff position did not have a material effect on our
consolidated financial position or results of operations.
10
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following information should be read in conjunction with our condensed consolidated
financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with
Managements Discussion and Analysis of Financial Condition and Results of Operations contained in
our Annual Report on Form 10-K for the year ended December 31, 2008.
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. We caution that a number of important factors could cause
actual results to differ materially from those expressed in any forward-looking statements made by
us or on our behalf. Such statements contain a number of risks and uncertainties, including but not
limited to: our need for financing in order to originate leases and contracts; the demand for the
equipment types we offer, expansion into new markets and the development of a sizeable dealer base;
our significant capital requirements; risks associated with economic downturns; risks of defaults
in our leases and the adequacy our provision for credit losses; higher interest rates; intense
competition; changes in our regulatory environment; the availability of qualified personnel, and
risks associated with acquisitions. Readers should not place undue reliance on forward-looking
statements, which reflect our view only as of the date hereof. We undertake no obligation to
publicly revise these forward-looking statements to reflect subsequent events or circumstances. We
cannot assure that we will be able to anticipate or respond timely to changes which could adversely
affect our operating results. 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 our common stock. Statements relating to past dividend
payments or our current dividend policy should not be construed as a guarantee that any future
dividends will be paid. For a more complete description of the prominent risks and uncertainties
inherent in our business, see the risk factors included in our most recent Annual Report on Form
10-K and other documents we file from time to time with the Securities and Exchange Commission.
Overview
We are a specialized commercial finance company that provides microticket equipment leasing
and other financing services. The average amount financed by TimePayment during 2008 was
approximately $5,500 while Leasecomm historically financed contracts averaging approximately
$1,900. Our portfolio generally consists of business equipment leased or rented primarily to small
commercial enterprises.
We finance the funding of our leases and contracts primarily through cash on hand and our
revolving line of credit. On August 2, 2007, we entered into a three-year $30 million revolving
line of credit with Sovereign based on qualified TimePayment lease receivables. On July 9, 2008,
we entered into an amended agreement to increase our revolving line of credit with Sovereign to $60
million. The maturity date of the amended agreement is August 2, 2010. Outstanding borrowings are
collateralized by eligible lease contracts and a security interest in all of our other assets and,
until February 2009, bore interest at Prime Rate or at LIBOR plus 2.75%. Under the terms of the
facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed
at maturity it automatically converts to a Prime Rate Loan. On February 10, 2009 we entered into an
amended agreement to increase our revolving line of credit with Sovereign to $85 million. Under
the amended agreement, outstanding borrowings bear interest at Prime plus 1.75% or LIBOR plus
3.75%, in each case subject to a minimum interest rate of 5%.
In a typical lease transaction, we originate a lease through our nationwide network of
equipment vendors, independent sales organizations and brokers. Upon our approval of a lease
application and verification that the lessee has received the equipment and signed the lease, we
pay the dealer for the cost of the equipment, plus the dealers profit margin.
11
In the past, we have also from time to time acquired service contracts under which 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 approval of the monitoring application and verification
with the homeowner that the system is installed, we would purchase the right to the payment stream
under the monitoring contract from the dealer at a negotiated multiple of the monthly payments. We
have not purchased any new security monitoring contracts since 2004, although we do originate
security equipment leases that include monitoring. Our service contract portfolio represents a
less significant portion of our revenue stream over time.
Substantially all leases originated or acquired by us are non-cancelable. During the term of
the lease, we are scheduled to receive payments sufficient to cover our borrowing costs and the
cost of the underlying equipment and provide us with an appropriate profit. We pass along some of
the costs of our leases and contracts by charging late fees, prepayment penalties, loss and damage
waiver fees and other service fees, when applicable. Collection fees are imposed based on our
estimate of the costs of collection. The loss and damage waiver fees are charged if a customer
fails to provide proof of insurance and are reasonably related to the cost of replacing the lost or
damaged equipment or product. The initial non-cancelable term of the lease is equal to or less than
the equipments estimated economic life and often provides us with additional revenues based on the
residual value of the equipment at the end of the lease. Initial terms of the leases in our
portfolio generally range from 12 to 60 months, with an average initial term of 45 months as of
December 31, 2008.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note B to the condensed
consolidated financial statements included in this Quarterly Report and in Note B to the
consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission. Certain accounting policies
are particularly important to the portrayal of our consolidated financial position and results of
operations. These policies require the application of significant judgment by us and as a result,
are subject to an inherent degree of uncertainty. In applying these policies, we make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and
the related disclosures. We base our estimates and judgments on historical experience, terms of
existing contracts, observance of trends in the industry, information obtained from dealers and
other sources, and on various other assumptions that we believe to be reasonable and appropriate
under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions.
