UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File No. 1-14771
MICROFINANCIAL INCORPORATED
(Exact name of Registrant as specified in its Charter)
Massachusetts 04-2962824
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
10 M Commerce Way, Woburn, MA 01801
(Address of Principal Executive Offices)
(781) 994-4800
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities and Exchange act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange
Act). [ ] Yes [X] No
As of November 1, 2004, 13,183,916 shares of the registrant's common stock,
$0.01 par value, were outstanding.
MICROFINANCIAL INCORPORATED
TABLE OF CONTENTS
Page
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited):
Condensed Consolidated Balance Sheets
December 31, 2003 and September 30, 2004 3
Condensed Consolidated Statements of Operations
Three and nine months ended September 30, 2003 and 2004 4
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2004 5
Notes to Condensed Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 3 Quantitative and Qualitative Disclosures about Market Risk 24
Item 4 Controls and Procedures 24
Part II OTHER INFORMATION
Item 1 Legal Proceedings 25
Item 2 Recent Sales of Unregistered Securities 28
Item 6 Exhibits and Reports on Form 8-K 29
Signatures 31
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
December 31, September 30,
------------- -------------
2003 2004
------------- -------------
ASSETS
Cash and cash equivalents $ 6,533 $ 6,251
Net investment in leases:
Receivables due in installments $ 175,788 $ 86,563
Estimated residual value 19,110 11,038
Initial direct costs 1,804 656
Less:
Advance lease payments and deposits (37) (27)
Unearned income (23,729) (8,813)
Allowance for credit losses (43,011) (23,709)
------------- -------------
Net investment in leases: 129,925 65,709
Investment in service contracts, net 8,844 5,725
Investment in rental contracts, net 3,758 2,099
Restricted cash 2,376 -
Property and equipment, net 2,086 1,131
Other assets 2,892 3,456
Deferred income taxes - 2,100
------------- -------------
Total assets $ 156,414 $ 86,471
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 58,843 $ 11,433
Subordinated notes payable 3,262 4,396
Capitalized lease obligations 209 81
Accounts payable 3,186 3,382
Other liabilities 4,104 2,078
Income taxes payable 7,789 7,809
Deferred income taxes payable 7,755 -
------------- -------------
Total liabilities
85,148 29,177
------------- -------------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares
issued at December 31, 2003 and September 30, 2004 - -
Common stock, $.01 par value; 25,000,000 shares authorized;
13,410,646 shares issued at December 31, 2003 and September 30, 2004 134 134
Additional paid-in capital 44,245 45,026
Retained earnings 29,402 14,622
Treasury stock, at cost (234,230 and 226,730 shares at December 31, 2003
and September 30, 2004, respectively) (2,515) (2,434)
Unearned compensation - (55)
------------- -------------
Total stockholders' equity 71,266 57,293
------------- -------------
Total liabilities and stockholders' equity $ 156,414 $ 86,471
============= =============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
For the three months ended For the nine months ended
September 30, September 30,
---------------------------- ----------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
Revenues:
Income on financing leases and loans $ 7,173 $ 2,560 $ 25,372 $ 9,962
Rental income 8,589 7,548 25,763 24,177
Income on service contracts 2,067 1,376 6,653 4,671
Loss and damage waiver fees 1,365 961 4,271 3,127
Service fees and other 2,863 1,780 9,533 6,078
------------ ------------ ------------ ------------
Total revenues 22,057 14,225 71,592 48,015
------------ ------------ ------------ ------------
Expenses:
Selling, general and administrative 7,837 7,235 25,677 21,359
Provision for credit losses 13,852 10,295 39,900 37,885
Depreciation and amortization 4,106 3,161 12,463 11,391
Interest 1,589 559 6,364 2,016
------------ ------------ ------------ ------------
Total expenses 27,384 21,250 84,404 72,651
------------ ------------ ------------ ------------
Net loss before benefit for income taxes (5,327) (7,025) (12,812) (24,636)
Benefit for income taxes (2,131) (2,810) (5,125) (9,856)
------------ ------------ ------------ ------------
Net loss ($ 3,196) ($ 4,215) ($ 7,687) ($ 14,780)
============ ============ ============ ============
Net loss per common share - basic and diluted ($ 0.25) ($ 0.32) ($ 0.59) ($ 1.12)
============ ============ ============ ============
Weighted-average shares used to compute:
Basic and diluted net loss per share 12,999,035 13,183,916 12,999,035 13,182,050
------------ ------------ ------------ ------------
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine months ended
September 30,
--------------------------
2003 2004
----------- -----------
Cash flows from operating activities:
Cash received from customers $ 107,575 $ 67,561
Cash paid to suppliers and employees (31,125) (21,698)
Cash received for income taxes 9,264 20
Interest paid (7,632) (2,168)
Interest received 98 14
----------- -----------
Net cash provided by operating activities 78,180 43,729
----------- -----------
Cash flows from investing activities:
Investment in lease contracts (2,159) (329)
Investment in inventory (103) (89)
Investment in direct costs (137) -
Investment in fixed assets (205) (76)
----------- -----------
Net cash used in investing activities (2,600) (494)
----------- -----------
Cash flows from financing activities:
Proceeds from secured debt - 11,322
Repayment of secured debt (83,361) (58,593)
Repayment of short term demand notes payable (30) -
Proceeds from issuance of subordinated debt - 1,500
Decrease in restricted cash 9,785 2,376
Repayment of capital leases (186) (122)
----------- -----------
Net cash used in financing activities (73,792) (43,517)
----------- -----------
Net increase (decrease) in cash and cash equivalents: 1,788 (282)
Cash and cash equivalents, beginning of period 5,494 6,533
----------- -----------
Cash and cash equivalents, end of period $ 7,282 $ 6,251
=========== ===========
(continued on following page)
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
For the nine months ended
September 30,
2003 2004
----------- -----------
Reconciliation of net loss to net cash provided
by operating activities:
Net loss ($ 7,687) ($ 14,780)
Adjustments to reconcile net loss to
cash provided by operating activities:
Amortization of unearned income, net of initial direct (25,372) (9,962)
costs
Depreciation and amortization 12,463 11,391
Provision for credit losses 39,900 37,885
Amortization of unearned compensation - 24
Recovery of equipment cost and residual value 75,283 31,114
Change in assets and liabilities:
Decrease (increase) in current taxes payable 448 20
Increase (decrease) in current taxes receivable (8,652) -
Decrease (increase) in deferred income taxes (5,125) (9,856)
Increase (decrease) in other assets (1,892) (565)
Increase (decrease) in accounts payable (952) 195
Decrease in other liabilities (234) (1,737)
----------- -----------
Net cash provided by operating activities $ 78,180 $ 43,729
=========== ===========
Supplemental disclosure of non-cash activities:
Fair market value of warrants issued $ 77 $ 784
The accompanying notes are an integral part of the condensed consolidated
financial statements.
6
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(A) Nature of Business:
MicroFinancial Incorporated (the "Company") which operates primarily
through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized
commercial finance company that primarily leases and rents "microticket"
equipment and provides other financing services in amounts generally ranging
from $400 to $15,000 with an average amount financed of approximately $1,900 and
an average lease term of 44 months. The Company does not market its services
directly to lessees but sources leasing transactions through a network of
independent sales organizations and other dealer-based origination networks
nationwide. The Company has funded its operations primarily through borrowings
under its credit facilities, issuances of subordinated debt and on balance sheet
securitizations.
MicroFinancial incurred net losses of $22.1 million and $15.7 million for
the years ended December 31, 2002 and 2003, respectively. The net losses
incurred by the Company during the third and fourth quarters of 2002 caused the
Company to be in default under certain debt covenants in its credit facility and
securitization agreements. In addition, as of September 30, 2002, the Company's
credit facility failed to renew and consequently, the Company was forced to
suspend substantially all new origination activity as of October 11, 2002.
MicroFinancial has taken certain steps in an effort to improve its financial
position. In June 2004, MicroFinancial secured a $10.0 million credit facility,
comprised of a one-year $8.0 million line of credit and a $2.0 million
three-year subordinated note, that enabled the Company to resume microticket
contract originations. In conjunction with raising new capital, the Company also
inaugurated a new wholly owned operating subsidiary, TimePayment Corp. LLC. On
September 29, 2004, MicroFinancial secured a three-year, $30.0 million, senior
secured revolving line of credit from CIT Commercial Services, a unit of CIT
Group. This line of credit replaced the previous one year, $8 million line of
credit obtained in June 2004 under more favorable terms and conditions
including, but not limited to, pricing at prime plus 1.5% or LIBOR plus 4%. In
addition, it retired the existing outstanding debt with the former bank group.
