##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 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
    
    04-2962824(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 
 
 þ 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, 2004 and September 30, 2005
    
    
    3Condensed Consolidated Statements of Operations Three and nine months ended September 30, 2004 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows Nine months ended September 30, 2004 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3 Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4 Controls and Procedures
    
    
    27Part II OTHER INFORMATIONItem 1 Legal Proceedings
    
    
    28Item 5 Other Information
    
    
    29Item 6 Exhibits
    
    
    30Signatures
    
    
    31Ex-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 data)
 December 31,
    
    
    September 30,2004
    
    
    2005ASSETSCash and cash equivalents
    
    $
    9,709
    
    
    $
    28,842Net investment in leases and loans:Receivables due in installments
    
    
    59,679
    
    
    
    31,442Estimated residual value
    
    
    9,502
    
    
    
    4,878Initial direct costs
    
    
    453
    
    
    
    128Less:Advance lease payments and deposits
    
    
    (25
    )
    
    
    (33
    )Unearned income
    
    
    (6,313
    )
    
    
    (3,117
    )Allowance for credit losses
    
    
    (14,963
    )
    
    
    (9,266
    )Net investment in leases and loans
    
    $
    48,333
    
    
    $
    24,032Investment in service contracts, net
    
    
    4,777
    
    
    
    2,156Investment in rental contracts, net
    
    
    1,785
    
    
    
    2,984Property and equipment, net
    
    
    754
    
    
    
    765Other assets
    
    
    2,412
    
    
    
    1,485Deferred income taxes
    
    
    3,500
    
    
    
    4,580Total assets
    
    $
    71,270
    
    
    $
    64,844LIABILITIES AND STOCKHOLDERS EQUITYNotes payable
    
    $
    34
    
    
    $
    19Subordinated notes payable
    
    
    4,589
    
    
    
    2,851Capitalized lease obligations
    
    
    41
    
    
    
    Accounts payable
    
    
    2,474
    
    
    
    1,148Dividends payable
    
    
    
    
    
    
    686Other liabilities
    
    
    2,039
    
    
    
    2,293Total liabilities
    
    $
    9,177
    
    
    $
    6,997Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at December 31, 2004 and September 30, 2005
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares authorized; 13,410,646
shares issued at December 31, 2004 and 13,726,900 shares at September 30, 2005
    
    
    134
    
    
    
    137Additional paid-in capital
    
    
    45,244
    
    
    
    43,941Retained earnings
    
    
    19,186
    
    
    
    13,947Treasury stock, at cost (225,480) shares at December 31, 2004 and 14,251
shares at September 30, 2005)
    
    
    (2,420
    )
    
    
    (139
    )Unearned compensation
    
    
    (51
    )
    
    
    (39
    )Total stockholders equity
    
    $
    62,093
    
    
    $
    57,847Total liabilities and stockholders equity
    
    $
    71,270
    
    
    $
    64,844
  3




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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS  (In thousands, except share and per share data)
 For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Revenues:Income on financing leases and loans
    
    $
    2,560
    
    
    $
    832
    
    
    $
    9,962
    
    
    $
    3,442Rental income
    
    
    7,548
    
    
    
    6,469
    
    
    
    24,177
    
    
    
    19,330Income on service contracts
    
    
    1,376
    
    
    
    792
    
    
    
    4,671
    
    
    
    2,818Loss and damage waiver fees
    
    
    961
    
    
    
    681
    
    
    
    3,127
    
    
    
    2,251Service fees and other
    
    
    1,780
    
    
    
    595
    
    
    
    6,078
    
    
    
    2,559Total revenues
    
    
    14,225
    
    
    
    9,369
    
    
    
    48,015
    
    
    
    30,400Expenses:Selling, general and administrative
    
    
    7,235
    
    
    
    4,461
    
    
    
    21,359
    
    
    
    16,699Provision for credit losses
    
    
    10,295
    
    
    
    1,576
    
    
    
    37,885
    
    
    
    8,870Depreciation and amortization
    
    
    3,161
    
    
    
    2,465
    
    
    
    11,391
    
    
    
    7,414Interest
    
    
    559
    
    
    
    203
    
    
    
    2,016
    
    
    
    986Total expenses
    
    
    21,250
    
    
    
    8,705
    
    
    
    72,651
    
    
    
    33,969Income (loss) before provision /(benefit) for income taxes
    
    
    (7,025
    )
    