Our critical accounting policies, including revenue recognition, maintaining the allowance for
credit losses, determining provisions for income taxes, and accounting for share-based compensation
are each discussed in more detail in our Annual Report on Form 10-K. We have reviewed and
determined that those policies remain our critical accounting policies and we did not make any
changes in those policies during the three months ended March 31, 2009.
Results of Operations Three months ended March 31, 2009 compared to the three months ended
March 31, 2008
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
Change |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Income on financing leases |
|
$ |
6,789 |
|
|
|
37.4 |
% |
|
$ |
4,940 |
|
Rental income |
|
|
2,209 |
|
|
|
(19.7 |
) |
|
|
2,752 |
|
Income on service contracts |
|
|
189 |
|
|
|
(27.0 |
) |
|
|
259 |
|
Loss and damage waiver fees |
|
|
986 |
|
|
|
43.3 |
|
|
|
688 |
|
Service fees and other income |
|
|
671 |
|
|
|
22.2 |
|
|
|
549 |
|
Interest income |
|
|
13 |
|
|
|
(78.3 |
) |
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
10,857 |
|
|
|
17.4 |
% |
|
$ |
9,248 |
|
|
|
|
|
|
|
|
|
|
|
|
Our lease contracts are accounted for as financing leases. At origination, we record the
gross lease receivable, the estimated residual value of the leased equipment, initial direct costs
incurred and the unearned lease income.
12
Unearned lease income is the amount by which the gross lease receivable plus the estimated
residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs
incurred are amortized over the related lease term using the interest method. Other revenues such
as loss and damage waiver fees, service fees relating to the leases and contracts, and rental
revenues are recognized as they are earned.
Total revenues for the three months ended March 31, 2009 were $10.9 million, an increase of
$1.6 million, or 17.4%, from the three months ended March 31, 2008. The overall increase was due
to an increase of $1.9 million in income on financing leases and a $0.4 million increase in fees
and other income partially offset by a decrease of $0.6 million in rental income, a decrease of
$70,000 in income on service contacts and a decrease of $47,000 in interest income. The decline in
rental income is the result of the attrition of LeaseComm rental contracts which is offset in part
by TimePayment lease contracts coming to term and converting to rentals. Service contact revenue
continues to decline since we have not funded any new service contracts. The decrease in interest
income is a direct result of the decrease in invested cash as well as lower rates of return.
Selling,
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
Change |
|
2008 |
|
|
(Dollars in thousands) |
Selling, general and administrative |
|
$ |
3,572 |
|
|
|
10.3 |
% |
|
$ |
3,239 |
|
As a percent of revenue |
|
|
32.9 |
% |
|
|
|
|
|
|
35.0 |
% |
Our selling, general and administrative (SG&A) expenses include costs of maintaining corporate
functions including accounting, finance, collections, legal, human resources, sales and
underwriting, and information systems. SG&A expenses also include commissions, service fees and
other marketing costs associated with our portfolio of leases and rental contracts. SG&A expenses
increased by $333,000 for the three months ended March 31, 2009, as compared to the three months
ended March 31, 2008. The increase was primarily driven by increases in compensation expense of
$287,000, and employee benefits of $67,000. The increase in compensation related expenses is the
result of an increase in the number of employees. The number of employees as of March 31, 2009 was
102 compared to 81 as of March 31, 2008.
Provision for Credit Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
Change |
|
2008 |
|
|
(Dollars in thousands) |
Provision for credit losses |
|
$ |
5,453 |
|
|
|
62.4 |
% |
|
$ |
3,357 |
|
As a percent of revenue |
|
|
50.2 |
% |
|
|
|
|
|
|
36.3 |
% |
We maintain an allowance for credit losses on our investment in leases, service contracts and
rental contracts at an amount that we believe is sufficient to provide adequate protection against
losses in our portfolio. Our provision for credit losses increased by $2.1 million for the three
months ended March 31, 2009, as compared to the three months ended March 31, 2008, while net
charge-offs increased by 240.2% to $4.4 million. The provision was based on providing a general
allowance on leases funded during the period and our analysis of actual and expected losses in our
portfolio. The increase in the allowance reflects the growth in lease receivables associated with
new lease originations, increased delinquency levels, and the current economic times.
