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| MFI > SEC Filings for MFI > Form 10-Q on 15-May-2009 | All Recent SEC Filings |
15-May-2009
Quarterly Report
In the past, we have also from time to time acquired service contracts under
which a homeowner purchases a security system and simultaneously signs a
contract with the dealer for the monitoring of that system for a monthly fee.
Upon approval of the monitoring application and verification with the homeowner
that the system is installed, we would purchase the right to the payment stream
under the monitoring contract from the dealer at a negotiated multiple of the
monthly payments. We have not purchased any new security monitoring contracts
since 2004, although we do originate security equipment leases that include
monitoring. Our service contract portfolio represents a less significant portion
of our revenue stream over time.
Substantially all leases originated or acquired by us are non-cancelable.
During the term of the lease, we are scheduled to receive payments sufficient to
cover our borrowing costs and the cost of the underlying equipment and provide
us with an appropriate profit. We pass along some of the costs of our leases and
contracts by charging late fees, prepayment penalties, loss and damage waiver
fees and other service fees, when applicable. Collection fees are imposed based
on our estimate of the costs of collection. The loss and damage waiver fees are
charged if a customer fails to provide proof of insurance and are reasonably
related to the cost of replacing the lost or damaged equipment or product. The
initial non-cancelable term of the lease is equal to or less than the
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 45 months as of December 31, 2008.
Critical Accounting Policies
Our significant accounting policies are more fully described in Note B to the
condensed consolidated financial statements included in this Quarterly Report
and in Note B to the consolidated financial statements included in our Annual
Report on Form 10-K for the year ended December 31, 2008 filed with the
Securities and Exchange Commission. Certain accounting policies are particularly
important to the portrayal of our consolidated financial position and results of
operations. These policies require the application of significant judgment by us
and as a result, are subject to an inherent degree of uncertainty. In applying
these policies, we make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and the related disclosures. We
base our estimates and judgments on historical experience, terms of existing
contracts, observance of trends in the industry, information obtained from
dealers and other sources, and on various other assumptions that we believe to
be reasonable and appropriate under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
Our critical accounting policies, including revenue recognition, maintaining
the allowance for credit losses, determining provisions for income taxes, and
accounting for share-based compensation are each discussed in more detail in our
Annual Report on Form 10-K. We have reviewed and determined that those policies
remain our critical accounting policies and we did not make any changes in those
policies during the three months ended March 31, 2009.
Results of Operations - Three months ended March 31, 2009 compared to the three
months ended March 31, 2008
Revenue
Three Months Ended
March 31,
2009 Change 2008
(Dollars in thousands)
Income on financing leases $ 6,789 37.4 % $ 4,940
Rental income 2,209 (19.7 ) 2,752
Income on service contracts 189 (27.0 ) 259
Loss and damage waiver fees 986 43.3 688
Service fees and other income 671 22.2 549
Interest income 13 (78.3 ) 60
Total revenues $ 10,857 17.4 % $ 9,248
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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 March 31, 2009 were $10.9 million,
an increase of $1.6 million, or 17.4%, from the three months ended March 31,
2008. The overall increase was due to an increase of $1.9 million in income on
financing leases and a $0.4 million increase in fees and other income partially
offset by a decrease of $0.6 million in rental income, a decrease of $70,000 in
income on service contacts and a decrease of $47,000 in interest income. The
decline in rental income is the result of the attrition of LeaseComm rental
contracts which is offset in part by TimePayment lease contracts coming to term
and converting to rentals. Service contact revenue continues to decline since we
have not funded any new service contracts. The decrease in interest income is a
direct result of the decrease in invested cash as well as lower rates of return.
Selling, General and Administrative Expenses
Three Months Ended
March 31,
2009 Change 2008
(Dollars in thousands)
Selling, general and administrative $ 3,572 10.3 % $ 3,239
As a percent of revenue 32.9 % 35.0 %
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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 commissions, service fees and other marketing costs
associated with our portfolio of leases and rental contracts. SG&A expenses
increased by $333,000 for the three months ended March 31, 2009, as compared to
the three months ended March 31, 2008. The increase was primarily driven by
increases in compensation expense of $287,000, and employee benefits of $67,000.
The increase in compensation related expenses is the result of an increase in
the number of employees. The number of employees as of March 31, 2009 was 102
compared to 81 as of March 31, 2008.
Provision for Credit Losses
Three Months Ended
March 31,
2009 Change 2008
(Dollars in thousands)
Provision for credit losses $ 5,453 62.4 % $ 3,357
As a percent of revenue 50.2 % 36.3 %
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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 $2.1 million for the three months ended March 31, 2009, as compared to the three months ended March 31, 2008, while net charge-offs increased by 240.2% to $4.4 million. The provision was based on providing a general allowance on leases funded during the period and our analysis of actual and expected losses in our portfolio. The increase in the allowance reflects the growth in lease receivables associated with new lease originations, increased delinquency levels, and the current economic times.
