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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K/A
Amendment
No. 1.
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(Mark One)
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from
to
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Commission file number
000-50448
Marlin Business Services
Corp.
(Exact name of Registrant as
specified in its charter)
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Pennsylvania
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38-3686388
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(State of
incorporation)
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(I.R.S. Employer Identification
No.)
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300 Fellowship Road, Mount Laurel, NJ 08054
(Address of principal executive
offices)
Registrants telephone number, including area code:
(888) 479-9111
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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None
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None
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Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $.01 par value
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K/A
or any amendment to this
Form 10-K/A. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act
Rule 12b-2). Yes o No þ
The aggregate market value of the voting common stock held by
non-affiliates of the Registrant, based on the closing price of
such shares on the NASDAQ National Market was approximately
$69,334,548 as of June 30, 2005. Shares of common stock
held by each executive officer and director and persons known to
us who beneficially owns 5% or more of our outstanding common
stock have been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of Registrants common stock
outstanding as of February 17, 2006 was
11,795,261 shares.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Registrants definitive Proxy Statement
related to the 2006 Annual Meeting of Shareholders, to be filed
with the Securities and Exchange Commission within 120 days
of the close of Registrants fiscal year, is incorporated
by reference into Part III of this
Form 10-K/A.
EXPLANATORY
NOTE
This Amendment No. 1 on
Form 10-K/A
(the
Form 10-K/A)
to Marlin Business Services Corp.s (the
Company) Annual Report on
Form 10-K
for the year ended December 31, 2005 initially filed with
the Securities and Exchange Commission (the SEC) on
March 2, 2006 (the Original Filing) is being
filed by the Company for the purpose of correcting a
typographical error within the line item Other
assets in the Consolidated Statements of Cash Flows in the
Original Filing. Below is the Other assets line item
as presented in the Original Filing and as corrected by this
Form 10-K/A:
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Year Ended
December 31,
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2005
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2004
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2003
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(in thousands)
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Original Filing:
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Other assets
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3,052
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(292
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(644
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As corrected:
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Other assets
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2,524
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212
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(1,031
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)
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The cash flow column totals were correct in the Original Filing
and therefore were not changed by this
Form 10-K/A.
For the convenience of the reader, this
Form 10-K/A
sets forth the Original Filing in its entirety. In addition,
pursuant to the rules of the SEC, Item 15 of Part IV
of the Original Filing has been amended to contain currently
dated certifications from the Companys Chief Executive
Officer and Principal Financial Officer, as required by
Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, and
currently dated consents from the Companys former and
current independent registered public accounting firms. The
consents of the Companys former and current independent
registered public accounting firms and the certifications of the
Companys officers are attached to this
Form 10-K/A
as Exhibits 23.1, 23.2, 31.1, 31.2 and 32.1.
Except for the foregoing amended information, this
Form 10-K/A
continues to speak as of the date of the Original Filing, and
the Company has not updated the disclosures contained herein to
reflect any subsequent events.
MARLIN
BUSINESS SERVICES CORP.
FORM 10-K/A
INDEX
1
PART I
FORWARD-LOOKING
STATEMENTS
Certain statements in this document may include the words or
phrases can be, expects,
plans, may, may affect,
may depend, believe,
estimate, intend, could,
should, would, if and
similar words and phrases that constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are subject to
various known and unknown risks and uncertainties and the
Company cautions that any forward-looking information provided
by or on its behalf is not a guarantee of future performance.
Statements regarding the following subjects are forward-looking
by their nature: (a) our business strategy; (b) our
projected operating results; (c) our ability to obtain
external financing; (d) our understanding of our
competition; and (e) industry and market trends. The
Companys actual results could differ materially from those
anticipated by such forward-looking statements due to a number
of factors, some of which are beyond the Companys control,
including, without limitation:
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availability, terms and deployment of capital;
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general volatility of capital markets, in particular, the market
for securitized assets;
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changes in our industry, interest rates or the general economy
resulting in changes to our business strategy;
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the nature of our competition;
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availability of qualified personnel; and
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the factors set forth in the section captioned Risk
Factors in Item 1A of this
Form 10-K/A.
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Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing solutions
primarily to small businesses. We finance over 60 categories of
commercial equipment important to our end user customers,
including copiers, telecommunications equipment, water
filtration systems, computers, and certain commercial and
industrial equipment. Our average lease transaction was
approximately $9,000 at December 31, 2005, and we typically
do not exceed $200,000 for any single lease transaction. This
segment of the equipment leasing market is commonly known in the
industry as the small-ticket segment. We access our end user
customers through origination sources comprised of our existing
network of over 9,200 independent commercial equipment dealers
and, to a lesser extent, through relationships with lease
brokers and direct solicitation of our end user customers. We
use a highly efficient telephonic direct sales model to market
to our origination sources. Through these origination sources,
we are able to deliver convenient and flexible equipment
financing to our end user customers. Our typical financing
transaction involves a non-cancelable, full-payout lease with
payments sufficient to recover the purchase price of the
underlying equipment plus an expected profit. As of
December 31, 2005, we serviced approximately 103,000 active
equipment leases having a total original equipment cost of
$932.8 million for approximately 82,000 end user customers.
The small-ticket equipment leasing market is highly fragmented.
We estimate that there are up to 75,000 independent equipment
dealers who sell the types of equipment we finance. We focus
primarily on the segment of the market comprised of the small
and mid-size independent equipment dealers. We believe this
segment is underserved because: 1) the large commercial
finance companies and large commercial banks typically
concentrate their efforts on marketing their products and
services directly to equipment manufacturers and larger
distributors, rather than the independent equipment dealers; and
2) many smaller commercial finance companies and regional
banking institutions have not developed the systems and
infrastructure required to adequately service these equipment
dealers on high volume, low-balance transactions. We focus on
establishing our relationships with independent equipment
dealers to meet their need for high quality, convenient
point-of-sale
lease financing
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programs. We provide equipment dealers with the ability to offer
our lease financing and related services to their customers as
an integrated part of their selling process, allowing them to
increase their sales and provide better customer service. We
believe our personalized service approach appeals to the
independent equipment dealer by providing each dealer with a
single point of contact to access our flexible lease programs,
obtain rapid credit decisions and receive prompt payment of the
equipment cost. Our fully integrated account origination
platform enables us to solicit, process and service a large
number of low balance financing transactions. From our inception
in 1997 to December 31, 2005, we processed approximately
409,000 lease applications and originated nearly 179,000 new
leases.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in the state of
Delaware on June 16, 1997. On August 5, 2003, we
incorporated Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. After the reorganization, Marlin Leasing Corporation
remains in existence as our primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share
resulting in net proceeds to us, after payment of underwriting
discounts and commissions but before other offering costs, of
approximately $46.6 million. We did not receive any
proceeds from the shares sold by the selling shareholders.
Competitive
Strengths
We believe several characteristics may distinguish us from our
competitors, including our:
Multiple sales origination channels. We use
multiple sales origination channels to effectively penetrate the
highly diversified and fragmented small-ticket equipment leasing
market. Our direct origination channels, which typically
account for approximately 67% of our originations, involve:
1) establishing relationships with independent equipment
dealers; 2) securing endorsements from national equipment
manufacturers and distributors to become the preferred lease
financing source for the independent dealers that sell their
equipment; and 3) soliciting our existing end user customer
base for repeat business. Our indirect origination channels
which typically account for approximately 33% of our
originations and consist of our relationships with brokers and
certain equipment dealers who refer transactions to us for a fee
or sell leases to us that they originated.
Highly effective account origination
platform. Our telephonic direct marketing
platform offers origination sources a high level of personalized
service through our team of 103 sales account executives, each
of whom acts as the single point of contact for his or her
origination sources. Our business model is built on a real-time,
fully integrated customer information database and a contact
management and telephony application that facilitate our account
solicitation and servicing functions.
Comprehensive credit process. We seek to
effectively manage credit risk at the origination source as well
as at the transaction and portfolio levels. Our comprehensive
credit process starts with the qualification and ongoing review
of our origination sources. Once the origination source is
approved, our credit process focuses on analyzing and
underwriting the end user customer and the specific financing
transaction, regardless of whether the transaction was
originated through our direct or indirect origination channels.
Portfolio diversification. As of
December 31, 2005, no single end user customer accounted
for more than 0.05% of our portfolio and leases from our largest
origination source accounted for only 1.5% of our portfolio. The
portfolio is also diversified nationwide with the largest state
portfolios existing in California (13%) and Florida (10%).
Fully integrated information management
system. Our business integrates information
technology solutions to optimize the sales origination, credit,
collection and account servicing functions. Throughout a
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transaction, we collect a significant amount of information on
our origination sources and end user customers. The
enterprise-wide integration of our systems enables data
collected by one group, such as credit, to be used by other
groups, such as sales or collections, to better perform their
functions.
Sophisticated collections environment. Our
centralized collections department is structured to collect
delinquent accounts, minimize credit losses and collect post
charge-off recovery dollars. Our collection strategy generally
utilizes a life-cycle approach, where a single collector handles
an account through its entire delinquency period. This approach
allows the collector to consistently communicate with the end
user customers decision maker to ensure that delinquent
customers are providing consistent information. In addition the
collections department utilizes specialist collectors who focus
on delinquent late fees, property taxes, bankrupt and large
balance accounts.
Access to multiple funding sources. We have
established and maintained diversified funding capacity through
multiple facilities with several national credit providers. Our
proven ability to consistently access funding at competitive
rates through various economic cycles provides us with the
liquidity necessary to manage our business.
Experienced management team. Our executive
officers average more than 15 years of experience in
providing financing solutions primarily to small businesses. As
we have grown, our founders have expanded the management team
with a group of successful, seasoned executives.
Disciplined
Growth Strategy
Our primary objective is to enhance our current position as a
provider of equipment financing solutions primarily to small
businesses by pursuing a strategy focused on organic growth
initiatives. We believe we can create additional lease financing
opportunities by increasing our new origination source
relationships and further penetrating our existing origination
sources. We expect to do this by adding new sales account
executives and continuing to train and season our existing sales
force. We also believe that we can increase originations in
certain regions of the country by establishing offices in
identified strategic locations. Other regional offices are
located in or near Atlanta, Georgia, Chicago, Illinois and
Denver, Colorado. We expect to open our fourth regional office
in Salt Lake City, Utah during 2006. Our Salt Lake City office
would also house Marlin Business Bank (in organization) subject
to regulatory approval and becoming operational.
Asset
Originations
Overview of Origination Process. We access our
end user customers through our extensive network of independent
equipment dealers and, to a lesser extent, through relationships
with lease brokers and the direct solicitation of our end user
customers. We use a highly efficient telephonic direct sales
model to market to our origination sources. Through these
sources, we are able to deliver convenient and flexible
equipment financing to our end user customers.
Our origination process begins with our database of thousands of
origination source prospects located throughout the United
States. We developed and continually update this database by
purchasing marketing data from third parties, such as
Dun & Bradstreet, Inc., by joining industry
organizations and by attending equipment trade shows. The
independent equipment dealers we target typically have had
limited access to lease financing programs, as the traditional
providers of this financing generally have concentrated their
efforts on the equipment manufacturers and larger distributors.
The prospects in our database are systematically distributed to
our sales force for solicitation and further data collection.
Sales account executives access prospect information and related
marketing data through our contact management software. This
contact management software enables the sales account executives
to sort their origination sources and prospects by any data
field captured, schedule calling campaigns, fax marketing
materials, send
e-mails,
produce correspondence and documents, manage their time and
calendar, track activity, recycle leads and review management
reports. We have also integrated predictive dialer technology
into the contact management system, enabling our sales account
executives to create efficient calling campaigns to any subset
of the origination sources in the database.
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Once a sales account executive converts a prospect into an
active relationship, that sales account executive becomes the
origination sources single point of contact for all
dealings with us. This approach, which is a cornerstone of our
origination platform, offers our origination sources a personal
relationship through which they can address all of their
questions and needs, including matters relating to pricing,
credit, documentation, training and marketing. This single point
of contact approach distinguishes us from our competitors, many
of whom require the origination sources to interface with
several people in various departments, such as sales support,
credit and customer service, for each application submitted.
Since many of our origination sources have little or no prior
experience in using lease financing as a sales tool, our
personalized, single point of contact approach facilitates the
leasing process for them. Other key aspects of our platform
aimed at facilitating the lease financing process for the
origination sources include:
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ability to submit applications via fax, phone, Internet, mail or
e-mail;
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credit decisions generally within two hours;
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one-page, plain-English form of lease for transactions under
$50,000;
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overnight or ACH funding to the origination source once all
lease conditions are satisfied;
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value-added portfolio reports, such as application status and
volume of lease originations;
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on-site or
telephonic training of the equipment dealers sales force
on leasing as a sales tool; and
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custom leases and programs.
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Of our 296 total employees as of December 31, 2005, we
employed 103 sales account executives, each of whom receives a
base salary and earns commissions based on their lease
originations. We also employed six employees dedicated to
marketing as of December 31, 2005.
Sales Origination Channels. We use direct and
indirect sales origination channels to effectively penetrate a
multitude of origination sources in the highly diversified and
fragmented small-ticket equipment leasing market. All sales
account executives use our telephonic direct marketing sales
model to solicit these origination sources and end user
customers.
Direct Channels. Our direct sales origination
channels, which typically account for approximately 67% of our
originations, involve:
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Independent equipment dealer
solicitations. This origination channel focuses
on soliciting and establishing relationships with independent
equipment dealers in a variety of equipment categories located
across the United States. Our typical independent equipment
dealer has less than $2.0 million in annual revenues and
fewer than 20 employees. Service is a key determinant in
becoming the preferred provider of financing recommended by
these equipment dealers.
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National account endorsements. This channel
focuses on securing endorsements from national equipment
manufacturers and distributors and then leveraging those
endorsements to become the preferred lease financing source for
the independent dealers that sell the manufacturers or
distributors equipment. Once the national account team
receives an endorsement, the equipment dealers that sell the
endorsing manufacturers or distributors products are
contacted by our sales account executives in the independent
equipment dealer channel. This allows us to quickly and
efficiently leverage the endorsements into new business
opportunities with many new equipment dealers located nationwide.
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End user customer solicitations. This channel
focuses on soliciting our existing portfolio of over 82,000 end
user customers for additional equipment leasing opportunities.
We view our existing end user customers as an excellent source
for additional business for various reasons, including that we
already have their credit information and lease payment
histories and they have already shown a propensity to finance
their equipment.
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Indirect Channels. Our indirect origination
channels which typically account for approximately 33% of our
originations and consist of our relationships with lease brokers
and certain equipment dealers who refer end user customer
transactions to us for a fee or sell us leases that they
originated with an end user customer.
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We conduct our own independent credit analysis on each end user
customer in an indirect lease transaction. We have written
agreements with most of our indirect origination sources whereby
they provide us with certain representations and warranties
about the underlying lease transaction. The origination sources
in our indirect channels generate leases that are similar to our
direct channels. We view these indirect channels as an
opportunity to extend our lease origination capabilities through
relationships with smaller originators who have limited access
to the capital markets and funding.
Sales
Recruiting, Training and Mentoring
Sales account executive candidates are screened for previous
sales experience and communication skills, phone presence and
teamwork orientation. Due to our extensive training program and
systematized sales approach, we do not regard previous leasing
or finance industry experience as being necessary. Our location
of offices near large urban centers gives us access to large
numbers of qualified candidates.
Each new sales account executive undergoes up to a
60-day
comprehensive training program shortly after he or she is hired.
The training program covers the fundamentals of lease finance
and introduces the sales account executive to our origination
and credit policies and procedures. It also covers technical
training on our databases and our information management tools
and techniques. At the end of the program, the sales account
executives are tested to ensure they meet our standards. In
addition to our formal training program, sales account
executives receive extensive
on-the-job
training and mentoring. All sales account executives sit in
groups, providing newer sales account executives the opportunity
to learn first hand from their more senior peers. In addition,
our sales managers frequently monitor and coach a sales account
executive during phone calls, enabling the individual to receive
immediate feedback. Our sales account executives also receive
continuing education and training, including periodic detailed
presentations on our contact management system, underwriting
guidelines and sales enhancement techniques.
Product
Offerings
Equipment leases. The type of lease products
offered by each of our sales origination channels share common
characteristics, and we generally underwrite our leases using
the same criteria. We seek to reduce the financial risk
associated with our lease transactions through the use of full
pay-out leases. A full pay-out lease provides that the
non-cancelable rental payments due during the initial lease term
are sufficient to recover the purchase price of the underlying
equipment plus an expected profit. The initial non-cancelable
lease term is equal to or less than the equipments
economic life. Initial terms generally range from 36 to
60 months. At December 31, 2005, the average original
term of the leases in our portfolio was approximately
46 months, and we had personal guarantees on approximately
47% of our leases. The remaining terms and conditions of our
leases are substantially similar, generally requiring end user
customers to, among other things:
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address any maintenance or service issues directly with the
equipment dealer or manufacturer;
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insure the equipment against property and casualty loss;
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pay or reimburse the Company for all taxes associated with the
equipment;
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use the equipment only for business purposes; and
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make all scheduled payments regardless of the performance of the
equipment.
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We charge late fees when appropriate throughout the term of the
lease. Our standard lease contract provides that in the event of
a default, we can require payment of the entire balance due
under the lease through the initial term and can seize and
remove the equipment for subsequent sale, refinancing or other
disposal at our discretion, subject to any limitations imposed
by law.
At the time of application, end user customers select a purchase
option that will allow them to purchase the equipment at the end
of the contract term for either one dollar, the fair market
value of the equipment or a specified percentage of the original
equipment cost. We seek to realize our recorded residual in
leased equipment at the end of the initial lease term by
collecting the purchase option price from the end user customer,
re-marketing the
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equipment in the secondary market or receiving additional rental
payments pursuant to the contracts automatic renewal
provision.
Property Insurance on Leased Equipment. Our
lease agreements specifically require the end user customers to
obtain all-risk property insurance in an amount equal to the
replacement value of the equipment and to designate us as the
loss payee on the policy. If the end user customer already has a
commercial property policy for its business, it can satisfy its
obligation under the lease by delivering a certificate of
insurance that evidences us as a loss payee under that policy.
At December 31, 2005, approximately 58% of our end user
customers insured the equipment under their existing policies.
For the others, we offer an insurance product through a master
property insurance policy underwritten by a third party national
insurance company that is licensed to write insurance under our
program in all 50 states and the District of Columbia. This
master policy names us as the beneficiary for all of the
equipment insured under the policy and provides all-risk
coverage for the replacement cost of the equipment.
In May 2000, we established AssuranceOne, Ltd., our
Bermuda-based, wholly owned captive insurance subsidiary, to
enter into a reinsurance contract with the issuer of the master
property insurance policy. Under this contract, AssuranceOne
reinsures 100% of the risk under the master policy, and the
issuing insurer pays AssuranceOne the policy premiums, less a
ceding fee based on annual net premiums written. The reinsurance
contract expires in May 2006.
Portfolio
Overview
At December 31, 2005, we had 103,278 active leases in our
portfolio, representing an aggregate minimum lease payments
receivable of $660.9 million. With respect to our portfolio
at December 31, 2005:
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the average original lease transaction was $9,032, with an
average remaining balance of $6,401;
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the average original lease term was 46 months;
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our active leases were spread among 82,479 different end user
customers, with the largest single end user customer accounting
for only 0.05% of the aggregate minimum lease payments
receivable;
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over 74.5% of the aggregate minimum lease payments receivable
were with end user customers who had been in business more than
five years;
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the portfolio was spread among 10,927 origination sources, with
the largest source accounting for only 1.5% of the aggregate
minimum lease payments receivable, and our nine largest
origination sources accounting for only 7.3% of the aggregate
minimum lease payments receivable;
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there were 70 different equipment categories financed, with the
largest categories set forth below, as a percentage of the
December 31, 2005 aggregate minimum lease payments
receivable:
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Equipment Category
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Percentage
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Copiers
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22
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%
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Commercial & Industrial
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7
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%
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Telecommunications equipment
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7
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%
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Computers
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6
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%
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Closed Circuit TV security systems
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6
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%
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Restaurant equipment
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6
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%
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Water filtration systems
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5
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%
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Security systems
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5
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%
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Automotive (no titled vehicles)
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4
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%
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Computer software
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4
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Cash registers
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3
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%
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Medical
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3
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%
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All others (none more than 2.0%)
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22
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%
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we had leases outstanding with end user customers located in all
50 states and the District of Columbia, with our largest
states of origination set forth below, as a percentage of the
December 31, 2005 aggregate minimum lease payments
receivable:
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|
State
|
|
Percentage
|
|
|
California
|
|
|
13
|
%
|
Florida
|
|
|
10
|
%
|
Texas
|
|
|
8
|
%
|
New York
|
|
|
7
|
%
|
New Jersey
|
|
|
6
|
%
|
Pennsylvania
|
|
|
4
|
%
|
Georgia
|
|
|
4
|
%
|
North Carolina
|
|
|
3
|
%
|
Massachusetts
|
|
|
3
|
%
|
Illinois
|
|
|
3
|
%
|
Ohio
|
|
|
3
|
%
|
All others (none more than 2.5%)
|
|
|
36
|
%
|
Information
Management
A critical element of our business operations is our ability to
collect detailed information on our origination sources and end
user customers at all stages of a financing transaction and to
effectively manage that information so that it can be used
across all aspects of our business. Our information management
system integrates a number of technologies to optimize our sales
origination, credit, collection and account servicing functions.
Applications used across our business include:
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|
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a sales information database that: 1) summarizes
vital information on our prospects, origination sources,
competitors and end user customers compiled from third party
data, trade associations, manufacturers, transaction information
and data collected through the sales solicitation process;
2) systematically analyzes call activity patterns to
improve outbound calling campaigns; and 3) produces
detailed reports using a variety of data fields to evaluate the
performance and effectiveness of our sales account executives;
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|
|
|
a credit performance database that stores extensive
portfolio performance data on our origination sources and end
user customers. Our credit staff has on-line access to this
information to monitor origination sources, end user customer
exposure, portfolio concentrations and trends and other credit
performance indicators;
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|
|
predictive auto dialer technology that is used in both
the sales origination and collection processes to improve the
efficiencies by which these groups make their thousands of daily
phone calls;
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|
|
|
imaging technology that enables our employees to retrieve
at their desktops all documents evidencing a lease transaction,
thereby further improving our operating efficiencies and service
levels; and
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|
|
|
an integrated voice response unit that enables our end
user customers the opportunity to quickly and efficiently obtain
certain information from us about their account.
|
Our information technology platform infrastructure is industry
standard and fully scalable to support future growth. Our
systems are backed up nightly and a full set of data tapes is
sent to an off-site storage provider weekly. In addition, we
have contracted with a third party for disaster recovery
services.
Credit
Underwriting
Credit underwriting is separately performed and managed apart
from asset origination. Each sales origination channel has one
or more credit teams supporting it. Our credit teams are located
in our New Jersey headquarters and each of our regional offices.
At December 31, 2005, we had 33 credit analysts managed by
7 credit managers having an average of nine years of experience.
Each credit analyst is measured monthly against a discrete set
of
8
performance variables, including decision turnaround time,
approval and loss rates, and adherence to our underwriting
policies and procedures.
Our typical financing transaction involves three parties: the
origination source, the end user customer and us. The key
elements of our comprehensive credit underwriting process
include the pre-qualification and ongoing review of origination
sources, the performance of due diligence procedures on each end
user customer and the monitoring of overall portfolio trends and
underwriting standards.
Pre-qualification and ongoing review of origination
sources. Each origination source must be
pre-qualified before we will accept applications from it. The
origination source must submit a source profile, which we use to
review the origination sources credit information and
check references. Over time, our database has captured credit
profiles on thousands of origination sources. We regularly track
all applications and lease originations by source, assessing
whether the origination source has a high application decline
rate and analyzing the delinquency rates on the leases
originated through that source. Any unusual situations that
arise involving the origination source are noted in the
sources file. Each origination source is reviewed on a
regular basis using portfolio performance statistics as well as
any other information noted in the sources file. We will
place an origination source on watch status if its portfolio
performance statistics are consistently below our expectations.
If the origination sources statistics do not improve in a
timely manner, we often stop accepting applications from that
origination source.
End user customer review. Each end user
customers application is reviewed using our rules-based
set of underwriting guidelines that focus on commercial and
consumer credit data. These underwriting guidelines have been
developed and refined by our management team based on their
experience in extending credit to small businesses. The
guidelines are reviewed and revised as necessary by our Senior
Credit Committee, which is comprised of our CEO, President,
General Counsel, Chief Credit Officer and Vice President of
Collections. Our underwriting guidelines require a thorough
credit investigation of the end user customer, which typically
includes an analysis of the personal credit of the owner, who
often guarantees the transaction, and verification of the
corporate name and location. The credit analyst may also
consider other factors in the credit decision process, including:
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|
|
|
|
length of time in business;
|
|
|
|
confirmation of actual business operations and ownership;
|
|
|
|
management history, including prior business experience;
|
|
|
|
size of the business, including the number of employees and
financial strength of the business;
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|
|
|
third-party commercial reports;
|
|
|
|
legal structure of business; and
|
|
|
|
fraud indicators.
|
Transactions over $75,000 receive a higher level of scrutiny,
often including review of financial statements or tax returns
and review of the business purpose of the equipment to the end
user customer.
Within two hours of receipt of the application, the credit
analyst is usually ready to render a credit decision. If there
is insufficient information to render a credit decision, a
request for more information will be made by the credit analyst.
Credit approvals are valid for a
90-day
period from the date of initial approval. In the event that the
funding does not occur within the
90-day
initial approval period, a re-approval may be issued after the
credit analyst has reprocessed all the relevant credit
information to determine that the creditworthiness of the
applicant has not deteriorated.
In most instances after a lease is approved, a phone audit with
the end user customer is performed by us, or in some instances
by the origination source, prior to funding the transaction. The
purpose of this audit is to verify information on the credit
application, review the terms and conditions of the lease
contract, confirm the customers satisfaction with the
equipment, and obtain additional billing information. We will
delay paying the origination source for the equipment if the
credit analyst uncovers any material issues during the phone
audit.
9
Monitoring of portfolio trends and underwriting
standards. Credit personnel use our databases and
our information management tools to monitor the characteristics
and attributes of our overall portfolio. Reports are produced to
analyze origination source performance, end user customer
delinquencies, portfolio concentrations, trends, and other
related indicators of portfolio performance. Any significant
findings are presented to the Senior Credit Committee for review
and action.
Our internal credit audit and surveillance team is responsible
for ensuring that the credit department adheres to all
underwriting guidelines. The audits produced by this department
are designed to monitor our origination sources, fraud
indicators, regional office operations, appropriateness of
exceptions to credit policy and documentation quality.
Management reports are regularly generated by this department
detailing the results of these auditing activities.
Account
Servicing
We service all of the leases we originate. Account servicing
involves a variety of functions performed by numerous work
groups, including:
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|
|
|
|
entering the lease into our accounting and billing system;
|
|
|
|
preparing the invoice information;
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|
|
|
filing Uniform Commercial Code financing statements on leases in
excess of $25,000;
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|
|
|
paying the equipment dealers for leased equipment;
|
|
|
|
billing, collecting and remitting sales, use and property taxes
to the taxing jurisdictions;
|
|
|
|
assuring compliance with insurance requirements; and
|
|
|
|
providing customer service to the leasing customers.
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Our integrated lease processing and accounting systems automate
many of the functions associated with servicing high volumes of
small-ticket leasing transactions.
Collection
Process
Our centralized collections department is structured to collect
delinquent accounts, minimize credit losses and collect
post-default recovery dollars. Our collection strategy generally
utilizes a life-cycle approach, under which a single collector
handles an account through an accounts entire period of
delinquency. This approach allows the collector to consistently
communicate with the end user customers decision-maker to
ensure that delinquent customers are providing consistent
information. It also creates account ownership by the
collectors, allowing us to evaluate them based on the
delinquency level of their assigned accounts. The collectors are
individually accountable for their results and a significant
portion of their compensation is based on the delinquency
performance of their accounts.