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
Change |
|
|
2008 |
|
|
|
(Dollars in thousands) |
|
Depreciation fixed assets |
|
$ |
105 |
|
|
|
19.3 |
% |
|
$ |
88 |
|
Depreciation rental equipment |
|
|
214 |
|
|
|
167.5 |
|
|
|
80 |
|
Amortization service contracts |
|
|
16 |
|
|
|
(74.2 |
) |
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
Total depreciation and amortization |
|
$ |
335 |
|
|
|
45.7 |
% |
|
$ |
230 |
|
|
|
|
|
|
|
|
|
|
|
|
As a percent of revenue |
|
|
3.1 |
% |
|
|
|
|
|
|
2.5 |
% |
13
Depreciation and amortization expense consists of depreciation on fixed assets and rental
equipment, and the amortization of service contracts. Fixed assets are recorded at cost and
depreciated over their expected useful lives. Certain rental contracts are originated as a result
of the renewal provisions of our lease agreements where at the end of lease term, the customer may
elect to continue to rent the leased equipment on a month-to-month basis. The rental equipment is
recorded at its residual value and depreciated over a term of 12 months. This term represents the
estimated life of a previously leased piece of equipment and is based upon our historical
experience. In the event the contract terminates prior to the end of the 12 month period, the
remaining net book value is expensed.
Depreciation expense on rental contracts increased by $134,000 and amortization of service
contracts decreased by $46,000 for the three months ended March 31, 2009, as compared to the three
months ended March 31, 2008. The increases in depreciation and amortization are due to the increase
in the overall size of our portfolio of rental equipment. Depreciation and amortization of
property and equipment increased by $17,000 for the three months ended March 31, 2009, as compared
to the three months ended March 31, 2008.
Service contracts are recorded at cost and amortized over their estimated life of 84 months.
In a typical service contract acquisition, a homeowner will purchase a home security system and
simultaneously sign a contract with the security dealer for monthly monitoring of the system. The
security dealer will then sell the rights to that monthly payment to us. We perform all of the
processing, billing, collection and administrative work on the service contract. The estimated
life is based upon the expected life of such contracts in the security monitoring industry and our
historical experience. In the event the contract terminates prior to the end of the 84 month term,
the remaining net book value is expensed.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
Change |
|
2008 |
|
|
(Dollars in thousands) |
Interest |
|
$ |
516 |
|
|
|
239.5 |
% |
|
$ |
152 |
|
As a percent of revenue |
|
|
4.8 |
% |
|
|
|
|
|
|
1.6 |
% |
We pay interest on borrowings under our revolving line of credit. Interest expense increased
by $364,000 for the three months ended March 31, 2009, as compared to the three months ended March
31, 2008. This increase resulted primarily from our increased level of borrowings. At March 31,
2009, the balance on our revolving line of credit was $35.8 million compared to $14.5 million at
March 31, 2008.
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2009 |
|
Change |
|
2008 |
|
|
(Dollars in thousands) |
Provision for income taxes |
|
$ |
378 |
|
|
|
(47.0 |
)% |
|
$ |
713 |
|
As a percent of revenue |
|
|
3.5 |
% |
|
|
|
|
|
|
7.7 |
% |
As a percent of income before taxes |
|
|
38.5 |
% |
|
|
|
|
|
|
31.4 |
% |
The provision for income taxes, deferred tax assets and liabilities and any necessary
valuation allowance recorded against net deferred tax assets, involves summarizing temporary
differences resulting from the different treatment of items, such as leases, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which are recorded on
the balance sheet. We must then assess the likelihood that deferred tax assets will be recovered
from future taxable income or tax carry-back availability and to the extent we believe recovery is
more likely than not, a valuation allowance is unnecessary. The provision for income taxes
decreased by $335,000 for the three months ended March 31, 2009, as compared to the three months
ended March 31, 2008. This decrease resulted primarily from the $1.3 million decrease in pre-tax
income partially offset by an increase in the effective tax rate from 31.4% for the three months
ended March 31, 2008 to 38.5% for the three months ended
March 31, 2009. The lower
overall effective tax rate for the three months ended March 31, 2008 was primarily related to the
release of certain state reserves related to the expiration of statutes of limitation.