Management has also continued to take steps to reduce overhead, including
a reduction in headcount from 203 at December 31, 2002 to 136 at December 31,
2003. During the nine months ended September 30, 2004, the employee headcount
was further reduced to 102 in a continued effort to maintain an infrastructure
that is aligned with current business conditions.
MicroFinancial, through its wholly owned subsidiary, Leasecomm
Corporation, periodically finances its lease and service contracts, together
with unguaranteed residuals, through securitizations using special purpose
entities. MFI Finance Corporation I (or "MFI I") is a special purpose vehicle.
The assets of such special purpose entities and cash collateral or other
accounts created in connection with the financings in which they participate are
not available to pay creditors of Leasecomm Corporation, TimePayment Corp. LLC,
MicroFinancial Incorporated, or other affiliates. While Leasecomm Corporation
generally does not sell its interests in leases, service contracts or loans to
third parties after origination, the Company does, from time to time, contribute
certain leases, service contracts, or loans to special-purpose entities for
purposes of obtaining financing in connection with the related receivables. The
contribution of such assets under the terms of such financings are intended to
constitute "true sales" of such assets for bankruptcy purposes (meaning that
such assets are legally isolated from Leasecomm Corporation). However, the
special purpose entities to which such assets are contributed are required under
generally accepted accounting principles to be consolidated in the financial
statements of the Company. As a result, such assets and the related liability
remain on the balance sheet and do not receive gain on sale treatment.
7
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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, the
interim statements do not include all of the information and disclosures
required for the annual financial statements. In the opinion of the Company's
management, the condensed consolidated financial statements contain all
adjustments, consisting only of normal recurring adjustments, considered
necessary for a fair presentation of these interim results. These financial
statements should be read in conjunction with the consolidated financial
statements and notes included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003. The results for the three-month and nine-month
periods ended September 30, 2004 are not necessarily indicative of the results
that may be expected for the full year ended December 31, 2004.
The balance sheet at December 31, 2003 has been derived from the audited
financial statements included in the Company's Annual Report on Form 10-K for
the year ended December 31, 2003.
Allowance for Credit Losses:
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 current 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.
The following table sets forth the Company's allowance for credit losses
as of December 31, 2003 and September 30, 2004 and the related provision,
charge-offs and recoveries for the nine months ended September 30, 2004.
Balance of allowance for credit losses at December 31, 2003 $ 43,011
---------
Provision for credit losses 37,885
Charge-offs (61,480)
Recoveries 4,293
-------
Charge-offs, net of recoveries (57,187)
---------
Balance of allowance for credit losses at September 30, 2004 $ 23,709
=========
Net Income (Loss) Per Share:
Basic net income (loss) per common share is computed based on the
weighted-average number of common shares outstanding during the period. Diluted
net income (loss) per common share gives effect to all potentially dilutive
common shares outstanding during the period. The computation of diluted net
income (loss) per share does not assume the issuance of common shares that have
an antidilutive effect on net income per common share. All stock options, common
stock warrants, and unvested restricted stock were excluded from the computation
of diluted net income (loss) per share for the three and nine month periods
ended September 30, 2003 and September 30, 2004, because their inclusion would
have had an antidilutive effect on net income (loss) per share. At September 30,
2003, 1,675,000 options, and 268,199 warrants, were excluded from the
computation of diluted net income (loss)
8
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
per share. At September 30, 2004, 1,675,000 options, 663,035 warrants, and
17,500 shares of restricted stock were excluded from the computation of diluted
net income (loss) per share.
For three months ended For nine months ended
September 30, September 30,
---------------------------- ----------------------------
2003 2004 2003 2004
------------ ------------ ------------ ------------
Net income (loss) ($ 3,196) ($ 4,215) ($ 7,687) ($ 14,780)
Shares used in computation:
Weighted average common shares
outstanding used in computation
of net income (loss) per common share 12,999,035 13,183,916 12,999,035 13,182,050
Dilutive effect of common stock
options - - - -
------------ ------------ ------------ ------------
Shares used in computation of net
income (loss) per common share -
assuming dilution 12,999,035 13,183,916 12,999,035 13,182,050
------------ ------------ ------------ ------------
Net income (loss) per common share -
basic and diluted ($ 0.25) ($ 0.32) ($ 0.59) ($ 1.12)
============ ============ ============ ============
Stock Options
Under the 1998 Equity Incentive Plan (the "1998 Plan") which was adopted
on July 9, 1998 the Company had reserved 4,120,380 shares of the Company's
common stock for issuance pursuant to the 1998 Plan. No options were granted
during the nine months ended September 30, 2004. A total of 1,675,000 options
were outstanding at September 30, 2004 of which 1,148,000 were vested.
On February 4, 2004, one non-employee director was granted 25,000 shares
of restricted stock. 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 and unearned compensation on the balance
sheet is reduced. As of September 30, 2004, 7,500 shares were fully vested, and
$24,000 had been amortized from unearned compensation to compensation expense.
Stock-based Employee Compensation
The Company accounts for stock-based employee compensation plans under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations. The current period
amortization of unearned compensation expense relating to the restricted stock
awards is reflected in net income (loss). No other stock-based employee
compensation cost is reflected in net income (loss), as either all options
granted under those plans had an exercise price equal to the market value of the
underlying common stock on the date of grant or options granted that result in
variable compensation costs had an exercise price greater than the fair market
value of the underlying common stock on September 30, 2004. The Company follows
the disclosure only requirements of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires that compensation under a fair value method
be determined using the Black-Scholes option-pricing model and disclosed in a
pro forma effect on earnings and earnings per share. The following table
illustrates the effect on net income (loss) and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, to stock-based employee compensation.
9
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended For the nine months ended
September 30, September 30,
-------------------------- --------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
Net income (loss), as reported ($ 3,196) ($ 4,215) ($ 7,687) ($ 14,780)
Add: Stock-based employee compensation
expense included in reported net income
94 4 256 24
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards (418) (198) (1,252) (679)
----------- ----------- ----------- -----------
Pro forma net income (loss) ($ 3,520) ($ 4,409) ($ 8,683) ($ 15,435)
=========== =========== =========== ===========
Earnings (loss) per share:
As reported - basic and diluted ($ 0.25) ($ 0.32) ($ 0.59) ($ 1.12)
=========== =========== =========== ===========
Proforma - basic and diluted ($ 0.27) ($ 0.33) ($ 0.67) ($ 1.17)
=========== =========== =========== ===========
There were no options granted during the nine months ended September 30,
2004. The fair value of option grants for options granted during the nine months
ended September 30, 2003 was estimated on the date of grant utilizing the
Black-Scholes option-pricing model with the following weighted-average
assumptions.
Risk-free interest rate 3.34%
Expected dividend yield 0.00%
Expected life 7 years
Volatility 76.00%
The weighted-average fair value at the date of grant for options granted
during the nine months ended September 30, 2003 approximated $0.62 per option.
The Company granted 200,000 options during the nine months ended September 30,
2003.
Notes Payable:
The Company had borrowings outstanding under its respective credit
facilities, securitization, and long-term debt agreements with the following
terms:
Amounts outstanding as of
-------------------------------------------------------------
Interest December 31, March 31, June 30, September 30,
(dollars in thousands) Rate 2003 2004 2004 2004
------------- ------------- ------------- ------------- -------------
Credit facility - old prime + 2.0% $ 55,346 $ 40,512 $ 26,108 $ -
Interim line of credit 15.60% - - - -
Credit facility - CIT prime + 1.5% - - - 11,322
MFI I term note securitization 5.58% 3,247 692 - -
Term notes 7.50% 250 250 250 250
Subordinated notes 7.0%-13.0% 3,262 3,262 4,762 4,762
------------- ------------- ------------- -------------
$ 62,105 $ 44,716 $ 31,120 $ 16,334
============= ============= ============= =============
On September 29, 2004, the Company entered into a three-year senior
secured revolving line of credit with CIT Commercial Services, a unit of CIT
Group ("CIT"), whereby it may borrow a maximum of $30.0 million based
10
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
upon qualified lease receivables. Outstanding borrowings with respect to the
revolving line of credit bear interest based at Prime plus 1.5% for Prime Rate
Loans, or the prevailing rate per annum as offered in the London Interbank
Offered Rate (LIBOR) plus 4.0% for LIBOR Loans. If the LIBOR Loans are not
renewed upon their maturity they automatically convert into prime rate loans.