Our collectors are grouped into teams that support a single
sales origination channel. By supporting a single channel, the
collector is able to gain knowledge about the origination
sources and the types of transactions and other characteristics
within that channel. Our collection activities begin with phone
contact when a payment becomes ten days past due and continue
throughout the delinquency period. We utilize a predictive
dialer that automates outbound telephone dialing. The dialer is
used to focus on and reduce the number of accounts that are
between ten and 30 days delinquent. A series of collection
notices are sent once an account reaches the 30-, 60-, 75- and
90-day
delinquency stages. Collectors input notes directly into our
servicing system, enabling them to monitor the status of problem
accounts and promptly take any necessary actions. In addition,
late charges are assessed when a leasing customer fails to remit
payment on a lease by its due date. If the lease continues to be
delinquent, we may exercise our remedies under the terms of the
contract, including acceleration of the entire lease balance,
litigation
and/or
repossession.
10
In addition, the collections department employs specialist
collectors who focus on delinquent late fees, property taxes,
bankrupt and large balance accounts. Bankrupt accounts are
assigned to a bankruptcy paralegal and accounts with more than
$30,000 outstanding are assigned to more experienced collection
personnel.
After an account becomes 120 days or more past due, it is
charged-off and referred to our internal recovery group,
consisting of a lawyer and a team of paralegals. The group
utilizes several resources in an attempt to maximize recoveries
on charged-off accounts, including: 1) initiating
litigation against the end user customer and any personal
guarantor using our internal legal staff; 2) referring the
account to an outside law firm or collection agency;
and/or
3) repossessing and remarketing the equipment through third
parties.
At the end of the initial lease term, a customer may return the
equipment, continue leasing the equipment, or purchase the
equipment for the amount set forth in the purchase option
granted to the customer. The collections department maintains a
team of employees who seek to realize our recorded residual in
the leased equipment at the end of the lease term.
Marlin Business Bank. In October 2005 we filed
an application for an Industrial Bank Charter with the FDIC and
the State of Utah Department of Financial Institutions to
form Marlin Business Bank (Bank). Subject to
regulatory approvals, we plan to begin operating the Bank in
2006 to further diversify our funding by issuing FDIC insured
deposits. Marlin Business Bank will operate from our Salt Lake
City office.
The Bank will be wholly owned by Marlin Business Services Corp.
In addition to further diversifying our funding sources, over
time the Bank may add other product offerings to better serve
our customer base. The Bank will be subject to FDIC and Utah
Department of Financial Institutions rules and regulations.
Marlin will provide the necessary capital to maintain the Bank
at well-capitalized status as defined by banking
regulations. Initial cash capital requirements are expected to
be $15.0 million.
Initially FDIC deposits will be raised from the brokered
certificates of deposit market. All deposits will be transacted
via telephone, mail,
and/or ACH
and wire transfer. There will be limited if any face to face
interaction with deposit and lease/loan customers in the
Banks office. The Banks initial asset product
offering will consist of small ticket leasing similar to what we
originate currently.
We have assembled a team of experienced bank managers and
directors to provide leadership for the Bank. Many of the
operational aspects of the Bank will be outsourced to Marlin
Leasing Corp.
Regulation
Although most states do not directly regulate the commercial
equipment lease financing business, certain states require
lenders and finance companies to be licensed, impose limitations
on interest rates and other charges, mandate disclosure of
certain contract terms and constrain collection practices and
remedies. Under certain circumstances, we also may be required
to comply with the Equal Credit Opportunity Act and the Fair
Credit Reporting Act. These acts require, among other things,
that we provide notice to credit applicants of their right to
receive a written statement of reasons for declined credit
applications. The Telephone Consumer Protection Act
(TCPA) of 1991 and similar state statutes or rules
that govern telemarketing practices are generally not applicable
to our
business-to-business
calling platform; however, we are subject to the sections of the
TCPA that regulate
business-to-business
facsimiles.
Our insurance operations are subject to various types of
governmental regulation. We are required to maintain insurance
producer licenses in states where we sell our insurance product.
Our wholly owned insurance company subsidiary, AssuranceOne
Ltd., is a Class 1 Bermuda insurance company and, as such,
is subject to the Insurance Act 1978 of Bermuda, as amended, and
related regulations.
Subject to our application for an Industrial Bank Charter
receiving all regulatory approvals, Marlin Business Bank will be
subject to FDIC and Utah Department of Financial Institutions
banking rules and regulations.
We believe that we currently are in compliance with all material
statutes and regulations that are applicable to our business.
11
Competition
We compete with a variety of equipment financing sources that
are available to small businesses, including:
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|
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|
|
national, regional and local finance companies that provide
leases and loan products;
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|
financing through captive finance and leasing companies
affiliated with major equipment manufacturers;
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|
corporate credit cards; and
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|
|
commercial banks, savings and loan associations and credit
unions.
|
Our principal competitors in the highly fragmented and
competitive small-ticket equipment leasing market are smaller
finance companies and local and regional banks. Other providers
of equipment lease financing include Key Corp, De Lage
Landen Financial, GE Commercial Equipment Finance and Wells
Fargo Bank, National Association. Many of these companies are
substantially larger than we are and have significantly greater
financial, technical and marketing resources than we do. While
these larger competitors provide lease financing to the
marketplace, many of them are not our primary competitors given
that our average transaction size is relatively small and that
our marketing focus is on independent equipment dealers and
their end user customers. Nevertheless, there can be no
assurances that these providers of equipment lease financing
will not increase their focus on our market and begin to compete
more directly with us.
Some of our competitors have a lower cost of funds and access to
funding sources that are not available to us. A lower cost of
funds could enable a competitor to offer leases with yields that
are less than the yields we use to price our leases, which might
force us to lower our yields or lose lease origination volume.
In addition, certain of our competitors may have higher risk
tolerances or different risk assessments, which could enable
them to establish more origination sources and end user customer
relationships and increase their market share. We compete on the
quality of service we provide to our origination sources and end
user customers. We have and will continue to encounter
significant competition.
Employees
As of December 31, 2005, we employed 296 people. None of
our employees are covered by a collective bargaining agreement
and we have never experienced any work stoppages. We work hard
to build strong relations with our employees.
We are a Pennsylvania corporation with our principal executive
offices located at 300 Fellowship Road, Mount Laurel, NJ
08054. Our telephone number is
(888) 479-9111
and our web site address is www.marlincorp.com. We make
available free of charge through the Investor Relations section
of our web site our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission. We include
our web site address in this Annual Report on
Form 10-K/A
only as an inactive textual reference and do not intend it to be
an active link to our web site.
Set forth below and elsewhere in this report and in other
documents we file with the Securities and Exchange Commission
are risks and uncertainties that could cause our actual results
to differ materially from the results contemplated by the
forward-looking statements contained in this report and other
periodic statements we make.
If we cannot obtain external financing, we may be unable to
fund our operations. Our business requires a
substantial amount of cash to operate. Our cash requirements
will increase if our lease originations increase. We
historically have obtained a substantial amount of the cash
required for operations through a variety of external financing
sources, such as borrowings under our revolving bank facility,
financing of leases through commercial paper (CP)
conduit warehouse facilities, and term note securitizations. A
failure to renew or increase the funding commitment under our
existing CP conduit warehouse facilities or add new CP conduit
warehouse facilities could affect our ability to refinance
leases originated through our revolving bank facility and,
accordingly, our ability to fund and originate new leases. An
inability to complete term note securitizations would result in
our inability to
12
refinance amounts outstanding under our CP conduit warehouse
facilities and revolving bank facility and would also negatively
impact our ability to originate and service new leases.
Our ability to complete CP conduit transactions and term note
securitizations, as well as obtain renewals of lenders
commitments, is affected by a number of factors, including:
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|
|
conditions in the securities and asset-backed securities markets;
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|
|
conditions in the market for commercial bank liquidity support
for CP programs;
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|
|
|
compliance of our leases with the eligibility requirements
established in connection with our CP conduit warehouse
facilities and term note securitizations, including the level of
lease delinquencies and defaults; and
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|
|
our ability to service the leases.
|
We are and will continue to be dependent upon the availability
of credit from these external financing sources to continue to
originate leases and to satisfy our other working capital needs.
We may be unable to obtain additional financing on acceptable
terms or at all, as a result of prevailing interest rates or
other factors at the time, including the presence of covenants
or other restrictions under existing financing arrangements. If
any or all of our funding sources become unavailable on
acceptable terms or at all, we may not have access to the
financing necessary to conduct our business, which would limit
our ability to fund our operations. We do not have long term
commitments from any of our current funding sources. As a
result, we may be unable to continue to access these or other
funding sources. In the event we seek to obtain equity
financing, our shareholders may experience dilution as a result
of the issuance of additional equity securities. This dilution
may be significant depending upon the amount of equity
securities that we issue and the prices at which we issue such
securities.
Our financing sources impose covenants, restrictions and
default provisions on us, which could lead to termination of our
financing facilities, acceleration of amounts outstanding under
our financing facilities and our removal as
servicer. The legal agreements relating to our
revolving bank facility, our CP conduit warehouse facilities and
our term note securitizations contain numerous covenants,
restrictions and default provisions relating to, among other
things, maximum lease delinquency and default levels, a minimum
net worth requirement and a maximum debt to equity ratio. In
addition, a change in our Chief Executive Officer or President
is an event of default under our revolving bank facility and CP
conduit warehouse facilities unless we hire a replacement
acceptable to our lenders within 90 days. Such a change is
also an immediate event of servicer termination under our term
note securitizations. A merger or consolidation with another
company in which we are not the surviving entity, likewise, is
an event of default under our financing facilities. Further, our
revolving bank facility and CP conduit warehouse facilities
contain cross default provisions whereby certain defaults under
one facility would also be an event of default under the other
facilities. An event of default under the revolving bank
facility or a CP conduit warehouse facility could result in
termination of further funds being made available under these
facilities. An event of default under any of our facilities
could result in an acceleration of amounts outstanding under the
facilities, foreclosure on all or a portion of the leases
financed by the facilities
and/or our
removal as a servicer of the leases financed by the facility.
This would reduce our revenues from servicing and, by delaying
any cash payment allowed to us under the financing facilities
until the lenders have been paid in full, reduce our liquidity
and cash flow.
If we inaccurately assess the creditworthiness of our end
user customers, we may experience a higher number of lease
defaults, which may restrict our ability to obtain additional
financing and reduce our earnings. We specialize
in leasing equipment to small businesses. Small businesses may
be more vulnerable than large businesses to economic downturns,
typically depend upon the management talents and efforts of one
person or a small group of persons and often need substantial
additional capital to expand or compete. Small business leases,
therefore, may entail a greater risk of delinquencies and
defaults than leases entered into with larger, more creditworthy
leasing customers. In addition, there is typically only limited
publicly available financial and other information about small
businesses and they often do not have audited financial
statements. Accordingly, in making credit decisions, our
underwriting guidelines rely upon the accuracy of information
about these small businesses obtained from the small business
owner and/or
third party sources, such as credit reporting agencies. If the
information we obtain from small business owners
and/or third
party sources is incorrect, our ability to make appropriate
credit decisions will be
13
impaired. If we inaccurately assess the creditworthiness of our
end user customers, we may experience a higher number of lease
defaults and related decreases in our earnings.
Defaulted leases and certain delinquent leases also do not
qualify as collateral against which initial advances may be made
under our revolving bank facility or CP conduit warehouse
facilities, and we cannot include them in our term note
securitizations. An increase in delinquencies or lease defaults
could reduce the funding available to us under our facilities
and could adversely affect our earnings, possibly materially. In
addition, increasing rates of delinquencies or charge-offs could
result in adverse changes in the structure of our future
financing facilities, including increased interest rates payable
to investors and the imposition of more burdensome covenants and
credit enhancement requirements. Any of these occurrences may
cause us to experience reduced earnings.
If we are unable to effectively manage any future growth, we
may suffer material operating losses. We have
grown our lease originations and overall business significantly
since we commenced operations. However, our ability to continue
to increase originations at a comparable rate depends upon our
ability to implement our disciplined growth strategy and upon
our ability to evaluate, finance and service increasing volumes
of leases of suitable yield and credit quality. Accomplishing
such a result on a cost-effective basis is largely a function of
our marketing capabilities, our management of the leasing
process, our credit underwriting guidelines, our ability to
provide competent, attentive and efficient servicing to our end
user customers, our access to financing sources on acceptable
terms and our ability to attract and retain high quality
employees in all areas of our business.
Our future success will be dependent upon our ability to manage
growth. Among the factors we need to manage are the training,
supervision and integration of new employees, as well as the
development of infrastructure, systems and procedures within our
origination, underwriting, servicing, collections and financing
functions in a manner which enables us to maintain higher volume
in originations. Failure to effectively manage these and other
factors related to growth in originations and our overall
operations may cause us to suffer material operating losses.
If losses from leases exceed our allowance for credit losses,
our operating income will be reduced or
eliminated. In connection with our financing of
leases, we record an allowance for credit losses to provide for
estimated losses. Our allowance for credit losses is based on,
among other things, past collection experience, industry data,
lease delinquency data and our assessment of prospective
collection risks. Determining the appropriate level of the
allowance is an inherently uncertain process and therefore our
determination of this allowance may prove to be inadequate to
cover losses in connection with our portfolio of leases. Factors
that could lead to the inadequacy of our allowance may include
our inability to effectively manage collections, unanticipated
adverse changes in the economy or discrete events adversely
affecting specific leasing customers, industries or geographic
areas. Losses in excess of our allowance for credit losses would
cause us to increase our provision for credit losses, reducing
or eliminating our operating income.
If we cannot effectively compete within the equipment leasing
industry, we may be unable to increase our revenues or maintain
our current levels of operations. The business of
small-ticket equipment leasing is highly fragmented and
competitive. Many of our competitors are substantially larger
and have considerably greater financial, technical and marketing
resources than we do. For example, some competitors may have a
lower cost of funds and access to funding sources that are not
available to us. A lower cost of funds could enable a competitor
to offer leases with yields that are lower than those we use to
price our leases, potentially forcing us to decrease our yields
or lose origination volume. In addition, certain of our
competitors may have higher risk tolerances or different risk
assessments, which could allow them to establish more
origination source and end user customer relationships and
increase their market share. There are few barriers to entry
with respect to our business and, therefore, new competitors
could enter the business of small-ticket equipment leasing at
any time. The companies that typically provide financing for
large-ticket or middle-market transactions could begin competing
with us on small-ticket equipment leases. If this occurs, or we
are unable to compete effectively with our competitors, we may
be unable to sustain our operations at their current levels or
generate revenue growth.
If we cannot maintain our relationships with origination
sources, our ability to generate lease transactions and related
revenues may be significantly impeded. We have
formed relationships with thousands of origination sources,
comprised primarily of independent equipment dealers and, to a
lesser extent, lease brokers. We rely on these relationships to
generate lease applications and originations. Most of these
relationships are not formalized in written agreements and those
that are formalized by written agreements are typically
terminable at will. Our typical
14
relationship does not commit the origination source to provide a
minimum number of lease transactions to us nor does it require
the origination source to direct all of its lease transactions
to us. The decision by a significant number of our origination
sources to refer their leasing transactions to another company
could impede our ability to generate lease transactions and
related revenues.
If interest rates change significantly, we may be subject to
higher interest costs on future term note securitizations and we
may be unable to effectively hedge our variable rate borrowings,
which may cause us to suffer material
losses. Because we generally fund our leases
through a revolving bank facility, CP conduit warehouse
facilities and term note securitizations, our margins could be
reduced by an increase in interest rates. Each of our leases is
structured so that the sum of all scheduled lease payments will
equal the cost of the equipment to us, less the residual, plus a
return on the amount of our investment. This return is known as
the yield. The yield on our leases is fixed because the
scheduled payments are fixed at the time of lease origination.
When we originate or acquire leases, we base our pricing in part
on the spread we expect to achieve between the yield on each
lease and the effective interest rate we expect to pay when we
finance the lease. To the extent that a lease is financed with
variable rate funding, increases in interest rates during the
term of a lease could narrow or eliminate the spread, or result
in a negative spread. A negative spread is an interest cost
greater than the yield on the lease. Currently, our revolving
bank facility and our CP conduit warehouse facilities have
variable rates based on LIBOR, prime rate or commercial paper
interest rates. As a result, because our assets have a fixed
interest rate, increases in LIBOR, prime rate or commercial
paper interest rates would negatively impact our earnings. If
interest rates increase faster than we are able to adjust the
pricing under our new leases, our net interest margin would be
reduced. As required under our financing facility agreements, we
enter into interest rate cap agreements to hedge against the
risk of interest rate increases in our CP conduit warehouse
facilities. If our hedging strategies are imperfectly
implemented or if a counterparty defaults on a hedging
agreement, we could suffer losses relating to our hedging
activities. In addition, with respect to our fixed rate
borrowings, such as our term note securitizations, increases in
interest rates could have the effect of increasing our borrowing
costs on future term note transactions.
Deteriorated economic or business conditions may lead to
greater than anticipated lease defaults and credit losses, which
could limit our ability to obtain additional financing and
reduce our operating income. Our operating income
may be reduced by various economic factors and business
conditions, including the level of economic activity in the
markets in which we operate. Delinquencies and credit losses
generally increase during economic slowdowns or recessions.
Because we extend credit primarily to small businesses, many of
our customers may be particularly susceptible to economic
slowdowns or recessions and may be unable to make scheduled
lease payments during these periods. Therefore, to the extent
that economic activity or business conditions deteriorate, our
delinquencies and credit losses may increase. Unfavorable
economic conditions may also make it more difficult for us to
maintain both our new lease origination volume and the credit
quality of new leases at levels previously attained. Unfavorable
economic conditions could also increase our funding costs or
operating cost structure, limit our access to the securitization
and other capital markets or result in a decision by lenders not
to extend credit to us. Any of these events could reduce our
operating income.
The departure of any of our key management personnel or our
inability to hire suitable replacements for our management may
result in defaults under our financing facilities, which could
restrict our ability to access funding and effectively operate
our business. Our future success depends to a
significant extent on the continued service of our senior
management team. A change in our Chief Executive Officer or
President is an event of default under our revolving bank
facility and CP conduit warehouse facilities unless we hire a
replacement acceptable to our lenders within 90 days. Such
a change is also an immediate event of servicer termination
under our term note securitizations. The departure of any of our
executive officers or key employees could limit our access to
funding and ability to operate our business effectively.
Mr. Bruce E. Sickel, our Senior Vice President and Chief
Financial Officer, has resigned from his position effective as
of March 3, 2006. We are currently seeking a new Chief
Financial Officer. We do not expect the change in Chief
Financial Officer to have any material adverse effect on our
financing arrangements.
The termination or interruption of, or a decrease in volume
under, our property insurance program would cause us to
experience lower revenues and may result in a significant
reduction in our net income. Our end user
customers are required to obtain all-risk property insurance for
the replacement value of the leased equipment. The end user
customer has the option of either delivering a certificate of
insurance listing us as loss payee under a
15
commercial property policy issued by a third party insurer or
satisfying their insurance obligation through our insurance
program. Under our program, the end user customer purchases
coverage under a master property insurance policy written by a
national third party insurer (our primary insurer)
with whom our captive insurance subsidiary, AssuranceOne, Ltd.,
has entered into a 100% reinsurance arrangement. Termination or
interruption of our program could occur for a variety of
reasons, including: 1) adverse changes in laws or
regulations affecting our primary insurer or AssuranceOne;
2) a change in the financial condition or financial
strength ratings of our primary insurer or AssuranceOne;
3) negative developments in the loss reserves or future
loss experience of AssuranceOne which render it uneconomical for
us to continue the program; 4) termination or expiration of
the reinsurance agreement with our primary insurer, coupled with
an inability by us to quickly identify and negotiate an
acceptable arrangement with a replacement carrier; or
5) competitive factors in the property insurance market. If
there is a termination or interruption of this program or if
fewer end user customers elected to satisfy their insurance
obligations through our program, we would experience lower
revenues and our net income may be reduced.
Regulatory and legal uncertainties could result in
significant financial losses and may require us to alter our
business strategy and operations. Laws or
regulations may be adopted with respect to our equipment leases
or the equipment leasing, telemarketing and collection
processes. Any new legislation or regulation, or changes in the
interpretation of existing laws, which affect the equipment
leasing industry could increase our costs of compliance or
require us to alter our business strategy.
We, like other finance companies, face the risk of litigation,
including class action litigation, and regulatory investigations
and actions in connection with our business activities. These
matters may be difficult to assess or quantify, and their
magnitude may remain unknown for substantial periods of time. A
substantial legal liability or a significant regulatory action
against us could cause us to suffer significant costs and
expenses, and could require us to alter our business strategy
and the manner in which we operate our business.
Failure to realize the projected value of residual interests
in equipment we finance would reduce the residual value of
equipment recorded as assets on our balance sheet and may reduce
our operating income. We estimate the residual
value of the equipment which is recorded as an asset on our
balance sheet. Realization of residual values depends on
numerous factors including: the general market conditions at the
time of expiration of the lease; the cost of comparable new
equipment; the obsolescence of the leased equipment; any unusual
or excessive wear and tear on or damage to the equipment; the
effect of any additional or amended government regulations; and
the foreclosure by a secured party of our interest in a
defaulted lease. Our failure to realize our recorded residual
values would reduce the residual value of equipment recorded as
assets on our balance sheet and may reduce our operating income.
Hurricane Katrina could negatively affect our operations,
which could have an adverse effect on our business or results of
operations. In late August 2005, Hurricane
Katrina struck the gulf coast of Louisiana, Mississippi and
Alabama and caused substantial property damage. Damage caused by
Hurricane Katrina could result in a decline in our leasing
activity, a decline in the value or destruction of leased
property and an increase in the risk of lease delinquencies and
defaults. Our business or results of operations may be adversely
affected by these and other negative effects of Hurricane
Katrina.
If we experience significant telecommunications or technology
downtime, our operations would be disrupted and our ability to
generate operating income could be negatively
impacted. Our business depends in large part on
our telecommunications and information management systems. The
temporary or permanent loss of our computer systems,
telecommunications equipment or software systems, through
casualty or operating malfunction, could disrupt our operations
and negatively impact our ability to service our customers and
lead to significant declines in our operating income.
We face risks relating to our recent accounting
restatement. If we fail to maintain an effective
system of internal controls, we may not be able to accurately
report our financial results. As a result, current and potential
investors could lose confidence in our financial reporting which
would harm our business and the trading price of our stock.
Effective internal controls are necessary for us to provide
reliable financial statements. If we cannot provide reliable
financial statements, our business and operating results could
be harmed. We have in the past discovered, and may in the future
discover, areas of our internal controls that need improvement
including control deficiencies
16
that may constitute material weaknesses. A material weakness is
a significant deficiency, as defined in Public Company
Accounting Oversight Board Audit Standard No. 2 or a
combination of significant deficiencies, that results in more
than a remote likelihood that material misstatements of our
annual or interim financial statements would not be prevented or
detected by company personnel in the normal course of performing
their assigned functions.
In connection with the preparation of our Annual Report on
Form 10-K
for the fiscal year ended December 31, 2004, an evaluation
was performed under the supervision and with the participation
of our management, including our CEO and CFO, of the
effectiveness of the design and operation of our disclosure
controls and procedures. As a result of this evaluation, during
the first fiscal quarter of 2005, management identified and
concluded that a material weakness existed at December 31,
2004 in our controls over the selection and application of
accounting policies. Specifically, management concluded that we
had misapplied generally accepted accounting principles as they
pertain to the timing of recognition of interim rental income
since our inception in 1997 and, accordingly, we restated our
financial statements for the fiscal years ended
December 31, 2003 and December 31, 2002, and for the
four quarters of fiscal years 2004 and 2003, to correct this
error. The identified material weakness was remediated during
the first fiscal quarter of 2005.
Consequently, management, including our CEO and CFO, have
concluded that our internal controls over financial reporting
were not designed or functioning effectively as of
December 31, 2004 to provide reasonable assurance that the
information required to be disclosed by us in reports filed
under the Securities Exchange Act of 1934 was recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and accumulated and
communicated to our management, including our CEO and CFO, as
appropriate, to allow timely decisions regarding disclosure.
Any failure to implement and maintain the improvements in our
internal control over financial reporting, or difficulties
encountered in the implementation of these improvements in our
controls, could cause us to fail to meet our reporting
obligations. Any failure to improve our internal controls to
address the identified material weakness could also cause
investors to lose confidence in our reported financial
information, which could have a negative impact on the trading
price of our stock.
Our quarterly operating results may fluctuate
significantly. Our operating results may differ
from quarter to quarter, and these differences may be
significant. Factors that may cause these differences include:
changes in the volume of lease applications, approvals and
originations; changes in interest rates; the timing of term note
securitizations; the availability of capital; the degree of
competition we face; and general economic conditions and other
factors. The results of any one quarter may not indicate what
our performance may be in the future.
Our common stock price is volatile. The
trading price of our common stock may fluctuate substantially
depending on many factors, some of which are beyond our control
and may not be related to our operating performance. These
fluctuations could cause you to lose part or all of your
investment in our shares of common stock. Those factors that
could cause fluctuations include, but are not limited to, the
following:
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|
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|
|
price and volume fluctuations in the overall stock market from
time to time;
|
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|
|
significant volatility in the market price and trading volume of
financial services companies;
|
|
|
|
actual or anticipated changes in our earnings or fluctuations in
our operating results or in the expectations of market analysts;
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|
|
investor perceptions of the equipment leasing industry in
general and our company in particular;
|
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|
|
the operating and stock performance of comparable companies;
|
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|
|
general economic conditions and trends;
|
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|
|
major catastrophic events;
|
|
|
|
loss of external funding sources;
|
|
|
|
sales of large blocks of our stock or sales by insiders; or
|
17
|
|
|
|
|
departures of key personnel.
|
It is possible that in some future quarter our operating results
may be below the expectations of financial market analysts and
investors and, as a result of these and other factors, the price
of our common stock may decline.
Certain investors continue to own a large percentage of our
common stock and have filed a shelf registration statement,
which could result in additional shares being sold into the
public market and thereby affect the market price of our common
stock. Two institutional investors that first
purchased our common stock in private placement transactions
prior to our IPO owned approximately 37% of the outstanding
shares of our common stock as of December 31, 2005. A shelf
registration statement on Form S-3 (No. 333-128329)
registering 4,294,947 shares of common stock owned by these two
investors became effective on December 19, 2005. A sale by
these investors of all or a portion of their shares pursuant to
the shelf registration statement or otherwise could ultimately
affect the market price of our common stock.
Anti-takeover provisions and our right to issue preferred
stock could make a third-party acquisition of us
difficult. We are a Pennsylvania corporation.
Anti-takeover provisions of Pennsylvania law could make it more
difficult for a third party to acquire control of us, even if
such change in control would be beneficial to our shareholders.
Our amended and restated articles of incorporation and our
bylaws will contain certain other provisions that would make it
more difficult for a third party to acquire control of us,
including a provision that our board of directors may issue
preferred stock without shareholder approval.
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|
Item 1B.
|
Unresolved
Staff Comments
|
None
At December 31, 2005, we operated from six leased
facilities including our executive office facility and five
branch offices. In December 2004 we relocated our Mount Laurel,
New Jersey executive offices to a leased facility of
approximately 50,000 square feet under a lease that expires
in May 2013. We also lease 5,621 square feet of office
space in Philadelphia, Pennsylvania, where we perform our lease
recording and acceptance functions. Our Philadelphia lease
expires in May 2008. In addition, we have regional offices in
Norcross, Georgia (a suburb of Atlanta), Englewood, Colorado (a
suburb of Denver), Chicago, Illinois and Salt Lake City, Utah.