As of December 31, 2008, we had a liability of $293,000 for unrecognized tax benefits and a
liability of $152,000 for accrued interest and penalties related to various state income tax
matters. As of March 31, 2009 we had a liability of $293,000 for unrecognized tax benefits and a
liability of $160,000 for accrued interest and
14
penalties. Of these amounts, approximately $295,000 would impact our effective tax rate after
a $158,000 federal tax benefit for state income taxes. The increase in the unrecognized tax
benefit relates to $8,000 in additional accrued interest expense. It is reasonably possible that
the total amount of unrecognized tax benefits may change significantly within the next 12 months;
however at this time we are unable to estimate the change.
Our federal income tax returns are subject to examination for tax years ended on or after
December 31, 2004 and our state income tax returns are subject to examination for tax years ended
on or after December 31, 2002.
Fair Value of Financial Instruments
For financial instruments including cash and cash equivalents, restricted cash, net investment
in leases, accounts payable, revolving line of credit, and other liabilities, we believe that the
carrying amount approximates fair value. The fair value of the revolving line of credit is
calculated based on incremental borrowing rates currently available on loans with similar terms and
maturities. The fair value of our revolving line of credit at March 31, 2009 approximates its
carrying value.
Other Operating Data
Dealer funding was $17.1 million for the three months ended March 31, 2009, a decrease of
$300,000 or 1.7%, compared to the three months ended March 31, 2008. We continue to concentrate on
our business development efforts, which include increasing the size of our vendor base and sourcing
a larger number of applications from those vendors. Receivables due in installments, estimated
residual values, net investment in service contracts and investment in rental contracts increased
from $162.1 million at December 31, 2008 to $170.3 million at March 31, 2009. Net cash provided by
operating activities increased by $3.9 million, or 43.9%, to $12.8 million during the three months
ended March 31, 2009 as compared to the three months ended March 31, 2008.
Exposure to Credit Losses
The amounts in the table below represent the balance of delinquent receivables on an exposure
basis for all leases, rental contracts, and service contracts in our portfolio. An exposure basis
aging classifies the entire receivable based on the invoice that is the most delinquent. For
example, in the case of a rental or service contract, if a receivable is 90 days past due, all
amounts billed and unpaid are placed in the over 90 days past due category. In the case of lease
receivables, where the minimum contractual obligation of the lessee is booked as a receivable at
the inception of the lease, if a receivable is 90 days past due, the entire receivable, including
all amounts billed and unpaid as well as the minimum contractual obligation yet to be billed, will
be placed in the over 90 days past due category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands) |
|
March 31, 2009 |
|
December 31, 2008 |
Current |
|
$ |
117,086 |
|
|
|
77.9 |
% |
|
$ |
110,423 |
|
|
|
77.3 |
% |
31-60 days past due |
|
|
5,341 |
|
|
|
3.6 |
|
|
|
6,941 |
|
|
|
4.8 |
|
61-90 days past due |
|
|
5,262 |
|
|
|
3.5 |
|
|
|
5,079 |
|
|
|
3.6 |
|
Over 90 days past due |
|
|
22,625 |
|
|
|
15.0 |
|
|
|
20,438 |
|
|
|
14.3 |
|
|
|
|
|
|
Gross receivables due in installments |
|
$ |
150,314 |
|
|
|
100.0 |
% |
|
$ |
142,881 |
|
|
|
100.0 |
% |
|
|
|
|
|
Liquidity and Capital Resources
General
Our lease and finance business is capital-intensive and requires access to substantial
short-term and long-term credit to fund lease originations. Since inception, we have funded our
operations primarily through borrowings under our credit facilities, on-balance sheet
securitizations, the issuance of subordinated debt, free cash flow and our initial public offering
completed in February 1999. We will continue to require significant additional capital to maintain
and expand our funding of leases and contracts, as well as to fund any future acquisitions of
leasing companies or portfolios. In the near term, we expect to finance our business utilizing the
cash on hand and our
15
revolving line of credit which matures in August 2010. Additionally, our uses of cash include
the payment of interest and principal on borrowings, selling, general and administrative expenses,
income taxes, payment of dividends and capital expenditures.