The prime rates at December 31, 2003, and September 30, 2004 were 4.00% and
4.75% respectively. The 90-day LIBOR rate at September 30, 2004 was 2.02%.
In connection with the issuance of the above line of credit, the Company
issued warrants to CIT to purchase an aggregate of 50,000 shares of the
Company's common stock at an exercise price of $0.825 per share and expiring on
June 10, 2007. The fair market value of the warrants, as determined using the
Black-Scholes option-pricing model, was accounted for as additional paid in
capital and discount on notes payable. The resulting notes payable discount was
$139,000, which is being amortized to interest expense under the interest
method.
Borrowings on the above senior secured revolving line of credit were used
to pay off the Company's existing lending syndicate in full, and replaced the
$8.0 million line of credit secured in June 2004, both of which are discussed
further below. Outstanding borrowings are collateralized by eligible lease
contracts pledged specifically to CIT. In addition, the Company granted CIT a
security interest in all of the assets of the Company to further collateralize
the outstanding borrowings.
Prior to obtaining the $30.0 million secured line of credit discussed
above, the Company had borrowings outstanding under a $192.0 senior credit
facility with a group of financial institutions (the lending syndicate), which
had failed to renew as of September 30, 2002. While cash flows from its
portfolio and other fees had been sufficient to repay amounts borrowed under the
senior credit facility, securitizations and subordinated debt, in October 2002,
the Company was forced to suspend virtually all new contract originations until
a new source of liquidity was obtained or until such time as the senior credit
facility was paid in full.
At December 31, 2002, the Company was in default of certain of its debt
covenants in its senior credit facility. The covenants that were in default with
respect to the senior credit facility required that the Company maintain a fixed
charge ratio in an amount not less than 130% of consolidated earnings, a
consolidated tangible net worth minimum of $77.5 million plus 50% of net income
quarterly beginning with September 30, 2000, and compliance with the borrowing
base. On April 14, 2003, the Company entered into a long-term agreement with its
lenders. This long-term agreement waived the defaults described above, and in
consideration for this waiver, required the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. As of September 30, 2004, the loan under the senior credit
facility had been fully repaid.
Also, on April 14, 2003, the Company issued warrants to purchase an
aggregate of 268,199 shares of the Company's common stock at an exercise price
of $.825 per share. The warrants were issued to the nine lenders in the
Company's lending syndicate in connection with the waiver of defaults and an
extension of the Company's term loan. Due to the anti-dilutive rights contained
in the warrant agreement, on June 10, 2004, an additional 2,207 warrants were
issued to the nine lenders in the Company's lending syndicate and all of the
warrants were re-priced to $.818 per share. This was a result of the issuance of
warrants in connection with the $10.0 million credit facility discussed below.
The warrants held by the nine lenders in the Company's lending syndicate became
50% exercisable as of June 30, 2004. Since all of the Company's obligations to
the lenders were paid in full prior to September 30, 2004, the remaining 50% of
the warrants were automatically cancelled pursuant to the term of the agreement.
Unless the warrants are exercised, they will expire on September 30, 2014. The
fair market value of the warrants, as determined using the Black-Scholes
option-pricing model, was accounted for as additional paid in capital. The
resulting cost of the warrants was $77,000, which is being amortized to interest
expense under the interest method. As of September 30, 2004, upon repayment of
the debt in full, $77,000 had been accreted to interest expense and the
resulting effective interest rate on the senior credit facility was prime plus
2.09%.
On June 10, 2004, the Company, through its new subsidiary, TimePayment
Corp LLC entered into a one year revolving line of credit whereby it could
borrow a maximum of $8.0 million based upon qualified lease receivables.
Simultaneously, TimePayment Corp LLC secured a commitment for a three year
subordinated note for $2.0 million. As of September 30, 2004, the Company had
$1.5 million outstanding under the subordinated note. According to the
agreements, outstanding borrowings with respect to the revolving line of credit
bear interest at 15.6% and outstanding borrowings with respect to the
subordinated note bear interest at 13.0%. Upon the closing of the $30.0
11
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
million senior secured revolving line of credit with CIT, the $8.0 million line
of credit was terminated by the Company.
In connection with the issuance of the above $8.0 million line of credit,
the Company issued warrants to purchase an aggregate of 100,000 shares of the
Company's common stock at an exercise price of $6.00 per share and expiring on
June 10, 2007. The fair market value of the warrants, as determined using the
Black-Scholes option-pricing model, was accounted for as additional paid in
capital and discount on notes payable. The resulting discount was $117,000,
which was being amortized to interest expense under the interest method. Since
the $8.0 million line of credit was cancelled as of September 29, 2004, as of
September 30, 2004, the entire discount had been accreted to interest expense.
In connection with the issuance of the above subordinated note, the
Company issued warrants to purchase 110,657 shares of the Company's common stock
at an exercise price of $2.00 per share and 191,685 shares of the Company's
common stock at an exercise price of $2.91 per share, both expiring on June 10,
2007. In the event the lender does not make the second of two installments of
the subordinated note available to TimePayment Corp LLC, the warrants to
purchase 27,664 shares of the Company's common stock at an exercise price of
$2.00 per share and 47,939 shares of the Company's common stock at an exercise
price of $2.91 per share will be automatically cancelled. The fair market value
of the warrants, as determined using the Black-Scholes option-pricing model, was
accounted for as additional paid in capital and discount on subordinated notes
payable. The resulting discount was $396,000, which is being amortized to
interest expense under the interest method. As of September 30, 2004, $30,000
had been accreted to interest expense and the resulting effective interest rate
on the subordinated note was the base rate plus 12.4%.
MFI I issued three series of notes, the 2000-1 Notes, the 2000-2 Notes,
and the 2001-3 Notes. In March 2000, MFI I issued the 2000-1 Notes in aggregate
principal amount of $50,056,686. In December 2000, MFI I issued the 2000-2 Notes
in aggregate principal amount of $50,561,633. In September 2001, MFI I issued
the 2001-3 Notes in aggregate principal amount of $39,397,354. As of September
30, 2004, all of the notes issued by MFI I had been fully repaid.
At December 31, 2003 and September 30, 2004, the Company also had other
notes payable which totaled $250,000. These notes are term notes that carry an
interest rate of 7.5% and are due in November 2004.
Dividends:
During the fourth quarter of 2002, the Board of Directors suspended the
future payment of dividends to comply with the Company's banking agreements.
Provisions in certain of the Company's credit facilities and agreements
governing its subordinated debt 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 Directors may deem relevant, and there can be no
assurance as to the amount and timing of payment of future dividends.
New Accounting Pronouncements:
In July 2004, the FASB issued EITF Issue No. 04-8 ("EITF 04-14") "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share." EITF
04-8 includes new guidance for determining when the dilutive effect of
contingently convertible debt investments ("Co-Cos") should be included in
diluted earnings per share. The accounting guidance provided in EITF 04-8 is
effective for reporting periods beginning after December 15, 2004. The Company
does not expect the adoption of EITF 04-8 to have a material impact on its
financial position or results of operations.
12
MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassification of Prior Year Balances:
Certain reclassifications have been made to prior years' consolidated
financial Statements to conform to the current presentation.
Commitments and Contingencies:
Please refer to Part II Other Information, Item 1 Legal Proceedings for
information about pending litigation of the Company.
The Company accepts lease applications on daily basis and as a result has
a pipeline of applications that have been approved, where a lease has not been
originated. The Company's commitment to lend, however, 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 and all required supporting information and successful verification
with the lessee. Since the Company funds on the same day a lease is successfully
verified, at any given time, the Company has no firm outstanding commitments to
lend.
13
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three months ended September 30, 2004 as compared to the three months ended
September 30, 2003.
Results of Operations
For the three months ended
September 30,
2003 Change 2004
------- --------------- -------
(in thousands)
Income on financing leases and loans $ 7,173 (64.3)% $ 2,560
Rental income ...................... 8,589 (12.1)% 7,548
Income on service contracts ........ 2,067 (33.4)% 1,376
Service fees, waiver fees and other 4,228 (35.2)% 2,741
------- ----- -------
Total revenues ..................... 22,057 (35.5)% 14,225
------- ----- -------
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 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, contracts and
loans, and rental revenues are recognized as they are earned.
