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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark
One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
 Commission File No. 1-14771
 MICROFINANCIAL INCORPORATED
  Massachusetts
(State or other jurisdiction of 
incorporation or organization)
    
    04-2962824
(I.R.S. Employer Identification No.)
 
 
 þ o
  o o þ
 o þ




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MICROFINANCIAL INCORPORATED
TABLE OF CONTENTS
 PagePart I- FINANCIAL INFORMATIONItem 1. Financial Statements (unaudited):Condensed Consolidated Balance Sheets -
December 31, 2006 and March 31, 2007
    
    
    3Condensed Consolidated Statements of Income -
Three months ended March 31, 2006 and 2007
    
    
    4Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2006 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    16Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    17Item 1A. Risk Factors
    
    
    17Item 6. Exhibits
    
    
    17Signatures
    
    
    18EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO




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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands, except share and per share data)
 December 31,
    
    
    March 31,2006
    
    
    2007ASSETSCash and cash equivalents
    
    $
    28,737
    
    
    $
    23,970Net investment in leases:Receivables due in installments
    
    
    40,455
    
    
    
    49,597Estimated residual value
    
    
    3,859
    
    
    
    4,966Initial direct costs
    
    
    302
    
    
    
    386Less:Advance lease payments and deposits
    
    
    (50
    )
    
    
    (52
    )Unearned income
    
    
    (13,682
    )
    
    
    (17,993
    )Allowance for credit losses
    
    
    (5,223
    )
    
    
    (4,810
    )Net investment in leases
    
    
    25,661
    
    
    
    32,094Investment in service contracts, net
    
    
    613
    
    
    
    481Investment in rental contracts, net
    
    
    313
    
    
    
    168Property and equipment, net
    
    
    655
    
    
    
    653Other assets
    
    
    652
    
    
    
    507Deferred income taxes, net
    
    
    3,090
    
    
    
    3,090Total assets
    
    $
    59,721
    
    
    $
    60,963LIABILITIES AND STOCKHOLDERS EQUITYNotes payable
    
    $
    5
    
    
    $
    24Accounts payable
    
    
    1,038
    
    
    
    511Dividends payable
    
    
    691
    
    
    
    695Other liabilities
    
    
    1,110
    
    
    
    1,420Income taxes payable
    
    
    741
    
    
    
    1,338Total liabilities
    
    
    3,585
    
    
    
    3,988Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at December 31, 2006 and March 31, 2007
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares authorized;
13,811,442 and 13,891,596 shares issued at December 31, 2006
and March 31, 2007, respectively
    
    
    138
    
    
    
    139Additional paid-in capital
    
    
    44,136
    
    
    
    44,452Retained earnings
    
    
    11,862
    
    
    
    12,384Total stockholders equity
    
    
    56,136
    
    
    
    56,975Total liabilities and stockholders equity
    
    $
    59,721
    
    
    $
    60,963
  3




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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (In thousands, except share and per share data)
 Three Months EndedMarch 31,2006
    
    2007Revenues:Income on financing leases
    
    $
    672
    
    
    $
    2,033Rental income
    
    
    5,721
    
    
    
    3,924Income on service contracts
    
    
    555
    
    
    
    361Loss and damage waiver fees
    
    
    551
    
    
    
    444Service fees and other
    
    
    1,103
    
    
    
    386Interest income
    
    
    315
    
    
    
    323Total revenues
    
    
    8,917
    
    
    
    7,471Expenses:Selling, general and administrative
    
    
    4,207
    
    
    
    3,568Provision for credit losses
    
    
    1,610
    
    
    
    1,523Depreciation and amortization
    
    
    1,765
    
    
    
    463Interest
    
    
    81
    
    
    
    13Total expenses
    
    
    7,663
    
    
    
    5,567Income before provision for income taxes
    
    
    1,254
    
    
    
    1,904Provision for income taxes
    
    
    490
    
    
    
    687Net income
    
    $
    764
    
    
    $
    1,217Net income per common share  basic
    
    $
    0.06
    
    
    $
    0.09Net income per common share  diluted
    
    $
    0.05
    
    
    $
    0.09Weighted-average shares:Basic
    
    
    13,762,979
    
    
    
    13,860,534Diluted
    
    
    13,905,902
    
    
    
    14,072,449
  4




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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Three Months EndedMarch 31,2006
    
    2007Cash flows from operating activities:Cash received from customers
    
    $
    12,178
    
    
    $
    9,547Cash paid to suppliers and employees
    
    
    (4,587
    )
    
    
    (3,537
    )Income taxes paid
    
    
    (150
    )
    
    
    (90
    )Interest paid
    
    
    (70
    )
    
    
    (1
    )Interest received
    
    
    315
    
    
    
    323Net cash provided by operating activities
    
    
    7,686
    
    
    
    6,242Cash flows from investing activities:Investment in lease and rental contracts
    
    
    (2,922
    )
    