For the three months ended March 31, 2009 and 2008, our primary sources of liquidity were cash
provided by operating activities and borrowings on our revolving line of credit. We generated cash
flow from operations of $12.8 million for the three months ended
March 31, 2009 compared to $8.9
million for the three months ended March 31, 2008. At March 31, 2009, we had approximately
$35,768,000 outstanding under our revolving credit facility and had available borrowing capacity of
approximately $49,232,000 as described below.
We used net cash in investing activities of $17.3 million during the three months ended March
31, 2009 and $17.6 million for the three months ended March 31, 2008. Investing activities
primarily relate to the origination of leases and the increase in cash used is consistent with our
focused and targeted sales and marketing effort.
Net cash provided by financing activities was $1.5 million for the three months ended March
31, 2009 compared to $7.4 million for the three months ended March 31, 2008. Financing activities
primarily consist of the borrowings and repayments on our revolving line of credit and dividend
payments.
We believe that cash flows from our existing portfolio, cash on hand, available borrowings on
our revolving line of credit, and the completion of additional financing as required will be
sufficient to support our operations and lease origination activity in the near term. Given the
tight credit conditions in the current marketplace, it may be difficult for us to obtain additional
low cost capital. Our inability to obtain additional financing would significantly impact our
ability to grow the business.
Borrowings
We utilize our revolving line of credit to fund the origination and acquisition of leases that
satisfy the eligibility requirements established pursuant to the facility. Borrowings outstanding
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009 |
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
Amounts |
|
Interest |
|
Unused |
|
Facility |
|
Amounts |
|
Interest |
|
Unused |
|
Facility |
(dollars in 000) |
|
Outstanding |
|
Rate |
|
Capacity |
|
Amount |
|
Outstanding |
|
Rate |
|
Capacity |
|
Amount |
Revolving credit
facility
(1) |
|
$ |
35,768 |
|
|
|
5.0 |
% |
|
$ |
49,232 |
|
|
$ |
85,000 |
|
|
$ |
33,325 |
|
|
|
3.25 |
% |
|
$ |
26,675 |
|
|
$ |
60,000 |
|
|
|
|
|
|
|
|
|
(1) |
|
The unused capacity is subject to the borrowing base formula. |
On August 2, 2007, we entered into a three-year $30 million revolving line of credit with
Sovereign based on qualified TimePayment lease receivables. On July 9, 2008 we entered into an
amended agreement to increase our revolving line of credit with Sovereign to $60 million. The
maturity date of the amended agreement is August 2, 2010. Outstanding borrowings are
collateralized by eligible lease contracts and a security interest in all of our other assets and,
until February 2009, bore interest at Prime or at LIBOR plus 2.75%. Under the terms of the
facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed
at maturity it automatically converts to a Prime Rate Loan. On February 10, 2009 we entered into an
amended agreement to increase our revolving line of credit with Sovereign to $85 million. Under
the amended agreement, outstanding borrowings bear interest at Prime plus 1.75% or LIBOR plus
3.75%, in each case subject to a minimum interest rate of 5%. All other terms of the facility
remained the same. As of March 31, 2009 and 2008, all of our loans were Prime Rate Loans.
Dividends
During the three
months ended March 31, 2009 and 2008 we did not declare a dividend.
During the three months ended December
31, 2008 we declared a dividend of $0.05 payable on January 19, 2009 to shareholders of record on
January 5, 2009.
16
On April 16, 2009 we declared a dividend of $0.05 payable on May 8, 2009 to shareholders of
record on April 30, 2009.
Future dividend payments are subject to ongoing review and evaluation by our Board of
Directors. The decision as to the amount and timing of future dividends, if any, will be made in
light of our financial condition, capital requirements and growth plans, as well as our external
financing arrangements and any other factors our Board of Directors may deem relevant. We can give
no assurance as to the amount and timing of future dividends.
Contractual Obligations and Lease Commitments
Contractual Obligations
We have entered into various agreements, such as debt and operating lease agreements that
require future payments. For the three months ended March 31, 2009 we had borrowed $18.4 million
against our lines of credit and had repaid $15.9 million. The $35.8 million of outstanding
borrowings as of March 31, 2009 will be repaid by the daily application of TimePayment receipts to
our outstanding balance. Our future minimum lease payments under non-cancelable operating leases
are $237,000 annually for the years 2009 and 2010.