Total revenues for the three months ended September 30, 2004 were $14.2
million, a decrease of $7.8 million, or 35.5%, from the three months ended
September 30, 2003. The decrease was primarily due to a decrease of $4.6
million, or 64.3%, in income on financing leases and loans, $1.5 million or
35.2% in service fees, loss and damage waiver fees and other income, $1.0
million, or 12.1% in rental income, and $691,000, or 33.4% in service contract
income. The overall decrease in revenue can be attributed to the decrease in the
overall size of the Company's portfolio of leases, rentals and service
contracts. The shrinking portfolio is a direct result of the Company being
forced to suspend virtually all new originations from October 2002 to June 2004,
as a result of its Lenders not renewing the revolving credit facility on
September 30, 2002. Revenues are expected to continue to decline so long as the
Company is not originating new contracts.
Selling, General and Administrative
For the three months ended
September 30,
2003 Change 2004
----- -------------- -----
(in thousands)
Selling, general and administrative..... 7,837 (7.7)% 7,235
As a percent of revenue................. 35.5% 50.9%
Our selling, general and administrative (SG&A) expenses include costs of
maintaining corporate functions including accounting, finance, collections,
legal, human resources, information systems and communications. SG&A expenses
also include commissions, service fees and other marketing costs associated with
the Company's portfolio of leases and rental contracts. SG&A expenses decreased
by $602,000, or 7.7%, for the three months ended September 30, 2004, as compared
to the three months ended September 30, 2003. The decrease was primarily driven
by a reduction in sales program expense approximately $524,000, $427,000 in
personnel related expenses as management reduced headcount from 144 to 102, and
$150,000 reduction in insurance expense. The expense reductions were achieved as
management continued to align the Company's infrastructure with the current
business conditions.
14
Provision for Credit Losses
For the three months ended
September 30,
2003 Change 2004
------ ---------- ------
(thousands)
Provision for credit losses............. 13,852 (25.7)% 10,295
As a percent of revenue................. 62.8% 72.4%
The Company maintains an allowance for credit losses on its investment in
leases, service contracts, rental contracts and loans at an amount that it
believes is sufficient to provide adequate protection against losses in its
portfolio. The Company's provision for credit losses decreased by $3.6 million,
or 25.7%, for the three months ended September 30, 2004, as compared to the
three months ended September 30, 2003, while net charge-offs decreased 7.7% to
$17.8 million. The provision was based on the Company's historical policy of
providing a provision for credit losses based upon the dealer fundings and
revenue recognized in any period, as well as 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, rental contracts
and loans.
Depreciation and Amortization
For the three months ended
September 30,
2003 Change 2004
----- ---------- -----
(thousands)
Depreciation - fixed assets ............. 335 (48.1)% 174
Depreciation and amortization - contracts 3,771 (20.8)% 2,987
----- ----- -----
Total depreciation and amortization ..... 4,106 (23.0)% 3,161
As a percent of revenue ................. 18.6% 22.2%
Depreciation and amortization expenses consist primarily of the
depreciation taken against fixed assets and rental contracts, and the
amortization of the Company's investment in service contracts. The Company's
investment in fixed assets is recorded at cost and amortized over the expected
life of the service period of the asset. Rental equipment is either recorded at
estimated residual value and depreciated using the straight-line method over a
period of 12 months or at the acquisition cost and depreciated using the
straight line method over a period of 36 months. Service contracts are recorded
at cost and amortized over 84 months. The Company periodically evaluates whether
events or circumstances have occurred that may affect the estimated useful life
or recoverability of the asset and any resulting charge is made to depreciation
and amortization expense. Depreciation and amortization related to rental and
service contracts decreased by $784,000, or 20.8%, for the three months ended
September 30, 2004, as compared to the three months ended September 30, 2003.
The decrease in depreciation and amortization can be attributed to the decrease
in the overall size of the Company's portfolio of leases, rentals and service
contracts. Depreciation related to the Company's property plant and equipment
decreased by $161,000, or 48.1%, for the three months ended September 30, 2004,
as compared to the three months ended September 30, 2003.
Interest Expense
For the three months ended
September 30,
2003 Change 2004
----- ------------- ----
(in thousands)
Interest................................ 1,589 64.8)% 559
As a percent of revenue................. 7.2% 3.9%
The Company pays interest on borrowings under the senior credit facility,
subordinated debt and the on balance sheet securitizations. Interest expense
decreased by $1.0 million, or 64.8%, for the three months ended September 30,
2004, as compared to the three months ended September 30, 2003. This decrease
resulted primarily from the Company's decreased level of borrowings. During the
three months ended September 30, 2004, the Company repaid the amounts borrowed
through its on-balance sheet securitization in full. At September 30, 2004, the
Company had notes payable of $11.4 million (including $11.3 million of
borrowings on the CIT credit facility, net of discounts of $139,000, and
$250,000 of term notes), compared to $85.5 million at September 30, 2003.
15
Other Operating Data
Dealer fundings were $222,000 for the three months ended September 30,
2004, an increase of $75,000, or 51.0%, compared to the three months ended
September 30, 2003. The Company was forced to suspend virtually all originations
from October 2002 until June 2004 when the Company was able to secure a limited
amount of new financing. During the third quarter of 2004, the Company focused
its efforts on securing a larger, lower priced line of credit and restarting its
origination business with a few select vendors. Receivables due in installments,
estimated residual values, loans receivable, investment in service contracts,
and investment in rental equipment decreased from $218.3 million for the year
ended December 31, 2003 to $114.9 million in September 30, 2004. Net cash
provided by operating activities decreased by $8.1 million, or 39.1%, to $12.7
million during the three months ended September 30, 2004.
Nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003.
Results of Operations
For the nine months ended
September 30,
2003 Change 2004
------- ------------- -------
(in thousands)
Income on financing leases and loans $25,372 (60.7)% $ 9,962
Rental income ...................... 25,763 (6.2)% 24,177
Income on service contracts ........ 6,653 (29.8)% 4,671
Service fees, waiver fees and other 13,804 (33.3)% 9,205
------- ------------- -------
Total revenues ..................... 71,592 (32.9)% 48,015
------- ------------- -------
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 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, contracts and
loans, and rental revenues are recognized as they are earned.
Total revenues for the nine months ended September 30, 2004 were $48.0
million, a decrease of $23.6 million, or 32.9%, from the nine months ended
September 30, 2003. The decrease was primarily due to a decrease of $15.4
million, or 60.7%, in income on financing leases and loans, $4.6 million or
33.3% in service fees, loss and damage waiver fees and other income, $2.0
million, or 29.8% in service contract income, and $1.6 million or 6.2% in rental
income. The overall decrease in revenue can be attributed to the decrease in the
overall size of the Company's portfolio of leases, rentals and service
contracts. The shrinking portfolio is a direct result of the Company being
forced to suspend virtually all new originations in October 2002, as a result of
its Lenders not renewing the revolving credit facility on September 30, 2002.
Revenues are expected to continue to decline so long as the Company is not
originating new contracts.
Selling, General and Administrative
For the nine months ended
September 30,
2003 Change 2004
------ ------------- ------
(in thousands)
Selling, general and administrative..... 25,677 (16.8)% 21,359
As a percent of revenue................. 35.9% 44.5%
Our selling, general and administrative (SG&A) expenses include costs of
maintaining corporate functions including accounting, finance, collections,
legal, human resources, information systems and communications. SG&A expenses
also include commissions, service fees and other marketing costs associated with
the Company's portfolio of leases and rental contracts. SG&A expenses decreased
by $4.3 million, or 16.8%, for the nine months ended September 30, 2004, as
compared to the nine months ended September 30, 2003. The decrease was primarily
driven by a reduction in personnel related expenses of approximately $2.1
million, as management reduced
16
headcount from 144 to 102, $1.3 million in sales program expense, and $887,000
in rent expense. The expense reductions were achieved as management continued to
align the Company's infrastructure with the current business conditions.
Provision for Credit Losses
For the nine months ended
September 30,
2003 Change 2004
------ ---------- ------
(thousands)
Provision for credit losses............. 39,900 (5.1)% 37,885
As a percent of revenue................. 55.7% 78.9%
The Company maintains an allowance for credit losses on its investment in
leases, service contracts, rental contracts and loans at an amount that it
believes is sufficient to provide adequate protection against losses in its
portfolio. The Company's provision for credit losses decreased by $2.0 million,
or 5.1%, for the nine months ended September 30, 2004, as compared to the nine
months ended September 30, 2003, while net charge-offs increased 1.0% to $57.2
million. The provision was based on the Company's historical policy of providing
a provision for credit losses based upon the dealer fundings and revenue
recognized in any period, as well as 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, rental contracts and loans.