    
    664
    
    
    
    (24,636
    )
    
    
    (3,569
    )Provision (benefit) for income taxes
    
    
    (2,810
    )
    
    
    310
    
    
    
    (9,856
    )
    
    
    (1,032
    )Net income (loss)
    
    ($
    4,215
    )
    
    $
    354
    
    
    ($
    14,780
    )
    
    ($
    2,537
    )Net income (loss) per common share  basic
    
    ($
    0.32
    )
    
    $
    0.03
    
    
    ($
    1.12
    )
    
    ($
    0.19
    )Net income (loss) per common share  diluted
    
    ($
    0.32
    )
    
    $
    0.03
    
    
    ($
    1.12
    )
    
    ($
    0.19
    )Weighted-average shares used to compute:Basic income (loss) per share
    
    
    13,183,916
    
    
    
    13,710,683
    
    
    
    13,182,050
    
    
    
    13,518,351Diluted net income (loss) per share
    
    
    13,183,916
    
    
    
    13,910,948
    
    
    
    13,182,050
    
    
    
    13,518,351
  4




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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 For the nine months endedSeptember 30,2004
    
    
    2005Cash flows from operating activities:Cash received from customers
    
    $
    67,561
    
    
    $
    43,772Cash paid to suppliers and employees
    
    
    (21,698
    )
    
    
    (16,541
    )Cash received (paid) for income taxes
    
    
    20
    
    
    
    (48
    )Interest paid
    
    
    (2,168
    )
    
    
    (413
    )Interest received
    
    
    14
    
    
    
    276Net cash provided by operating activities
    
    
    43,729
    
    
    
    27,046Cash flows from investing activities:Investment in lease contracts
    
    
    (329
    )
    
    
    (4,119
    )Investment in inventory
    
    
    (89
    )
    
    
    (13
    )Investment in direct costs
    
    
    0
    
    
    
    (33
    )Investment in fixed assets
    
    
    (76
    )
    
    
    (271
    )Net cash used in investing activities
    
    
    (494
    )
    
    
    (4,436
    )Cash flows from financing activities:Proceeds from secured debt
    
    
    11,322
    
    
    
    214Repayment of secured debt
    
    
    (58,593
    )
    
    
    (135
    )Proceeds from issuance of subordinated debt
    
    
    1,500
    
    
    
    Repayment of subordinated debt
    
    
    
    
    
    
    (1,500
    )Decrease in restricted cash
    
    
    2,276
    
    
    
    Repayment of capital leases
    
    
    (122
    )
    
    
    (41
    )Payment of dividends
    
    
    
    
    
    
    (2,015
    )Net cash used in financing activities
    
    
    (43,517
    )
    
    
    (3,477
    )Net increase (decrease) in cash and cash equivalents:
    
    
    (282
    )
    
    
    19,133Cash and cash equivalents, beginning of period
    
    
    6,533
    
    
    
    9,709Cash and cash equivalents, end of period
    
    $
    6,251
    
    
    $
    28,842
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MICROFINANCIAL INCORPORATED
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 For the nine months endedSeptember 30,2004
    
    
    2005Reconciliation of net loss to net cash provided
by operating activities:Net loss
    
    ($
    14,780
    )
    
    ($
    2,537
    )Adjustments to reconcile net loss to
cash provided by operating activities:Amortization of unearned income, net of initial direct costs
    
    
    (9,962
    )
    
    
    (3,442
    )Depreciation and amortization
    
    
    11,391
    
    
    
    7,414Provision for credit losses
    
    
    37,885
    
    
    
    8,870Recovery of equipment cost and residual value
    
    
    30,967
    
    
    
    16,611Share based compensation expense
    
    
    
    
    
    
    930Amortization of unearned compensation
    
    
    24
    
    
    
    12Non-cash interest expense (amortization of debt discount)
    
    
    147
    
    
    
    572Change in assets and liabilities:Current taxes payable
    
    
    20
    
    
    
    (48
    )Deferred income taxes
    
    
    (9,856
    )
    
    
    (1,032
    )Other assets
    
    
    (565
    )
    
    
    802Accounts payable
    
    
    195
    
    
    
    (1,326
    )Other liabilities
    
    
    (1,737
    )
    
    
    220Net cash provided by operating activities
    
    $
    43,729
    
    
    $
    27,046Supplemental disclosure of non-cash activities:Treasury stock issued for option exercises
    