Our Georgia office is 6,043 square feet and the lease
expires in July 2008. Our Colorado office is 5,914 square
feet and the lease expires in August 2006. Our Chicago office,
which opened in January 2004, is 4,166 square feet and the
lease expires in April 2008. Our Salt Lake City office, which we
expect to open in 2006, is under a lease signed in November
2005, for 5,764 square feet, which expires in August 2010.
We believe our leased facilities are adequate for our current
needs and sufficient to support our current operations and
growth.
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|
Item 3.
|
Legal
Proceedings
|
We are party to various legal proceedings, which include claims,
litigation and class action suits arising in the ordinary course
of business. In the opinion of management, these actions will
not have a material adverse effect on our business, financial
condition or results of operations.
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|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
None
18
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Marlin Business Services Corp. completed its initial public
offering of common stock and became a publicly traded company on
November 12, 2003. The Companys common stock trades
on the NASDAQ National Market under the symbol MRLN.
The following table sets forth, for the periods indicated, the
high and low sales prices per share of our common stock as
reported on the NASDAQ National Market.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
First Quarter
|
|
$
|
21.67
|
|
|
$
|
17.11
|
|
|
$
|
19.49
|
|
|
$
|
14.85
|
|
Second Quarter
|
|
$
|
20.95
|
|
|
$
|
17.25
|
|
|
$
|
18.09
|
|
|
$
|
14.69
|
|
Third Quarter
|
|
$
|
24.00
|
|
|
$
|
19.95
|
|
|
$
|
19.40
|
|
|
$
|
14.11
|
|
Fourth Quarter
|
|
$
|
24.55
|
|
|
$
|
20.45
|
|
|
$
|
19.74
|
|
|
$
|
16.27
|
|
Dividend
Policy
We have not paid or declared any cash dividends on our common
stock and we presently have no intention of paying cash
dividends on the common stock in the foreseeable future. The
payment of cash dividends, if any, will depend upon our
earnings, financial condition, capital requirements, cash flow
and long-range plans and such other factors as our Board of
Directors may deem relevant.
Number of
Record Holders
There were 104 holders of record of our common stock at
February 17, 2006. We believe that the number of beneficial
owners is greater than the number of record holders because a
large portion of our common stock is held of record through
brokerage firms in street name.
Sale of
Unregistered Securities
On August 18, 2005, we issued $340.6 million of
asset-backed debt securities through our special purpose
subsidiary, Marlin Leasing Receivables IX LLC. The issuance was
done in reliance on the exemption from registration provided by
Rule 144A of the Securities Act of 1933. J.P. Morgan
Securities, Inc. served as the initial purchaser and placement
agent for the issuance, and the aggregate initial
purchasers discounts and commissions paid was
approximately $1.1 million.
19
|
|
Item 6.
|
Selected
Financial Data
|
The following financial information should be read together with
the financial statements and notes thereto and
Managements Discussion and Analysis of Financial
Condition and Results of Operations sections included
elsewhere in this
Form 10-K/A.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands, except
share data)
|
|
|
Statement of Operations
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
$
|
85,529
|
|
|
$
|
71,168
|
|
|
$
|
56,403
|
|
|
$
|
46,328
|
|
|
$
|
35,986
|
|
Interest expense
|
|
|
20,835
|
|
|
|
16,675
|
|
|
|
18,069
|
|
|
|
17,899
|
|
|
|
16,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
64,694
|
|
|
|
54,493
|
|
|
|
38,334
|
|
|
|
28,429
|
|
|
|
19,105
|
|
Provision for credit losses
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
7,965
|
|
|
|
6,850
|
|
|
|
5,918
|
|
Net interest and fee income after
provision for credit losses
|
|
|
53,808
|
|
|
|
44,540
|
|
|
|
30,369
|
|
|
|
21,579
|
|
|
|
13,187
|
|
Insurance and other income
|
|
|
4,682
|
|
|
|
4,383
|
|
|
|
3,423
|
|
|
|
2,725
|
|
|
|
2,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,490
|
|
|
|
48,923
|
|
|
|
33,792
|
|
|
|
24,304
|
|
|
|
15,273
|
|
Salaries and benefits
|
|
|
18,173
|
|
|
|
14,447
|
|
|
|
10,273
|
|
|
|
8,109
|
|
|
|
5,306
|
|
General and administrative
|
|
|
11,908
|
|
|
|
10,063
|
|
|
|
7,745
|
|
|
|
5,744
|
|
|
|
4,610
|
|
Financing related costs
|
|
|
1,554
|
|
|
|
2,055
|
|
|
|
1,604
|
|
|
|
1,618
|
|
|
|
1,259
|
|
Change in fair value of
warrants(1)
|
|
|
|
|
|
|
|
|
|
|
5,723
|
|
|
|
908
|
|
|
|
(208
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and
cumulative effect of change in accounting principle
|
|
|
26,855
|
|
|
|
22,358
|
|
|
|
8,447
|
|
|
|
7,925
|
|
|
|
4,306
|
|
Income tax provision
|
|
|
10,607
|
|
|
|
8,899
|
|
|
|
5,600
|
|
|
|
3,594
|
|
|
|
1,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
|
16,248
|
|
|
|
13,459
|
|
|
|
2,847
|
|
|
|
4,331
|
|
|
|
2,770
|
|
Cumulative effect of change in
accounting principle, net of tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
2,847
|
|
|
$
|
4,331
|
|
|
$
|
2,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income per common share before
cumulative effect of change in accounting
principle basic
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
|
$
|
1.50
|
|
|
$
|
0.82
|
|
Net income per common
share basic
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
|
$
|
1.50
|
|
|
$
|
0.65
|
|
Weighted average
shares basic
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
|
|
3,001,754
|
|
|
|
1,703,820
|
|
|
|
1,858,858
|
|
Income per common share before
cumulative effect of change in accounting
principle diluted
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
|
$
|
0.61
|
|
|
$
|
0.44
|
|
Net income per common
share diluted
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
|
$
|
0.61
|
|
|
$
|
0.39
|
|
Weighted average
shares diluted
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
|
|
3,340,968
|
|
|
|
7,138,232
|
|
|
|
6,234,437
|
|
|
|
|
(1) |
|
The change in fair value of warrants is a non-cash expense. Upon
completion of our initial public offering in November 2003, all
warrants were exercised on a net issuance basis. As a result,
there are no longer any outstanding warrants and no effects on
subsequent periods. |
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(Dollars in thousands)
|
|
|
Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total new leases originated
|
|
|
32,754
|
|
|
|
31,818
|
|
|
|
30,258
|
|
|
|
25,368
|
|
|
|
23,207
|
|
Total equipment cost originated
|
|
$
|
318,457
|
|
|
$
|
272,271
|
|
|
$
|
242,278
|
|
|
$
|
203,458
|
|
|
$
|
171,378
|
|
Average net investment in direct
financing
leases(1)
|
|
|
523,948
|
|
|
|
446,965
|
|
|
|
363,853
|
|
|
|
286,589
|
|
|
|
208,149
|
|
Weighted average interest rate
(implicit) on new leases
originated(2)
|
|
|
12.75
|
%
|
|
|
13.82
|
%
|
|
|
14.01
|
%
|
|
|
14.17
|
%
|
|
|
15.82
|
%
|
Interest income as a percent of
average net investment in direct financing
leases(1)
|
|
|
12.90
|
|
|
|
12.91
|
|
|
|
13.09
|
|
|
|
13.65
|
|
|
|
14.56
|
|
Interest expense as percent of
average interest bearing liabilities, excluding subordinated
debt(3)
|
|
|
4.24
|
|
|
|
3.86
|
|
|
|
4.54
|
|
|
|
5.76
|
|
|
|
7.41
|
|
Portfolio Asset Quality
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments receivable
|
|
$
|
660,946
|
|
|
$
|
571,150
|
|
|
$
|
489,430
|
|
|
$
|
392,392
|
|
|
$
|
303,560
|
|
Delinquencies past due, greater
than 60 days
|
|
|
0.61
|
%
|
|
|
0.78
|
%
|
|
|
0.74
|
%
|
|
|
0.86
|
%
|
|
|
1.94
|
%
|
Allowance for credit losses
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
|
$
|
3,965
|
|
|
$
|
3,059
|
|
Allowance for credit losses to net
investment in direct financing
leases(2)
|
|
|
1.39
|
%
|
|
|
1.26
|
%
|
|
|
1.23
|
%
|
|
|
1.21
|
%
|
|
|
1.24
|
%
|
Charge-offs, net
|
|
$
|
9,135
|
|
|
$
|
8,907
|
|
|
$
|
6,914
|
|
|
$
|
5,944
|
|
|
$
|
4,579
|
|
Ratio of net charge-offs to
average net investment in direct financing leases
|
|
|
1.74
|
%
|
|
|
1.99
|
%
|
|
|
1.90
|
%
|
|
|
2.07
|
%
|
|
|
2.20
|
%
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency
ratio(4)
|
|
|
43.36
|
%
|
|
|
41.63
|
%
|
|
|
43.15
|
%
|
|
|
44.47
|
%
|
|
|
46.79
|
%
|
Return on average total assets
|
|
|
2.57
|
%
|
|
|
2.54
|
%
|
|
|
0.66
|
%
|
|
|
1.31
|
%
|
|
|
1.04
|
%
|
Return on average
stockholders
equity(5)
|
|
|
15.96
|
%
|
|
|
16.47
|
%
|
|
|
9.18
|
%
|
|
|
19.63
|
%
|
|
|
15.67
|
%
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
34,472
|
|
|
$
|
16,092
|
|
|
$
|
29,435
|
|
|
$
|
6,354
|
|
|
$
|
2,504
|
|
Restricted cash
|
|
|
47,786
|
|
|
|
37,331
|
|
|
|
29,604
|
|
|
|
24,372
|
|
|
|
16,325
|
|
Net investment in direct financing
leases
|
|
|
572,581
|
|
|
|
489,678
|
|
|
|
419,160
|
|
|
|
335,442
|
|
|
|
255,169
|
|
Total assets
|
|
|
670,989
|
|
|
|
554,693
|
|
|
|
487,709
|
|
|
|
374,671
|
|
|
|
281,741
|
|
Revolving and term secured
borrowings
|
|
|
516,849
|
|
|
|
434,670
|
|
|
|
393,997
|
|
|
|
327,842
|
|
|
|
245,551
|
|
Subordinated debt, net of discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,520
|
|
|
|
9,408
|
|
Total liabilities
|
|
|
558,380
|
|
|
|
464,343
|
|
|
|
413,838
|
|
|
|
350,526
|
|
|
|
261,534
|
|
Redeemable convertible preferred
stock, including accrued dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,171
|
|
|
|
19,391
|
|
Total stockholders equity
|
|
|
112,609
|
|
|
|
90,350
|
|
|
|
73,871
|
|
|
|
2,974
|
|
|
|
816
|
|
|
|
|
(1) |
|
Includes securitized assets. |
|
(2) |
|
Excludes the amortization of initial direct costs and fees
deferred. |
|
(3) |
|
Excludes subordinated debt liability and accrued subordinated
debt interest for periods prior to 2004. |
|
(4) |
|
Salaries, benefits, general and administrative expenses divided
by net interest and fee income, insurance and other income. |
|
(5) |
|
Stockholders equity includes preferred stock and accrued
dividends in calculation for periods prior to our IPO. |
21
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
FORWARD-LOOKING
STATEMENTS
Certain statements in this document may include the words or
phrases can be, expects,
plans, may, may affect,
may depend, believe,
estimate, intend, could,
should, would, if and
similar words and phrases that constitute forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are subject to
various known and unknown risks and uncertainties and the
Company cautions that any forward-looking information provided
by or on its behalf is not a guarantee of future performance.
Statements regarding the following subjects are forward-looking
by their nature: (a) our business strategy; (b) our
projected operating results; (c) our ability to obtain
external financing; (d) our understanding of our
competition; and (e) industry and market trends. The
Companys actual results could differ materially from those
anticipated by such forward-looking statements due to a number
of factors, some of which are beyond the Companys control,
including, without limitation:
|
|
|
|
|
availability, terms and deployment of capital;
|
|
|
|
general volatility of capital markets, in particular, the market
for securitized assets;
|
|
|
|
changes in our industry, interest rates or the general economy
resulting in changes to our business strategy;
|
|
|
|
the nature of our competition;
|
|
|
|
availability of qualified personnel; and
|
|
|
|
|
|
the factors set forth in the section captioned Risk
Factors in Item 1A of this
Form 10-K/A.
|
Forward-looking statements apply only as of the date made and
the Company is not required to update forward-looking statements
for subsequent or unanticipated events or circumstances.
Overview
We are a nationwide provider of equipment financing solutions
primarily to small businesses. We finance over 60 categories of
commercial equipment important to businesses including copiers,
telephone systems, computers, and certain commercial and
industrial equipment. We access our end user customers through
origination sources comprised of our existing network of
independent equipment dealers and, to a lesser extent, through
relationships with lease brokers and through direct solicitation
of our end user customers. Our leases are fixed rate
transactions with terms generally ranging from 36 to
60 months. At December 31, 2005, our lease portfolio
consisted of approximately 103,000 accounts, from approximately
82,000 customers, with an average original term of
46 months, and average transaction size of approximately
$9,000.
Since our founding in 1997, we have grown to $671.0 million
in total assets at December 31, 2005. Our assets are
substantially comprised of our net investment in leases which
totaled $572.6 million at December 31, 2005. Our lease
portfolio grew 16.9% in 2005. Personnel costs represent our most
significant overhead expense and we have added to our staffing
levels to both support and grow our lease portfolio. Since
inception, we have also added four regional sales offices to
help us penetrate certain targeted markets, with our most recent
office in Salt Lake City, Utah. The Salt Lake City office is
expected to become fully operational by the end of the second
quarter of 2006. Growing the lease portfolio, while maintaining
asset quality, remains the primary focus of management. We
expect our on-going investment in our sales teams and regional
offices to drive continued growth in our lease portfolio.
Our revenue consists of interest and fees from our leases and,
to a lesser extent, income from our property insurance program
and other fee income. Our expenses consist of interest expense
and operating expenses, which include salaries and benefits and
other general and administrative expenses. As a credit lender,
our earnings are also significantly impacted by credit losses.
For the year ended December 31, 2005, our net credit losses
were 1.74% of our average net investment in leases. We establish
reserves for credit losses which require us to estimate expected
losses in our portfolio.
22
Our leases are classified as direct financing leases under
generally accepted accounting principles, and we recognize
interest income over the term of the lease. Direct financing
leases transfer substantially all of the benefits and risks of
ownership to the equipment lessee. Our investment in leases is
reflected in our financial statements as net investment in
direct financing leases. Net investment in direct
financing leases consists of the sum of total minimum lease
payments receivable and the estimated residual value of leased
equipment, less unearned lease income. Unearned lease income
consists of the excess of the total future minimum lease
payments receivable plus the estimated residual value expected
to be realized at the end of the lease term plus deferred net
initial direct costs and fees less the cost of the related
equipment. Approximately 69% of our lease portfolio amortizes
over the term to a $1 residual value. For the remainder of the
portfolio, we must estimate end of term residual values for the
leased assets. Failure to correctly estimate residual values
could result in losses being realized on the disposition of the
equipment at the end of the lease term.
Since our founding, we have funded our business through a
combination of variable rate borrowings and fixed rate asset
securitization transactions, as well as through the issuance
from time to time of subordinated debt and equity. Our variable
rate financing sources consist of a revolving bank facility and
two CP conduit warehouse facilities. We issue fixed rate term
debt through the asset-backed securitization market. Typically,
leases are funded through variable rate borrowings until
refinanced through term note securitization at fixed rates. All
of our term note securitizations have been accounted for as
on-balance sheet transactions and, therefore, we have not
recognized gains or losses from these transactions. As of
December 31 2005, all of our $516.8 million borrowings
were fixed cost term note securitizations.
Since we initially finance our fixed-rate leases with variable
rate financing, our earnings are exposed to unexpected increases
in interest rates that may occur before those variable rates can
be hedged by a fixed rate term note securitization. We use
derivative contracts to attempt to reduce our exposure to
increasing interest rates. We generally benefit in times of
falling and low interest rates. We are also dependent upon
obtaining future financing to refinance our warehouse lines of
credit in order to grow our lease portfolio. We currently plan
to complete a fixed-rate term note securitization at least once
a year. Failure to obtain such financing, or other alternate
financing, would significantly restrict our growth and future
financial performance.
We have recently filed an application for an Industrial Bank
Charter with the FDIC and the State of Utah Department of
Financial Institutions to form Marlin Business Bank.
Subject to regulatory approvals, we plan to begin operating the
bank in 2006 to further diversify our funding by issuing FDIC
insured deposits. Marlin Business Bank will operate from our
Salt Lake City office.
Reorganization
and Initial Public Offering
Marlin Leasing Corporation was incorporated in the state of
Delaware on June 16, 1997. On August 5, 2003, we
incorporated Marlin Business Services Corp. in Pennsylvania. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly owned subsidiary of Marlin Business Services Corp.
As a result, all former shareholders of Marlin Leasing
Corporation became shareholders of Marlin Business Services
Corp. After the reorganization, Marlin Leasing Corporation
remains in existence as our primary operating subsidiary.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share
resulting in net proceeds to us, after payment of underwriting
discounts and commissions but before other offering costs, of
approximately $46.6 million. We did not receive any
proceeds from the shares sold by the selling shareholders.
Critical
Accounting Policies
Our discussion and analysis of our financial condition and
results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America (GAAP). Preparation of these financial
statements requires us to make estimates and judgments that
affect reported amounts of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities at the date of our financial statements. On an
ongoing basis, we
23
evaluate our estimates, including credit losses, residuals,
initial direct costs and fees, other fees and realization of
deferred tax assets. We base our estimates on historical
experience and on various other assumptions that are believed to
be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. Critical accounting policies are defined as those that
are reflective of significant judgments and uncertainties. Our
consolidated financial statements are based on the selection and
application of critical accounting policies, the most
significant of which are described below.
Income recognition. Interest income is
recognized under the effective interest method. The effective
interest method of income recognition applies a constant rate of
interest equal to the internal rate of return on the lease. When
a lease is 90 days or more delinquent, the lease is
classified as being on non-accrual and we do not recognize
interest income on that lease until the lease is less than
90 days delinquent.
Fee income consists of fees for delinquent lease payments and
cash collected on early termination of leases. Fee income also
includes net residual income which includes income from lease
renewals and gains and losses on the realization of residual
values of equipment disposed of at the end of term.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. Other fees
are recognized when received. Net residual income includes
charges for the reduction in estimated residual values on
equipment for leases in renewal and is recognized during the
renewal period. Residual balances at lease termination which
remain uncollected more than 120 days are charged against
income.
Insurance income is recognized on an accrual basis as earned
over the term of the lease. Payments that are 120 days or
more past due are charged against income. Ceding commissions,
losses and loss adjustment expenses are recorded in the period
incurred and netted against insurance income.
Initial direct costs and fees. We defer
initial direct costs incurred and fees received to originate our
leases in accordance with SFAS No. 91, Accounting
for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases. The
initial direct costs and fees we defer are part of the net
investment in direct financing leases and are amortized to
interest income using the effective interest method. We defer
third party commission costs as well as certain internal costs
directly related to the origination activity. The costs include
evaluating the prospective lessees financial condition,
evaluating and recording guarantees and other security
arrangements, negotiating lease terms, preparing and processing
lease documents and closing the transaction. The fees we defer
are documentation fees collected at lease inception. The
realization of the deferred initial direct costs, net of fees
deferred, is predicated on the net future cash flows generated
by our lease portfolio.
Lease residual values. A direct financing
lease is recorded at the aggregate future minimum lease payments
plus the estimated residual values less unearned income.
Residual values reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. These estimates are based on
industry data and on our experience. Management performs
periodic reviews of the estimated residual values and any
impairment, if other than temporary, is recognized in the
current period.
Allowance for credit losses. We maintain an
allowance for credit losses at an amount sufficient to absorb
losses inherent in our existing lease portfolio as of the
reporting dates based on our projection of probable net credit
losses. To project probable net credit losses, we perform a
migration analysis of delinquent and current accounts. A
migration analysis is a technique used to estimate the
likelihood that an account will progress through the various
delinquency stages and ultimately be charged off. In addition to
the migration analysis, we also consider other factors including
recent trends in delinquencies and charge-offs; accounts filing
for bankruptcy; recovered amounts; forecasting uncertainties;
the composition of our lease portfolio; economic conditions; and
seasonality. We then establish an allowance for credit losses
for the projected probable net credit losses based on this
analysis. A provision is charged against earnings to maintain
the allowance for credit losses at the appropriate level. Our
policy is to charge-off against the allowance the estimated
unrecoverable portion of accounts once they reach 121 days
delinquent.
Our projections of probable net credit losses are inherently
uncertain, and as a result we cannot predict with certainty the
amount of such losses. Changes in economic conditions, the risk
characteristics and composition of the portfolio, bankruptcy
laws, and other factors could impact our actual and projected
net credit losses and the related
24
allowance for credit losses. To the degree we add new leases to
our portfolio, or to the degree credit quality is worse than
expected, we will record expense to increase the allowance for
credit losses for the estimated net losses expected in our lease
portfolio.
Derivatives. SFAS 133, as amended,
Accounting for Derivative Instruments and Hedging
Activities, requires recognition of all derivatives at fair
value as either assets or liabilities in the consolidated
balance sheet. The accounting for subsequent changes in the fair
value of these derivatives depends on whether it has been
designated and qualifies for hedge accounting treatment pursuant
to the accounting standard. For derivatives not designated or
qualifying for hedge accounting, the related gain or loss is
recognized in earnings for each period and included in other
income or financing related costs in the consolidated statement
of operations. For derivatives designated for hedge accounting,
initial assessments are made as to whether the hedging
relationship is expected to be highly effective and on-going
periodic assessments may be required to determine the on-going
effectiveness of the hedge. The gain or loss on derivatives
qualifying for hedge accounting is recorded in other
comprehensive income on the balance sheet net of tax effects
(unrealized gain or loss on cash flow hedges) or in current
period earnings depending on the effectiveness of the hedging
relationship.
Stock-Based Compensation. We issue both
restricted shares and stock options to certain employees and
directors as part of our overall compensation strategy. The
Company follows the intrinsic value method of accounting for
stock-based employee compensation in accordance with Accounting
Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. We record deferred compensation for option
grants to employees for the amount, if any, by which the fair
value per share exceeds the exercise price per share at the
measurement date, which is generally the grant date. This
deferred compensation is recognized over the vesting period.
Pursuant to the disclosure requirements of
SFAS No. 123, Accounting for Stock-Based Compensation,
the Company discloses net income as if compensation expense for
stock option grants had been determined based upon the fair
value at the date of grant.
In 2006 we will adopt SFAS No. 123R Share-Based
Payments, an amendment of FASB Statements 123 and 95,
which requires companies to recognize expense on the grant-date
for the fair value of stock options and other equity-based
compensation issued to employees and non-employees. The Company
plans to use the modified prospective method whereby awards that
are granted, modified, or settled after the date of adoption
will be measured and accounted for in accordance with
Statement 123R. Unvested equity classified awards that were
granted prior to 2006 date will be accounted for in accordance
with Statement 123R and expensed as the awards vest based
on their grant date fair value. We will adopt this rule in the
first quarter of 2006 and anticipate recognizing approximately
$731,000 of expense for the vesting of previously issued stock
options in 2006.
Warrants. We issued warrants to purchase our
common stock to the holders of our subordinated debt that was
repaid in November 2003. In accordance with EITF Issue
No. 96-13,
codified in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled In, a Companys Own Stock, we
initially classified the warrants fair value as a
liability since the warrant holders had the ability to put to
the Company the shares of common stock exercisable under the
warrants under certain conditions to us for cash settlement.
Subsequent changes in the fair value of the warrants were
recorded in the accompanying statement of operations. The charge
to operations in 2003 was $5.7 million. Under the terms of
the warrant agreement, the warrants were exercised into common
stock at the time of our IPO and the total warrant liability
balance of $7.1 million was reclassified back to equity
and, therefore, there are no effects on subsequent operations in
2004 or 2005.
Income taxes. Significant management judgment
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
different treatment of items, for example, leases for tax and
accounting purposes. These differences result in deferred tax
assets and liabilities, which are included within the
consolidated balance sheet. Our 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 our management believes recovery is not likely, a
valuation allowance must be established. To the extent that we
establish a valuation allowance in a period, an expense must be
recorded within the tax provision in the statement of operations.
25
Our net operating loss carryforwards (NOLs) as of
December 31, 2005 for federal and state income tax purposes
were approximately $9.2 million and $6.9 million,
respectively. The NOLs expire in periods beginning 2009 to 2025.
The Tax Reform Act of 1986 contains provisions that may limit
the NOLs available to be used in any given year upon the
occurrence of certain events, including significant changes in
ownership interest. A change in the ownership of a company
greater than 50% within a three-year period results in an annual
limitation on a companys ability to utilize its NOLs from
tax periods prior to the ownership change. Management believes
that the reorganization and initial public offering did not have
a material effect on its ability to utilize these NOLs. No
valuation allowance has been established against net deferred
tax assets related to our NOLs, as our management believes these
NOLs will be realizable through reversal of existing deferred
tax liabilities, and future taxable income. If actual results
differ from these estimates or these estimates are adjusted in
future periods, we may need to establish a valuation allowance,
which could materially impact its financial position and results
of operations.
Results
of Operations
Comparison
of the Years Ended December 31, 2005 and 2004
Net income. Net income was $16.2 million
for the year ended December 31, 2005. This represented a
$2.7 million, or 20.0%, increase from $13.5 million
net income reported for the year ended December 31, 2004.
Our increased earnings are primarily the result of growth and
improved net interest and fee margins in our core leasing
business. During the third quarter of 2005, the Company
increased its reserves for expected credit losses based on its
initial assessments of exposure to areas significantly impacted
by Hurricane Katrina (such as New Orleans). The impact of this
increase in reserves was a reduction of approximately $753,000
in net income for the year 2005.
Diluted net income per share was $1.36 for the year ended
December 31, 2005 and $1.15 for the year ended
December 31, 2004.
For the year ended December 31, 2005, we generated 32,754
new leases at a cost of $318.5 million compared to 31,818
new leases at a cost of $272.2 million for the year ended
December 31, 2004. The weighted average implicit interest
rate on new leases originated was 12.75% for the year ended
December 31, 2005 compared to 13.82% for year ended
December 31, 2004. Overall, the net investment in direct
financing leases grew 16.9%, to $572.6 million at
December 31, 2005 from $489.7 million at
December 31, 2004. Returns on average assets were 2.57% for
the year ended December 31, 2005 and 2.54% for the year
ended December 31, 2004. Returns on average equity were
15.96% for the year ended December 31, 2005 and 16.47% for
the year ended December 31, 2004. Our debt to equity ratio
was 4.59:1 at December 31, 2005 compared to 4.81:1 at
December 31, 2004.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
67,572
|
|
|
$
|
57,707
|
|
Fee income
|
|
|
17,957
|
|
|
|
13,461
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
85,529
|
|
|
|
71,168
|
|
Interest expense
|
|
|
20,835
|
|
|
|
16,675
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
$
|
64,694
|
|
|
$
|
54,493
|
|
|
|
|
|
|
|
|
|
|
Average net investment in direct
financing
leases(1)
|
|
$
|
523,948
|
|
|
$
|
446,965
|
|
Percent of average net investment
in direct financing leases:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12.90
|
%
|
|
|
12.91
|
%
|
Fee income
|
|
|
3.43
|
|
|
|
3.01
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
16.33
|
|
|
|
15.92
|
|
Interest expense
|
|
|
3.98
|
|
|
|
3.73
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
12.35
|
%
|
|
|
12.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes allowance for credit losses and initial direct costs
and fees deferred. |
26
Net interest and fee margin. Net interest and
fee income increased $10.2 million, or 18.7%, to
$64.7 million for the year ended December 31, 2005
from $54.5 million for the year ended December 31,
2004. The increase in the net interest and fee margin represents
an increase of 16 basis points to 12.35% for the year ended
December 31, 2005 from 12.19% for the year ended
December 31, 2004 with the increase primarily attributed to
fee income.