Depreciation and Amortization
For the nine months ended
September 30,
2003 Change 2004
------ ---------- ------
(thousands)
Depreciation - fixed assets................ 1,154 (43.8)% 649
Depreciation and amortization - contracts.. 11,309 (5.0)% 10,742
------ ----- ------
Total depreciation and amortization........ 12,463 (8.6)% 11,391
As a percent of revenue................. 17.4% 23.7%
Depreciation and amortization expenses consist primarily of the
depreciation taken against fixed assets and rental equipment, and the
amortization of the Company's investment in service contracts. The Company's
investment in fixed assets is recorded at cost and amortized over the expected
life of the service period of the asset. Rental equipment is either recorded at
estimated residual value and depreciated using the straight-line method over a
period of 12 months or at the acquisition cost and depreciated using the
straight line method over a period of 36 months. Service contracts are recorded
at cost and amortized over 84 months. The Company periodically evaluates whether
events or circumstances have occurred that may affect the estimated useful life
or recoverability of the asset and any resulting charge is made to depreciation
and amortization expense. Depreciation and amortization related to rental and
service contracts decreased by $567,000, or 5.0%, for the nine months ended
September 30, 2004, as compared to the nine months ended September 30, 2003. The
decrease in depreciation and amortization can be attributed to the decrease in
the overall size of the Company's portfolio of leases, rentals and service
contracts. Depreciation related to the Company's property plant and equipment
decreased by $505,000, or 43.8%, for the nine months ended September 30, 2004,
as compared to the nine months ended September 30, 2003.
Interest Expense
For the nine months ended
September 30,
2003 Change 2004
----- ------------- -----
(in thousands)
Interest................................ 6,364 (68.3)% 2,016
As a percent of revenue................. 8.9% 4.2%
The Company pays interest on borrowings under the senior credit facility,
subordinated debt and the on balance sheet securitizations. Interest expense
decreased by $4.3 million, or 68.3%, for the nine months ended September 30,
2004, as compared to the nine months ended September 30, 2003. This decrease
resulted primarily from the Company's decreased level of borrowings. At
September 30, 2004, the Company had notes payable of $11.4 million
17
(including $11.3 million of borrowings on the CIT credit facility, net of
discounts of $139,000, and $250,000 of term notes), compared to $85.5 million at
September 30, 2003.
Other Operating Data
Dealer fundings were $288,000 for the nine months ended September 30,
2004, a decrease of $1.3 million, or 81.3%, compared to the nine months ended
September 30, 2003. In 2003, the Company was able to fund a limited number of
new contracts using its own free cash flow, however, the amount and timing of
the new originations was restricted by the amount of available cash and the
terms of the Company's banking agreements. The long term bank agreement entered
into on April 14, 2003 placed further restriction on the Company's ability to
originate new contracts, until the Company was able to secure a limited amount
of financing in June 2004. During the third quarter of 2004, the Company focused
its efforts on securing a larger, lower priced line of credit and restarting its
origination business with a few select vendors. Receivables due in installments,
estimated residual values, loans receivable, investment in service contracts,
and investment in rental equipment also decreased from $218.3 million for the
year ended December 31, 2003 to $114.9 million in September 30, 2004. Net cash
provided by operating activities decreased by $34.5 million, or 44.1%, to $43.7
million during the nine months ended September 30, 2004.
Critical Accounting Policies
In response to the SEC's release No. 33-8040, "Cautionary Advice regarding
Disclosure About Critical Accounting Policies," Management identified the most
critical accounting principles upon which our financial status depends. The
Company determined the critical principles by considering accounting policies
that involve the most complex or subjective decisions or assessments. We
identified our most critical accounting policies to be those related to revenue
recognition and maintaining the allowance for credit losses. These accounting
policies are discussed below as well as within the notes to the consolidated
financial statements.
Revenue Recognition
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 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 either recorded at
estimated residual value and depreciated using the straight-line method over a
period of 12 months or at the acquisition cost and depreciated using the
straight line method over a period of 36 months. Loans are reported at their
outstanding principal balance. Interest income on loans is recognized as it is
earned.
Allowance for Credit Losses
The Company maintains an allowance for credit losses on its investment in
leases, service contracts, rental 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, rental contract or loan, if any, and reflects
management's judgment of additional loss potential considering current economic
conditions and the nature and characteristics of the underlying lease portfolio.
The Company determines the necessary periodic provision for
18
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, rental 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, rental 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,
rental contracts and loans to be uncollectable when one of the following occurs:
(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 without
contact with the lessee. 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 may 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 employs collection procedures and a legal process to resolve any credit
problems.
Income taxes
Significant management judgement is required in determining the provision
for income taxes, deferred tax assets and liabilities and any necessary
valuation allowance recorded against net deferred tax assets. The process
involves summarizing temporary differences resulting from the difference
treatment of items, for example, leases, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are recorded on
the balance sheet. Management 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 management believes recovery is more likely than
not, no valuation allowance is deemed necessary. No valuation allowance has been
established against net deferred tax assets, as management believes these assets
to be realizable through future taxable income.
Exposure to Credit Losses
The following table sets forth certain information as of December 31, 2002
and 2003 and September 30, 2004 with respect to delinquent leases, service
contracts and loans. The percentages in the table below represent the aggregate
on such date of the actual amounts not paid on each invoice by the number of
days past due, rather than the entire balance of a delinquent receivable, over
the cumulative amount billed at such date from the date of origination on all
leases, service contracts, and loans in the Company's portfolio. For example, if
a receivable is 90 days past due, the portion of the receivable that is over 30
days past due will be placed in the 31-60 days past due category, the portion of
the receivable which is over 60 days past due will be placed in the 61-90 days
past due category and the portion of the receivable which is over 90 days past
due will be placed in the over 90 days past due category. The Company
historically used this methodology of calculating its delinquencies because of
its experience that lessees who miss a payment do not necessarily default on the
entire lease. Accordingly, the Company includes only the amount past due rather
than the entire lease receivable in each category.
As of As of
December 31, September 30,
(dollars in thousands) 2002 2003 2004
--------------- ----------------- -----------------
Cumulative amounts billed $600,637 $478,791 $343,711
31-60 days past due $ 5,772 1.0% $ 5,446 1.1% $ 2,139 0.6%
61-90 days past due 6,019 1.0% 3,995 0.8% 2,051 0.6%
Over 90 days past due 137,607 22.9% 85,883 17.9% 47,305 13.8%
--------------- ----------------- -----------------
Total past due $149,398 24.9% $ 95,324 19.8% $ 51,495 15.0%
=============== ================= =================
19
Alternatively, 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 the Company's portfolio as of September 30, 2004. 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.
September 30,
(dollars in thousands) 2004
Current $26,596 30.7%
31-60 days past due 1,188 1.4%
61-90 days past due 1,021 1.2%
Over 90 days past due 57,758 66.7%
--------------------
Total receivables due in installments $86,563 100.0%
====================
Liquidity and Capital Resources
General
The Company's lease and finance business is capital-intensive and requires
access to substantial short-term and long-term credit to fund new lease
originations. Since inception, the Company has funded its operations primarily
through borrowings under its credit facilities, its on-balance sheet
securitizations, the issuance of subordinated debt and an initial public
offering completed in February of 1999. The Company will continue to require
significant additional capital to maintain and expand its volume of leases, and
contracts funded, as well as to fund any future acquisitions of leasing
companies or portfolios. Additionally, the Company's uses of cash include the
payment of interest expenses, repayment of borrowings under its credit
facilities and securitizations, payment of selling, general and administrative
expenses, income taxes and capital expenditures.
For the nine months ended September 30, 2004 and September 30, 2003,
respectively, the Company's primary source of liquidity was cash provided by
operating activities. The Company generated cash flow from operations of $43.7
million for the nine months ended September 30, 2004 and $78.2 million for the
nine months ended September 30, 2003.
The Company used net cash in investing activities of $494,000 for the
nine-months ended September 30, 2004 and $2.6 million for the nine-months ended
September 30, 2003. Investing activities primarily relate to the origination of
new leases and contracts as well as capital expenditures.
Net cash used in financing activities was $43.5 million for the
nine-months ended September 30, 2004 and $73.8 million for the nine-months ended
September 30, 2003. Financing activities include net borrowings and repayments
on our various financing sources.
The Company believes that cash flows from its existing portfolio, and
borrowings on the existing credit facility will be sufficient to support the
Company's operations and lease origination activity for the foreseeable future.
Borrowings
The Company utilizes its credit facilities to fund the origination and
acquisition of leases that satisfy the eligibility requirements established
pursuant to each facility.
