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| MFI > SEC Filings for MFI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
imposed based on our estimate of the costs of collection. The loss and damage
waiver fees are charged if a customer fails to provide proof of insurance and
are reasonably related to the cost of replacing the lost or damaged equipment or
product. The initial non-cancelable term of the lease is equal to or less than
the equipment's estimated economic life and often provides us with additional
revenues based on the residual value of the equipment at the end of the lease.
Initial terms of the leases in our portfolio generally range from 12 to 60
months, with an average initial term of 47 months as of December 31, 2007.
In the past we have also from time to time acquired service contracts, under
which a homeowner purchases a security system and simultaneously signs a
contract with the dealer for the monitoring of that system for a monthly fee.
Upon approval of the monitoring application and verification with the homeowner
that the system is installed, we would purchase the right to the payment stream
under the monitoring contract from the dealer at a negotiated multiple of the
monthly payments. We have not purchased any new security service contracts since
2004 and our service contract portfolio represents a less significant portion of
our revenue stream over time.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note B to the
condensed consolidated financial statements included in this Quarterly Report
and in Note B to the consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2007 filed with the
Securities and Exchange Commission. Certain accounting policies are particularly
important to the portrayal of our consolidated financial position and results of
operations. These policies require the application of significant judgment by us
and as a result, are subject to an inherent degree of uncertainty. In applying
these policies, we make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and the related disclosures. We
base our estimates and judgments on historical experience, terms of existing
contracts, observance of trends in the industry, information obtained from
dealers and other sources, and on various other assumptions that we believe to
be reasonable and appropriate under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Our critical accounting policies, including revenue recognition, maintaining
the allowance for credit losses, determining provisions for income taxes, and
accounting for share-based compensation are each discussed in more detail in our
Annual Report on Form 10-K. We have reviewed and determined that those policies
remain our critical accounting policies and we did not make any changes in those
policies during the nine months ended September 30, 2008.
Results of Operations - Three months ended September 30, 2008 compared to the
three months ended September 30, 2007
Revenue
Three Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Income on financing leases $ 6,030 77.0 % $ 3,406
Rental income 2,330 (28.7 ) 3,268
Income on service contracts 221 (27.1 ) 303
Loss and damage waiver fees 849 62.0 524
Service fees and other income 632 52.3 415
Interest income 23 (87.4 ) 182
Total revenues $ 10,085 24.5 % $ 8,098
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Our lease contracts are accounted for as financing leases. At origination, we
record the gross lease receivable, the estimated residual value of the leased
equipment, initial direct costs incurred and the unearned lease income. Unearned
lease income is the amount by which the gross lease receivable plus the
estimated residual value exceeds the cost of the equipment. Unearned lease
income and initial direct costs incurred are amortized over the related lease
term using the interest method. Other revenues such as loss and damage waiver
fees, service fees relating to the leases and contracts, and rental revenues are
recognized as they are earned.
Total revenues for the three months ended September 30, 2008 were
$10.1 million, an increase of $2.0 million, or 24.5%, from the three months
ended September 30, 2007. The overall increase was due to an increase of
$2.6 million in income on financing leases, an increase of $542,000 in fees and
other income, partially offset by a decrease of $0.9 million in rental income, a
decrease of $160,000 in interest income, and a decrease of $82,000 in income on
service contracts. The increase in income on financing leases is a result of the
continued growth in new
lease originations. The decline in rental income is primarily explained by attrition rates in the two sources of rental income. One source is rental agreements that are originated and cancellable on a monthly basis. The other is the rental income that is recognized at the end of the lease term when a lessee chooses to keep the equipment and rents it on a monthly basis. Since we resumed funding in 2004 following an interruption in our funding sources, we have not originated any new rental contracts and few lease contracts have been eligible to convert to rental agreements since they have not reached the end of term. The decrease in interest income is a result of the decrease in cash and cash equivalents on hand as well as lower rates of investment. In addition we have not funded any new service contracts, in which we purchase the right to the payment stream under a home security monitoring contract for a negotiated multiple of the monthly payments, since we resumed funding in 2004; therefore this segment of revenue is expected to continually decline.
Selling, General and Administrative
Three Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Selling, general and administrative $ 3,260 4.0 % $ 3,134
As a percent of revenue 32.3 % 38.7 %
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Our selling, general and administrative (SG&A) expenses include costs of
maintaining corporate functions including accounting, finance, collections,
legal, human resources, sales and underwriting, and information systems. SG&A
expenses also include service fees and other marketing costs associated with our
portfolio of leases and rental contracts. SG&A expenses increased by $126,000
for the three months ended September 30, 2008, as compared to the three months
ended September 30, 2007. The increase was primarily driven by a $145,000
increase in payroll, a $124,000 increase in collection expense, and a $78,000
increase in cost of equipment sold; offset in part by a $98,000 decrease in
professional fees, a $58,000 decrease in legal services, and a $57,000 decrease
in other taxes as well as a net decrease of $8,000 in all other categories of
SG&A.