Interest income, net of amortized initial direct costs and fees,
increased $9.9 million, or 17.1%, to $67.6 million for
the year ended December 31, 2005 from $57.7 million
for the year ended December 31, 2004. The increase is
primarily due to a 17.2% growth in average net investment in
direct financing leases (DFL) which increased
$76.9 million to $523.9 million for the year ended
December 31, 2005 from $447.0 million for the year
ended December 31, 2004.
Our interest income yield on assets declined by 1 basis
point for the year ended December 31, 2005 to 12.90% as a
percentage of average net investment in DFL from 12.91% for the
year ended December 31, 2004. The interest income yield on
our lease portfolio declined by 36 basis points for the
year ended December 31, 2005 to 12.37% as a percentage of
average net investment in DFL from 12.73% for the year ended
December 31, 2004. This decline was due in part to lower
weighted average implicit interest rates on new leases
originated in the year ended December 31, 2005 than in
years prior and the amortization and payoffs of older higher
yielding leases. This reduction was partially offset by a
35 basis point increase in earnings on cash balances which
grew to 0.53% as a percentage of average net investment in DFL
for the year ended 2005 compared to 0.18% for the year ended
December 31, 2004.
Fee income increased $4.5 million, or 33.4%, to
$18.0 million for the year ended December 31, 2005
from $13.5 million for the year ended December 31,
2004. All major components of fee income contributed to the
increase in fiscal year 2005 consistent with the continued
growth and seasoning of our lease portfolio. Fee income, as a
percentage of average net investment in DFL, increased
42 basis points to 3.43% for the year ended
December 31, 2005 from 3.01% for the year ended
December 31, 2004. Fees for delinquent lease payments (late
charges) increased $2.6 million to $10.1 million for
the year ended December 31, 2005 compared to
$7.6 million for the same period of 2004. Late charges
remained the largest component of fee income at 1.93% as a
percentage of average net investment in DFL for the year ended
December 31, 2005 compared to 1.69% for the year ended
December 31, 2004. Net residual income, including income
from lease extensions, also increased as more leases where we
retain a residual interest reached end of term. Net residual
income increased $1.3 million to $6.0 million for the
year ended December 31, 2005 compared to $4.7 million
for the same period of 2004. As a percentage of average net
investment in DFL, net residual income was 1.14% for the year
ended December 31, 2005 compared to 1.05% for the year
ended December 31, 2004.
Interest expense increased $4.1 million to
$20.8 million for the year period ended December 31,
2005 from $16.7 million for the year ended
December 31, 2004. Interest expense, as a percentage of the
average net investment in DFL, increased 25 basis points to
3.98% for the year ended December 31, 2005 from 3.73% for
the year ended December 31, 2004. Borrowing costs have
risen due to the continued growth of the Company and higher
interest rates on the Companys borrowings due to increased
market interest rates. The Federal Reserve increased its
targeted fed funds rate eight times for a total of 2.0% during
2005 and a total of thirteen times or 3.25% since June 2004.
These increases have increased interest rates on LIBOR and Prime
interest rate based loans such as the Companys warehouse
facilities and created a higher interest rate environment in
which to issue term note securitizations.
Interest expense as a percentage of weighted average borrowings
was 4.24% for the year ended December 31, 2005 compared to
3.86% for the year ended December 31, 2004. The average
balance for our warehouse facilities was $58.2 million for
the year ended December 31, 2005 compared to
$69.4 million for the year ended December 31, 2004.
The average borrowing costs for our warehouse facilities was
4.13% for the year ended December 31, 2005 compared to
2.13% for year ended December 31, 2004 reflecting the
higher interest rate environment. (See Liquidity and Capital
Resources in this Item 7).
Interest costs on our August 2005 issued term securitization
borrowing increased over those issued in 2003 and 2004 due to
the rising interest rate environment. For the year ended
December 31, 2005, average term securitization borrowings
outstanding were $432.9 million at a weighted average
coupon of 3.79% compared with $362.3 million at a weighted
average coupon of 3.63% for the year ended December 31,
2004. On August 18, 2005 we closed on the issuance of our
seventh term note securitization transaction in the amount of
$340.6 million at a weighted average
27
interest coupon approximating 4.81% over the term of the
financing. After the effects of hedging and other transaction
costs are considered, we expect total interest expense on the
2005 term transaction to approximate an average of 4.50% over
the term of the borrowing. In July 2004 we issued
$304.6 million in term securitizations with an approximate
average total interest expense of 4.24% over the term of the
borrowing. Our term securitizations include multiple classes of
fixed rate notes with the shorter term, lower coupon classes
amortizing (maturing) faster then the longer term higher coupon
classes. This causes the blended interest expenses related to
these borrowings to change and generally increase over the term
of the borrowing.
On August 15, 2005 we elected to exercise our call option
and pay off our 2002-1 term securitization when the remaining
note balances outstanding were $26.5 million at a coupon
rate of approximately 4.40%. On August 15, 2004 we
exercised our call option and paid off our 2001-1 term
securitization when the remaining note balances outstanding were
$16.3 million at a coupon of approximately 6.00%.
Insurance and other income. Insurance and
other income increased $300,000 to $4.7 million for the
year ended December 31, 2005 from $4.4 million for the
year ended December 31, 2004. The increase is primarily
related to higher net insurance income earned in 2005. During
the fourth quarter of 2005, we expensed approximately $190,000
in insurance claims from the Gulf States region of the USA
attributed to the effects of Hurricane Katrina.
Salaries and benefits expense. Salaries and
benefits expense increased $3.7 million, or 25.8%, to
$18.2 million for the year ended December 31, 2005
from $14.4 million for the year ended December 31,
2004. The increase in compensation expense is attributable to
personnel growth and merit and bonus payment increases. Total
personnel increased to 296 at December 31, 2005 from 273 at
December 31, 2004. In 2005, sales compensation increased
$1.9 million related to additional hiring of sales account
executives and higher commissions paid. In addition, collection
and operations salaries increased $502,000 related principally
to additional personnel associated with growth in the lease
portfolio. In 2005, management and support department
compensation increased $1.3 million including an increase
of $496,000 related to accrued incentive bonuses and $187,000
related to compensation of officers hired for Marlin Business
Bank (in organization).
General and administrative expense. General
and administrative expenses increased $1.8 million, or
18.3%, to $11.9 million for the year ended
December 31, 2005 from $10.1 million for the year
ended December 31, 2004. The increase in general and
administrative expenses was due primarily to an increase in
occupancy expenses of $666,000 and increased depreciation
expenses of $204,000 primarily related to the move of our
executive offices to a new and larger facility in December 2004.
Other increases included legal, audit and other professional
fees of $505,000 of which $166,000 were associated with shelf
registration statements filed with the SEC on behalf of certain
shareholders and the Company. Additionally, we spent more on
credit bureaus, property tax administration, data processing and
postage as a result of increased lease originations and our
overall growth. We also recognized $142,000 of general and
administrative expenses related to the founding of Marlin
Business Bank (in organization). General and administrative
expense, as a percentage of the average net investment in DFL,
increased 2 basis points to 2.27% for the year ended
December 31, 2005 from 2.25% for the year ended
December 31, 2004.
Financing related costs. Financing related
costs include commitment fees paid to our financing sources and
costs pertaining to our derivative contracts used to limit our
exposure to possible increases in interest rates. Financing
related costs decreased $500,000 to $1.6 million for the
year period ended December 31, 2005 from $2.1 million
for the year ended December 31, 2004. The decrease was due
principally to lower costs associated with mark to market
adjustments for derivative contracts in the period. Mark to
market adjustments were a net gain of $3,000 for the year ended
December 31, 2005 compared with net loss of $528,000 for
the year ended December 31, 2004. Commitment fees were
$1.6 million for the year ended December 31, 2005
compared with $1.5 for the year ended December 31, 2004.
Provision for credit losses. The provision for
credit losses increased $900,000, or 9.4%, to $10.9 million
for the year ended December 31, 2005 from
$10.0 million for the year ended December 31, 2004. In
general, we experienced positive trends in credit quality for
the year ended December 31, 2005 with lower annualized net
charge-offs and lower year-end delinquency levels than for the
year ended December 31, 2004. Net charge-offs were
$9.1 million for the year ended December 31, 2005 and
$8.9 million for the year ended December 31, 2004. Net
charge-offs as a percentage of average net investment in leases
decreased to 1.74% in 2005 from 1.99% in 2004.
28
We generally expect net charge-offs to approximate 2.00% of
average net investment in leases. The 2005 provision for credit
losses included a $1.25 million estimate made during the
third quarter for expected losses from the areas hardest hit by
Hurricane Katrina. This additional reserve was initially
estimated based on our total estimated exposure of
$4.8 million in net investment in direct financing leases
in the most affected areas at the time. Through
December 31, 2005, we have yet to experience any
significant charge-offs related to Hurricane Katrina. However,
we have restructured approximately $1.0 million in net
investment in leases in the Gulf States region by deferring
payments on such leases generally until January 2006. We
continue to monitor this portion of our portfolio as a
specifically identified segment outside of our normal migration
analysis.
Provision for income taxes. The provision for
income taxes increased to $10.6 million for the year ended
December 31, 2005 from $8.9 million for the year ended
December 31, 2004. The increase in tax expense is primarily
attributed to the increase in pretax income. Our effective tax
rate, which is a combination of federal and state income tax
rates, was 39.5% for the year ended December 31, 2005
compared to 39.8% for the year ended December 31, 2004. We
anticipate our effective tax rate in future years to approximate
our 2005 effective tax rate.
Comparison
of the Years Ended December 31, 2004 and 2003
Net income. Net income increased
$10.7 million to $13.5 million for the year ended
December 31, 2004 from $2.8 million for the year ended
December 31, 2003. Net income for 2003 was significantly
impacted by recognition of $5.7 million of expense relating
to mark to market accounting of the fair value of warrants
outstanding. The warrants were exercised in conjunction with our
IPO transaction in November 2003 and are no longer outstanding.
Excluding the impact of the change in fair value of warrants,
2004 net income of $13.5 million was an increase of
$5.0 million, or 58.8%, compared to pro forma net income of
$8.5 million for the year 2003. The increased earnings in
2004 were primarily the result of growth and improved net
interest and fee margins in our core leasing business. In 2004
we benefited from lower borrowing costs primarily due to a
generally low interest rate environment and successful
completion of our first AAA rated term
securitization in July 2004. Previous term transactions were
issued with lower credit ratings. Interest expense was also
lower in 2004 as borrowings were reduced due to our higher
levels of capital following our IPO in November 2003.
For the year ended December 31, 2004, we generated 31,818
new leases at a cost of $272.2 million compared to 30,258
new leases at a cost of $242.3 million for the year ended
December 31, 2003. Overall, the net investment in direct
financing leases grew 16.8%, to $489.7 million at
December 31, 2004 from $419.2 million at
December 31, 2003.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Interest income
|
|
$
|
57,707
|
|
|
$
|
47,624
|
|
Fee income
|
|
|
13,461
|
|
|
|
8,779
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
71,168
|
|
|
|
56,403
|
|
Interest expense
|
|
|
16,675
|
|
|
|
18,069
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
$
|
54,493
|
|
|
$
|
38,334
|
|
|
|
|
|
|
|
|
|
|
Average net investment in direct
financing
leases(1)
|
|
$
|
446,965
|
|
|
$
|
363,853
|
|
Percent of average net investment
in direct financing leases:
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
12.91
|
%
|
|
|
13.09
|
%
|
Fee income
|
|
|
3.01
|
|
|
|
2.41
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
15.92
|
|
|
|
15.50
|
|
Interest expense
|
|
|
3.73
|
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee margin
|
|
|
12.19
|
%
|
|
|
10.53
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes allowance for credit losses and initial direct costs
and fees deferred. |
29
Net interest and fee margin. Net interest and
fee income increased $16.2 million, or 42.3%, to
$54.5 million for the year ended December 31, 2004
from $38.3 million for the year ended December 31,
2003. The increase in the net interest and fee margin represents
an increase of 166 basis points to 12.19% for the year
ended December 31, 2004 from 10.53% for the same period in
2003.
Interest income, net of amortized initial direct costs and fees,
increased $10.1 million, or 21.2%, to $57.7 million
for the year ended December 31, 2004 from
$47.6 million for the year ended December 31, 2003.
The increase is primarily due to a 22.8% growth in average net
investment in direct financing leases (DFL) which
increased $83.1 million to $447.0 million for the year
ended December 31, 2004 from $363.9 million for the
year ended December 31, 2003. Interest rates were generally
low in 2004. Our interest income yield on our lease portfolio
declined by 18 basis points to 12.91% as older higher
yielding leases amortized and implicit yields on new leases
originated fell in 2004. The weighted average implicit interest
rate on new leases originated was 13.82% for the year ended
December 31, 2004 compared to 14.01% for the year ended
December 31, 2003.
Fee income increased $4.7 million, or 53.4%, to
$13.5 million for the year ended December 31, 2004
from $8.8 million for the year ended December 31,
2003. All major components of fee income contributed to the
increase in the 2004 period consistent with the continued growth
and seasoning of our lease portfolio. Fee income as a percentage
of average net investment in DFL, increased 60 basis points
to 3.01% for the year ended December 31, 2004 from 2.41%
for the year ended December 31, 2003. The increase is
primarily due to higher net residual income including income
from lease extensions as more leases where we retain a residual
interest reach end of term. As a percentage of average net
investment in DFL, net residual income was 1.05% for the year
ended December 31, 2004 compared to 0.56% for the year
ended December 31, 2003. Fees for delinquent lease payments
(late charges), which were the largest component of fee income,
was 1.69% as a percentage of average net investment in DFL for
the year ended December 31, 2004 compared to 1.63% for the
year ended December 31, 2003.
Interest expense decreased $1.4 million to
$16.7 million for the year period ended December 31,
2004 from $18.1 million for the year ended
December 31, 2003. Interest expense, as a percentage of the
average net investment in DFL, decreased 124 basis points
to 3.73% annualized for the year period ended December 31,
2004 from 4.97% annualized for the year ended December 31,
2003. Lower borrowing costs have resulted from a generally low
interest rate environment in both 2004 and 2003 and from higher
capitalization levels in 2004 primarily resulting from our IPO.
For the year ended December 31, 2004 average warehouse
funding was $69.4 million or 15.5% of average investment in
DFL compared with $70.8 million and 19.5% of average
investment in DFL for the year ended December 31, 2003. The
weighted average coupon expense on warehouse funding was 2.13%
for the year ended December 31, 2004 compared to 2.42% for
the year ended December 31, 2003.
In addition to lower variable rate warehouse funding, older
higher fixed rate term borrowings have been reduced through
scheduled repayments and payoffs of over the past 24 months
and, recent fixed rate term borrowings have been issued at lower
interest rates. In November 2003 we repaid $10 million of
subordinated debt with a coupon of 11.00%. In April 2004 we
exercised our call option and paid off our 2000 term
securitization when the remaining note balances outstanding were
$9.4 million at a coupon of 7.96%. In August 2004 we
exercised our call option and paid off our 2001 term
securitization when the remaining note balances outstanding were
$16.3 million at a coupon of approximately 6.00%. The
existing term securitizations and subordinated debt that we
repaid were all at higher coupons than the weighted average
coupon of term debt issued in over this same period. In July
2004 we issued $304.6 million in term securitizations with
an initial weighted average initial coupon of 3.29% and in June
2003 we issued $217.2 million in term securitizations at a
weighted average coupon of 3.18%.
Insurance and other income. Insurance and
other income increased $1.0 million to $4.4 million
for the year ended December 31, 2004 from $3.4 million
for the year ended December 31, 2003. The increase is
primarily related to higher insurance income of $775,000 related
to a 24.1% increase in the number of insured accounts.
Salaries and benefits expense. Salaries and
benefits expense increased $4.1 million, or 39.8%, to
$14.4 million for the year ended December 31, 2004
from $10.3 million for the year ended December 31,
2003. The increase in compensation expense is attributable to
personnel growth and merit and bonus payment increases. Total
personnel increased to 273 at December 31, 2004 from 237 at
December 31, 2003. In 2004, sales compensation increased
$2.2 million related to additional hiring of sales account
executives. In addition, collection and operations salaries
increased $508,000 related to additional personnel associated
with growth in the lease portfolio. In 2004,
30
management and support department compensation increased
$1.5 million related to additional personnel and $652,000
of the increase related to accrued incentive bonuses.
General and administrative expense. General
and administrative expenses increased $2.4 million, or
31.2%, to $10.1 million for the year ended
December 31, 2004 from $7.7 million for the year ended
December 31, 2003. The increase in general and
administrative expenses was due primarily to an increase in
insurance costs of $571,000 relating to higher Directors and
Officers Insurance costs and increased credit bureau charges of
$244,000. Other increases included audit and professional fees
of $279,000 for the incremental costs associated with being a
public company and Sarbanes-Oxley compliance, investor relations
expense of $151,000, franchise tax expense of $151,000 and
occupancy expense of $223,000 due to the incremental costs of
our new Chicago office which opened in January 2004 and
expansion of our Denver and Atlanta offices. We also incurred
$221,000 in non-recurring expense in 2004 associated with the
relocation of our New Jersey office. Additionally, we spent more
on recruiting and training, bank processing fees, data
processing and postage as a result of increased lease
originations and our overall growth.
Financing related costs. Financing related
costs include commitment fees paid to our financing sources and
costs pertaining to our derivative contracts used to limit our
exposure to possible increases in interest rates. Financing
related costs increased $451,000 to $2.1 million for the
year period ended December 31, 2004 from $1.6 million
for the year ended December 31, 2003. The increase was due
principally to higher costs associated with mark to market
adjustments for derivative contracts in the period. Mark to
market adjustments of $528,000 were recorded on derivatives for
the year ended December 31, 2004 compared with $199,000 for
the year ended December 31, 2003. Commitment fees were
$1.5 million for the year ended December 31, 2004
compared with $1.4 for the year ended December 31, 2003.
Change in fair value of warrants. Warrants
issued in connection with subordinated debt increased in value
$5.7 million during 2003. This non-cash expense increased
primarily as a result of the increase in the estimated fair
market value of our common stock used in valuing our warrants.
As part of our reorganization undertaken in November 2003, all
outstanding warrants were exercised on a net issuance basis for
common stock. Accordingly, this expense has not continued beyond
fiscal year 2003.
Provision for credit losses. The provision for
credit losses increased $2.0 million, or 25.0%, to
$10.0 million for the year ended December 31, 2004
from $8.0 million for the year ended December 31,
2003. The increase in our provision for credit losses was a
result of growth of our lease portfolio and the corresponding
proportional growth in net charge-offs. Net charge-offs were
$8.9 million for the period ended December 31, 2004
and $6.9 million for the year ended December 31, 2003.
Net charge-offs as a percentage of average net investment in
leases increased to 1.99% in 2004 from 1.90% in 2003.
Provision for income taxes. The provision for
income taxes increased to $8.9 million for the year ended
December 31, 2004 from $5.6 million for the year ended
December 31, 2003. The increase in tax expense is primarily
attributed to the increase in pretax income. Our effective tax
rate, which is a combination of federal and state income tax
rates, was 39.8% for the year ended December 31, 2004
compared to 66.3% for the year ended December 31, 2003. The
effective tax rate in 2003 was heavily impacted by the expense
associated with the changes in fair value of warrants which is a
non-deductible expense.
Earnings
per common share
In conjunction with our November 2003 reorganization and IPO,
warrants were exercised and convertible preferred stock
converted, and our capital structure simplified into one class
of common stock outstanding. The number of common shares issued
as a result of these conversions was 5.86 million, or
approximately 52% of total common shares outstanding following
the IPO. Because of the significant impact on share count and
the related impact on operations from warrant valuations and
preferred dividends, we believe a pro forma analysis of diluted
EPS for the year 2003 provides a more meaningful basis to
evaluate performance of the Company over the past three fiscal
years. The following analysis reconciles 2003 EPS calculations
on a GAAP basis to pro forma EPS which assumes the exercise of
the of warrants and the conversion of the convertible preferred
stock as of the beginning of
31
the periods reported and adds back warrant expenses and
preferred dividends (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income attributable to common
stockholders
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
841
|
|
Weighted average common shares
outstanding (used for basic EPS)
|
|
|
11,552
|
|
|
|
11,330
|
|
|
|
3,002
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
|
435
|
|
|
|
400
|
|
|
|
339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares and assumed conversions (used for diluted EPS)
|
|
|
11,986
|
|
|
|
11,730
|
|
|
|
3,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share
(GAAP):
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
Diluted
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
Pro forma 2003 earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings used for
diluted EPS
|
|
|
|
|
|
|
|
|
|
$
|
841
|
|
Change in fair value of warrants
|
|
|
|
|
|
|
|
|
|
|
5,723
|
|
Preferred Stock Dividends
|
|
|
|
|
|
|
|
|
|
|
2,006
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted net earnings
|
|
|
|
|
|
|
|
|
|
$
|
8,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted weighted average common
shares and assumed conversions (used for diluted EPS)
|
|
|
|
|
|
|
|
|
|
|
3,341
|
|
Effect of warrants
|
|
|
|
|
|
|
|
|
|
|
605
|
|
Effect of Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
4,454
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma weighted average shares
used for diluted EPS
|
|
|
|
|
|
|
|
|
|
|
8,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma diluted EPS
|
|
|
|
|
|
|
|
|
|
$
|
1.02
|
|
|
|
|
(1) |
|
The effects of convertible preferred stock in 2003 were deemed
anti-dilutive and, therefore, not considered in 2003 GAAP
diluted EPS calculations. |
Operating
Data
We manage expenditures using a comprehensive budgetary review
process. Expenses are monitored by departmental heads and are
reviewed by senior management monthly. The efficiency ratio
(relating expenses with revenues) and the ratio of salaries and
benefits and general and administrative expenses as a percentage
of the average net investment in direct financing leases shown
below are metrics used by management to monitor productivity and
spending levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Average net investment in direct
financing leases
|
|
$
|
523,948
|
|
|
$
|
446,965
|
|
|
$
|
363,853
|
|
Salaries and benefits expense
|
|
|
18,173
|
|
|
|
14,447
|
|
|
|
10,273
|
|
General and administrative expense
|
|
|
11,908
|
|
|
|
10,063
|
|
|
|
7,745
|
|
Efficiency ratio
|
|
|
43.36
|
%
|
|
|
41.63
|
%
|
|
|
43.15
|
%
|
Percent of average net investment
in leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
3.47
|
%
|
|
|
3.23
|
%
|
|
|
2.82
|
%
|
General and administrative
|
|
|
2.27
|
%
|
|
|
2.25
|
%
|
|
|
2.13
|
%
|
32
Key growth indicators management evaluates regularly are sales
account executive staffing levels and the activity of our
origination sources, which are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or For the Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
Number of sales account executives
|
|
|
103
|
|
|
|
100
|
|
|
|
84
|
|
|
|
67
|
|
|
|
50
|
|
Number of originating
sources(1)
|
|
|
1,295
|
|
|
|
1,244
|
|
|
|
1,147
|
|
|
|
929
|
|
|
|
815
|
|
|
|
|
(1) |
|
Monthly average of origination sources generating lease volume. |
Residual
Performance
Our leases offer our end user customers the option to own the
purchased equipment at lease expiration. Based on the minimum
lease payments receivable as of December 31, 2005,
approximately 69% of our leases were one dollar purchase option
leases, 23% were fair market value leases and 8% were fixed
purchase option leases, the latter of which typically are 10% of
the original equipment cost. As of December 31, 2005, there
were $44.3 million of residual assets retained on our
balance sheet of which $30.3 million or 67.6% were related
to copiers. As of December 31, 2004, there were
$41.1 million of residual assets retained on our balance
sheet of which $25.6 million or 60.4% were related to
copiers. No other group of equipment represented more than 10%
of equipment residuals as of December 31, 2005 and 2004,
respectively. Improvements in technology and other market
changes, particularly in copiers, could adversely impact our
ability to realize the recorded residual values of this
equipment.
Our leases generally include automatic renewal provisions and
many leases continue beyond their initial term. We consider
renewal income a component of residual performance. For the
years ended December 31, 2005, 2004, and 2003 renewal
income, net of depreciation amounted to $6.1 million,
$4.5 million, and $2.5 million and net gains (losses)
on residual values disposed at end of term amounted to
$(41,000), $158,000, and ($443,000) respectively. The increase
in net residual income is generally consistent with past
customer behavior in electing renewal options, the growth in our
lease portfolio and an increased number of leases where we
retain a residual interests reaching end of term.
Asset
Quality
The chart below provides our asset quality statistics for the
years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Allowance for credit losses,
beginning of period
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
|
$
|
3,965
|
|
Provision for credit losses
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
7,965
|
|
Charge-offs, net
|
|
|
(9,135
|
)
|
|
|
(8,907
|
)
|
|
|
(6,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for credit losses, end
of period
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average net
investment in direct financing
leases(1)
|
|
|
1.74
|
%
|
|
|
1.99
|
%
|
|
|
1.90
|
%
|
Allowance for credit losses to net
investment in direct financing
leases(1)
|
|
|
1.39
|
%
|
|
|
1.26
|
%
|
|
|
1.23
|
%
|
Average net investment in direct
financing
leases(1)
|
|
$
|
523,948
|
|
|
$
|
446,965
|
|
|
$
|
363,853
|
|
Net investment in direct financing
leases, end of
period(1)
|
|
$
|
562,039
|
|
|
|
479,767
|
|
|
|
409,451
|
|
Delinquencies 60 days or more
past
due(2)
|
|
|
0.61
|
%
|
|
|
0.78
|
%
|
|
|
0.74
|
%
|
Allowance for credit losses to
delinquent accounts 60 days or more past due
|
|
|
192.3
|
%
|
|
|
136.13
|
%
|
|
|
138.22
|
%
|
Non-accrual accounts
|
|
$
|
2,017
|
|
|
$
|
1,944
|
|
|
$
|
1,504
|
|
Restructured accounts
|
|
$
|
4,140
|
|
|
$
|
2,896
|
|
|
$
|
2,056
|
|
|
|
|
(1) |
|
Net investment in leases excludes allowance for credit losses
and initial direct costs and fees deferred. |
|
(2) |
|
Calculated as a percentage of minimum lease payments receivable. |
33
We generally expect net charge-offs to approximate 2.00% of
average net investment in leases. Net charge-offs in 2005 were
1.74% and below our 2.00% expectation we believe principally due
to continued refinement of our credit underwriting and
monitoring of our lease portfolio. Also, general economic
conditions in the USA have remained favorable as reflected by
the Federal Reserves actions to increase interest rates.
In the third quarter of 2005 we booked additional reserves for
expected credit losses of $1.25 million based on our
assessment of information available at the time on our lease
portfolios exposure to those areas most impacted by
Hurricane Katrina in late August 2005. Marlin estimates that it
had approximately $4.8 million in net investment in leases
outstanding in the areas most affected by Hurricane Katrina.
During the fourth quarter 2005 we charged off approximately
$51,000 and restructured approximately $1.0 million of
these accounts by deferring lessee payments generally until
January 2006. The longer term impact of this storm on the
economy in the Gulf States Region and our customers remains
uncertain. The additional Hurricane Katrina reserve was the
primary cause of the increase in the allowance for credit losses
as a percentage of net investment in leases to increase to 1.39%
at December 31, 2005 from 1.26% at December 31, 2004.