20
Borrowings outstanding under the Company's revolving credit facilities and
long-term debt consist of the following:
As of As of
December 31, 2003 September 30, 2004
------------------------- ---------------------------------------------------
Maximum
Amounts Interest Amounts Interest Unused Facility
(dollars in thousands) Outstanding Rate Outstanding Rate Capacity Amount
----------- --------- ----------- ---------- -------- -------
Revolving credit facility - old (1) $ 55,346 6.00% $ - 6.75% $ - $ -
Revolving credit facility - new (2) - 11,322 6.50% 18,678 30,000
MFI I term note securitization (3) 3,247 5.58% - 5.58% - -
Term notes (4) 250 7.50% 250 7.50% - -
Subordinated notes (5) 3,262 7.0%-12.5% 4,762 7.75%-13.0% 500 -
----------- ----------- -------- --------
$ 62,105 $ 16,334 $ 19,178 $ 30,000
=========== =========== ======== ========
(1) After September 30, 2002 this facility failed to renew and the Company no
longer had the ability to draw down additional amounts.
(2) The unused capacity is subject to lease eligibility and the borrowing base
formula
(3) The MFI I term note securitization is a one-time funding that pays down over
time, without any ability for the Company to draw down additional amounts.
(4) The term notes were a one-time funding, without any ability for the Company
to draw down additional amounts.
(5) Subordinated notes are generally one-time fundings, without any ability for
the Company to draw down additional amounts, however in June 2004, the
Company issued a $2.0 million subordinated note, of which only $1.5 million
was outstanding as of September 30,2004. The note holder advanced the
additional $500,000 in October 2004.
On September 29, 2004, the Company entered into a three-year senior
secured revolving line of credit with CIT Commercial Services, a unit of CIT
Group (CIT),whereby it may borrow a maximum of $30.0 million based upon
qualified lease receivables. Outstanding borrowings with respect to the
revolving line of credit bear interest based at Prime plus 1.5% for Prime Rate
Loans, or the prevailing rate per annum as offered in the London Interbank
Offered Rate (LIBOR) plus 4.0% for LIBOR Loans. If the LIBOR Loans are not
renewed upon their maturity they automatically convert into prime rate loans.
The prime rates at December 31, 2003, and September 30, 2004 were 4.00% and
4.75% respectively. The 90-day LIBOR rate at September 30, 2004 was 2.02%.
Prior to obtaining the $30.0 million secured line of credit discussed
above, the Company had borrowings outstanding under a $192.0 senior credit
facility with a group of financial institutions, which had failed to renew as of
September 30, 2002. While cash flows from its portfolio and other fees had been
sufficient to repay amounts borrowed under the senior credit facility,
securitizations and subordinated debt, in October 2002, the Company was forced
to suspend virtually all new contract originations until a new source of
liquidity was obtained or until such time as the senior credit facility was paid
in full.
At December 31, 2002, the Company was in default of certain of its debt
covenants in its senior credit facility. The covenants that were in default with
respect to the senior credit facility require that the Company maintain a fixed
charge ratio in an amount not less than 130% of consolidated earnings, a
consolidated tangible net worth minimum of $77.5 million plus 50% of net income
quarterly beginning with September 30, 2000, and compliance with the borrowing
base. On April 14, 2003, the Company entered into a long-term agreement with its
lenders. This long-term agreement waived the defaults described above, and in
consideration for this waiver, required the outstanding balance of the loan to
be repaid over a term of 22 months beginning in April 2003 at an interest rate
of prime plus 2.0%. As of September 30, 2004, the loan under the senior credit
facility had been fully repaid.
The Company, through its wholly owned subsidiary, Leasecomm Corporation,
periodically finances its lease and service contracts, together with
unguaranteed residuals, through securitizations using special purpose entities.
The assets of such special purpose entities and cash collateral or other
accounts created in connection with the financings in which they participate are
not available to pay creditors of Leasecomm Corporation, MicroFinancial
21
Incorporated, or other affiliates. However, the special purpose entities to
which such assets are required under generally accepted accounting principles to
be consolidated in the financial statements of the Company. As a result, such
assets and the related liability remain on the balance sheet and do not receive
gain on sale treatment. The amounts borrowed under the securitization were fully
repaid as of September 30, 2004.
Contractual Obligations and Commercial Commitments
Contractual Obligations
The Company has entered into various agreements, such as long term debt
agreements, capital lease agreements and operating lease agreements that require
future payments be made. Long-term debt agreements include all debt outstanding
under the securitization, subordinated notes, demand notes and other notes
payable.
At September 30, 2004, the repayment schedules for outstanding borrowings
on the revolving credit facility, long-term debt, minimum lease payments under
non-cancelable operating leases and future minimum lease payments under capital
leases were as follows:
Revolving
For the period ended Credit Long-Term Operating Capital
December 31, Facility(1) Debt Leases Leases Total
-------------------- ----------- --------- ---------- ------- ---------
2004 $11,322 $ 362 $ 146 $ 40 $ 548
2005 - 2,050 585 55 2,690
2006 - 2,600 - - 13,922
2007 - - - - -
2008 - - - - -
2009 - - - - -
Thereafter - - - - -
----------- --------- ---------- ------- ---------
$ 11,322 $ 5,012 $ 731 $ 95 $ 17,160
=========== ========= ========== ======= =========
(1)The Company's obligation to repay the revolving credit facility in the
current year is subject to lease collateral availability and the borrowing
base formula. The credit facility expires on September 29, 2007.
Commitments
The Company accepts lease applications on daily basis and as a result has
a pipeline of applications that have been approved, where a lease has not been
originated. The Company's commitment to lend, however, 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 and all required supporting information and successful verification
with the lessee. Since the Company funds on the same day a lease is successfully
verified, at any given time, the Company has no firm outstanding commitments to
lend.
Note on Forward-Looking Information
Statements in this document that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes" "anticipates" "expects" and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results to differ materially from those
expressed in any forward-looking statements made by or on behalf of the Company.
Such statements contain a number of risks and uncertainties, including but not
limited to: the Company's need for additional financing in order to originate
new leases and contracts; the Company's dependence on point-of-sale
authorization systems and expansion into new markets; the Company's significant
capital requirements; risks associated with economic downturns; higher interest
rates; intense competition; change in regulatory environment; the availability
of qualified personnel and risks associated with acquisitions. Readers should
not place undue reliance on forward-looking
22
statements, which reflect the management's view only as of the date hereof. The
Company undertakes no obligation to publicly revise these forward-looking
statements to reflect subsequent events or circumstances. The Company cannot
assure that it will be able to anticipate or respond timely to changes which
could adversely affect its operating results in one or more fiscal quarters.
Results of operations in any past period should not be considered indicative of
results to be expected in future periods. Fluctuations in operating results may
result in fluctuations in the price of the Company's common stock. For a more
complete description of the prominent risks and uncertainties inherent in the
Company's business, see the risks factors described in the Company's Form S-1
Registration Statement and other documents filed from time to time with the
Securities and Exchange Commission.
23
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market-Rate-Sensitive Instruments and Risk Management
The following discussion about the Company's risk management activities
includes forward-looking statements that involve risk and uncertainties. Actual
results could differ materially from those projected in the forward-looking
statements.
In the normal course of operations, the Company also faces risks that are
either non-financial or nonquantifiable. Such risks principally include credit
risk, and legal risk, and are not represented in the analysis that follows.
Interest Rate Risk Management
The implicit yield to the Company on all of its leases, 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 lease and the effective interest cost
it will pay when it finances such leases, contracts and loans through its credit
facility. 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 followed the practice described below, which is 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. Currently, given the fixed repayment schedules of the
Company's outstanding debt over the past two years, the Company has been limited
in its ability to manage the blend of fixed and variable rate interest
obligations. As of September 30, 2004, the Company's outstanding fixed-rate
indebtedness outstanding under the Company's securitizations and subordinated
debt represented 27.8% of the Company's total outstanding indebtedness.
ITEM 4 CONTROLS AND PROCEDURES
Disclosure controls and procedures: As of the end of the period covered by
this report, the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to the Exchange Act Rule 13a-15. Based upon the evaluation, the
Company's Chief Executive Officer and Chief Financial Officer concluded that the
Company's 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 Company reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Internal Controls: As of the date of the evaluation described above, there
have not been any significant changes in the Company's internal controls or in
other factors that could significantly affect those controls.
24
PART II. OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
Management believes, after consultation with counsel, that the allegations
against the Company included in the lawsuits described below are subject to
substantial legal defenses, 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.