    
    (10,138
    )Investment in direct costs
    
    
    (54
    )
    
    
    (142
    )Investment in property and equipment
    
    
    (68
    )
    
    
    (57
    )Net cash used in investing activities
    
    
    (3,044
    )
    
    
    (10,337
    )Cash flows from financing activities:Proceeds from secured debt
    
    
    40
    
    
    
    19Repayment of subordinated debt
    
    
    (1,800
    )
    
    
    Payment of dividends
    
    
    (4,118
    )
    
    
    (691
    )Net cash used in financing activities
    
    
    (5,878
    )
    
    
    (672
    )Net change in cash and cash equivalents
    
    
    (1,236
    )
    
    
    (4,767
    )Cash and cash equivalents, beginning of period
    
    
    32,926
    
    
    
    28,737Cash and cash equivalents, end of period
    
    $
    31,690
    
    
    $
    23,970Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    764
    
    
    
    1,217Adjustments to reconcile net income to net
cash provided by operating activities:Amortization of unearned income, net of initial direct costs
    
    
    (672
    )
    
    
    (2,033
    )Depreciation and amortization
    
    
    1,765
    
    
    
    463Provision for credit losses
    
    
    1,610
    
    
    
    1,523Recovery of equipment cost and residual value
    
    
    4,159
    
    
    
    4,232Stock-based compensation expense
    
    
    84
    
    
    
    392Non-cash interest expense (amortization of debt discount)
    
    
    11
    
    
    
    12Changes in assets and liabilities:Current taxes payable
    
    
    (150
    )
    
    
    597Deferred income taxes
    
    
    490
    
    
    
    Other assets
    
    
    205
    
    
    
    132Accounts payable
    
    
    (595
    )
    
    
    (219
    )Other liabilities
    
    
    15
    
    
    
    (74
    )Net cash provided by operating activities
    
    $
    7,686
    
    
    $
    6,242Supplemental disclosure of non-cash activities:Fair market value of stock issued for compensation
    
    $
    199
    
    
    $
    307
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MICROFINANCIAL INCORPORATED
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
 A. Nature of Business
  B. Summary of Significant Accounting Policies
 Basis of Presentation
   Allowance for Credit Losses
   6




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
  Allowance for credit losses at December 31, 2006
    
    
    
    
    
    $
    5,223Provision for credit losses
    
    
    
    
    
    
    1,523Charge-offs
    
    
    (3,095
    )Recoveries
    
    
    1,159Charge-offs, net of recoveries
    
    
    
    
    
    
    (1,936
    )Allowance for credit losses at March 31, 2007
    
    
    
    
    
    $
    4,810
 Net Income Per Share
  Three Months EndedMarch 31,2006
    
    
    2007Net income
    
    $
    764
    
    
    $
    1,217Weighted average common shares outstanding
    
    
    13,762,979
    
    
    
    13,860,534Dilutive effect of common stock
options, warrants and restricted stock
    
    
    142,923
    
    
    
    211,915Shares used in computation of net income
per common share  diluted
    
    
    13,905,902
    
    
    
    14,072,449Net income per common share  basic
    
    $
    0.06
    
    
    $
    0.09Net income per common share  diluted
    
    $
    0.05
    
    
    $
    0.09
 Stock-Based Employee Compensation
   7




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
  Outstanding
    
    
    ExercisableWeighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    Intrinsic
    
    
    Average
    
    
    
    
    
    
    IntrinsicExercise Price
    
    
    Shares
    
    
    Life (Years)
    
    
    Value
    
    
    Exercise Price
    
    
    Shares
    
    
    Value$
    12.31
    
    
    
    359,391
    
    
    
    1.91
    
    
    $
    
    
    
    $
    12.31
    
    
    
    359,391
    
    
    $
    13.54
    
    
    
    40,609
    
    
    
    1.91
    
    
    
    
    
    
    
    13.54
    
    
    
    40,609
    
    
    
    9.78
    
    
    
    350,000
    
    
    
    2.90
    
    
    
    
    
    
    
    9.78
    
    
    
    350,000
    
    
    
    13.10
    
    
    
    90,000
    
    
    
    3.89
    
    
    
    
    
    
    
    13.10
    
    
    
    90,000
    
    
    
    6.70
    
    
    
    235,000
    
    
    
    4.91
    
    
    
    
    
    
    
    6.70
    
    
    
    217,000
    
    
    
    1.59
    
    
    
    167,500
    
    
    
    5.66
    
    
    
    602
    
    
    
    1.59
    
    
    
    167,500
    
    
    
    6025.77
    
    
    
    40,188
    
    
    
    9.92
    
    
    
    
    
    
    
    5.77
    
    
    
    
    
    
    
    1,282,688
    
    
    
    3.61
    
    
    $
    602
    
    
    $
    9.23
    
    
    
    1,224,500
    
    
    $
    602
      C. Notes Payable
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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
  D. Commitments and Contingencies
 Legal Matters
  Lease Commitments
  E. Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109.
   9