Delinquent accounts 60 days or more past due as a
percentage of minimum lease payments receivable declined to
0.61% at December 31, 2005 from 0.78% at December 31,
2004. Our usual experience and expectation is for slightly
higher delinquency rates as of year-end as we believe our
lessees tend to adjust their payment patterns around the
year-end. We also expected higher delinquency rates in the
fourth quarter of 2005 attributed to Hurricane Katrina and its
impact on our lessees in the Gulf States region. We restructured
many accounts in the Katrina affected areas by deferring
payments until January 2006 and, therefore, these accounts did
not contribute to delinquency rates as of year end. We continue
to monitor this portion of our portfolio as a specifically
identified segment outside of our normal migration analysis.
Liquidity
and Capital Resources
Our business requires a substantial amount of cash to operate
and grow. Our primary liquidity need is for new lease
originations. In addition, we need liquidity to pay interest and
principal on our borrowings, to pay fees and expenses incurred
in connection with our securitization transactions, to fund
infrastructure and technology investment and to pay
administrative and other operating expenses.
We are dependent upon the availability of financing from a
variety of funding sources to satisfy these liquidity needs.
Historically, we have relied upon four principal types of third
party financing to fund our operations:
|
|
|
|
|
borrowings under a revolving bank facility;
|
|
|
|
financing of leases in CP conduit warehouse facilities;
|
|
|
|
financing of leases through term note securitizations; and
|
|
|
|
equity and debt securities with third party investors.
|
New lease originations are generally funded in the short-term
with cash from operations or through borrowings under our
revolving bank facility or our CP conduit warehouse facilities.
Our current plans assume the execution of a term note
securitization approximately once a year to refinance and
relieve the bank and CP conduit warehouse facilities. As of
December 31, 2005 we had no borrowings outstanding under
our bank and CP conduit warehouse facilities and, therefore, we
had approximately $265.0 million of available borrowing
capacity through these facilities in addition to available cash
and cash equivalents of $34.5 million.
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share
resulting in net proceeds to us, after payment of underwriting
discounts and commissions but before other offering costs, of
approximately $46.6 million. We did not receive any
proceeds from the shares sold by the selling shareholders. We
used the net proceeds from the IPO as follows:
(i) approximately $10.1 million was used to repay all
of our outstanding 11% subordinated debt and all accrued
interest thereon; (ii) approximately $6.0 million was
used to pay accrued dividends on preferred stock which converted
to common stock at the time of the IPO; (iii) approximately
$1.6 million was used to pay issuance
34
costs incurred in connection with the IPO. The remaining
$28.9 million was used to fund newly originated and
existing leases in our portfolio and other general business
purposes.
Net cash provided by financing activities was
$81.6 million, $39.2 million and $94.1 million
for the years ended December 31, 2005, 2004 and 2003,
respectively.
We used cash in investing activities of $103.3 million,
$89.5 million and $95.7 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Investing
activities primarily relate to lease origination activity.
Additional liquidity is provided by our cash flow from
operations. We generated cash flow from operations of
$40.1 million, $36.9 million and $24.6 million
for the years ended December 31, 2005, 2004 and 2003,
respectively.
We expect cash from operations, additional borrowings on
existing and future credit facilities and, the completion of
additional on-balance sheet term note securitizations to be
adequate to support our operations and projected growth.
Cash and Cash Equivalents. Our objective is to
maintain a low cash balance, investing any free cash in leases.
We generally fund our lease originations and growth using
advances under our revolving bank facility and our CP conduit
warehouse facilities. We had available cash and cash equivalents
of $34.5 million at December 31, 2005 and
$16.1 million at December 31, 2004.
Restricted Cash. We had $47.8 million of
restricted cash as of December 31, 2005 compared to
$37.3 million at December 31, 2004. Restricted cash
consists primarily of the cash reserves and advance payment
accounts related to our term note securitizations.
Borrowings. Our aggregate outstanding secured
borrowings amounted to $516.8 million at December 31,
2005 and $434.7 million at December 31, 2004. At
December 31, 2005, our external financing sources, maximum
facility amounts, amounts outstanding and unused available
commitments, subject to certain minimum equity restrictions and
other covenants and conditions, are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the 12 Months Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
As of December 31,
2005
|
|
|
|
Maximum
|
|
|
Month End
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Facility
|
|
|
Amount
|
|
|
Amount
|
|
|
Average
|
|
|
Amounts
|
|
|
Average
|
|
|
Unused
|
|
|
|
Amount
|
|
|
Outstanding
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Outstanding
|
|
|
Coupon
|
|
|
Capacity
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Revolving bank
facility(1)
|
|
$
|
40,000
|
|
|
$
|
4,356
|
|
|
$
|
1,357
|
|
|
|
6.18
|
%
|
|
$
|
|
|
|
|
|
%
|
|
$
|
40,000
|
|
CP conduit warehouse
facilities(1)
|
|
$
|
225,000
|
|
|
|
167,734
|
|
|
|
56,863
|
|
|
|
4.08
|
|
|
|
|
|
|
|
|
|
|
|
225,000
|
|
Term note
securitizations(2)
|
|
|
|
|
|
|
602,344
|
|
|
|
432,932
|
|
|
|
3.79
|
|
|
|
516,849
|
|
|
|
4.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
265,000
|
|
|
|
|
|
|
$
|
491,152
|
|
|
|
3.83
|
%
|
|
$
|
516,849
|
|
|
|
4.02
|
%
|
|
$
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Subject to lease eligibility and borrowing base formula. |
|
(2) |
|
Our term note securitizations are one-time fundings that pay
down over time without any ability for us to draw down
additional amounts. As of December 31, 2005, we had
completed seven on-balance-sheet term note securitizations and
repaid four in their entirety. |
Revolving bank facility. Our revolving bank
facility totals $40.0 million from four financial
institutions. It is secured by leases that meet specified
eligibility criteria. Our revolving bank facility provides
temporary funding pending the accumulation of sufficient pools
of leases for financing through a CP conduit warehouse facility
or an on-balance-sheet term note securitization. Funding under
this facility is based on a borrowing base formula and factors
in an assumed discount rate and advance rate against the pledged
leases. Our weighted average outstanding borrowings under this
facility were $1.4 million for the year ended
December 31, 2005 compared to $5.7 million for the
year ended December 31, 2004. We incurred interest expense
under this facility of $84,000 for the year ended
December 31, 2005 compared to $197,000 for the year ended
December 31, 2004. This facility expires on August 31,
2007. As of December 31, 2005 and December 31, 2004,
there were no borrowings outstanding under the revolving bank
facility.
35
CP conduit warehouse facilities. We have two
CP conduit warehouse facilities that allow us to borrow, repay
and re-borrow based on a borrowing base formula. In these
transactions, we transfer pools of leases and interests in the
related equipment to special purpose, bankruptcy remote
subsidiaries. These special purpose entities in turn pledge
their interests in the leases and related equipment to an
unaffiliated conduit entity, which generally issues commercial
paper to investors. Borrowings under these facilities are based
on borrowing base formulas and assumed discount rates and
advance rates against the pledged collateral combined with
specific portfolio concentration criteria. These facilities are
also credit enhanced through third party financial
guarantors insurance policies. Interest expense on these
facilities is generally charged based on floating commercial
paper rates. These financing arrangements have minimum annual
fee requirements based on anticipated usage of the facilities.
00-A
Warehouse Facility This facility totals
$125 million and expires in October 2006. For the year
ended December 31, 2005 and the year ended
December 31, 2004, the weighted average interest rates were
3.74% and 1.71%, respectively. As of December 31, 2005 and
December 31, 2004, there were no borrowings outstanding
under this facility.
02-A
Warehouse Facility This facility totals
$100 million and expires in April 2006. For the year ended
December 31, 2005 and year ended December 31, 2004,
the weighted average interest rate was 4.29% and 2.29%,
respectively. There was $0 outstanding under this facility at
December 31, 2005 and $12.0 million at
December 31, 2004.
Term note securitizations. Since our founding
through December 31, 2005, we have completed seven
on-balance-sheet term note securitizations of which three remain
outstanding. In connection with each securitization transaction,
we have transferred leases to our wholly owned, special-purpose
bankruptcy remote subsidiaries and issued term debt
collateralized by such commercial leases to institutional
investors in private securities offerings. Our term note
securitizations differ from our CP conduit warehouse facilities
primarily in that our term note securitizations have fixed
terms, fixed interest rates and fixed principal amounts. By
entering into term note securitizations, we reduce outstanding
borrowings under our CP conduit warehouse facilities and
revolving bank facility, which increases the amounts available
to us under these facilities to fund additional lease
originations.
As of December 31, 2005, $501.7 million of our net
investment in direct financing leases was pledged to our term
note securitizations. Each of our outstanding term note
securitizations is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Scheduled
|
|
|
|
|
|
|
Notes Originally
|
|
|
Balance as of
|
|
|
Maturity
|
|
|
Original
|
|
|
|
Issued
|
|
|
December 31, 2005
|
|
|
Date
|
|
|
Coupon Rate
|
|
|
|
(Dollars in thousands)
|
|
|
2003 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A
|
|
$
|
197,290
|
|
|
$
|
50,473
|
|
|
|
May 2008
|
|
|
|
2.90
|
%
|
Class B
|
|
|
14,262
|
|
|
|
3,842
|
|
|
|
February 2009
|
|
|
|
5.07
|
|
Class C
|
|
|
5,600
|
|
|
$
|
1,955
|
|
|
|
May 2010
|
|
|
|
8.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
217,152
|
|
|
$
|
56,270
|
|
|
|
|
|
|
|
3.18
|
%(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
89,000
|
|
|
$
|
|
|
|
|
August 2005
|
|
|
|
2.04
|
%(2)
|
Class A-2
|
|
|
60,000
|
|
|
|
18,547
|
|
|
|
January 2007
|
|
|
|
2.91
|
(2)
|
Class A-3
|
|
|
24,000
|
|
|
|
24,000
|
|
|
|
June 2007
|
|
|
|
3.36
|
|
Class A-4
|
|
|
61,574
|
|
|
|
61,574
|
|
|
|
May 2011
|
|
|
|
3.88
|
(2)
|
Class B
|
|
|
49,684
|
|
|
|
36,443
|
|
|
|
May 2011
|
|
|
|
4.35
|
|
Class C
|
|
|
20,362
|
|
|
|
14,935
|
|
|
|
May 2011
|
|
|
|
5.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,620
|
|
|
$
|
155,499
|
|
|
|
|
|
|
|
3.29
|
%(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Scheduled
|
|
|
|
|
|
|
Notes Originally
|
|
|
Balance as of
|
|
|
Maturity
|
|
|
Original
|
|
|
|
Issued
|
|
|
December 31, 2005
|
|
|
Date
|
|
|
Coupon Rate
|
|
|
|
(Dollars in thousands)
|
|
|
2005 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A-1
|
|
$
|
92,000
|
|
|
$
|
56,520
|
|
|
|
August 2005
|
|
|
|
4.05
|
%
|
Class A-2
|
|
|
73,500
|
|
|
|
73,500
|
|
|
|
January 2007
|
|
|
|
4.49
|
|
Class A-3
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
June 2007
|
|
|
|
4.63
|
|
Class A-4
|
|
|
46,749
|
|
|
|
46,749
|
|
|
|
May 2011
|
|
|
|
4.75
|
|
Class B
|
|
|
55,546
|
|
|
|
55,546
|
|
|
|
May 2011
|
|
|
|
5.09
|
|
Class C
|
|
|
22,765
|
|
|
|
22,765
|
|
|
|
May 2011
|
|
|
|
5.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
340,560
|
|
|
$
|
305,080
|
|
|
|
|
|
|
|
4.60
|
%(1)(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Term Note Securitizations
|
|
|
|
|
|
$
|
516,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the original weighted average initial coupon rate for
all tranches of the securitization. In addition to this coupon
interest, term securitizations also have other transaction costs
which are amortized over the life of the borrowings as
additional interest expense. |
|
(2) |
|
Original coupon rate represents fixed rate coupon payable on
interest rate swap agreement. Certain classes of the 2004 term
note securitization were issued at variable rates to investors
with the Company simultaneously entering interest rate swap
agreements to convert the borrowings to a fixed interest cost.
For the weighted average term of the 2004-1 term note
securitization, the weighted average coupon rate will
approximate 3.81%. |
|
(3) |
|
The weighted average coupon rate of the 2005-1 term note
securitization will approximate 4.81% over the term of the
borrowing. |
Financial
Covenants
All of our secured borrowing arrangements have financial
covenants we must comply with in order to obtain funding through
the facilities and to avoid an event of default. The revolving
bank facility and CP conduit warehouse facilities also contain
cross default provisions such that an event of default on any
facility would be considered an event of default under the
others, in essence simultaneously restricting our ability to
access either of these critical sources of funding. A default by
any of our term note securitizations is also considered an event
of default under the revolving bank facility and CP conduit
warehouse facilities. Some of the critical financial covenants
under our borrowing arrangements as of December 31, 2005
include:
|
|
|
|
|
Tangible net worth of not less than $70.0 million;
|
|
|
|
Debt to equity ratio of not more than
10-to-1;
|
|
|
|
Fixed charge coverage ratio of not less than
1.15-to-1; and
|
|
|
|
Interest coverage ratio of not less than
3.25-to-1.
|
As of December 31, 2005 we believe we were in compliance
with all covenants in our borrowing relationships.
Contractual
Obligations
In addition to our scheduled maturities on our credit facilities
and term debt, we have future cash obligations under various
types of contracts. We lease office space and office equipment
under long-term operating leases. The
37
contractual obligations under our agreements, credit facilities,
term securitizations, operating leases and commitments under
non-cancelable contracts as of December 31, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations as of
December 31, 2005
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Leased
|
|
|
Capital
|
|
|
|
|
|
|
Borrowings
|
|
|
Interest
|
|
|
Leases
|
|
|
Facilities
|
|
|
Leases
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
2006
|
|
$
|
222,760
|
|
|
$
|
18,073
|
|
|
$
|
59
|
|
|
$
|
1,635
|
|
|
$
|
100
|
|
|
$
|
242,627
|
|
2007
|
|
|
155,176
|
|
|
|
9,913
|
|
|
|
14
|
|
|
|
1,600
|
|
|
|
74
|
|
|
|
166,777
|
|
2008
|
|
|
88,064
|
|
|
|
4,396
|
|
|
|
3
|
|
|
|
1,417
|
|
|
|
35
|
|
|
|
93,915
|
|
2009
|
|
|
39,611
|
|
|
|
1,454
|
|
|
|
|
|
|
|
1,280
|
|
|
|
|
|
|
|
42,345
|
|
2010
|
|
|
11,130
|
|
|
|
201
|
|
|
|
|
|
|
|
1,281
|
|
|
|
|
|
|
|
12,612
|
|
Thereafter
|
|
|
108
|
|
|
|
2
|
|
|
|
|
|
|
|
2,898
|
|
|
|
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
516,849
|
|
|
$
|
34,039
|
|
|
$
|
76
|
|
|
$
|
10,111
|
|
|
$
|
209
|
|
|
$
|
561,284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Interest Rate Risk and Sensitivity
Market risk is the risk of losses arising from changes in values
of financial instruments. We engage in transactions in the
normal course of business that expose us to market risks. We
attempt to mitigate such risks through prudent management
practices and strategies such as attempting to match the
expected cash flows of our assets and liabilities.
We are exposed to market risks associated with changes in
interest rates and our earnings may fluctuate with changes in
interest rates. The lease assets we originate are almost
entirely fixed rate. Accordingly, we generally seek to finance
these assets with fixed interest cost term note securitization
borrowings that we issue periodically. Between term note
securitization issues, we finance our new lease originations
through a combination of variable rate warehouse facilities and
working capital. Our mix of fixed and variable rate borrowings
and our exposure to interest rate risk changes over time. During
2005, the mix of variable rate borrowings has ranged from zero
to 36% of total borrowings and averaged 13%. Our highest
exposure to variable rate borrowings generally occurs just prior
to the issuance of a term note securitization.
We use derivative financial instruments to manage exposure to
the effects of changes in market interest rates and to fulfill
certain covenants in our borrowing arrangements. All derivatives
are recorded on the balance sheet at their fair value as either
assets or liabilities. Accounting for the changes in fair value
of derivatives depends on whether the derivative has been
designated and qualifies for hedge accounting treatment pursuant
to SFAS 133, as amended, Accounting for Derivative
Instruments and Hedging Activities.
We use interest rate swaps to reduce our exposure to changing
market interest rates prior to issuing a term note
securitization. In this scenario we enter into forward starting
swap agreements to coincide with the forecasted pricing date of
our next term note securitization. The value of this derivative
contract moves directly with interest rates and our intention is
to close these derivative contracts simultaneous with the
pricing of our next term securitization and amortize the
resulting gain or loss to interest expense over the term of our
forecasted securitization. We may choose to hedge all or a
portion of a forecasted transaction. In June and September 2005,
the Company entered forward starting interest rate swap
agreements with total underlying notional amounts of
$225.0 million to commence in September 2006 related to its
forecasted 2006 term note securitization transaction. These
interest rate swap agreements are recorded in other assets on
the consolidated balance sheet at their fair values of
$2.3 million. These interest rate swap agreements were
designated as cash flow hedges with unrealized gains recorded in
the equity section of the balance sheet of approximately
$1.4 million, net of tax, as of December 31, 2005. The
Company expects to terminate these agreements simultaneously
with the pricing of its 2006 term securitization with any of the
unrecognized gains or losses amortized to interest expense over
the term of the related borrowing.
In October and December 2004, the Company had entered into
similar forward starting interest rate swap agreements with
total underlying notional amounts of $250.0 million to
commence in August 2005 related to our 2005 term note
securitization transaction. The Company terminated these
agreements simultaneously with the
38
pricing of its 2005 term securitization issued on
August 11, 2005 and is amortizing the realized gains of
$3.2 million to interest expense over the term of the
related borrowing. These interest rate swap agreements were
designated as cash flow hedges with the gains realized deferred
and recorded in the equity section of the balance sheet at
approximately $1.5 million, net of tax, as of
December 31, 2005. During the year ended December 31,
2005, the Company amortized $687,000 of deferred gains to lower
interest expense of the related 2005 term securitization
borrowing. The Company expects to reclassify approximately
$803,000, net of tax, into earnings over the next twelve months.
We issued a term note securitization on July 22, 2004 where
certain classes of notes were issued at variable rates to
investors. We simultaneously entered into interest rate swap
contracts to convert these borrowings to a fixed interest cost
to the Company for the term of the borrowing. As of
December 31, 2005, we had interest rate swap agreements
related to these transactions with underlying notional amounts
of $80.1 million. These interest rate swap agreements are
recorded in other assets on the consolidated balance sheet at
their fair values of $1.1 million and $71,000 as of
December 31, 2005 and December 31, 2004, respectively.
These interest rate swap agreements were designated as cash flow
hedges with unrealized gains recorded in the equity section of
the balance sheet of approximately $652,000 and $43,000, net of
tax, as of December 31, 2005 and December 31, 2004,
respectively. The ineffectiveness related to these interest rate
swap agreements designated as cash flow hedges was not material
for the year ended December 31, 2005.
During the year ended December 31, 2005, the Company
recognized a net gain of $70,000 in other financing related
costs related to the fair values of the interest rate swaps that
did not qualify for hedge accounting. During the year ended
December 31, 2004, the Company recognized a net loss of
$89,000 in other financing related costs related to similar
interest rate swaps that were terminated or did not qualify for
hedge accounting. As of December 31, 2005, the Company had
interest rate swap agreements related to non-hedge accounting
transactions with underlying notional amounts of $512,000. These
interest rate swap agreements are recorded in other assets on
the consolidated balance sheet at a fair value of $76,000. These
derivative contracts also related to the 2004 term
securitization and are intended to offset certain prepayment
risks in the lease portfolio pledged in the 2004 term
securitization.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in our warehouse borrowing arrangements. Accordingly,
these cap agreements are recorded at fair value in other assets
at $103,000 and $73,000 as of December 31, 2005 and
December 31, 2004, respectively. Changes in the fair values
of the caps are recorded in financing related costs in the
accompanying statements of operations. The notional amount of
interest rate caps owned as of December 31, 2005 and
December 31, 2004 was $155.1 million and
$133.9 million, respectively. The Company also sells
interest rate caps to generate premium revenues to partially
offset the premium cost of purchasing its required interest rate
caps. As of December 31, 2005, the notional amount of
interest-rate cap sold agreements totaled $64.6 million.
The fair value of interest-rate caps sold is recorded in other
liabilities at $81,000 as of December 31, 2005. There were
no similar outstanding sold rate cap agreements at
December 31, 2004.
39
The following table provides information about our derivative
financial instruments and other financial instruments that are
sensitive to changes in interest rates, including debt
obligations. For debt obligations, the table presents the
expected principal cash flows and the related weighted average
interest rates as of December 31, 2005 expected as of and
for each year ended through December 31, 2010 and for
periods thereafter.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date by
Calendar Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 &
|
|
|
Carrying
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
There After
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate debt
|
|
$
|
222,760
|
|
|
$
|
155,176
|
|
|
$
|
88,064
|
|
|
$
|
39,611
|
|
|
$
|
11,238
|
|
|
$
|
516,849
|
|
Average fixed rate
|
|
|
4.04
|
%
|
|
|
4.15
|
%
|
|
|
4.26
|
%
|
|
|
4.71
|
%
|
|
|
4.94
|
%
|
|
|
4.18
|
%
|
Variable rate debt
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Average variable rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Interest rate caps purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
155,073
|
|
|
$
|
102,794
|
|
|
$
|
51,911
|
|
|
$
|
10,269
|
|
|
$
|
1,515
|
|
|
$
|
155,073
|
|
Ending notional balance
|
|
|
102,794
|
|
|
|
51,911
|
|
|
|
10,269
|
|
|
|
1,515
|
|
|
|
|
|
|
$
|
|
|
Average receive rate
|
|
|
6.16
|
%
|
|
|
6.11
|
%
|
|
|
6.06
|
%
|
|
|
6.01
|
%
|
|
|
6.00
|
%
|
|
|
6.13
|
%
|
Interest rate caps sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
64,619
|
|
|
$
|
54,726
|
|
|
$
|
39,750
|
|
|
$
|
8,777
|
|
|
$
|
1,512
|
|
|
$
|
64,619
|
|
Ending notional balance
|
|
|
54,726
|
|
|
|
39,750
|
|
|
|
8,777
|
|
|
|
1,512
|
|
|
|
|
|
|
$
|
|
|
Average pay rate
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
|
|
6.00
|
%
|
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
79,608
|
|
|
$
|
49,790
|
|
|
$
|
3,248
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
166,188
|
|
Ending notional balance
|
|
|
49,790
|
|
|
|
3,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Average pay rate
|
|
|
3.85
|
%
|
|
|
3.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.86
|
%
|
Forward starting interest rate
swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning notional balance
|
|
$
|
225,000
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
225,000
|
|
Ending notional balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Average pay rate
|
|
|
4.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.13
|
%
|
Our earnings are sensitive to fluctuations in interest rates.
The revolving bank facility and CP conduit warehouse facilities
are charged a floating rate of interest based on LIBOR, prime
rate or commercial paper interest rates. Because our assets are
fixed rate, increases in these market interest rates would
negatively impact earnings and decreases in the rates would
positively impact earnings because the rate charged on our
borrowings would change faster than our assets could reprice. We
would have to offset increases in borrowing costs by adjusting
the pricing under our new leases or our net interest margin
would be reduced. There can be no assurance that we will be able
to offset higher borrowing costs with increased pricing of our
assets.
For example, the impact of a hypothetical 100 basis point,
or 1.0%, increase in the market rates for which our borrowings
are indexed for the twelve month period ended December 31,
2005 would have been to reduce net interest and fee income by
approximately $582,000 based on our average variable rate
warehouse borrowings of approximately $58.2 million for the
year then ended, excluding the effects of derivatives, taxes and
possible increases in the yields from our lease portfolio due to
the origination of new leases at higher interest rates.
We manage and monitor our exposure to interest rate risk using
balance sheet simulation models. Such models incorporate many of
our assumptions about our business including new asset
production and pricing, interest rate forecasts, overhead
expense forecasts and assumed credit losses. Past experience
drives many of the assumptions used in our simulation models and
actual results could vary substantially.
40
Selected
Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Quarters
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
Year ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
15,714
|
|
|
$
|
16,389
|
|
|
$
|
17,490
|
|
|
$
|
17,979
|
|
Fee income
|
|
|
4,448
|
|
|
|
4,586
|
|
|
|
4,225
|
|
|
|
4,699
|
|
Revenue
|
|
|
21,333
|
|
|
|
22,192
|
|
|
|
22,877
|
|
|
|
23,809
|
|
Income tax expense
|
|
|
2,580
|
|
|
|
2,874
|
|
|
|
2,299
|
|
|
|
2,854
|
|
Net income
|
|
|
3,949
|
|
|
|
4,484
|
|
|
|
3,444
|
|
|
|
4,370
|
|
Basic earnings per share
|
|
|
0.34
|
|
|
|
0.39
|
|
|
|
0.30
|
|
|
|
0.38
|
|
Diluted earnings per share
|
|
|
0.33
|
|
|
|
0.38
|
|
|
|
0.29
|
|
|
|
0.36
|
|
Net investment in direct financing
leases
|
|
|
510,700
|
|
|
|
537,497
|
|
|
|
557,870
|
|
|
|
572,581
|
|
Total assets
|
|
|
580,554
|
|
|
|
601,591
|
|
|
|
732,933
|
|
|
|
670,989
|
|
Deferred tax liability
|
|
|
21,804
|
|
|
|
23,352
|
|
|
|
26,674
|
|
|
|
25,362
|
|
Total liabilities
|
|
|
483,603
|
|
|
|
500,288
|
|
|
|
625,462
|
|
|
|
558,380
|
|
Retained earnings
|
|
|
19,512
|
|
|
|
23,997
|
|
|
|
27,440
|
|
|
|
31,811
|
|
Total stockholders equity
|
|
|
96,951
|
|
|
|
101,303
|
|
|
|
107,471
|
|
|
|
112,609
|
|
Year ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
13,403
|
|
|
$
|
14,120
|
|
|
$
|
14,901
|
|
|
$
|
15,283
|
|
Fee income
|
|
|
2,810
|
|
|
|
3,206
|
|
|
|
3,466
|
|
|
|
3,979
|
|
Revenue
|
|
|
17,298
|
|
|
|
18,332
|
|
|
|
19,519
|
|
|
|
20,402
|
|
Income tax expense
|
|
|
1,987
|
|
|
|
2,230
|
|
|
|
2,213
|
|
|
|
2,468
|
|
Net income
|
|
|
3,045
|
|
|
|
3,411
|
|
|
|
3,395
|
|
|
|
3,608
|
|
Basic earnings per share
|
|
|
0.27
|
|
|
|
0.30
|
|
|
|
0.30
|
|
|
|
0.32
|
|
Diluted earnings per share
|
|
|
0.26
|
|
|
|
0.29
|
|
|
|
0.29
|
|
|
|
0.31
|
|
Net investment in direct financing
leases
|
|
|
437,688
|
|
|
|
458,990
|
|
|
|
477,038
|
|
|
|
489,678
|
|
Total assets
|
|
|
493,787
|
|
|
|
514,034
|
|
|
|
590,950
|
|
|
|
554,693
|
|
Deferred tax liability
|
|
|
11,714
|
|
|
|
13,427
|
|
|
|
15,112
|
|
|
|
18,110
|
|
Total liabilities
|
|
|
416,479
|
|
|
|
432,055
|
|
|
|
505,546
|
|
|
|
464,343
|
|
Retained earnings
|
|
|
5,150
|
|
|
|
8,561
|
|
|
|
11,956
|
|
|
|
15,563
|
|
Total stockholders equity
|
|
|
77,307
|
|
|
|
81,978
|
|
|
|
85,404
|
|
|
|
90,350
|
|
Recently
Issued Accounting Standards
In December 2004, the FASB issued Statement No. 123R
Share-Based Payments, an amendment of FASB
Statements 123 and 95, requiring companies to recognize
expense on the grant-date for the fair value of stock options
and other equity-based compensation issued to employees and
non-employees. The Statement is effective for most public
companies interim or annual periods beginning after
June 15, 2005 (not later than January 1, 2006 for
calendar-year-end
companies). All public companies must use either the modified
prospective or the modified retrospective transition method. The
Company plans to use the modified prospective method whereby
awards that are granted, modified, or settled after the date of
adoption will be measured and accounted for in accordance with
Statement 123R. Unvested equity classified awards that were
granted prior to the effective date will be accounted for in
accordance with Statement 123R and expensed as the awards
vest based on their grant date fair value. Accordingly, the
Company will adopt this rule in the first quarter of 2006 and
anticipates recognizing approximately $731,000 of pre-tax
expense for the vesting of previously issued stock options in
2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error
Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3.