Provision for Credit Losses
Three Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Provision for credit losses $ 3,782 97.1 % $ 1,919
As a percent of revenue 37.5 % 23.7 %
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We maintain an allowance for credit losses on our investment in leases,
service contracts and rental contracts at an amount that we believe is
sufficient to provide adequate protection against losses in our portfolio. Our
provision for credit losses increased by $1.9 million, or 97.1%, for the three
months ended September 30, 2008, as compared to the three months ended
September 30, 2007, while net charge-offs increased by 92.2% to $2.9 million.
The provision was based on our analysis of actual and expected losses in our
portfolio. The 90-day delinquent lease payments receivable on an exposure basis
increased by 98.9% to $17.9 million at September 30, 2008 compared to
$9.0 million at September 30, 2007. The increase in the allowance for credit
losses reflects both the increased size of our lease portfolio and increased
delinquency levels.
Depreciation and Amortization
Three Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Depreciation - fixed assets $ 100 31.6 % $ 76
Depreciation - rental equipment 107 (10.8 ) 120
Amortization - service contracts 38 (58.7 ) 92
Total depreciation and amortization $ 245 (14.9 )% $ 288
As a percent of revenue 2.4 % 3.6 %
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Depreciation and amortization expense consists of depreciation on fixed
assets and rental equipment, and the amortization of service contracts. Fixed
assets are recorded at cost and depreciated over their expected useful lives.
Certain rental contracts are originated as a result of the renewal provisions of
our lease agreements where at the end of lease term, the customer may elect to
continue to rent the equipment on a month-to-month basis. The rental equipment
is recorded at its residual value and depreciated over a term of 12 months. This
term represents the estimated life of a previously leased piece of equipment and
is based upon our historical experience. In the event the contract terminates
prior to the end of the 12 month period, the remaining net book value is
expensed.
Depreciation expense on lease contracts that have converted to rental
contracts decreased by $13,000 and amortization of service contracts decreased
by $54,000 for the three months ended September 30, 2008, as compared to the
three months ended September 30, 2007. The decreases in depreciation and
amortization are due to the decrease in the overall size of our portfolio of
rental equipment and service contracts as well as the fact that a greater
percentage of the assets are fully depreciated. Depreciation and amortization of
property and equipment increased by $24,000 for the three months ended
September 30, 2008, as compared to the three months ended September 30, 2007.
The increase in depreciation on property and equipment is a result of office and
computer equipment additions.
We have in the past offered a rental agreement, which allowed the customer,
assuming the contract was current and no event of default existed, to terminate
the contract at any time by returning the equipment and providing us with
30 days notice. These assets were recorded at cost and depreciated over an
estimated life of 36 months. This term was based upon our historical experience.
In the event that the contract terminated prior to the end of the 36 month
period, the remaining net book value was expensed. We have not originated any
new rental contracts since 2004.
Service contracts were recorded at cost and amortized over their estimated
life of 84 months. In a typical service contract acquisition, a homeowner will
purchase a home security system and simultaneously sign a contract with the
security dealer for monthly monitoring of the system. The security dealer would
then sell the rights to that monthly payment to us. We perform all of the
processing, billing, collection and administrative work on the service contract.
The estimated life is based upon the expected life of such contracts in the
security monitoring industry and our historical experience. In the event the
contract terminates prior to the end of the 84 month term, the remaining net
book value is expensed. We have not originated any new service contracts since
2004.
Interest Expense
Three Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Interest $ 310 2,284.6 % $ 13
As a percent of revenue 3.1 % 0.2 %
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We pay interest on borrowings under our senior credit facility. Interest
expense increased by $297,000 for the three months ended September 30, 2008, as
compared to the three months ended September 30, 2007. This increase resulted
primarily from our increased level of borrowings. At September 30, 2008, we had
notes payable of $41.1 million compared to notes payable of $0 at September 30,
2007.
Provision for Income Taxes
Three Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Provision for income taxes $ 905 (3.8 )% $ 941
As a percent of revenue 9.0 % 11.6 %
As a percent of income before taxes 36.4 % 34.3 %
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The provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets, involves summarizing temporary differences resulting from the different
treatment of items, such as leases, for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are recorded on
the balance sheet. We then assess the likelihood that deferred tax assets will
be recovered from future taxable income or tax carry-back availability and to
the extent we believe recovery is more likely than not, a valuation allowance is
unnecessary. The provision for income taxes decreased by $36,000 for the three
months ended September 30, 2008, as compared to the three months ended
September 30, 2007. This decrease resulted primarily from the $256,000 decrease
in pre-tax income and was partially offset by an increase in the effective tax
rate from 34.3% for the three months ended September 30, 2007 to 36.4% for the
three months ended September 30, 2008. The increase in the overall effective tax
rate relates to the release of $325,000 of state tax reserves during the three
months ended September 30, 2007. The Commonwealth of Massachusetts has enacted
legislation that provides for a reduction in the corporate income rate as well
as requiring mandatory unitary combined filing. We are currently evaluating the
impact of this legislation, we do not believe that it will have a material
effect on our provision for income taxes.