Depreciation and Amortization
Three Months Ended
March 31,
2009 Change 2008
(Dollars in thousands)
Depreciation - fixed assets $ 105 19.3 % $ 88
Depreciation - rental equipment 214 167.5 80
Amortization - service contracts 16 (74.2 ) 62
Total depreciation and amortization $ 335 45.7 % $ 230
As a percent of revenue 3.1 % 2.5 %
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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 leased equipment on a month-to-month basis. The rental
equipment is recorded at its residual value and depreciated over a term of
12 months. This term represents the estimated life of a previously leased piece
of equipment and is based upon our historical experience. In the event the
contract terminates prior to the end of the 12 month period, the remaining net
book value is expensed.
Depreciation expense on rental contracts increased by $134,000 and
amortization of service contracts decreased by $46,000 for the three months
ended March 31, 2009, as compared to the three months ended March 31, 2008. The
increases in depreciation and amortization are due to the increase in the
overall size of our portfolio of rental equipment. Depreciation and amortization
of property and equipment increased by $17,000 for the three months ended
March 31, 2009, as compared to the three months ended March 31, 2008.
Service contracts are recorded at cost and amortized over their estimated
life of 84 months. In a typical service contract acquisition, a homeowner will
purchase a home security system and simultaneously sign a contract with the
security dealer for monthly monitoring of the system. The security dealer will
then sell the rights to that monthly payment to us. We perform all of the
processing, billing, collection and administrative work on the service contract.
The estimated life is based upon the expected life of such contracts in the
security monitoring industry and our historical experience. In the event the
contract terminates prior to the end of the 84 month term, the remaining net
book value is expensed.
Interest Expense
Three Months Ended
March 31,
2009 Change 2008
(Dollars in thousands)
Interest $ 516 239.5 % $ 152
As a percent of revenue 4.8 % 1.6 %
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We pay interest on borrowings under our revolving line of credit. Interest
expense increased by $364,000 for the three months ended March 31, 2009, as
compared to the three months ended March 31, 2008. This increase resulted
primarily from our increased level of borrowings. At March 31, 2009, the balance
on our revolving line of credit was $35.8 million compared to $14.5 million at
March 31, 2008.
Provision for Income Taxes
Three Months Ended
March 31,
2009 Change 2008
(Dollars in thousands)
Provision for income taxes $ 378 (47.0 )% $ 713
As a percent of revenue 3.5 % 7.7 %
As a percent of income before taxes 38.5 % 31.4 %
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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 must then assess the likelihood that deferred tax assets will be recovered
from future taxable income or tax carry-back availability and to the extent we
believe recovery is more likely than not, a valuation allowance is unnecessary.
The provision for income taxes decreased by $335,000 for the three months ended
March 31, 2009, as compared to the three months ended March 31, 2008. This
decrease resulted primarily from the $1.3 million decrease in pre-tax income
partially offset by an increase in the effective tax rate from 31.4% for the
three months ended March 31, 2008 to 38.5% for the three months ended March 31,
2009. The lower overall effective tax rate for the three months ended March 31,
2008 was primarily related to the release of certain state reserves related to
the expiration of statutes of limitation.
As of December 31, 2008, we had a liability of $293,000 for unrecognized tax
benefits and a liability of $152,000 for accrued interest and penalties related
to various state income tax matters. As of March 31, 2009 we had a liability of
$293,000 for unrecognized tax benefits and a liability of $160,000 for accrued
interest and
penalties. Of these amounts, approximately $295,000 would impact our effective
tax rate after a $158,000 federal tax benefit for state income taxes. The
increase in the unrecognized tax benefit relates to $8,000 in additional accrued
interest expense. It is reasonably possible that the total amount of
unrecognized tax benefits may change significantly within the next 12 months;
however at this time we are unable to estimate the change.
Our federal income tax returns are subject to examination for tax years ended
on or after December 31, 2004 and our state income tax returns are subject to
examination for tax years ended on or after December 31, 2002.
Fair Value of Financial Instruments
For financial instruments including cash and cash equivalents, restricted
cash, net investment in leases, accounts payable, revolving line of credit, and
other liabilities, we believe that the carrying amount approximates fair value.
The fair value of the revolving line of credit is calculated based on
incremental borrowing rates currently available on loans with similar terms and
maturities. The fair value of our revolving line of credit at March 31, 2009
approximates its carrying value.
Other Operating Data
Dealer funding was $17.1 million for the three months ended March 31, 2009, a
decrease of $300,000 or 1.7%, compared to the three months ended March 31, 2008.
We continue to concentrate on our business development efforts, which include
increasing the size of our vendor base and sourcing a larger number of
applications from those vendors. Receivables due in installments, estimated
residual values, net investment in service contracts and investment in rental
contracts increased from $162.1 million at December 31, 2008 to $170.3 million
at March 31, 2009. Net cash provided by operating activities increased by
$3.9 million, or 43.9%, to $12.8 million during the three months ended March 31,
2009 as compared to the three months ended March 31, 2008.