SFAS No. 154 changes the accounting for and reporting
of a
41
voluntary change in accounting principle and replaces APB
Opinion No. 20 and SFAS No. 3. Under Opinion
No. 20, most changes in accounting principle were reported
in the income statement of the period of change as a cumulative
adjustment. However, under SFAS No. 154, a voluntary
change in accounting principle must be shown retrospectively in
the financial statements, if practicable, for all periods
presented. In cases where retrospective application is
impracticable, an adjustment to the assets and liabilities and a
corresponding adjustment to retained earnings can be made as of
the beginning of the earliest period for which retrospective
application is practicable rather than being reported in the
income statement. The adoption of SFAS No. 154 did not
have a material effect on the Companys consolidated
financial statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
an amendment of SFAS No. 133 and No. 140. This
Statement, which becomes effective for fiscal years beginning
after September 15, 2006, addresses certain beneficial
interests in securitized financial assets. Because of the recent
issuance of this Statement and, given that adoption of
SFAS 155 is not required until fiscal year 2007, the
Company has not completed its initial assessment of the impact,
if any, this Statement may have on its consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
The information appearing in the section captioned
Managements Discussion and Analysis of Operations
and Financial Condition Market Interest Rate
Risk and Sensitivity under Item 7 of this
Form 10-K/A
is incorporated herein by reference.
42
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
Managements
Annual Report on Internal Control over Financial
Reporting
Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting
as defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended (the
Exchange Act). The Companys internal control
over financial reporting is designed to provide reasonable
assurance to the Companys management and Board of
Directors regarding the preparation and fair presentation of
published financial statements. Because of its inherent
limitations, internal control over financial reporting may not
prevent or detect misstatements.
Management has assessed the effectiveness of the Companys
internal control over financial reporting as of
December 31, 2005. In making its assessment of internal
control over financial reporting, management used the criteria
set forth by the Committee of Sponsoring Organizations
(COSO) of the Treadway Commission in Internal
Control Integrated Framework.
Management has concluded that, as of December 31, 2005, the
Companys internal control over financial reporting was
effective based on the criteria set forth by the COSO of the
Treadway Commission in Internal
Control Integrated Framework.
The Companys independent registered public accounting
firm, Deloitte & Touche LLP, has issued an attestation
report on managements assessment of the Companys
internal control over financial reporting included herein.
March 2, 2006
43
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Marlin Business Services Corp. and Subsidiaries:
We have audited managements assessment, included in the
accompanying Managements Annual Report on Internal Control
over Financial Reporting, that Marlin Business Services
Corporation and subsidiaries (the Company)
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission. The Companys management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on managements assessment and an
opinion on the effectiveness of the Companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements as of and for the year ended
December 31, 2005 of the Company and our report dated
March 2, 2006 expressed an unqualified opinion on those
consolidated financial statements.
Philadelphia, PA
March 2, 2006
44
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
Index to
Consolidated Financial Statements
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Marlin Business Services Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of
Marlin Business Services Corporation and subsidiaries (the
Company) as of December 31, 2005, and the
related consolidated statements of operations,
stockholders equity, and cash flows for the year then
ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2005 consolidated financial statements
present fairly, in all material respects, the financial position
of the Company at as of December 31, 2005, and the results
of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2005, based on the
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 2, 2006 expressed an unqualified
opinion on managements assessment of the effectiveness of
the Companys internal control over financial reporting and
an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
Philadelphia, Pennsylvania
March 2, 2006
46
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Marlin Business Services Corp. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of
Marlin Business Services Corp. and subsidiaries (the Company) as
of December 31, 2004 and the related consolidated
statements of operations, stockholders equity, and cash
flows for the years ended December 31, 2004 and 2003. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Marlin Business Services Corp. and subsidiaries as
of December 31, 2004, and the results of their operations
and their cash flows for each of the years ended
December 31, 2004 and 2003, in conformity with
U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of Marlin Business Services Corp. internal control
over financial reporting as of December 31, 2004, based on
criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 11, 2005, not included
herein, KPMG LLP expressed an unqualified opinion on
managements assessment of, and an adverse opinion on the
effectiveness of, internal controls over financial reporting.
Philadelphia, PA
March 11, 2005
47
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share
amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
34,472
|
|
|
$
|
16,092
|
|
Restricted cash
|
|
|
47,786
|
|
|
|
37,331
|
|
Net investment in direct financing
leases
|
|
|
572,581
|
|
|
|
489,678
|
|
Property and equipment, net
|
|
|
3,776
|
|
|
|
3,555
|
|
Fair value of cash flow hedges
|
|
|
3,383
|
|
|
|
618
|
|
Other assets
|
|
|
8,991
|
|
|
|
7,419
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
670,989
|
|
|
$
|
554,693
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Revolving and term secured
borrowings
|
|
$
|
516,849
|
|
|
$
|
434,670
|
|
Other liabilities:
|
|
|
|
|
|
|
|
|
Sales and property taxes payable
|
|
|
7,702
|
|
|
|
4,856
|
|
Accounts payable and accrued
expenses
|
|
|
8,467
|
|
|
|
6,707
|
|
Deferred income tax liability
|
|
|
25,362
|
|
|
|
18,110
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
558,380
|
|
|
|
464,343
|
|
Commitments and contingencies
(note 8)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.01 par
value; 75,000 shares authorized; 11,755 and
11,528 shares issued and outstanding, respectively
|
|
|
117
|
|
|
|
115
|
|
Preferred Stock, $0.01 par
value; 5,000 shares authorized; none issued and outstanding
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
78,781
|
|
|
|
75,732
|
|
Stock subscription receivable
|
|
|
(25
|
)
|
|
|
(54
|
)
|
Deferred compensation
|
|
|
(1,595
|
)
|
|
|
(1,380
|
)
|
Other comprehensive income
|
|
|
3,520
|
|
|
|
374
|
|
Retained earnings
|
|
|
31,811
|
|
|
|
15,563
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
112,609
|
|
|
|
90,350
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
670,989
|
|
|
$
|
554,693
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share
amounts)
|
|
|
Interest income
|
|
$
|
67,572
|
|
|
$
|
57,707
|
|
|
$
|
47,624
|
|
Fee income
|
|
|
17,957
|
|
|
|
13,461
|
|
|
|
8,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fee income
|
|
|
85,529
|
|
|
|
71,168
|
|
|
|
56,403
|
|
Interest expense
|
|
|
20,835
|
|
|
|
16,675
|
|
|
|
18,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income
|
|
|
64,694
|
|
|
|
54,493
|
|
|
|
38,334
|
|
Provision for credit losses
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
7,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and fee income after
provision for credit losses
|
|
|
53,808
|
|
|
|
44,540
|
|
|
|
30,369
|
|
Insurance and other income
|
|
|
4,682
|
|
|
|
4,383
|
|
|
|
3,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,490
|
|
|
|
48,923
|
|
|
|
33,792
|
|
Salaries and benefits
|
|
|
18,173
|
|
|
|
14,447
|
|
|
|
10,273
|
|
General and administrative
|
|
|
11,908
|
|
|
|
10,063
|
|
|
|
7,745
|
|
Financing related costs
|
|
|
1,554
|
|
|
|
2,055
|
|
|
|
1,604
|
|
Change in fair value of warrants
|
|
|
|
|
|
|
|
|
|
|
5,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
26,855
|
|
|
|
22,358
|
|
|
|
8,447
|
|
Income taxes
|
|
|
10,607
|
|
|
|
8,899
|
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,248
|
|
|
|
13,459
|
|
|
|
2,847
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
2,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stockholders
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
Diluted earnings per share:
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
Weighted average shares used in
computing basic earnings per share
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
|
|
3,001,754
|
|
Weighted average shares used in
computing diluted earnings per share
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
|
|
3,340,968
|
|
See accompanying notes to consolidated financial statements.
49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
|
|
|
Other
|
|
|
Retained
|
|
|
Total
|
|
|
|
Common
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Subscription
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Earnings
|
|
|
Shareholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Compensation
|
|
|
Income
|
|
|
(Deficit)
|
|
|
Equity
|
|
|
|
(In thousands, except share
amounts)
|
|
|
Balance, December 31, 2002
|
|
|
1,623,440
|
|
|
|
16
|
|
|
|
1,842
|
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
1,263
|
|
|
|
2,974
|
|
Issuance of Common Stock, net of
issuance costs of $1,599
|
|
|
3,673,317
|
|
|
|
36
|
|
|
|
45,307
|
|
|
|
(189
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,154
|
|
Exercise of stock options
|
|
|
60,655
|
|
|
|
1
|
|
|
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
Preferred stock conversion
|
|
|
5,156,152
|
|
|
|
52
|
|
|
|
17,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,151
|
|
Warrants conversion
|
|
|
700,046
|
|
|
|
7
|
|
|
|
7,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,145
|
|
Deferred compensation related to
stock options
|
|
|
|
|
|
|
|
|
|
|
64
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Preferred Stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,006
|
)
|
|
|
(2,006
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,847
|
|
|
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
11,213,610
|
|
|
$
|
112
|
|
|
$
|
71,918
|
|
|
$
|
(213
|
)
|
|
$
|
(50
|
)
|
|
|
|
|
|
$
|
2,104
|
|
|
$
|
73,871
|
|
Issuance of Common Stock
|
|
|
39,116
|
|
|
|
1
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
523
|
|
Exercise of stock options
|
|
|
147,599
|
|
|
|
1
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
438
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
834
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
159
|
|
Restricted stock grant
|
|
|
127,372
|
|
|
|
1
|
|
|
|
2,021
|
|
|
|
|
|
|
|
(2,022
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
692
|
|
|
|
|
|
|
|
|
|
|
|
692
|
|
Unrealized gains on cash Flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
374
|
|
|
|
|
|
|
|
374
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,459
|
|
|
|
13,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
11,527,697
|
|
|
$
|
115
|
|
|
$
|
75,732
|
|
|
$
|
(54
|
)
|
|
$
|
(1,380
|
)
|
|
$
|
374
|
|
|
$
|
15,563
|
|
|
$
|
90,350
|
|
Issuance of Common Stock
|
|
|
19,792
|
|
|
|
|
|
|
|
356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
356
|
|
Exercise of stock options
|
|
|
147,591
|
|
|
|
1
|
|
|
|
594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
595
|
|
Tax benefit on stock options
exercised
|
|
|
|
|
|
|
|
|
|
|
972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
972
|
|
Payment of receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
Restricted stock grant
|
|
|
60,145
|
|
|
|
1
|
|
|
|
1,127
|
|
|
|
|
|
|
|
(1,295
|
)
|
|
|
|
|
|
|
|
|
|
|
(167
|
)
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,080
|
|
|
|
|
|
|
|
|
|
|
|
1,080
|
|
Unrealized gains on cash Flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,146
|
|
|
|
|
|
|
|
3,146
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,248
|
|
|
|
16,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
11,755,225
|
|
|
$
|
117
|
|
|
$
|
78,781
|
|
|
$
|
(25
|
)
|
|
$
|
(1,595
|
)
|
|
$
|
3,520
|
|
|
$
|
31,811
|
|
|
$
|
112,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
2,847
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,048
|
|
|
|
3,634
|
|
|
|
3,076
|
|
Provision for credit losses
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
7,965
|
|
Amortization of deferred gain on
cash flow hedge
|
|
|
(686
|
)
|
|
|
|
|
|
|
|
|
Loss on fixed assets disposed
|
|
|
|
|
|
|
154
|
|
|
|
|
|
Deferred taxes
|
|
|
5,143
|
|
|
|
8,899
|
|
|
|
5,600
|
|
Change in fair value of warrants
|
|
|
|
|
|
|
|
|
|
|
5,723
|
|
Amortization of deferred initial
direct costs and fees
|
|
|
11,916
|
|
|
|
11,869
|
|
|
|
10,253
|
|
Deferred initial direct costs and
fees
|
|
|
(14,270
|
)
|
|
|
(13,117
|
)
|
|
|
(12,550
|
)
|
Effect of changes in other
operating items:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
2,524
|
|
|
|
212
|
|
|
|
(1,031
|
)
|
Accounts payable and accrued
expenses
|
|
|
4,274
|
|
|
|
1,826
|
|
|
|
2,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
40,083
|
|
|
|
36,889
|
|
|
|
24,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross equipment purchased for
direct financing lease contracts
|
|
|
(318,413
|
)
|
|
|
(272,275
|
)
|
|
|
(242,278
|
)
|
Principal collections on lease
finance receivables
|
|
|
227,575
|
|
|
|
190,534
|
|
|
|
148,997
|
|
Security deposits collected, net of
returns
|
|
|
(598
|
)
|
|
|
2,518
|
|
|
|
3,909
|
|
Acquisitions of property and
equipment
|
|
|
(1,457
|
)
|
|
|
(2,518
|
)
|
|
|
(1,076
|
)
|
Change in restricted cash
|
|
|
(10,455
|
)
|
|
|
(7,727
|
)
|
|
|
(5,233
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(103,348
|
)
|
|
|
(89,468
|
)
|
|
|
(95,681
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuances of Common stock
|
|
|
385
|
|
|
|
682
|
|
|
|
46,876
|
|
Stock issuance costs
|
|
|
|
|
|
|
|
|
|
|
(1,599
|
)
|
Exercise of stock options
|
|
|
595
|
|
|
|
438
|
|
|
|
220
|
|
Payment of accrued preferred
dividends
|
|
|
|
|
|
|
|
|
|
|
(6,025
|
)
|
Subordinated debt repayment
|
|
|
|
|
|
|
|
|
|
|
(10,000
|
)
|
Debt issuance costs
|
|
|
(1,514
|
)
|
|
|
(2,556
|
)
|
|
|
(1,495
|
)
|
Term securitization advances
|
|
|
340,560
|
|
|
|
304,620
|
|
|
|
217,152
|
|
Term securitization repayments
|
|
|
(246,348
|
)
|
|
|
(203,866
|
)
|
|
|
(151,714
|
)
|
Secured bank facility advances
|
|
|
50,581
|
|
|
|
20,420
|
|
|
|
108,961
|
|
Secured bank facility repayments
|
|
|
(50,581
|
)
|
|
|
(24,929
|
)
|
|
|
(125,284
|
)
|
Warehouse advances
|
|
|
169,005
|
|
|
|
115,482
|
|
|
|
167,169
|
|
Warehouse repayments
|
|
|
(181,038
|
)
|
|
|
(171,055
|
)
|
|
|
(150,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
81,645
|
|
|
|
39,236
|
|
|
|
94,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
18,380
|
|
|
|
(13,343
|
)
|
|
|
23,081
|
|
Cash and cash equivalents,
beginning of period
|
|
|
16,092
|
|
|
|
29,435
|
|
|
|
6,354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
34,472
|
|
|
$
|
16,092
|
|
|
$
|
29,435
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash
flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
19,101
|
|
|
$
|
14,507
|
|
|
$
|
15,624
|
|
Cash paid for income taxes
|
|
|
5,938
|
|
|
|
|
|
|
|
|
|
Conversion of Preferred stock to
Common stock
|
|
|
|
|
|
|
|
|
|
|
17,151
|
|
Conversion of Warrants to Common
stock
|
|
|
|
|
|
|
|
|
|
|
7,145
|
|
See accompanying notes to consolidated financial statements.
51
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
(Dollars in thousands, except share data)
Marlin Business Services Corp. (Company) was
incorporated in the Commonwealth of Pennsylvania on
August 5, 2003. Through its principal operating subsidiary,
Marlin Leasing Corporation, the Company provides equipment
leasing solutions primarily to small businesses nationwide in a
segment of the equipment leasing market commonly referred to in
the leasing industry as the small-ticket segment. The Company
finances over 60 categories of commercial equipment important to
its end user customers including copiers, telephone systems,
computers and certain commercial and industrial equipment.
References to the Company, we,
us, and our herein refer to Marlin
Business Services Corp. and its wholly-owned subsidiaries after
giving effect to the reorganization described below, unless the
context otherwise requires.
Initial
Public Offering
In November 2003, 5,060,000 shares of our common stock were
issued in connection with our IPO. Of these shares, a total of
3,581,255 shares were sold by the company and
1,478,745 shares were sold by selling shareholders. The
initial public offering price was $14.00 per share
resulting in net proceeds to us, after payment of underwriting
discounts and commissions but before other offering costs, of
approximately $46.6 million. We did not receive any
proceeds from the shares sold by the selling shareholders. We
used the net proceeds from the IPO as follows:
(i) approximately $10.1 million was used to repay all
of our outstanding 11% subordinated debt and all accrued
interest thereon; (ii) approximately $6.0 million was
used to pay accrued dividends on preferred stock which converted
to common stock at the time of the IPO; (iii) approximately
$1.6 million was used to pay issuance costs incurred in
connection with the IPO. The remaining $28.9 million was
used to fund newly originated and existing leases in our
portfolio and for general business purposes.
Reorganization
Since our founding, we have conducted all of our operations
through Marlin Leasing Corporation, which was incorporated in
the state of Delaware on June 16, 1997. On
November 11, 2003, we reorganized our operations into a
holding company structure by merging Marlin Leasing Corporation
with a wholly owned subsidiary of Marlin Business Services
Corp., a Pennsylvania corporation. As a result, all former
shareholders of Marlin Leasing Corporation became shareholders
of Marlin Business Services Corp. After the reorganization,
Marlin Leasing Corporation remains in existence as our primary
operating subsidiary.
In anticipation of the public offering, on October 12,
2003, Marlin Leasing Corporations Board of Directors
approved a stock split of its Class A Common Stock at a
ratio of 1.4 shares for every one share of Class A
Common Stock in order to increase the number of shares of
Class A Common Stock authorized and issued. All per share
amounts and outstanding shares, including all common stock
equivalents, such as stock options, warrants and convertible
preferred stock, have been retroactively restated in the
accompanying consolidated financial statements and notes to
consolidated financial statements for all periods presented to
reflect the stock split.
The following steps to reorganize our operations into a holding
company structure were taken prior to the completion of our
initial public offering of common stock in November 2003:
|
|
|
|
|
all classes of Marlin Leasing Corporations redeemable
convertible preferred stock converted into Class A common
stock of Marlin Leasing Corporation;
|
|
|
|
all warrants to purchase Class A common stock of Marlin
Leasing Corporation were exercised on a net issuance, or
cashless, basis for Class A common stock, and a selling
shareholder exercised options to purchase 60,655 shares of
Class A common stock. The exercise of warrants resulted in
the issuance of 700,046 common shares on a net issuance basis,
based on the initial public offering price of $14.00 per share;
|
52
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
|
|
|
|
|
all warrants to purchase Class B common stock of Marlin
Leasing Corporation were exercised on a net issuance basis for
Class B common stock, and all Class B common stock was
converted by its terms into Class A common stock;
|
|
|
|
a direct, wholly owned subsidiary of Marlin Business Services
Corp. merged with and into Marlin Leasing Corporation, and each
share of Marlin Leasing Corporations Class A common
stock was exchanged for one share of Marlin Business Services
Corp. common stock under the terms of an agreement and plan of
merger dated August 27, 2003; and
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|
|
|
the Marlin Leasing Corporation 1997 Equity Compensation Plan was
assumed by, and merged into, the Marlin Business Services Corp.
2003 Equity Compensation Plan. All outstanding options to
purchase Marlin Leasing Corporations Class A common
stock under the 1997 Plan were converted into options to
purchase shares of common stock of Marlin Business Services Corp.
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|
|
2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany
accounts and transactions have been eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Estimates are used
when accounting for income recognition, the residual values of
leased equipment, the allowance for credit losses, deferred
initial direct costs and fees, late fee receivables, valuations
of warrants and income taxes. Actual results could differ from
those estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments purchased
with a maturity of three months or less to be cash equivalents.
Restricted
Cash
Restricted cash consists primarily of the cash reserve, advance
payment accounts and cash held by the trustee related to the
Companys term securitizations. The restricted cash balance
also includes amounts due from securitizations representing
reimbursements of servicing fees and excess spread income.
Net
Investment in Direct Financing Leases
The Company uses the direct finance method of accounting to
record income from direct financing leases. At the inception of
a lease, the Company records the minimum future lease payments
receivable, the estimated residual value of the leased equipment
and the unearned lease income. Initial direct costs and fees
related to lease originations are deferred as part of the
investment and amortized over the lease term. Unearned lease
income is the amount by which the total lease receivable plus
the estimated residual value exceeds the cost of the equipment.
Unearned lease income, net of initial direct costs and fees, is
recognized as revenue over the lease term on the interest method.
53
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Residual values reflect the estimated amounts to be received at
lease termination from lease extensions, sales or other
dispositions of leased equipment. Estimates are based on
industry data or managements experience. Management
performs periodic reviews of the estimated residual values
recorded and any impairment, if other than temporary, is
recognized in the current period.
Yields implicit in the Companys direct financing leases
are fixed at the inception of the lease and generally range from
8% to 20%. Residual values of the equipment under lease
generally range from $1 to 15% of the cost of equipment and are
based on the type of equipment leased and the lease term.
Allowance
for Credit Losses
An allowance for credit losses is maintained at a level that
represents managements best estimate of probable losses
based upon an evaluation of known and inherent risks in the
Companys lease portfolio as of the balance sheet date.
Managements evaluation is based upon regular review of the
lease portfolio including a migration analysis of delinquent and
current accounts that estimates the likelihood that accounts
will progress through the various delinquency stages and
ultimately be charged off. In addition to the migration
analysis, management also considers such factors as the level of
recourse provided, if any, delinquencies, historical loss
experience, current economic conditions, and other relevant
factors. Actual losses may vary from current estimates. These
estimates are reviewed periodically and as adjustments become
necessary, they are recorded in earnings in the period in which
they become known. Our policy is to charge-off against the
allowance the estimated unrecoverable portion of accounts once
they reach 121 days delinquent.
Property
and Equipment
The Company records property and equipment at cost. Equipment
capitalized under capital leases are recorded at the present
value of the minimum lease payments due over the lease term.
Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the
related assets or lease term, whichever is shorter. The Company
generally uses depreciable lives that range from three to seven
years based on equipment type.
Other
Assets
Included in other assets on the consolidated balance sheets are
transaction costs associated with warehouse facilities and term
securitization transactions that are being amortized over the
estimated lives of the related warehouse facilities and the term
securitization transactions using a method which approximates
the interest method. In addition, other assets includes prepaid
expenses, accrued fee income and progress payments on equipment
purchased to lease.
Other assets are comprised of the following:
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|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Deferred transaction costs
|
|
$
|
2,050
|
|
|
$
|
2,573
|
|
Accrued fees receivable
|
|
|
2,012
|
|
|
|
1,813
|
|
Prepaid expenses
|
|
|
1,208
|
|
|
|
975
|
|
Derivative collateral
|
|
|
784
|
|
|
|
352
|
|
Property tax receivables
|
|
|
191
|
|
|
|
625
|
|
Other
|
|
|
2,746
|
|
|
|
1,081
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,991
|
|
|
$
|
7,419
|
|
|
|
|
|
|
|
|
|
|
54
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Securitization
From inception through December 31, 2005, the Company has
completed seven term note securitizations of which four have
been repaid. In connection with each transaction, the Company
has established a bankruptcy remote special-purpose subsidiary
and issued term debt to institutional investors. Under
SFAS No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement 125, the
Companys securitizations do not qualify for sales
accounting treatment due to certain call provisions that the
Company maintains as well as the fact that the special purpose
entities used in connection with the securitizations also hold
the residual assets. Accordingly, assets and related debt of the
special purpose entities are included in the accompanying
consolidated balance sheets. The Companys leases and
restricted cash are assigned as collateral for these borrowings
and there is no further recourse to the general credit of the
Company. Collateral in excess of these borrowings represents the
Companys maximum loss exposure.
Derivatives
The Company uses derivative financial instruments to manage
exposure to the effects of changes in market interest rates and
to fulfill certain covenants in its borrowing arrangements.
SFAS 133, as amended, Accounting for Derivative
Instruments and Hedging Activities, requires every
derivative instrument, including certain derivative instruments
embedded in other contracts, to be recorded in the balance sheet
as either an asset or liability measured at its fair value.
SFAS No. 133 requires that changes in the
derivatives fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company
records the fair value of derivative contracts based on market
value indications supplied by financial institutions who are
also counterparty to the derivative contracts.
Income
recognition
Interest income is recognized under the effective interest
method. The effective interest method of income recognition
applies a constant rate of interest equal to the internal rate
of return on the lease. When a lease is 90 days or more
delinquent, the lease is classified as being on non-accrual and
we do not recognize interest income on that lease until the
lease is less than 90 days delinquent.
Fee
Income
Fee income consists of fees for delinquent lease payments and
cash collected on early termination of leases. Fee income also
includes net residual income, which includes income from lease
renewals and gains and losses on the realization of residual
values of equipment disposed at the end of term. Residual
balances at lease termination which remain uncollected more than
120 days are charged against income.
Fee income from delinquent lease payments is recognized on an
accrual basis based on anticipated collection rates. Other fees
are recognized when received. Net residual income includes
charges for the reduction in estimated residual values on
equipment for leases in renewal and is recognized during the
renewal period. Management performs periodic reviews of the
estimated residual values and any impairment, if other than
temporary, is recognized in the current period.
Fee income from delinquent lease payments amounted to $10,124,
$7,566 and $5,942 during the years ended December 31, 2005,
2004 and 2003, respectively. For the years ended
December 31, 2005, 2004, and 2003 renewal income, net of
depreciation amounted to $6,050, $4,519 and $2,474, and net
gains (losses) on residual values amounted to $(41), $158 and
($443), respectively.
55
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Insurance
and Other Income
Insurance income is recognized on an accrual basis as earned
over the term of the lease. Payments that are 120 days or
more past due are charged against income. Ceding commissions,
losses and loss adjustment expenses are recorded in the period
incurred and netted against insurance income. Other income
includes fees received from lease syndications and gains on
sales of leases which are recognized when received.
Initial
direct costs and fees
The Company defers initial direct costs incurred and fees
received to originate our leases in accordance with
SFAS No. 91, Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases. The initial direct costs and fees
deferred are part of the net investment in direct financing
leases and are amortized to interest income using the effective
interest method. We defer third party commission costs as well
as certain internal costs directly related to the origination
activity. The costs include evaluating the prospective
lessees financial condition, evaluating and recording
guarantees and other security arrangements, negotiating lease
terms, preparing and processing lease documents and closing the
transaction. The fees we defer are documentation fees collected
at lease inception. The realization of the deferred initial
direct costs, net of fees deferred, is predicated on the net
future cash flows generated by our lease portfolio.