Lease Commitments
We accept lease applications on a daily basis and have a pipeline of applications that have
been approved, where a lease has not been originated. Our commitment to lend does not become
binding until all of the steps in the lease origination process have been completed, including but
not limited to the receipt of a complete and accurate lease document, all required supporting
information and successful verification with the lessee. Since we fund on the same day a lease is
successfully verified, we do not have any firm outstanding commitments to lend.
Recent Accounting Pronouncements
See Note E of the notes to the unaudited condensed consolidated financial statements for a
discussion of the impact of recent accounting pronouncements.
17
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
The following discussion about our 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, we also face risks
that are either non-financial or non-quantifiable. Such risks principally include credit risk and
legal risk, and are not represented in the analysis that follows.
The implicit yield on all of our leases and contracts is on a fixed interest rate basis due to
the leases and contracts having scheduled payments that are fixed at the time of origination. When
we originate or acquire leases or contracts, we base our pricing in part on the spread we expect to
achieve between the implicit yield on each lease or contract and the effective interest rate we
expect to incur in financing such lease or contract through our credit facility. Increases in
interest rates during the term of each lease or contract could narrow or eliminate the spread, or
result in a negative spread.
Given the relatively short average life of our leases and contracts, our goal is to maintain a
blend of fixed and variable interest rate obligations which limits our interest rate risk. As of
March 31, 2009, we have repaid all of our fixed-rate debt and have $35.8 million of outstanding
variable interest rate obligations under our revolving line of credit.
Our revolving line of credit bears interest at rates which fluctuate with changes in the prime
rate or the LIBOR; therefore, our interest expense is sensitive to changes in market interest
rates. The effect of a 10% adverse change in market interest rates, sustained for one year, on our
interest expense would be immaterial.
We maintain an investment portfolio in accordance with our investment policy guidelines. The
primary objectives of the investment guidelines are to preserve capital, maintain sufficient
liquidity to meet our operating needs, and to maximize return. We minimize investment risk by
limiting the amount invested in any single security and by focusing on conservative investment
choices with short terms and high credit quality standards. We do not use derivative financial
instruments or invest for speculative trading purposes.
ITEM 4. Controls and Procedures
Disclosure controls and procedures: As of the end of the period covered by this report, we
carried out an evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule
13a-15. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective. Disclosure controls and
procedures are controls and procedures that are designed to ensure that information required to be
disclosed in our reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Internal controls over financial reporting: During the first quarter of our fiscal year ended
December 31, 2009, no changes were made in our internal control over financial reporting that
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
18
Part II Other Information
ITEM 1. Legal Proceedings
We are subject to claims and suits arising in the ordinary course of business. At this time,
we do not believe these matters will have a material adverse effect on our results of operations
or financial positions.
ITEM 1A. Risk Factors
For a discussion of the material risks that we face relating to our business, financial
performance and industry, as well as other risks that an investor in our common stock may face, see
the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the
year ended December 31, 2008. The risks described in our Annual Report on Form 10-K and elsewhere
in this report are not the only risks we face. Additional risks and uncertainties not currently
known to us or that we currently deem to be immaterial may also materially adversely affect our
business, financial condition or operating results.
ITEM 6. Exhibits
(a) Exhibits index
|
|
|
10.1
|
|
Agreement and Amendment No. 1 to Restated Credit Agreement dated February 10, 2009 (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2009).
|
|
|
|
10.2
|
|
Additional Lender Supplement dated February 10, 2009 (incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2009). |
|
|
|
10.3
|
|
Commitment Increase Supplement (incorporated by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2009).
|
|
|
|
10.4
|
|
Commerce Bank & Trust Company
Note dated February 10, 2009 (incorporated by reference to Exhibit 10.14.17 to the Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission March 31, 2009). |
|
|
|
10.5
|
|
Danversbank Note dated February 10, 2009 (incorporated by reference to Exhibit 10.14.18 to the
Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission March 31, 2009).
|
|
|
|
10.6 |
|
Wells Fargo Bank Note dated February 10, 2009 (incorporated by reference to Exhibit 10.14.19 to the Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission March 31, 2009). |
|
|
|
31.1*
|
|
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
31.2*
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
32.1*
|
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2*
|
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
19
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/ Richard F. Latour
|
|
|
|
President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By: /s/ James R. Jackson Jr.
|
|
|
|
Vice President and Chief Financial Officer |
|
|
|
|
|
|
Date: May 15, 2009
20