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  Forward-Looking Information
  Overview
   Critical Accounting Policies
  10




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Results of Operations  Three months ended March 31, 2007 compared to the three months ended March
31, 2006
 Revenue
 Three Months Ended March 31,2006
    
    
    Change
    
    
    2007(Dollars in thousands)Income on financing leases
    
    $
    672
    
    
    
    202.5
    %
    
    $
    2,033Rental income
    
    
    5,721
    
    
    
    (31.4
    )
    
    
    3,924Income on service contracts
    
    
    555
    
    
    
    (35.0
    )
    
    
    361Loss and damage waiver fees
    
    
    551
    
    
    
    (19.4
    )
    
    
    444Service fees and other income
    
    
    1,103
    
    
    
    (65.0
    )
    
    
    386Interest income
    
    
    315
    
    
    
    2.5
    
    
    
    323Total revenues
    
    $
    8,917
    
    
    
    (16.2
    )%
    
    $
    7,471
   Selling, General and Administrative
 Three Months Ended March 31,2006
    
    Change
    
    2007(Dollars in thousands)Selling, general and administrative
    
    $
    4,207
    
    
    
    (15.2
    )%
    
    $
    3,568As a percent of revenue
    
    
    47.2
    %
    
    
    
    
    
    
    47.8
    %
  11




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Provision for Credit Losses
 Three Months Ended March 31,2006
    
    Change
    
    2007(Dollars in thousands)Provision for credit losses
    
    $
    1,610
    
    
    
    (5.4
    )%
    
    $
    1,523As a percent of revenue
    
    
    18.1
    %
    
    
    
    
    
    
    20.4
    %
  Depreciation and Amortization
 Three Months Ended March 31,2006
    
    
    Change
    
    
    2007(Dollars in thousands)Depreciation  fixed assets
    
    $
    57
    
    
    
    3.5
    %
    
    $
    59Depreciation  rental equipment
    
    
    1,317
    
    
    
    (79.3
    )
    
    
    272Amortization  service contracts
    
    
    391
    
    
    
    (66.2
    )
    
    
    132Total depreciation and amortization
    
    $
    1,765
    
    
    
    (73.8
    )%
    
    $
    463As a percent of revenue
    
    
    19.8
    %
    
    
    
    
    
    
    6.2
    %
     12




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Interest Expense
 Three Months Ended March 31,2006
    
    Change
    
    2007(Dollars in thousands)Interest
    
    $
    81
    
    
    
    (84.0
    )%
    
    $
    13As a percent of revenue
    
    
    0.9
    %
    
    
    
    
    
    
    0.2
    %
  Provision for Income Taxes
 Three Months Ended March 31,2006
    
    2007(Dollars in thousands)Provision for income taxes
    
    $
    490
    
    
    $
    687As a percent of revenue
    
    
    5.5
    %
    
    
    9.2
    %As a percent of income before taxes
    
    
    39.1
    %
    
    
    36.1
    %
  Other Operating Data
  Exposure to Credit Losses
  13




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(dollars in thousands)
    
    December 31, 2006
    
    
    March 31, 2007Current
    
    $
    29,027
    
    
    
    71.8
    %
    
    $
    38,952
    
    
    
    78.5
    %31-60 days past due
    
    
    1,607
    
    
    
    4.0
    
    
    
    1,755
    
    
    
    3.561-90 days past due
    
    
    825
    
    
    
    2.0
    
    
    
    819
    
    
    
    1.7Over 90 days past due
    
    
    8,996
    
    
    
    22.2
    
    
    
    8,071
    
    
    
    16.3Gross receivables due in installments
    
    $
    40,455
    
    
    
    100.0
    %
    
    $
    49,597
    
    
    
    100.0
    %
 Liquidity and Capital Resources
 General
      Borrowings
  December 31, 2006
    
    
    March 31, 2007Amount
    
    
    Interest
    
    
    Amount
    
    
    Interest
    
    
    Unused
    
    
    Maximum(dollars in thousands)
    
    Outstanding
    
    
    Rate
    
    
    Outstanding
    
    
    Rate
    
    
    Capacity
    
    
    AmountRevolving credit
facility
(1)
    
    $
    5
    
    
    
    9.75
    %
    
    $
    24
    
    
    
    9.75
    %
    
    $
    29,976
    
    
    $
    30,000
 
 (1)
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Dividends
     Contractual Obligations and Lease Commitments
 Contractual Obligations
  Commitments
  Recent Accounting Pronouncements
  15




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
     
 ITEM 4. Controls and Procedures
   16




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Part II  Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 6. Exhibits
 (a)
    
    Exhibits index
 31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2*
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 17




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SIGNATURES
  MicroFinancial IncorporatedBy:
    /s/ Richard F. LatourPresident and Chief Executive OfficerBy:
    /s/ James R. Jackson Jr.Vice President and Chief Financial Officer  18