Financing
Related Costs
Financing related costs consist of bank commitment fees and the
change in fair value of derivative agreements.
Stock-Based
Compensation
The Company issues both restricted shares and stock options to
certain employees as part of its overall compensation strategy.
The Company follows the intrinsic value method of accounting for
stock-based employee compensation in accordance with Accounting
Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and related
interpretations. The Company records deferred compensation for
option grants to employees for the amount, if any, by which the
fair value per share exceeds the exercise price per share at the
measurement date, which is generally the grant date. This
deferred compensation is recognized over the vesting period.
Under SFAS No. 123, Accounting for Stock-Based
Compensation, compensation expense related to stock options
granted to employees and directors is computed using option
pricing models to determine the fair value of the stock options
at the date of grant. The Company has primarily used the
Black-Scholes option pricing model to determine fair value of
options issued. Pursuant to the disclosure requirements of
SFAS No. 123, had compensation
56
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
expense for stock option grants been determined based upon the
fair value at the date of grant, the Companys net income
would have decreased as follows:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income, as reported
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
2,847
|
|
Add: stock-based employee
compensation expense included in net income, net of tax
|
|
|
549
|
|
|
|
428
|
|
|
|
8
|
|
Deduct: total stock-based employee
compensation expense determined under fair value-based method
for all awards, net of tax
|
|
|
(897
|
)
|
|
|
(686
|
)
|
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
15,900
|
|
|
$
|
13,201
|
|
|
$
|
2,814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic As reported
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
Pro forma
|
|
|
1.38
|
|
|
|
1.17
|
|
|
|
0.27
|
|
Diluted As
reported
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
Pro forma
|
|
|
1.33
|
|
|
|
1.13
|
|
|
|
0.24
|
|
Weighted average shares used in
computing basic earnings per share
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
|
|
3,001,754
|
|
Weighted average shares used in
computing diluted earnings per share
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
|
|
3,340,968
|
|
For purposes of determining the above disclosure required by
SFAS No. 123, the Company determined the fair value of
the options on their grant dates. Key assumptions used in the
pricing models were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
Weighted Averages:
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Risk-free interest rate
|
|
|
3.748
|
%
|
|
|
3.994
|
%
|
|
|
3.929
|
%
|
Expected life of option grants
|
|
|
5.1 years
|
|
|
|
8.0 years
|
|
|
|
7.2 years
|
|
Expected dividends
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Volatility
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%(1)
|
|
|
|
(1) |
|
Prior to the Company going public in November 2003, the Company
valued options using the minimum value method which does not
require a volatility assumption. |
In 2005, the Company issued 119,765 stock options each with an
exercise price equal to or greater than the estimated fair
market value of the stock at the grant date. The weighted
average fair value of stock options issued with an exercise
price equal to the market price of the stock at the grant date
for the twelve months ended December 31, 2005, was
$6.67 per share.
In 2004, the Company issued 207,000 stock options each with an
exercise price equal to or greater than the estimated fair
market value of the stock at the grant date. The weighted
average fair value of stock options issued with an exercise
price equal to the market price of the stock at the grant date
for the twelve months ended December 31, 2004, was
$8.54 per share.
In 2003, the Company issued 153,855 stock options with an
exercise price equal to or greater than the estimated fair
market value of the stock at the grant date. The weighted
average fair value of stock options issued with an exercise
price equal to the market price of the stock at the grant date
for the twelve months ended December 31, 2003, was
$7.31 per share. In 2003, the Company issued 74,900 stock
options with an exercise price
57
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
less than the estimated fair market value of the stock at the
grant date. The weighted average fair value of stock options
issued with an exercise price less than the market price of the
stock at the grant date for the twelve months ended
December 31, 2003, was $1.52 per share.
In 2005, the Company issued a total of 84,203 shares of
restricted stock of which 72,944 shares were unvested and
4,434 were forfeited at December 31, 2005. The restricted
shares cliff vest in 7 or 10 years and are subject to
accelerated vesting criteria if performance measures are
obtained. The Company recorded deferred compensation of
approximately $1,517 based on the fair market value of the
Companys stock price at the time of issuance. As vesting
occurs, or is deemed likely to occur, compensation expense is
recognized and deferred compensation reduced on the balance
sheet. The Company recognized $415 of compensation expense
related to this 2005 restricted stock for the year ended
December 31, 2005. Restricted stock was issued at a price
equal to the market price of the Companys stock at the
grant date and was a weighted average of $18.01 for the twelve
months ended December 31, 2005.
In 2004, the Company issued a total of 127,372 shares of
restricted stock. The restricted shares cliff vest in
10 years and are subject to accelerated vesting criteria if
performance measures are obtained. During 2005, 39,510 of the
shares vested and 19,626 were forfeited. The Company recorded
deferred compensation of approximately $2.0 million based
on the fair market value of the Companys stock price at
the time of issuance. As vesting occurs, or is deemed likely to
occur, compensation expense is recognized and deferred
compensation reduced on the balance sheet. The Company
recognized $481 and $674 of compensation expense related to this
restricted stock for the years ended December 31, 2005 and
December 31, 2004, respectively. Restricted stock was
issued at a price equal to the market price of the
Companys stock at the grant date and was a weighted
average of $15.88 for the twelve months ended December 31,
2004.
Income
Taxes
The Company accounts for income taxes under the provisions of
SFAS No. 109, Accounting for Income
Taxes. SFAS No. 109 requires the use of
the asset and liability method under which deferred taxes are
determined based on the estimated future tax effects of
differences between the financial statement and tax bases of
assets and liabilities, given the provisions of the enacted tax
laws. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax
liabilities and projected future taxable income in making this
assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which
the deferred tax assets are deductible, management believes it
is more likely than not the Company will realize the benefits of
these deductible differences.
Earnings
Per Share
The Company follows SFAS No. 128, Earnings Per
Share. Basic earnings per share is computed by dividing net
income available to common stockholders by the weighted average
number of common shares outstanding for the period. Diluted
earnings per share is computed based on the weighted average
number of common shares outstanding and the dilutive impact of
the exercise or conversion of common stock equivalents, such as
stock options, warrants and convertible preferred stock, into
shares of Common Stock as if those securities were exercised or
converted.
Reclassifications
Certain amounts in prior financial statements were reclassified
to conform to the current year presentation.
58
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Recent
Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123R
Share-Based Payments, an amendment of FASB
Statements 123 and 95, requiring companies to recognize
expense on the grant-date for the fair value of stock options
and other equity-based compensation issued to employees and
non-employees. The Statement is effective for most public
companies interim or annual periods beginning after
June 15, 2005. All public companies must use either the
modified prospective or the modified retrospective transition
method. The Company plans to use the modified prospective method
whereby awards that are granted, modified, or settled after the
date of adoption will be measured and accounted for in
accordance with Statement 123R. Unvested equity classified
awards that were granted prior to the effective date will be
accounted for in accordance with Statement 123R and
expensed as the awards vest based on their grant date fair
value. Accordingly, Marlin will adopt this rule in 2006 and
anticipates recognizing approximately $731 of expense for the
vesting of previously issued stock options in 2006.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error
Corrections a replacement of APB Opinion
No. 20 and FASB Statement No. 3.
SFAS No. 154 changes the accounting for and reporting
of a voluntary change in accounting principle and replaces APB
Opinion No. 20 and SFAS No. 3. Under Opinion
No. 20, most changes in accounting principle were reported
in the income statement of the period of change as a cumulative
adjustment. However, under SFAS No. 154, a voluntary
change in accounting principle must be shown retrospectively in
the financial statements, if practicable, for all periods
presented. In cases where retrospective application is
impracticable, an adjustment to the assets and liabilities and a
corresponding adjustment to retained earnings can be made as of
the beginning of the earliest period for which retrospective
application is practicable rather than being reported in the
income statement. The adoption of SFAS No. 154 did not
have a material effect on the Companys consolidated
financial statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial Instruments
an amendment of SFAS No. 133 and No. 140. This
Statement, which becomes effective for fiscal years beginning
after September 15, 2006, addresses certain beneficial
interests in securitized financial assets. Because of the recent
issuance of this Statement and given that adoption of
SFAS 155 is not required until fiscal year 2007, the
Company has not completed its initial assessment of the impact,
if any, this Statement may have on its consolidated financial
statements.
|
|
3.
|
Change in
Accounting Principle
|
The Company had previously accounted for its warrants in
accordance with EITF Issue
No. 88-9,
Put Warrants. The holders of the Companys warrants,
which were issued in connection with subordinated debt, had the
option to put the shares of Class A Common Stock
exercisable under the warrants to the Company at fair value upon
certain circumstances. In accordance with EITF Issue
No. 88-9,
the Company had classified and measured the put warrants in
equity. In connection with the Companys initial public
offering, the Company was required to adopt EITF Issue 96-13,
codified in EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled In, a Companys Owned Stock,
since the provisions of EITF Issue
No. 88-9
are applicable to nonpublic companies. Under EITF Issue
No. 96-13,
the put warrants are classified as a liability and measured at
fair value, with changes in fair value reported in earnings. The
effect of this change in accounting principle on net income was
a decrease of $5,723 for the year ended December 31, 2003.
The warrants were exercised into common stock on a net issuance
basis in conjunction with the Companys November 2003 IPO
and the total warrant liability of $7.1 million was
reclassified back to equity at that time.
59
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
|
|
4.
|
Net
Investment in Direct Financing Leases
|
Net investment in direct financing leases consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2005
|
|
|
2004
|
|
|
Minimum lease payments receivable
|
|
$
|
660,946
|
|
|
$
|
571,269
|
|
Estimated residual value of
equipment
|
|
|
44,279
|
|
|
|
41,062
|
|
Unearned lease income, net of
initial direct costs and fees deferred
|
|
|
(106,083
|
)
|
|
|
(97,245
|
)
|
Security deposits
|
|
|
(18,748
|
)
|
|
|
(19,346
|
)
|
Allowance for credit losses
|
|
|
(7,813
|
)
|
|
|
(6,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
572,581
|
|
|
$
|
489,678
|
|
|
|
|
|
|
|
|
|
|
Minimum lease payments receivable under lease contracts and the
amortization of unearned lease income, net of initial direct
costs and fees deferred, is as follows as of December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
Minimum Lease
|
|
|
|
|
|
|
Payments
|
|
|
Income
|
|
|
|
Receivable
|
|
|
Amortization
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
268,103
|
|
|
|
55,036
|
|
2007
|
|
|
195,624
|
|
|
|
30,826
|
|
2008
|
|
|
119,137
|
|
|
|
14,297
|
|
2009
|
|
|
58,115
|
|
|
|
5,166
|
|
2010
|
|
|
19,690
|
|
|
|
753
|
|
Thereafter
|
|
|
277
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
660,946
|
|
|
$
|
106,083
|
|
|
|
|
|
|
|
|
|
|
The Companys leases are assigned as collateral for
borrowings as further discussed in note 9.
Initial direct costs and fees deferred were $18,355 and $15,973
as of December 31, 2005 and 2004, respectively, and are
netted in unearned income and will be amortized to income using
the level yield method.
Income is not recognized on leases when a default on monthly
payment exists for a period of 90 days or more. Income
recognition resumes when a lease becomes less than 90 days
delinquent. As of December 31, 2005 and 2004, the Company
maintained direct finance lease receivables which were on a
nonaccrual basis of $2,017 and $1,944, respectively. As of
December 31, 2005 and 2004, the Company had minimum lease
receivables in which the terms of the original lease agreements
had been renegotiated in the amount of $4,140 and $2,896,
respectively.
|
|
5.
|
Concentrations
of Credit Risk
|
As of December 31, 2005, leases approximating 13% and 10%
of the net investment balance of leases by the Company were
located in the states of California and Florida, respectively.
No other state accounted for more than 10% of the net investment
balance of leases owned and serviced by the Company as of
December 31, 2005. As of December 31, 2005 no single
vendor source accounted for more than 3% of the net investment
balance of leases owned by the Company. The largest single
obligor accounted for less than 1% of the net investment balance
of leases owned by the Company as of December 31, 2005.
Although the Companys portfolio of leases includes lessees
located throughout the United States, such lessees ability
to honor their contracts may be substantially dependent on
economic conditions in these states. All such contracts are
collateralized by the related equipment. The Company leases to a
variety of different industries, including retail, service,
manufacturing, medical and
60
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
restaurant, among others. To the extent that the economic or
regulatory conditions prevalent in such industries change, the
lessees ability to honor their lease obligations may be
adversely impacted. The estimated residual value of leased
equipment was comprised of 67.6% of copiers as of
December 31, 2005. No other group of equipment represented
more than 10% of equipment residuals as of December 31,
2005. Improvements and other changes in technology could
adversely impact the Companys ability to realize the
recorded value of this equipment.
The Company enters into derivative instruments with
counterparties that generally consist of large financial
institutions. The Company monitors its positions with these
counterparties and the credit quality of these financial
institutions. The Company does not anticipate nonperformance by
any of its counterparties. In addition to the fair value of
derivative instruments recognized in the consolidated financial
statements, the Company could be exposed to increased interest
costs in future periods if counterparties failed.
|
|
6.
|
Allowance
for Credit Losses
|
Net investments in direct financing leases are charged-off when
they are contractually past due 121 days based on the
historical net loss rates realized by the Company.
Activity in this account is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Balance, beginning of period
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
|
$
|
3,965
|
|
Current provisions
|
|
|
10,886
|
|
|
|
9,953
|
|
|
|
7,965
|
|
Charge-offs, net
|
|
|
(9,135
|
)
|
|
|
(8,907
|
)
|
|
|
(6,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
7,813
|
|
|
$
|
6,062
|
|
|
$
|
5,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property
and Equipment, net
|
Property and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
Depreciable
|
|
|
|
2005
|
|
|
2004
|
|
|
Life
|
|
|
Furniture and equipment
|
|
$
|
2,384
|
|
|
$
|
2,019
|
|
|
|
7 years
|
|
Computer systems and equipment
|
|
|
4,932
|
|
|
|
4,347
|
|
|
|
3-5 years
|
|
Leasehold improvements
|
|
|
496
|
|
|
|
309
|
|
|
|
lease term
|
|
Less accumulated
depreciation and amortization
|
|
|
(4,036
|
)
|
|
|
(3,120
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,776
|
|
|
$
|
3,555
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $1,094, $890 and $714
for the years ended December 31, 2005, 2004 and 2003,
respectively.
|
|
8.
|
Commitments
and Contingencies
|
The Company is involved in legal proceedings, which include
claims, litigation and class action suits arising in the
ordinary course of business. In the opinion of management, these
actions will not have a material adverse effect on the
Companys consolidated financial position or results of
operations.
As of December 31, 2005, the Company leases all six of its
office locations including its executive offices in Mt. Laurel,
New Jersey, and its offices in Denver, Colorado, Atlanta,
Georgia, Philadelphia, Pennsylvania, Chicago, Illinois and Salt
Lake City, Utah. These lease commitments are accounted for as
operating leases.
61
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
The Company has entered into several capital leases to finance
corporate property and equipment.
The following is a schedule of future minimum lease payments for
capital and operating leases as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
100
|
|
|
|
1,694
|
|
2007
|
|
|
74
|
|
|
|
1,614
|
|
2008
|
|
|
35
|
|
|
|
1,420
|
|
2009
|
|
|
|
|
|
|
1,280
|
|
2010
|
|
|
|
|
|
|
1,281
|
|
Thereafter
|
|
|
|
|
|
|
2,898
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
209
|
|
|
$
|
10,187
|
|
|
|
|
|
|
|
|
|
|
Less amount
representing interest
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease
payments
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense was $1,191, $786 and $606 for the years ended
December 31, 2005, 2004 and 2003, respectively.
The Company has employment agreements with certain senior
officers that currently extend through November 12,
2007,with certain renewal options.
|
|
9.
|
Revolving
and Term Secured Borrowings
|
Borrowings outstanding under the Companys revolving credit
facilities and long-term debt consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Secured bank facility
|
|
$
|
|
|
|
$
|
|
|
00-A
Warehouse Facility
|
|
|
|
|
|
|
|
|
02-A
Warehouse Facility
|
|
|
|
|
|
|
12,034
|
|
02-1 Term Securitization
|
|
|
|
|
|
|
47,952
|
|
03-1
Term Securitization
|
|
|
56,270
|
|
|
|
112,280
|
|
04-1 Term Securitization
|
|
|
155,499
|
|
|
|
262,404
|
|
05-1 Term Securitization
|
|
|
305,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total borrowings
|
|
$
|
516,849
|
|
|
$
|
434,670
|
|
|
|
|
|
|
|
|
|
|
62
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
At the end of each period, the Company has the following minimum
lease payments receivable assigned as collateral:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Secured bank facility
|
|
$
|
|
|
|
$
|
|
|
00-A
Warehouse Facility
|
|
|
|
|
|
|
|
|
02-A
Warehouse Facility
|
|
|
|
|
|
|
16,755
|
|
02-1 Term Securitization
|
|
|
|
|
|
|
49,311
|
|
03-1
Term Securitization
|
|
|
57,868
|
|
|
|
119,907
|
|
04-1 Term Securitization
|
|
|
174,081
|
|
|
|
295,335
|
|
05-1 Term Securitization
|
|
|
350,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
582,867
|
|
|
$
|
481,308
|
|
|
|
|
|
|
|
|
|
|
Secured
Bank Facility
As of December 31, 2005, the Company has a secured line of
credit with a group of four banks to provide up to $40,000 in
borrowings generally at LIBOR plus 1.50%. The credit facility
expires on August 31, 2007. For the years ended
December 31, 2005 and 2004, the weighted average interest
rates were 6.18% and 3.46%, respectively. For the years ended
December 31, 2005 and 2004, the Company incurred commitment
fees on the unused portion of the credit facility of $216 and
$230, respectively.
Warehouse
Facilities
00-A
Warehouse Facility During December 2000, the
Company entered into a $75 million commercial paper
warehouse facility (the
00-A
Warehouse Facility). This facility was increased to
$125 million in May 2001. The
00-A
Warehouse Facility expires in October 2006 and is credit
enhanced through a third party financial guarantee insurance
policy. The
00-A
Warehouse Facility allows the Company on an ongoing basis to
transfer lease receivables to a wholly-owned, bankruptcy remote,
special purpose subsidiary of the Company, which issues variable
rate notes to investors carrying an interest rate equal to the
rate on commercial paper issued to fund the notes during the
interest period. For the years ended December 31, 2005,
2004, and 2003, the weighted average interest rates were 3.74%,
1.71%, and 1.84%, respectively. As of December 31, 2005 and
December 31, 2004 notes outstanding under this facility
were $0. The
00-A
Warehouse Facility requires that the Company limit its exposure
to adverse interest rate movements on the variable rate notes
through entering into interest rate cap agreements. As of
December 31, 2005, the Company had interest rate cap
transactions with notional values of $61.3 million, at a
weighted average rate of 6.20%. The fair value of these interest
rate cap transactions was $49 as of December 31, 2005.
02-A
Warehouse Facility During April 2002, the
Company entered into a $75 million commercial paper
warehouse facility (the
02-A
Warehouse Facility). In January 2004 the
02-A
Warehouse Facility was transferred to another lender and
increased to $100 million in March 2004. The
02-A
Warehouse Facility expires in April 2006 and is credit enhanced
through a third party financial guarantee insurance policy. The
02-A
Warehouse Facility allows the Company on an ongoing basis to
transfer lease receivables to a wholly-owned, bankruptcy remote,
special purpose subsidiary of the Company, which issues variable
rate notes to investors carrying an interest rate equal to the
rate on commercial paper issued to fund the notes during the
interest period. For the years ended December 31, 2005,
2004 and 2003, the weighted average interest rate was 4.29%,
2.29% and 2.43%, respectively. As of December 31, 2005 and
December 31, 2004 notes outstanding under this facility
were $0 and $12.0 million, respectively. The
02-A
Warehouse Facility requires that the Company limit its exposure
to adverse interest rate movements on the variable rate notes
through entering into interest rate cap agreements. As of
December 31, 2005,
63
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
the Company had interest rate cap transactions with notional
values of $93.8 million at a weighted average rate of
6.07%. The fair value of these interest rate cap transactions
was $53 as of December 31, 2005.
Term
Securitizations
02-1 Transaction On June 25, 2002, the
Company closed a $184.4 million term securitization
(Series 2002-1
Notes). In connection with the
Series 2002-1
transaction, three tranches of notes were issued to investors in
the form of $166.3 million Class A Notes,
$12.7 million Class B Notes and $5.4 million
Class C Notes. The weighted average fixed rate coupon
payable to investors is 4.36%. On August 16, 2005, the
Company exercised the option to redeem the
Series 2002-1
Notes in whole and the outstanding balances were paid in full.
03-1
Transaction On June 25, 2003, the Company
closed a $217.2 million term securitization
(Series 2003-1
Notes). In connection with the
Series 2003-1
transaction, three tranches of notes were issued to investors in
the form of $197.3 million Class A Notes,
$14.3 million Class B Notes and $5.6 million
Class C Notes. The weighted average fixed rate coupon
payable to investors is 3.18%.
04-1 Transaction On July 22, 2004 the
Company closed a $304.6 million term securitization
(Series 2004-1
Notes). In connection with the 2004-1 transaction, 6
classes of notes were issued to investors with three of the
classes issued at variable rates but swapped to fixed interest
cost to the Company through use of derivative interest rate swap
contracts. The weighted average interest coupon will approximate
3.81% over the term of the financing.
05-1 Transaction On August 18, 2005 the
Company closed a $340.6 million term securitization
(Series 2005-1
Notes). In connection with the 2005-1 transaction, 6
classes of fixed rate notes were issued to investors. The
weighted average interest coupon will approximate 4.81% over the
term of the financing.
Borrowings under the Companys warehouse facilities and,
the term securitizations, are collateralized by the
Companys direct financing leases. The Company is
restricted from selling, transferring, or assigning the leases
or placing liens or pledges on these leases.
Under the revolving bank facility, warehouse facilities and term
securitization agreements, the Company is subject to numerous
covenants, restrictions and default provisions relating to,
among other things, maximum lease delinquency and default
levels, a minimum net worth requirement and a maximum debt to
equity ratio. A change in the Chief Executive Officer or
President is an event of default under the revolving bank
facility and warehouse facilities unless a replacement
acceptable to the Companys lenders is hired within
90 days. Such an event is also an immediate event of
servicer termination under the term securitizations. A merger or
consolidation with another company in which the Company is not
the surviving entity is an event of default under the financing
facilities. In addition, the revolving bank facility and
warehouse facilities contain cross default provisions whereby
certain defaults under one facility would also be an event of
default on the other facilities. An event of default under the
revolving bank facility or warehouse facilities could result in
termination of further funds being available under such
facility. An event of default under any of the facilities could
result in an acceleration of amounts outstanding under the
facilities, foreclosure on all or a portion of the leases
financed by the facilities
and/or the
removal of the Company as servicer of the leases financed by the
facility. As of December 31, 2005 and 2004 the Company was
in compliance with terms of the warehouse facilities and term
securitization agreements.
64
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Scheduled principal and interest payments on outstanding debt as
of December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Interest
|
|
Year Ending December 31:
|
|
|
|
|
|
|
|
|
2006
|
|
$
|
222,760
|
|
|
$
|
18,073
|
|
2007
|
|
|
155,176
|
|
|
|
9,913
|
|
2008
|
|
|
88,064
|
|
|
|
4,396
|
|
2009
|
|
|
39,611
|
|
|
|
1,454
|
|
2010
|
|
|
11,130
|
|
|
|
201
|
|
Thereafter
|
|
|
108
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
516,849
|
|
|
$
|
34,039
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Derivative
and Hedging Activities
|
The Company entered forward starting interest rate swap
agreements with total underlying notional amounts of
$225.0 million to commence in September 2006 related to its
forecasted 2006 term note securitization transaction. The value
of this derivative contract moves directly with interest rates
and the Company expects to terminate these agreements
simultaneously with the pricing of its 2006 term securitization
with any of the unrecognized gains or losses amortized to
interest expense over the term of the related borrowing. The
Company may choose to hedge all or a portion of a forecasted
transaction. These interest rate swap agreements are recorded in
other assets on the consolidated balance sheet at their fair
values of $2.3 million. These interest rate swap agreements
were designated as cash flow hedges with unrealized gains
recorded in the equity section of the balance sheet of
approximately $1.4 million, net of tax, as of
December 31, 2005.
In 2004, the Company had entered into forward starting interest
rate swap agreements with total underlying notional amounts of
$250.0 million related to our 2005 term note securitization
transaction. The Company terminated these agreements
simultaneously with the pricing of its 2005 term securitization
issued on August 11, 2005 and is amortizing the realized
gains of $3.2 million to interest expense over the term of
the related borrowing. These interest rate swap agreements were
designated as cash flow hedges with the gains realized deferred
and recorded in the equity section of the balance sheet at
approximately $1.5 million, net of tax, as of
December 31, 2005. During the year ended December 31,
2005, the Company amortized $687 of deferred gains to lower
interest expense of the related 2005 term securitization
borrowing. The Company expects to reclassify $803 thousand, net
of tax, into earnings over the next twelve months.
The Company issued a term note securitization on July 22,
2004 where certain classes of notes were issued at variable
rates to investors and simultaneously entered into interest rate
swap contracts to convert these borrowings to a fixed interest
cost to the Company for the term of the borrowing. At
December 31, 2005, we had interest rate swap agreements
related to these transactions with underlying notional amounts
of $80.1 million. These interest rate swap agreements are
recorded in other assets on the consolidated balance sheet at
their fair values of $1.1 million and $71 as of
December 31, 2005 and December 31, 2004, respectively.
These interest rate swap agreements were designated as cash flow
hedges with unrealized gains recorded in the equity section of
the balance sheet of approximately $652 and $43, net of tax, as
of December 31, 2005 and December 31, 2004,
respectively. The ineffectiveness related to these interest rate
swap agreements designated as cash flow hedges was not material
for the year ended December 31, 2005.
During the year ended December 31, 2005, the Company
recognized a net gain of $70 in other financing related costs
related to the fair values of the interest rate swaps that did
not qualify for hedge accounting. During the year ended
December 31, 2004, the Company recognized a net loss of $89
in other financing related costs related to similar interest
rate swaps that were terminated or did not qualify for hedge
accounting. As of December 31, 2005, the Company had
interest rate swap agreements related to non-hedge accounting
transactions with underlying notional amounts of $512. These
interest rate swap agreements are recorded in other liabilities
on the consolidated
65
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
balance sheet at a fair value of $76. These derivative contracts
also related to the 2004 term securitization and are intended to
offset certain prepayment risks in the lease portfolio pledged
in the 2004 term securitization.
The Company also uses interest-rate cap agreements that are not
designated for hedge accounting treatment to fulfill certain
covenants in our warehouse borrowing arrangements. Accordingly,
these cap agreements are recorded at fair value in other assets
at $103 and $73 as of December 31, 2005 and
December 31, 2004, respectively. Changes in the fair values
of the caps are recorded in financing related costs in the
accompanying statements of operations. The notional amount of
interest rate caps owned as of December 31, 2005 and
December 31, 2004 was $155.1 million and
$133.9 million, respectively. The Company also sells
interest rate caps to generate premium revenues to partially
offset the premium cost of purchasing its required interest rate
caps. As of December 31, 2005, the notional amount of
interest-rate cap sold agreements totaled $64.6 million.
The fair value of interest-rate caps sold is recorded in other
liabilities at $81 as of December 31, 2005. There were no
similar outstanding sold rate cap agreements at
December 31, 2004.