A. The Company filed an action in the United States District Court for the
District of Massachusetts against Sentinel Insurance Company, Ltd.,
("Sentinel"), Premier Holidays International, Inc., ("Premier") and Daniel
DelPiano ("DelPiano") arising from Premier's October, 1999, default on its
repayment obligations to the Company under a Twelve Million Dollar ($12,000,000)
loan. Judgment has been entered in this case against Sentinel, which had issued
a business performance insurance policy guaranteeing repayment of the loan, in
the amount of Fourteen Million Dollars ($14,000,000). This judgment has not been
satisfied. Sentinel is currently undergoing liquidation proceedings, and a claim
in this amount has been filed with the bankruptcy court. The Company does not
expect to receive any amount as a result of its claim. The Company's case
against Premier and DelPiano was tried in November 2003 and was decided by the
Court in March, 2004. The Court entered a judgment for the Company against
Premier and DelPiano, jointly and severally, on all of the Company's counts,
including fraud and violation of Massachusetts General Laws, Chapter 93A, and
dismissing with prejudice all of Premier and DelPiano's claims and
counterclaims. The Court awarded the Company Twenty Three Million Dollars
($23,000,000) in damages. The case was appealed to the United States Court of
Appeals for the First Circuit. All appellate briefs were filed and heard on
September 15, 2004. On October 5, 2004, the First Circuit Court of Appeals
affirmed the District Court's Judgment in favor of the Company. Collection of
this award is not assumed and therefore it is not reflected in the financial
statements as of September 30, 2004.
B. In October 2002, the Company was served with a Complaint in an action
in the United States District Court for the Southern District of New York filed
by approximately 170 present and former lessees asserting individual claims. The
Complaint contains claims for violation of RICO (18 U.S.C. Section 1964), fraud,
unfair and deceptive acts and practices, unlawful franchise offerings, and
intentional infliction of mental anguish. The claims purportedly arise from
Leasecomm's dealer relationships with Themeware, E-Commerce Exchange,
Cardservice International, Inc., and Online Exchange for the leasing of websites
and virtual terminals. The Complaint asserts that the Company is responsible for
the conduct of its dealers in trade shows, infomercials and web page
advertisements, seminars, direct mail, telemarketing, all which are alleged to
constitute unfair and deceptive acts and practices. Further, the Complaint
asserts that Leasecomm's lease contracts as well as its collection practices and
late fees are unconscionable. The Complaint seeks restitution, compensatory and
treble damages, and injunctive relief. The Company filed a Motion to Dismiss the
Complaint on January 31, 2003. By decision dated September 30, 2003, the court
dismissed the complaint with leave to file an amended complaint. An Amended
Complaint was filed in November 2003. The Company filed a Motion to Dismiss the
Amended Complaint, which was denied by the U.S. District Court in September
2004. The Company is preparing to file an answer to the Amended Complaint
denying the Plaintiff's allegations. Because of the uncertainties inherent in
litigation, the Company cannot predict whether the outcome will have a material
adverse effect.
C. On August 22, 2002, Plaintiff Aaron Cobb filed a Complaint against
Leasecomm Corporation and MicroFinancial, Inc. and another Entity known as
Galaxy Mall, Inc. alleging breach of contract; Fraud, Suppression and Deceit;
Unjust Enrichment; Conspiracy; Conversion; Theft by Deception; and violation of
Alabama Usury Laws. The Complaint was filed on behalf of Aaron Cobb
individually, and on behalf of a class of persons and entities similarly
situated in the State of Alabama. More specifically, the Plaintiff purports to
represent a class of persons and small business in the State of Alabama who
allegedly were induced to purchase services and/or goods from any of the
Defendants named in the Complaint. The case is venued in Bullock County,
Alabama. On March 31, 2003 the trial court entered an Order denying the
Company's Motion to Dismiss. An appeal of the Order was filed with the Alabama
Supreme Court on May 12, 2003. On February 20, 2004, the Alabama Supreme Court
overruled
25
the Company's application for rehearing. On February 24, 2004, Plaintiff filed a
First Amended Class Action Complaint in which Plaintiff added Electronic
Commerce International ("ECI") as an additional party defendant. No new
allegations were asserted against the Company in the Amended Complaint. On March
31, 2004 the Company filed an answer to the Amended Complaint denying the
Plaintiff's allegations. The Company continues to deny any wrongdoing and plans
to vigorously defend this claim. The Company has also filed an additional motion
to enforce a forum selection clause, which, if successful, would cause this case
to be dismissed with leave to re-file in Massachusetts. Galaxy Mall has filed a
similar motion. These motions are scheduled to be heard in September 2004. Also,
all discovery in this case has been halted, pending a discovery order to be
entered into in connection with a schedule for class certification proceedings.
Because of the uncertainties inherent in litigation, the Company cannot predict
whether the outcome will have a material adverse effect.
D. In March 2003, a purported class action was filed in Superior Court in
Massachusetts against Leasecomm and one of its dealers. The class sought to be
certified is a nationwide class (excluding certain residents of the State of
Texas) who signed identical or substantially similar lease agreements with
Leasecomm covering the same product. After the Company had filed a motion to
dismiss, but before the motion to dismiss was heard by the Court, plaintiffs
filed an Amended Complaint. The Amended Complaint asserts claims against the
Company for declaratory relief, absence of consideration, unconscionability, and
violation of Massachusetts General Laws Chapter 93A, Section 11. The Company
filed a motion to dismiss the Amended Complaint. The Court allowed the Company's
motion to dismiss the Amended Complaint in March 2004. In May 2004, a purported
class action on behalf of the same named plaintiffs and asserting the same
claims was filed in Cambridge District Court. The Company has filed a Motion to
Dismiss the Complaint, which was heard in August 2004, and denied by the
District Court. On September 16, 2004, the Company filed an answer to the
Amended Complaint denying the Plaintiff's allegations. Because of the
uncertainties in litigation, the Company can not predict whether the outcome
will have a material adverse effect.
E. On April 28, 2003, Plaintiff Wallace Dickey filed a purported class
action against Leasecomm Corporation, Cardservice International, Inc., Linkpoint
International, Inc., and Clear Commerce Corporation alleging that he
lease-financed through Leasecomm the right to use certain computer software
manufactured, distributed, and sold by the other defendants. The Plaintiff did
not allege that Leasecomm failed to provide the lease financing contemplated by
the Leasecomm lease. Instead, the Plaintiff alleged that the other defendants'
software failed to operate as well as he believed it would. He sued for a
declaration that would allow him to rescind his contract, to recover money paid
in the course of the transaction, and to recover damages allegedly caused by
unspecified deceptive trade practices. The Plaintiff asserted his claims "on
behalf of himself and all others similarly situated." Leasecomm denied all of
the Plaintiff's allegations. The defendants agreed to a proposed class action
settlement with the Plaintiff and his counsel. The proposed settlement, if
granted final approval by the Court, would apply to all Texas residents who
lease-financed through Leasecomm the same software rights that the Plaintiff
lease-financed. The Court preliminarily approved certification of the Texas
class for settlement purposes only, and the parties distributed notice to all
class members in accordance with the Court's instructions. Upon expiration of
the notice period, the Parties sought and the Court granted final approval to
the settlement class. The Court's final judgment became final on October 8,
2004.
F. On April 29, 2003, Leasecomm was served with a Complaint filed in the
Orange County Superior Court for the State of California. In that Complaint,
Maria J. Smith purports to bring a claim against Leasecomm and two other
defendants (Galaxy Mall, Inc. and Electronic Commerce International, Inc.) for
unfair business practices and competition under California Business and
Professions Code section 17200 et seq. The essence of the claim is that Smith
and others who are similarly situated were defrauded in connection with their
acquisition of certain licenses that were financed by Leasecomm. In May 2003,
Leasecomm filed a motion to stay the action in favor of a Massachusetts forum
based on a forum selection clause contained in plaintiff's lease agreement with
Leasecomm. After filing the motion, Leasecomm entered into settlement
negotiations with plaintiff's counsel to explore the possibility of resolving
the matter on a class wide basis without the need for further litigation
(meaning the settlement would, if accepted, apply not only to the named
plaintiff but to others similarly situated). The parties signed a stipulation
setting forth the terms of their agreement and the Court has preliminarily
approved the settlement, approved the form of notice to class members. On
October 15, 2004, the Parties sought and the Court granted final approval to the
settlement class.
