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| MFI > SEC Filings for MFI > Form 10-Q on 14-Aug-2009 | All Recent SEC Filings |
14-Aug-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, and anticipate that service contract revenue will continue to
decline 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 six months ended June 30, 2009.
Results of Operations - Three months ended June 30, 2009 compared to the three
months ended June 30, 2008
Revenue
Three Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Income on financing leases $ 7,098 26.8 % $ 5,596
Rental income 2,138 (13.9 ) 2,484
Income on service contracts 175 (27.1 ) 240
Loss and damage waiver fees 1,018 32.6 768
Service fees and other income 699 31.4 532
Interest income 1 (96.3 ) 27
Total revenues $ 11,129 15.4 % $ 9,647
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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 June 30, 2009 were $11.1 million,
an increase of $1.5 million, or 15.4%, from the three months ended June 30,
2008. The overall increase was due to an increase of $1.5 million in income on
financing leases, an increase of $0.4 in fees and other income, partially offset
by a decrease of $0.3 million in rental income, and a decrease of $65,000 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 the result of the attrition of Leasecomm rental contracts which is
partially offset 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 since 2004.
Selling, General and Administrative Expenses
Three Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Selling, general and administrative $ 3,492 9.2 % $ 3,198
As a percent of revenue 31.4 % 33.2 %
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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 $294,000 for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. The increase was primarily driven by increases in compensation expense of $304,000 and employee benefits of $78,000, offset by a $77,000 decrease in legal expenses. The increase in compensation related expenses is the result of an increase in the number of employees. The number of employees as of June 30, 2009 was 106 compared to 86 as of June 30, 2008.
Provision for Credit Losses
Three Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Provision for credit losses $ 4,993 63.2 % $ 3,060
As a percent of revenue 44.9 % 31.7 %
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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 for the three months ended
June 30, 2009, as compared to the three months ended June 30, 2008, while net
charge-offs increased by 215.8% to $4.2 million. The provision is 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 and charge off levels, and the current
economic conditions.
Depreciation and Amortization
Three Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Depreciation - fixed assets $ 105 9.4 % $ 96
Depreciation - rental equipment 269 228.0 82
Amortization - service contracts 9 (82.7 ) 52
Total depreciation and amortization $ 383 66.5 % $ 230
As a percent of revenue 3.4 % 2.4 %
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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 $187,000 and
amortization of service contracts decreased by $43,000 for the three months
ended June 30, 2009, as compared to the three months ended June 30, 2008. The
increase in depreciation is primarily due to the increase in the number of
TimePayment lease contracts coming to maturity and converting to rentals.
Depreciation and amortization of property and equipment increased by $9,000 for
the three months ended June 30, 2009, as compared to the three months ended
June 30, 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 June 30,
2009 Change 2008
(Dollars in thousands)
Interest $ 661 182.5 % $ 234
As a percent of revenue 5.9 % 2.4 %
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We pay interest on borrowings under our senior credit facility. Interest expense increased by $427,000 for the three months ended June 30, 2009, as compared to the three months ended June 30, 2008. This increase resulted primarily from our increased level of borrowings and debt closing costs on our line of credit. At June 30, 2009, we had notes payable under our line of credit of $41.0 million compared to notes payable of $21.4 million at June 30, 2008.
Provision for Income Taxes
Three Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Provision for income taxes $ 616 (41.5 )% $ 1,053
As a percent of revenue 5.5 % 10.9 %
As a percent of income before taxes 38.5 % 36.0 %
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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 $437,000 for the three months ended
June 30, 2008, as compared to the three months ended June 30, 2007. This
increase resulted primarily from the $1.3 million decrease in pre-tax income and
was partially offset by an increase in the effective tax rate from 36.0% for the
three months ended June 30, 2008 to 38.5% for the three months ended June 30,
2009.
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 related
to various state income tax matters. As of June 30, 2009 we had a liability of
$293,000 for unrecognized tax benefits and a liability of $170,000 for accrued
interest and penalties. Of these amounts, approximately $300,000 would impact
our effective tax rate after a $161,000 federal tax benefit for state income
taxes. The increase in the unrecognized tax benefits relates to $10,000 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.
Other Operating Data
Dealer funding was $19.6 million for the three months ended June 30, 2009, an
increase of $1.1 million or 9.5%, compared to the six months ended June 30,
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 net investment in
rental contracts increased from $170.3 million at March 31, 2009 to
$180.6 million at June 30, 2009. Net cash provided by operating activities
increased by $3.1 million, or 26.7%, to $14.3 million during the three months
ended June 30, 2009 as compared to the three months ended June 30, 2008.
Results of Operations - Six months ended June 30, 2009 compared to the six
months ended June 30, 2008
Revenue
Six Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Income on financing leases $ 13,887 31.8 % $ 10,536
Rental income 4,347 (17.0 ) 5,236
Income on service contracts 364 (27.1 ) 499
Loss and damage waiver fees 2,004 37.6 1,456
Service fees and other income 1,370 26.9 1,080
Interest income 14 (83.9 ) 87
Total revenues $ 21,986 16.4 % $ 18,894
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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 six months ended June 30, 2009 were $22.0 million, an
increase of $3.1 million, or 16.4%, from the six months ended June 30, 2008. The
overall increase was due to an increase of $3.4 million in income on financing
leases, and a $0.8 increase in fees and other income partially offset by a
decrease of $0.8 million in rental income, a decrease of $135,000 in service
contracts and a decrease of $73,000 in interest income. The increase in income
on financing leases is a result of the continued growth in new lease
originations. The decline in rental income is the result of the attrition of
Leasecomm rental contracts which is partially offset 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.
Selling, General and Administrative Expenses
Six Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Selling, general and administrative $ 7,064 9.7 % $ 6,437
As a percent of revenue 32.1 % 34.1 %
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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 $627,000 for the six months ended
June 30, 2009, as compared to the six months ended June 30, 2008. The increase
was primarily driven by increases in compensation expense of $524,000 and an
increase in employee benefits $144,000 as a result of an increase in the number
of employees.
Provision for Credit Losses
Six Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Provision for credit losses $ 10,446 62.8 % $ 6,417
As a percent of revenue 47.5 % 34.0 %
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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 $4.0 million for the six months ended
June 30, 2009, as compared to the six months ended June 30, 2008, while net
charge-offs increased by 227.9% to $8.7 million. The provision is 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 and charge off levels, and the current
economic conditions.
Depreciation and Amortization
Six Months Ended June 30,
2009 Change 2008
(Dollars in thousands)
Depreciation - fixed assets $ 210 14.1 % $ 184
Depreciation - rental equipment 483 198.1 162
Amortization - service contracts 25 (78.1 ) 114
Total depreciation and amortization $ 718 56.1 % $ 460
As a percent of revenue 3.3 % 2.4 %
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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 $321,000 and
amortization of service contracts decreased by $89,000 for the six months ended
June 30, 2009, as compared to the six months ended June 30, 2008. The increase
in depreciation is due to the increase in the overall size of our portfolio of
rental equipment. Depreciation and amortization of property and equipment
increased by $26,000 for the six months ended June 30, 2009, as compared to the
six months ended June 30, 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.
. . .
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