Exposure to Credit Losses
The amounts in the table below represent the balance of delinquent
receivables on an exposure basis for all leases, rental contracts, and service
contracts in our portfolio. An exposure basis aging classifies the entire
receivable based on the invoice that is the most delinquent. For example, in the
case of a rental or service contract, if a receivable is 90 days past due, all
amounts billed and unpaid are placed in the over 90 days past due category. In
the case of lease receivables, where the minimum contractual obligation of the
lessee is booked as a receivable at the inception of the lease, if a receivable
is 90 days past due, the entire receivable, including all amounts billed and
unpaid as well as the minimum contractual obligation yet to be billed, will be
placed in the over 90 days past due category.
(dollars in thousands) March 31, 2009 December 31, 2008
Current $ 117,086 77.9 % $ 110,423 77.3 %
31-60 days past due 5,341 3.6 6,941 4.8
61-90 days past due 5,262 3.5 5,079 3.6
Over 90 days past due 22,625 15.0 20,438 14.3
Gross receivables due in installments $ 150,314 100.0 % $ 142,881 100.0 %
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Liquidity and Capital Resources
General
Our lease and finance business is capital-intensive and requires access to
substantial short-term and long-term credit to fund lease originations. Since
inception, we have funded our operations primarily through borrowings under our
credit facilities, on-balance sheet securitizations, the issuance of
subordinated debt, free cash flow and our initial public offering completed in
February 1999. We will continue to require significant additional capital to
maintain and expand our funding of leases and contracts, as well as to fund any
future acquisitions of leasing companies or portfolios. In the near term, we
expect to finance our business utilizing the cash on hand and our
revolving line of credit which matures in August 2010. Additionally, our uses of
cash include the payment of interest and principal on borrowings, selling,
general and administrative expenses, income taxes, payment of dividends and
capital expenditures.
For the three months ended March 31, 2009 and 2008, our primary sources of
liquidity were cash provided by operating activities and borrowings on our
revolving line of credit. We generated cash flow from operations of
$12.8 million for the three months ended March 31, 2009 compared to $8.9 million
for the three months ended March 31, 2008. At March 31, 2009, we had
approximately $35,768,000 outstanding under our revolving credit facility and
had available borrowing capacity of approximately $49,232,000 as described
below.
We used net cash in investing activities of $17.3 million during the three
months ended March 31, 2009 and $17.6 million for the three months ended
March 31, 2008. Investing activities primarily relate to the origination of
leases and the increase in cash used is consistent with our focused and targeted
sales and marketing effort.
Net cash provided by financing activities was $1.5 million for the three
months ended March 31, 2009 compared to $7.4 million for the three months ended
March 31, 2008. Financing activities primarily consist of the borrowings and
repayments on our revolving line of credit and dividend payments.
We believe that cash flows from our existing portfolio, cash on hand,
available borrowings on our revolving line of credit, and the completion of
additional financing as required will be sufficient to support our operations
and lease origination activity in the near term. Given the tight credit
conditions in the current marketplace, it may be difficult for us to obtain
additional low cost capital. Our inability to obtain additional financing would
significantly impact our ability to grow the business.
Borrowings
We utilize our revolving line of credit to fund the origination and
acquisition of leases that satisfy the eligibility requirements established
pursuant to the facility. Borrowings outstanding consist of the following:
March 31, 2009 December 31, 2008
Maximum Maximum
Amounts Interest Unused Facility Amounts Interest Unused Facility
(dollars in 000) Outstanding Rate Capacity Amount Outstanding Rate Capacity Amount
Revolving credit
facility(1) $ 35,768 5.0 % $ 49,232 $ 85,000 $ 33,325 3.25 % $ 26,675 $ 60,000
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(1) The unused capacity is subject to the borrowing base formula.
On August 2, 2007, we entered into a three-year $30 million revolving line of
credit with Sovereign based on qualified TimePayment lease receivables. On
July 9, 2008 we entered into an amended agreement to increase our revolving line
of credit with Sovereign to $60 million. The maturity date of the amended
agreement is August 2, 2010. Outstanding borrowings are collateralized by
eligible lease contracts and a security interest in all of our other assets and,
until February 2009, bore interest at Prime or at LIBOR plus 2.75%. Under the
terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans.
If a LIBOR Loan is not renewed at maturity it automatically converts to a Prime
Rate Loan. On February 10, 2009 we entered into an amended agreement to increase
our revolving line of credit with Sovereign to $85 million. Under the amended
agreement, outstanding borrowings bear interest at Prime plus 1.75% or LIBOR
plus 3.75%, in each case subject to a minimum interest rate of 5%. All other
terms of the facility remained the same. As of March 31, 2009 and 2008, all of
our loans were Prime Rate Loans.
Dividends
During the three months ended March 31, 2009 and 2008 we did not declare a
dividend. During the three months ended December 31, 2008 we declared a dividend
of $0.05 payable on January 19, 2009 to shareholders of record on January 5,
2009.
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