G. In October 2003, the Company was served with a purported class action
complaint which was filed in the United States District Court for the District
of Massachusetts alleging violations of federal securities law. The
26
purported class would consist of all persons who purchased Company securities
between February 5, 1999 and October 30, 2002. The Complaint asserts that during
this period the Company made a series of materially false or misleading
statements about the Company's business, prospects and operations, including
with respect to certain lease provisions, the Company's course of dealings with
its vendor/dealers, and the Company's reserves for credit losses. In April 2004,
an Amended Class Action Complaint was filed which added additional defendants
and expanded upon the prior allegations with respect to the Company. The Company
filed a Motion to Dismiss the Amended Complaint, which is awaiting decision by
the Court. Because of the uncertainties inherent in litigation, the Company
cannot predict whether the outcome will have a material adverse effect.
H. In February 2004, a purported class action was filed in Superior Court
in Massachusetts against Leasecomm, a dealer, and a party purportedly related to
the dealer. The class sought to be certified is a nationwide class who signed
lease agreements identical to, or substantially similar to, the plaintiff's
lease agreement with Leasecomm, and covering the same product. The Complaint
asserts claims for declaratory judgment, absence of consideration,
unconscionability, and violation of Massachusetts General Laws Chapter 93A,
Section 11. The claims concern the validity, enforceability, and alleged
unconscionability of the lease of a product which enabled a merchant to process
credit card payments. The Complaint seeks rescission of lease agreements with
Leasecomm, restitution, multiple damages and attorneys fees under Chapter 93A,
and injunctive relief. The Company has filed a Motion to Dismiss the Complaint,
which is awaiting decision by the Court. Because of the uncertainties inherent
in litigation the Company cannot predict whether the outcome will have a
material adverse effect.
I. In February 2003, Leasecomm received a Civil Investigative Demand
("CID") from the Office of the Attorney General, State of Washington, to which
it has responded. The CID concerns an investigation of monitoring agreements
between Priority One, Inc. and various State of Washington consumers, as to
which Leasecomm appears to be the assignee of the right to receive monthly
payments and monitoring agreements between former Priority One, Inc. customers
and security monitoring companies. Since the investigation is in process, and no
legal action has been commenced against Leasecomm, the Company can not predict
whether the outcome will have a material adverse effect.
J. On June 21, 2004, Leasecomm was named as defendant in a punitive class
action complaint filed in the Los Angeles County Superior Court for the State of
California. In that Complaint, styled as Margarita Hinojosa, et al. v. Leasecomm
Corporation, case no. BC317371, plaintiffs purport to bring claims against
Leasecomm on behalf of themselves and others similarly situated for fraud,
unfair business practices under California Business & Professions Code section
17200 et seq., false advertising under California Business & Professions Code
section 17500 et seq. and violations of various California consumer protection
statutes. The essence of the claim is that plaintiffs and others who are
similarly situated were defrauded in connection with their acquisition of credit
card swipe machines that were financed by Leasecomm and which plaintiffs claim
they intended to use to add value to telephone calling cards that could be used
for their personal use or resale to others. During negotiations with plaintiffs'
counsel prior to the filing of the Complaint, Leasecomm reached a proposed class
action settlement of all claims. In September 2004, the Court preliminarily
approved the settlement, approved the form of notice to class members and has
set a final approval hearing for January 11, 2005. The settlement must receive
final approval to become effective. Because of the uncertainties inherent in
litigation, the Company cannot predict whether the outcome will have a material
adverse effect.
27
ITEM 2 RECENT SALES OF UNREGISTERED SECURITIES
(c) On September 29, 2004, the Company issued warrants to purchase an
aggregate of 50,000 shares of the Company's common stock at an exercise price of
$0.825 per share and expiring on June 10, 2007. The warrants were issued to the
lender in the Company's new $30.0 million credit line. The exemption from
registration relied on by the Company was Section 4(2) of the Securities Act of
1933. The investor was an accredited investor and the offering otherwise met the
requirements of Regulation D under the Securities Act.
On September 29, 2004, the Company issued warrants to purchase an
aggregate of 75,000 shares of the Company's common stock at an exercise price of
$3.704 per share and expiring on June 10, 2007. The warrants were issued to the
financial advisor the Company engaged to secure the Company's new $30.0 million
credit line. The exemption from registration relied on by the Company was
Section 4(2) of the Securities Act of 1933. The investor was an accredited
investor and the offering otherwise met the requirements of Regulation D under
the Securities Act.
28
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits index
10.1 Revolving Credit Agreement, dated as of September 29, 2004, by and
among Leasecomm Corporation and TimePayment Corp. LLC, as
Borrowers, MicroFinancial Incorporated, The CIT Group/Commercial
Services, Inc., as Agent, and the other financial institutions from
time to time party thereto, as Lenders. (incorporated by reference
to Exhibit 10.1 of the Registrant's Form 8-K filed on October 4,
2004)
10.2 $30,000,000 Revolving Credit Note, dated as of September 29, 2004,
issued by Leasecomm Corporation and TimePayment Corp. LLC and
payable to the order of The CIT Group/Commercial Services, Inc.
(incorporated by reference to Exhibit 10.2 of the Registrant's Form
8-K filed on October 4, 2004)
10.3 Guaranty, dated as of September 29, 2004, by MicroFinancial
Incorporated in favor of The CIT Group/Commercial Services, Inc.,
as Agent. (incorporated by reference to Exhibit 10.3 of the
Registrant's Form 8-K filed on October 4, 2004)
10.4 Pledge Agreement, dated as of September 29, 2004, by and between
MicroFinancial Incorporated and The CIT Group/Commercial Services,
Inc., as Secured Party, on behalf of the Lenders. (incorporated by
reference to Exhibit 10.4 of the Registrant's Form 8-K filed on
October 4, 2004)
10.5 Security Agreement, dated as of September 29, 2004, by and among
Leasecomm Corporation, TimePayment Corp. LLC and The CIT
Group/Commercial Services, Inc., as Agent. (incorporated by
reference to Exhibit 10.5 of the Registrant's Form 8-K filed on
October 4, 2004)
10.6 Intellectual Property Security Agreement, dated as of September 29,
2004, by and among Leasecomm Corporation, TimePayment Corp. LLC and
The CIT Group/Commercial Services, Inc., as Agent. (incorporated by
reference to Exhibit 10.6 of the Registrant's Form 8-K filed on
October 4, 2004)
10.7 Revolving Credit Assignment of Leases, dated as of September 29,
2004, by and among Leasecomm Corporation, TimePayment Corp. LLC and
The CIT Group/Commercial Services, Inc., as Agent. (incorporated by
reference to Exhibit 10.7 of the Registrant's Form 8-K filed on
October 4, 2004)
10.8 Warrant Purchase Agreement, dated as of September 29, 2004, by and
between MicroFinancial Incorporated and The CIT Group/Commercial
Services, Inc., as Investor. (incorporated by reference to Exhibit
10.8 of the Registrant's Form 8-K filed on October 4, 2004)
10.9 Warrant Certificate, dated as of September 29, 2004, for the
purchase of 50,000 shares of common stock, issued by MicroFinancial
Incorporated in favor of The CIT Group/Commercial Services, Inc.
(incorporated by reference to Exhibit 10.9 of the Registrant's Form
8-K filed on October 4, 2004)
10.10 Registration Rights Agreement, dated as of September 29, 2004, by
and between MicroFinancial Incorporated and The CIT
Group/Commercial Services, Inc., as Holder. (incorporated by
reference to Exhibit 10.10 of the Registrant's Form 8-K filed on
October 4, 2004)
10.11* Warrant Certificate, dated as of September 29, 2004 for the
purchase of 75,000 shares of common stock, issued by MicroFinancial
Incorporated in favor of Stonebridge Associates LLC
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
* Filed herewith
(b) Reports on Form 8-K
A form 8-K was filed on July 8, 2004, to announce that the Company
satisfies NYSE Continued Listing Compliance Plan.
A form 8-K was furnished on August 2, 2004, to announce the Company's
financial results for the second quarter and six months ended June 30,
2004.
29
(b) Reports on Form 8-K (continued)
A form 8-K was filed on August 5, 2004, to announce that the Company
continues to reduce its outstanding debt obligations.
A form 8-K was filed on September 3, 2004 to announce that the Company
continues to reduce its outstanding debt obligations.
A form 8-K was filed on October 4, 2004 to announce that on September 29,
2004, Leasecomm Corporation and TimePayment Corp. LLC, wholly-owned
subsidiaries of the Company, signed a $30 million credit agreement with
The CIT Group/Commercial Services, Inc.
30
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: November 15, 2004
31