    $
    
    
    
    $
    2,018Treasury stock issued for warrants exercised
    
    $
    
    
    
    $
    222Subordinated debt converted to equity
    
    $
    
    
    
    $
    779Fair market value of warrants issued
    
    $
    784
    
    
    $
    Fair market value of restricted stock issued
    
    
    
    
    
    $
    63
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MICROFINANCIAL INCORPORATED
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
    Basis of Presentation:
   Allowance for Credit Losses:
   7




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Balance of allowance for credit losses at December 31, 2004
    
    
    
    
    
    $
    14,963Provision for credit losses
    
    
    
    
    
    
    8,870Charge-offs
    
    
    (19,395
    )Recoveries
    
    
    4,828Charge-offs, net of recoveries
    
    
    
    
    
    
    (14,567
    )Balance of allowance for credit losses at September 30, 2005
    
    
    
    
    
    $
    9,266
 Net Income (Loss) Per Share:
  For three months ended
    
    
    For nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income (loss)
    
    ($
    4,215
    )
    
    $
    354
    
    
    ($
    14,780
    )
    
    ($
    2,537
    )Shares used in computation:Weighted average common shares
outstanding used in computation
of net income (loss) per common share
    
    
    13,183,916
    
    
    
    13,710,683
    
    
    
    13,182,050
    
    
    
    13,518,351Dilutive effect of common stock
options
    
    
    
    
    
    
    200,265
    
    
    
    
    
    
    
    Shares used in computation of net
income (loss) per common share 
assuming dilution
    
    
    13,183,916
    
    
    
    13,910,948
    
    
    
    13,182,050
    
    
    
    13,518,351Net income (loss) per common share  basic
    
    ($
    0.32
    )
    
    $
    0.03
    
    
    ($
    1.12
    )
    
    ($
    0.19
    )Net income (loss) per common share  diluted
    
    ($
    0.32
    )
    
    $
    0.03
    
    
    ($
    1.12
    )
    
    ($
    0.19
    )
 8




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Stock Options
    Stock-based Employee Compensation
 Accounting for Stock Issued to
Employees
 Accounting for Stock-Based Compensation
 For the three months ended
    
    
    For the nine months endedSeptember 30,
    
    
    September 30,2004
    
    
    2005
    
    
    2004
    
    
    2005Net income (loss), as reported
    
    ($
    4,215
    )
    
    $
    354
    
    
    ($
    14,780
    )
    
    ($
    2,537
    )Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects
    
    
    4
    
    
    
    79
    
    
    
    24
    
    
    
    934Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (198
    )
    
    
    (79
    )
    
    
    (679
    )
    
    
    (934
    )Proforma net income (loss)
    
    ($
    4,409
    )
    
    $
    354
    
    
    ($
    15,435
    )
    
    ($
    2,537
    )Earnings (loss) per share:As reported  basic and diluted
    
    ($
    0.32
    )
    
    $
    0.03
    
    
    ($
    1.12
    )
    
    ($
    0.19
    )Proforma  basic and diluted
    
    ($
    0.33
    )
    
    $
    0.03
    
    
    ($
    1.17
    )
    
    ($
    0.19
    )
 9




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Weighted-AverageShares
    
    
    Price Per Share
    
    
    Exercise PriceOutstanding at December 31, 2004
    
    
    1,675,000
    
    
    $
    0.86 to $13.544
    
    
    $
    7.139Exercised
    
    
    (432,500
    )
    
    $
    0.86 to $1.585
    
    
    $
    1.250Outstanding at September 30, 2005
    
    
    1,242,500
    
    
    $
    1.585 to $13.544
    
    
    $
    9.189
  Outstanding
    
    ExercisableWeighted-
    
    
    
    
    
    Weighted-Average
    
    Aggregate
    
    
    Average
    
    
    
    
    
    AggregateExercise Price
    
    Shares
    
    Life (Years)
    
    Intrinsic Value
    
    
    Exercise Price
    
    Shares
    
    Intrinsic Value$12.3125
    
    
    359,391
    
    
    
    3.41
    
    
    $
    2,321,176
    
    
    $
    12.3125
    
    
    
    359,391
    
    
    $
    2,321,176$13.5440
    
    
    40,609
    
    
    
    3.41
    
    
    $
    288,479
    
    
    $
    13.5440
    
    
    
    40,609
    
    
    $
    288,479$9.7813
    
    
    350,000
    
    
    