The Companys income tax provision consisted of the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,473
|
|
|
$
|
|
|
|
$
|
|
|
State
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
5,464
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
4,368
|
|
|
|
7,414
|
|
|
|
4,622
|
|
State
|
|
|
775
|
|
|
|
1,485
|
|
|
|
978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
5,143
|
|
|
|
8,899
|
|
|
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes
|
|
$
|
10,607
|
|
|
$
|
8,899
|
|
|
$
|
5,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense results principally from the use of
different revenue and expense recognition methods for tax and
financial accounting purposes principally related to lease
accounting. The Company estimates these differences and adjusts
to actual upon preparation of the income tax returns. The
sources of these temporary differences and the related tax
effects were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net operating loss carryforwards
|
|
$
|
3,548
|
|
|
$
|
12,480
|
|
|
$
|
5,817
|
|
Allowance for credit losses
|
|
|
3,114
|
|
|
|
2,416
|
|
|
|
1,981
|
|
Lease accounting
|
|
|
(28,721
|
)
|
|
|
(33,733
|
)
|
|
|
(18,092
|
)
|
Deferred acquisition costs
|
|
|
(3,274
|
)
|
|
|
|
|
|
|
|
|
Interest-rate cap agreements
|
|
|
95
|
|
|
|
203
|
|
|
|
120
|
|
Other comprehensive income
|
|
|
(2,329
|
)
|
|
|
(244
|
)
|
|
|
|
|
Accrued expenses
|
|
|
30
|
|
|
|
60
|
|
|
|
179
|
|
Depreciation
|
|
|
(405
|
)
|
|
|
(341
|
)
|
|
|
(252
|
)
|
Deferred income
|
|
|
2,145
|
|
|
|
725
|
|
|
|
404
|
|
Deferred compensation
|
|
|
435
|
|
|
|
282
|
|
|
|
6
|
|
Other
|
|
|
|
|
|
|
42
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liability
|
|
$
|
(25,362
|
)
|
|
$
|
(18,110
|
)
|
|
$
|
(9,822
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
In 2005 we changed our tax accounting for certain deferred
acquisition costs and began to expense these items as incurred
for income tax purposes. This change resulted in a $3.3 million
deferred tax liability in 2005.
As of December 31, 2005 the Company had net operating loss
carryforwards (NOLs) for federal and state income
tax purposes of approximately $9.2 million and
$6.9 million, respectively. Federal NOLs expire in
years 2018 and 2024, while state NOLs expire in years 2009
through 2024.
The following is a reconciliation of the statutory federal
income tax rate to the effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State taxes, net of federal benefit
|
|
|
4.3
|
|
|
|
4.3
|
|
|
|
7.5
|
|
Change in fair market
value warrants
|
|
|
|
|
|
|
|
|
|
|
23.7
|
|
Other permanent differences
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
39.5
|
%
|
|
|
39.8
|
%
|
|
|
66.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a reconciliation of net income and shares used
in computing basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Basic earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
2,847
|
|
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(2,006
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stockholders
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic
earnings per share
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
|
|
3,001,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
$
|
1.41
|
|
|
$
|
1.19
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common
stockholders
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
841
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing basic
earnings per share
|
|
|
11,551,589
|
|
|
|
11,330,132
|
|
|
|
3,001,754
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee options and restricted
stock
|
|
|
434,499
|
|
|
|
399,571
|
|
|
|
339,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted
earnings per share
|
|
|
11,986,088
|
|
|
|
11,729,703
|
|
|
|
3,340,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
$
|
1.36
|
|
|
$
|
1.15
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of the convertible preferred stock in 2003 have been
excluded from diluted earnings per share computations as they
were deemed anti-dilutive. Preferred stock converted into common
shares in conjunction with the November 2003 IPO.
67
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
The shares used in computing diluted earnings per share exclude
options to purchase 2,700, 148,410, and 134,500 shares of
Common Stock for the years ended December 31, 2005, 2004
and 2003, respectively, as the inclusion of such shares would be
anti-dilutive.
In October 2003, the Company adopted the Marlin Business
Services Corp. 2003 Equity Compensation Plan (the 2003
Plan). The Marlin Leasing Corporation 1997 Equity
Compensation Plan (the 1997 Plan) was merged into
the 2003 Plan (as combined, the Equity Plan), and
all 943,760 options outstanding under the 1997 Plan were assumed
by the 2003 Plan. Under the terms of the Equity Plan, as
amended, employees, certain consultants and advisors, and
nonemployee members of the Companys board of directors
have the opportunity to receive incentive and nonqualified
grants of stock options, stock appreciation rights, restricted
stock and other equity-based awards as approved by the board.
The aggregate number of shares under the Equity Plan that may be
issued pursuant to stock options or restricted stock grants is
2,100,000. Stock options issued generally vest over four years
though some vest over eight years but may accelerate if certain
performance measures are obtained. All options expire not more
than ten years after the date of grant.
Information with respect to options granted under the Equity
Plan is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Balance, December 31, 2002
|
|
|
910,108
|
|
|
$
|
4.43
|
|
Granted
|
|
|
228,755
|
|
|
|
10.20
|
|
Exercised
|
|
|
(60,655
|
)
|
|
|
3.63
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2003
|
|
|
1,078,208
|
|
|
$
|
5.66
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
207,000
|
|
|
|
18.20
|
|
Exercised
|
|
|
(147,599
|
)
|
|
|
2.97
|
|
Forfeited
|
|
|
(42,089
|
)
|
|
|
9.83
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
1,095,520
|
|
|
$
|
8.21
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
119,765
|
|
|
|
17.96
|
|
Exercised
|
|
|
(147,591
|
)
|
|
|
4.03
|
|
Forfeited
|
|
|
(65,436
|
)
|
|
|
14.70
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
1,002,258
|
|
|
$
|
9.56
|
|
|
|
|
|
|
|
|
|
|
There were 523,088 shares available for future grants under
the Equity Plan as of December 31, 2005.
68
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
The following table summarizes information about stock options
outstanding as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
Number
|
|
|
Remaining Life
|
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
Exercise Prices
|
|
Outstanding
|
|
|
(Years)
|
|
|
Exercise Price
|
|
|
Exercisable
|
|
|
Exercise Price
|
|
|
$1.90 3.39
|
|
|
341,116
|
|
|
|
4.68
|
|
|
$
|
2.96
|
|
|
|
271,466
|
|
|
$
|
2.85
|
|
4.23 5.01
|
|
|
123,041
|
|
|
|
4.19
|
|
|
|
4.39
|
|
|
|
123,041
|
|
|
|
4.39
|
|
10.18
|
|
|
164,535
|
|
|
|
5.90
|
|
|
|
10.18
|
|
|
|
154,858
|
|
|
|
10.18
|
|
14.00 16.02
|
|
|
134,000
|
|
|
|
8.06
|
|
|
|
14.60
|
|
|
|
53,138
|
|
|
|
14.26
|
|
$17.52 22.25
|
|
|
239,566
|
|
|
|
7.13
|
|
|
|
18.39
|
|
|
|
3,103
|
|
|
|
18.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,002,258
|
|
|
|
5.86
|
|
|
$
|
9.56
|
|
|
|
605,606
|
|
|
$
|
6.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On January 11, 2005, the Company issued 103,960 stock
options to employees under the 2003 Plan at a strike price equal
to the fair market value of the common stock of $17.52 at date
of issuance. During the remainder of the year, the Company
issued an additional 10,000 stock options to employees under the
2003 Plan at a strike price equal to the fair market value of
the common stock averaging $21.22 as of the date of issuance.
These options have a seven year term and a four year vesting
provision. The Company also issued 5,805 stock options during
the second quarter to non-employee independent directors at a
strike price equal to the fair market value of the common stock
of $19.78. These options have a seven year term and vest one
year from the date of grant.
On January 11, 2005, the Company issued 55,384 shares
of restricted stock under the 2003 Plan. An additional
6,393 shares were issued during the first quarter of 2005
and 2,500 shares were issued during the third quarter of
2005 under the same plan. The restricted shares vest in seven
years but may be accelerated if certain performance measures are
achieved. The Company recorded deferred compensation of
approximately $1,143 based on stock prices of $17.52, $18.30 and
and average of $22.18, respectively, at the time of issuance. As
vesting occurs, or is deemed likely to occur, compensation
expense is recognized and deferred compensation reduced on the
balance sheet. The Company recognized $272 of compensation
expense related to this restricted stock for the year ended
December 31, 2005.
Also in 2005, the Company issued another 13,101 shares of
restricted stock primarily through a management stock ownership
program. Restrictions on the shares lapse at the end of
10 years but may lapse (vest) in as little as three years
if the employee remains employed at the Company and holds a
matching number of other common shares in addition to these
restricted shares. As the shares were issued at various dates,
the Company has recorded deferred compensation of approximately
$239 with an average stock price of $18.23 for all shares
issued. For the year ended December 31, 2005, $64 of
compensation expense was recognized related to this restricted
stock.
On May 26, 2005, the Company issued 6,825 shares of
restricted stock to non-employee independent directors. The
restricted shares vest at the earlier of seven years from the
grant date or six months following the directors
termination of Board service. The Company recorded deferred
compensation of approximately $135 based on a stock price of
$19.78 at the time of issuance. The Company recognized $79 of
expense for the year ended December 31, 2005 related to
this restricted stock.
On March 9, 2004, the Company issued restricted common
shares under its 2003 Equity Compensation Plan of which 68,236
and 127,372 were unvested at December 31, 2005 and
December 31, 2004, respectively. Certain officers of the
Company irrevocably elected to receive the restricted shares in
lieu of cash based on a percentage of their targeted annual
bonus expected to be paid over the next three years.
Restrictions on the shares lapse at the end of 10 years but
may lapse (vest) in as little as three years if designated
performance goals are achieved. During 2005, 39,510 of the
shares vested and 19,626 were forfeit. The Company recorded
deferred compensation of approximately $2.0 million at the
time of issuance based on the then stock price of $15.88. As
vesting occurs, or is deemed likely to occur, compensation
expense is recognized and deferred compensation reduced on the
balance sheet. The
69
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
Company recognized $481 and $674 of compensation expense related
to this program for the years ended December 31, 2005 and
December 31, 2004, respectively.
During 2003, in connection with the grant of options to
employees, the Company recorded deferred compensation of $64
representing the difference between the exercise price and the
fair value of the Companys common stock on the date such
options were granted. Deferred compensation is included as a
component of stockholders equity and is being amortized to
expense ratably over the four-year vesting period of the options.
Prior to October 2003, the Company allowed employees to purchase
common stock at fair value under the Equity Plan. Shares
purchased under the Equity Plan for the years ended
December 31, 2003 and 2002 were 92,063 and 37,376,
respectively. Under this stock purchase program, the Company
accepted full recourse, interest-bearing, promissory notes from
employees repayable over five years. Under the terms of this
program, the Company extended loans for additional shares based
upon an employees investment in the Companys common
stock. Amounts due the Company are shown as stock subscription
receivable in equity. Shares reacquired from employees were
retired.
In October 2003, the Company adopted the Employee Stock Purchase
Plan (the ESPP). Under the terms of the ESPP,
employees have the opportunity to purchase shares of common
stock during designated offering periods equal to the lesser of
95% of the fair market value per share on the first day of the
offering period or the purchase date. Participants are limited
to 10% of their compensation. The aggregate number of shares
under the ESPP that may be issued is 200,000. During 2005 and
2004, 19,792 and 39,116 shares, respectively, of common
stock were sold for $357 and $523, respectively pursuant to the
terms of the ESPP.
The Company adopted a 401(k) plan (the Plan) which
originally became effective as of January 1, 1997. The
Companys employees are entitled to participate in the
Plan, which provides savings and investment opportunities.
Employees can contribute up to the maximum annual amount
allowable per IRS guidelines. The Plan also provides for Company
contributions equal to 25% of an employees contribution
percentage up to a maximum employee contribution of 4%. The
Company has elected to double the required match in 2005, 2004
and 2003. The Companys contributions to the Plan for the
years ended December 31, 2005, 2004 and 2003 were
approximately $257, $221 and $171, respectively.
|
|
15.
|
Other
Comprehensive Income
|
The following table details the components of other
comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Net income, as reported
|
|
$
|
16,248
|
|
|
$
|
13,459
|
|
|
$
|
2,847
|
|
Changes in fair values of
derivatives qualifying as cash flow hedges
|
|
|
5,230
|
|
|
|
618
|
|
|
|
|
|
Tax effect
|
|
|
(2,084
|
)
|
|
|
(244
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in fair values of
derivatives qualifying as cash flow hedges, net of tax
|
|
|
3,146
|
|
|
|
374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
19,394
|
|
|
$
|
13,833
|
|
|
$
|
2,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. |
Disclosures about the Fair Value of Financial Instruments
|
(a) Cash
and Cash Equivalents
The carrying amount of the Companys cash approximates fair
value as of December 31, 2005 and 2004.
70
MARLIN
BUSINESS SERVICES CORP. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
(Dollars
in thousands, except share data)
(b) Restricted
Cash
The Company maintains cash reserve accounts as a form of credit
enhancement in connection with the
Series 2005-1,
2004-1 and
2003-1 term
securitizations. The book value of such cash reserve accounts is
included in restricted cash on the accompanying balance sheet.
The fair values of the cash reserve accounts are determined
based on a discount rate equal to the weighted coupon payable on
the term notes and the estimated life for each term
securitization.
(c) Revolving
and Term Secured Borrowings
The fair value of the Companys debt and secured borrowings
was estimated by discounting cash flows at current rates offered
to the Company for debt and secured borrowings of the same or
similar remaining maturities.
(d) Accounts
Payable and Accrued Expenses
The carrying amount of the Companys accounts payable
approximates fair value as of December 31, 2005 and 2004.
(e) Interest-Rate
Caps
The fair value of the Companys interest-rate cap
agreements purchased was $103 and $73 as of December 31,
2005 and 2004, respectively, as determined by third party
valuations. The fair value of the Companys interest-rate
cap agreements sold was ($81) and $0 as of December 31,
2005 and 2004, respectively, as determined by third party
valuations.
(f) Interest-Rate
Swaps
The fair value of the Companys interest-rate swap
agreements was $3,459 and $624 as of December 31, 2005 and
2004, respectively, as determined by third party valuations.
The following summarizes the carrying amount and estimated fair
value of the Companys financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Cash and cash equivalents
|
|
$
|
34,472
|
|
|
$
|
34,472
|
|
|
$
|
16,092
|
|
|
$
|
16,092
|
|
Restricted cash
|
|
|
47,786
|
|
|
|
46,568
|
|
|
|
37,331
|
|
|
|
36,544
|
|
Revolving and term secured
borrowings
|
|
|
516,849
|
|
|
|
509,512
|
|
|
|
434,670
|
|
|
|
430,501
|
|
Accounts payable and accrued
expenses
|
|
|
16,088
|
|
|
|
16,088
|
|
|
|
11,563
|
|
|
|
11,563
|
|
Interest-rate caps purchased
|
|
|
103
|
|
|
|
103
|
|
|
|
73
|
|
|
|
73
|
|
Interest-rate caps sold
|
|
|
(81
|
)
|
|
|
(81
|
)
|
|
|
|
|
|
|
|
|
Interest-rate swaps
|
|
|
3,459
|
|
|
|
3,459
|
|
|
|
624
|
|
|
|
624
|
|
|
|
17.
|
Related
Party Transactions
|
The Company obtains all of its commercial, healthcare and other
insurance coverage through The Selzer Company, an insurance
broker located in Warrington, Pennsylvania. Richard Dyer, the
brother of Daniel P. Dyer, the Chairman of the Board of
Directors and Chief Executive Officer, is the President of The
Selzer Company. We do not have any contractual arrangement with
The Selzer Group or Richard Dyer, nor do we pay either of them
any direct fees. Insurance premiums paid to The Selzer Company
were $619 and $640 during the years ended December 31, 2005
and 2004.
71
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure Controls and Procedures The
Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in
the Companys reports under the Securities Exchange Act of
1934, as amended (the Exchange Act), is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such
information is accumulated and communicated to management,
including the Companys Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
as appropriate, to allow timely decisions regarding required
disclosure.
In connection with the preparation of this Annual Report on
Form 10-K,
as of December 31, 2005, we updated our evaluation of the
effectiveness of the design and operation of our disclosure
controls and procedures for purposes of filing reports under the
Securities and Exchange Act of 1934. This controls evaluation
was done under the supervision and with the participation of
management, including our CEO and our CFO. Our CEO and our CFO
have concluded that our disclosure controls and procedures (as
defined in
Rule 13(a)-15(e)
and 15(d)-15(e) under the Exchange Act) are effective to provide
reasonable assurance that information relating to us and our
subsidiaries that we are required to disclose in the reports
that we file or submit to the SEC is recorded, processed,
summarized and reported with the time periods specified in the
SECs rules and forms.
Managements Annual Report on Internal Control over
Financial Reporting Our CEO and CFO
provided a report on behalf of management on our internal
control over financial reporting. The full text of
managements report is contained in Item 8 of this
Form 10-K
and is incorporated herein by reference.
Attestation Report of the Registered Public Accounting
Firm The attestation report of our
independent registered public accounting firm on our
managements assessment of internal control over financial
reporting is contained in Item 8 of this
Form 10-K
and is incorporated herein by reference.
Change in Internal Control Over Financial
Reporting There were no changes in the
Companys internal control over financial reporting that
occurred during the Companys fourth fiscal quarter of 2005
that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over
financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
The information required by Item 10 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2006 Annual Meeting of Stockholders.
We have adopted a code of ethics and business conduct that
applies to all of our directors, officers and employees,
including our principal executive officer, principal financial
officer, principal accounting officer and persons performing
similar functions. Our code of ethics and business conduct is
available free of charge within the investor relations
section of our website at www.marlincorp.com. We intend to post
on our website any amendments and waivers to the code of ethics
and business conduct that are required to be disclosed by the
rules of the Securities and Exchange Commission, or file a
Form 8-K,
Item 5.05 to the extent required by NASDAQ listing
standards.
72
|
|
Item 11.
|
Executive
Compensation
|
The information required by Item 11 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2006 Annual Meeting of Stockholders.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by Item 12 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2006 Annual Meeting of Stockholders.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by Item 13 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2006 Annual Meeting of Stockholders.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by Item 14 is incorporated by
reference from the information in the Registrants
definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2006 Annual Meeting of Stockholders.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) Documents filed as part of this Report
The following is a list of consolidated and combined financial
statements and supplementary data included in this report under
Item 8 of Part II hereof:
|
|
|
|
1.
|
Financial Statements and Supplemental Data
|
Reports of Independent Registered Public Accounting Firms
Consolidated Balance Sheets as of December 31, 2005 and
2004.
Consolidated Statements of Operations for the years ended
December 31, 2005, 2004 and 2003.
Consolidated Statements of Stockholders Equity for the
years ended December 31, 2005, 2004 and 2003.
Consolidated Statements of Cash Flows for the years ended
December 31, 2005, 2004 and 2003.
Notes to Consolidated Financial Statements.
|
|
|
|
2.
|
Financial Statement Schedules
|
Schedules, are omitted because they are not applicable or are
not required, or because the required information is included in
the consolidated and combined financial statements or notes
thereto.
(b) Exhibits.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
3
|
.1(3)
|
|
Amended and Restated Articles of
Incorporation of the Registrant.
|
|
3
|
.2(2)
|
|
Bylaws of the Registrant.
|
|
4
|
.1(2)
|
|
Second Amended and Restated
Registration Agreement, as amended through July 26, 2001,
by and among Marlin Leasing Corporation and certain of its
shareholders.
|
|
10
|
.1(2)
|
|
2003 Equity Compensation Plan of
the Registrant.
|
|
10
|
.2(2)
|
|
2003 Employee Stock Purchase Plan
of the Registrant.
|
|
10
|
.3(2)
|
|
Lease Agreement, dated as of
April 9, 1998, and amendment thereto dated as of
September 22, 1999 between W9/PHC Real Estate Limited
Partnership and Marlin Leasing Corporation.
|
73
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4(4)
|
|
Lease Agreement, dated as of
October 21, 2003, between Liberty Property Limited
Partnership and Marlin Leasing Corporation
|
|
10
|
.5(2)
|
|
Employment Agreement, dated as of
October 14, 2003 between Daniel P. Dyer and the Registrant.
|
|
10
|
.6(2)
|
|
Employment Agreement, dated as of
October 14, 2003 between Gary R. Shivers and the Registrant.
|
|
10
|
.7(2)
|
|
Employment Agreement, dated as of
October 14, 2003 between George D. Pelose and the
Registrant.
|
|
10
|
.8(1)
|
|
Master Lease Receivables
Asset-Backed Financing Facility Agreement, dated as of
December 1, 2000, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. IV and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.9(1)
|
|
Amended and Restated
Series 2000-A
Supplement dated as of August 7, 2001, to the Master Lease
Receivables Asset-Backed Financing Facility Agreement, dated as
of December 1, 2000, by and among Marlin Leasing
Corporation, Marlin Leasing Receivables Corp. IV, Marlin Leasing
Receivables IV LLC, Deutsche Bank AG, New York Branch, XL
Capital Assurance Inc. and Wells Fargo Bank Minnesota, National
Association.
|
|
10
|
.10(1)
|
|
Third Amendment to the Amended and
Restated
Series 2000-A
Supplement dated as of September 25, 2002, by and among
Marlin Leasing Corporation, Marlin Leasing Receivables Corp. IV,
Marlin Leasing Receivables IV LLC, Deutsche Bank AG, New
York Branch, XL Capital Assurance Inc. and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.11(5)
|
|
Fourth Amendment to the Amended
and Restated
Series 2000-A
Supplement dated as of October 7, 2004, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. IV, Marlin
Leasing Receivables IV LLC, Deutsche Bank AG, New York
Branch, XL Capital Assurance Inc. and Wells Fargo Bank, National
Association.
|
|
10
|
.12(1)
|
|
Second Amended and Restated
Warehouse Revolving Credit Facility Agreement dated as of
August 31, 2001, by and among Marlin Leasing Corporation,
the Lenders and National City Bank.
|
|
10
|
.13(1)
|
|
First Amendment to Second Amended
and Restated Warehouse Revolving Credit Facility Agreement dated
as of July 28, 2003, by and among Marlin Leasing
Corporation, the Lenders and National City Bank.
|
|
10
|
.14(3)
|
|
Second Amendment to Second Amended
and Restated Warehouse Revolving Credit Facility Agreement dated
as of October 16, 2003, by and among Marlin Leasing
Corporation, the Lenders and National City Bank.
|
|
10
|
.15(9)
|
|
Third Amendment to Second Amended
and Restated Warehouse Revolving Credit Facility Agreement dated
as of August 26, 2005, by and among Marlin Leasing
Corporation, the Lenders and National City Bank.
|
|
10
|
.16(1)
|
|
Master Lease Receivables
Asset-Backed Financing Facility Agreement (the Master Facility
Agreement), dated as of April 1, 2002, by and among Marlin
Leasing Corporation, Marlin Leasing Receivables Corp. II
and Wells Fargo Bank Minnesota, National Association.
|
|
10
|
.17(1)
|
|
Series 2002-A
Supplement, dated as of April 1, 2002, to the Master Lease
Receivables Asset-Backed Financing Facility Agreement, dated as
of April 1, 2002, by and among Marlin Leasing Corporation,
Marlin Leasing Receivables Corp. II, Marlin Leasing
Receivables II LLC, National City Bank and Wells Fargo Bank
Minnesota, National Association.
|
|
10
|
.18(1)
|
|
First Amendment to
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement and Consent to Assignment of
2002-A Note,
dated as of July 10, 2003, by and among Marlin Leasing
Corporation, Marlin Leasing Receivables Corp. II, Marlin
Leasing Receivables II LLC, ABN AMRO Bank N.V. and Wells
Fargo Bank Minnesota, National Association.
|
|
10
|
.19(4)
|
|
Second Amendment to
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of January 13,
2004, by and among Marlin Leasing Corporation, Marlin Leasing
Receivables Corp. II, Marlin Leasing Receivables II
LLC, Bank One, N.A., and Wells Fargo Bank Minnesota, National
Association.
|
|
10
|
.20(4)
|
|
Third Amendment to
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of March 19,
2004, by and among Marlin Leasing Corporation, Marlin Leasing
Receivables Corp. II, Marlin Leasing Receivables II
LLC, Bank One, N.A., and Wells Fargo Bank Minnesota, National
Association.
|
74
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.21(6)
|
|
Fifth Amendment to
Series 2002-A
Supplement to the Master Lease Receivables Asset-Backed
Financing Facility Agreement, dated as of March 18,
2005, by and among Marlin Leasing Corporation, Marlin Leasing
Receivables Corp. II, Marlin Leasing Receivables II
LLC, JP Morgan Chase Bank, N.A., (successor by merger to Bank
One, N.A.), and Wells Fargo Bank Minnesota, National Association.
|
|
10
|
.22(7)
|
|
Compensation Policy for
Non-Employee Independent Directors.
|
|
10
|
.23(10)
|
|
Transition & Release
Agreement made as of December 6, 2005 (effective as of
December 14, 2005) between Bruce E. Sickel and the
Registrant.
|
|
16
|
.1(8)
|
|
Letter on Change in Certifying
Accountant dated June 27, 2005 from KPMG LLP to the
Securities and Exchange Commission.
|
|
21
|
.1
|
|
List of Subsidiaries (Filed
herewith)
|
|
23
|
.1
|
|
Consent of Deloitte &
Touche LLP (Filed herewith)
|
|
23
|
.2
|
|
Consent of KPMG LLP (Filed
herewith)
|
|
31
|
.1
|
|
Certification of the Chief
Executive Officer of Marlin Business Services Corp. required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. (Filed
herewith)
|
|
31
|
.2
|
|
Certification of the Principal
Financial Officer of Marlin Business Services Corp. required by
Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended. (Filed
herewith)
|
|
32
|
.1
|
|
Certification of the Chief
Executive Officer and Principal Financial Officer of Marlin
Business Services Corp. required by
Rule 13a-14(b)
under the Securities Exchange Act of 1934, as amended. (This
exhibit shall not be deemed filed for purposes of
Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liability of that section.
Further, this exhibit shall not be deemed to be incorporated by
reference into any filing under the Securities Exchange Act of
1933, as amended, or the Securities Exchange Act of 1934, as
amended.). (Furnished herewith)
|
|
|
|
|
|
Management contract or compensatory plan or arrangement. |
|
|
|
(1) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Registration Statement on
Form S-1
(File No.
333-108530),
filed on September 5, 2003, and incorporated by reference
herein. |
|
(2) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Amendment No. 1 to
Registration Statement on
Form S-1
(File
No. 333-108530),
filed on October 14, 2003, and incorporated by reference
herein. |
|
(3) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Amendment No. 2 to
Registration Statement on
Form S-1
filed on October 28, 2003 (File
No. 333-108530),
and incorporated by reference herein. |
|
(4) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Annual Report on
Form 10-K
for the fiscal year ended December 31, 2003 filed on
March 29, 2004, and incorporated by reference herein. |
|
(5) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated October 7, 2004 filed on October 12, 2004, and
incorporated herein by reference. |
|
(6) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Quarterly Report on
Form 10-
Q for the quarterly period ended March 31, 2005 filed on
May 9, 2005, and incorporated by reference herein. |
|
(7) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated May 26, 2005 filed on June 2, 2005, and
incorporated by reference herein. |
|
(8) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated June 24, 2005 filed on June 29, 2005, and
incorporated by reference herein. |
|
(9) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated August 26, 2005 filed on August 26, 2005, and
incorporated by reference herein. |
|
(10) |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants
Form 8-K
dated December 14, 2005 and filed on December 14,
2005, and incorporated by reference herein. |
75
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report on Form 10-K/A to be signed on its behalf by
the undersigned, thereunto duly authorized.
Date: April 14, 2006
Marlin Business Services
Corp.
Daniel P. Dyer
Chief Executive Officer
76