As of June 30, 2008, we had a liability of $328,000 for potential tax
obligations and a liability of $147,000 for accrued interest and penalties
related to various state income tax matters. As of September 30, 2008 we had a
liability of $290,000 for potential tax obligations and a liability of $145,000
for accrued interest and penalties. Of these amounts, approximately $282,000
would impact our effective tax rate after a $153,000 federal tax benefit for
state income taxes. The decrease in the unrecognized tax benefits and interest
is due to the conclusion of various state audits and the payment of assessments.
It is reasonably possible that the total amount of unrecognized tax benefits may
change significantly within the next 12 months; however at this time we are
unable to estimate the change.
Our federal income tax returns are subject to examination for tax years ended
on or after December 31, 2004 and our state income tax returns are subject to
examination for tax years ended on or after December 31, 2002.
Other Operating Data
Dealer funding was $16.1 million for the three months ended September 30,
2008, an increase of $1.1 million or 7.7%, compared to the three months ended
September 30, 2007. Throughout the year, the Company has adopted more
restrictive credit standards which, on a dollar basis, have resulted in a
decrease in our application approval ratios. We continue to concentrate on our
business development efforts, which include increasing the size of our vendor
base and sourcing a larger number of applications from those vendors. The
aggregate amount of receivables due in installments, estimated residual values,
net investment in service contracts and net investment in rental contracts
increased from $141.2 million at June 30, 2008 to $150.9 million at
September 30, 2008. Net cash provided by operating activities increased by
$4.1 million, or 56.7%, to $11.3 million during the three months ended
September 30, 2008 as compared to the three months ended September 30, 2007.
Results of Operations - Nine months ended September 30, 2008 compared to the
nine months ended September 30, 2007
Revenue
Nine Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Income on financing leases $ 16,566 104.7 % $ 8,092
Rental income 7,566 (29.3 ) 10,706
Income on service contracts 720 (27.5 ) 993
Loss and damage waiver fees 2,305 59.8 1,442
Service fees and other income 1,712 51.4 1,131
Interest income 110 (85.4 ) 752
Total revenues $ 28,979 25.4 % $ 23,116
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Our lease contracts are accounted for as financing leases. At origination, we
record the gross lease receivable, the estimated residual value of the leased
equipment, initial direct costs incurred and the unearned lease income. Unearned
lease income is the amount by which the gross lease receivable plus the
estimated residual value exceeds the cost of the equipment. Unearned lease
income and initial direct costs incurred are amortized over the related lease
term using the interest method. Other revenues such as loss and damage waiver
fees, service fees relating to the leases and contracts, and rental revenues are
recognized as they are earned.
Total revenues for the nine months ended September 30, 2008 were
$29.0 million, an increase of $5.9 million, or 25.4%, from the nine months ended
September 30, 2007. The overall increase was due to an increase of $8.5 million
in income on financing leases, and a $1.4 million increase in fees and other
income partially offset by a decrease of $3.1 million in rental income, a
decrease of $0.6 million in interest income and a decrease of $0.3 million in
income on service contracts. The increase in income on financing leases is a
result of the continued growth in new lease originations. The decline in rental
income is primarily explained by attrition rates in the two sources of rental
income. One source is rental agreements that are originated and cancellable on a
monthly basis. The other is the rental income that is recognized at the end of
the lease term when a lessee chooses to keep the equipment and rents it on a
monthly basis. Since we resumed funding in 2004 following an interruption in our
funding sources, we have not originated any new rental contracts, and few lease
contracts have been eligible to convert to rental agreements since they have not
reached the end of term. The decrease in interest income is a direct result of
the decrease in cash and cash equivalents on hand as well as a reduction in the
rates of return on invested cash. In addition, we have not funded any new
service contracts since we resumed funding in 2004; therefore this segment of
revenue is expected to continually decline.
Selling, General and Administrative
Nine Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Selling, general and administrative $ 9,697 (1.7 )% $ 9,861
As a percent of revenue 33.5 % 42.7 %
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Our selling, general and administrative (SG&A) expenses include costs of maintaining corporate functions including accounting, finance, collections, legal, human resources, sales and underwriting, and information systems. SG&A expenses also include service fees and other marketing costs associated with our portfolio of leases and rental contracts. SG&A expenses decreased by $164,000 for the nine months ended September 30, 2008, as compared to the nine months ended September 30, 2007. The decrease was primarily driven by reductions in legal expense of $124,000, and amortization of debt closing cost of $196,000 offset by an increase of $172,000 in cost of equipment sold.
Provision for Credit Losses
Nine Months Ended
September 30,
2008 Change 2007
(Dollars in thousands)
Provision for credit losses $ 10,199 99.2 % $ 5,119
As a percent of revenue 35.2 % 22.1 %
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We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Our provision for credit losses increased by $5.1 million, or 99.2%, for the nine months ended September 30, 2008, as compared to the nine months ended . . .
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