    4.41
    
    
    $
    1,907,883
    
    
    $
    9.7813
    
    
    
    350,000
    
    
    $
    1,907,883$13.1000
    
    
    90,000
    
    
    
    5.39
    
    
    $
    538,208
    
    
    $
    13.1000
    
    
    
    72,000
    
    
    $
    493,357$6.7000
    
    
    235,000
    
    
    
    6.42
    
    
    $
    875,455
    
    
    $
    6.7000
    
    
    
    141,000
    
    
    $
    627,409$1.5850
    
    
    167,500
    
    
    
    7.16
    
    
    $
    179,929
    
    
    $
    1.5850
    
    
    
    117,500
    
    
    $
    129,794$ 1.585 to $13.544
    
    
    1,242,500
    
    
    
    4.91
    
    
    $
    6,111,130
    
    
    $
    9.8453
    
    
    
    1,080,500
    
    
    $
    5,768,098
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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   Original grant date
    
    11/25/2002
    
    
    2/28/2002
    
    
    2/20/01
    
    
    2/24/2000
    
    
    2/25/1999
    
    
    2/25/1999Exercise price
    
    $
    1.59
    
    
    $
    6.70
    
    
    $
    13.10
    
    
    $
    9.78
    
    
    $
    13.54
    
    
    $
    12.31Expected life (in years)
    
    
    3.75
    
    
    
    3.75
    
    
    
    3.25
    
    
    
    2.75
    
    
    
    2.25
    
    
    
    2.00Annualized volatility
    
    
    81
    %
    
    
    81
    %
    
    
    81
    %
    
    
    81
    %
    
    
    81
    %
    
    
    81
    %Dividend yield
    
    
    5.13
    %
    
    
    5.13
    %
    
    
    5.13
    %
    
    
    5.13
    %
    
    
    5.13
    %
    
    
    5.13
    %Risk free rate
    
    
    4.050
    %
    
    
    4.050
    %
    
    
    3.910
    %
    
    
    3.910
    %
    
    
    3.820
    %
    
    
    3.820
    %
  Notes Payable:
  Amounts outstanding as ofInterest
    
    
    December 31,
    
    
    September 30,(dollars in thousands)
    
    Rate
    
    
    2004
    
    
    2005Revolving credit facility
    
    prime + 1.5%
    
    $
    34
    
    
    $
    19Subordinated notes
    
    
    7.75%-13.0
    %
    
    
    5,152
    
    
    
    2,851$
    5,186
    
    
    $
    2,870
   11




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Dividends:
   New Accounting Pronouncements:
 Exchanges of Non-monetary Assets
- An Amendment of APB Opinion No. 29 Accounting for Non-monetary
Transactions
 Reclassification of Prior Year Balances:
  Commitments and Contingencies:
   Other:
  12




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ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    13




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Three months ended September 30, 2005 as compared to the three months ended September 30, 2004.
 Results of Operations
 For the three months endedSeptember 30,2004
    
    
    Change
    
    
    2005(dollars in thousands)Income on financing leases and loans
    
    $
    2,560
    
    
    
    (67.5
    )%
    
    $
    832Rental income
    
    
    7,548
    
    
    
    (14.3
    )%
    
    
    6,469Income on service contracts
    
    
    1,376
    
    
    
    (42.4
    )%
    
    
    792Service fees, waiver fees and other
    
    
    2,741
    
    
    
    (53.4
    )%
    
    
    1,276Total revenues
    
    $
    14,225
    
    
    
    (34.1
    )%
    
    $
    9,369
   Selling, General and Administrative
 For the three months endedSeptember 30,2004
    
    
    Change
    
    
    2005(dollars in thousands)Selling, general and administrative
    
    $
    7,235
    
    
    
    (38.3
    )%
    
    $
    4,461As a percent of revenue
    
    
    57.9
    %
    
    
    
    
    
    
    47.6
    %
  14




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Provision for Credit Losses
 For the three months endedSeptember 30,2004
    
    
    Change
    
    
    2005(dollars in thousands)Provision for credit losses
    
    $
    10,295
    
    
    
    (84.7
    )%
    
    $
    1,576As a percent of revenue
    
    
    72.4
    %
    
    
    
    
    
    
    16.8
    %
  Depreciation and Amortization
 For the three months endedSeptember 30,2004
    
    
    Change
    
    
    2005(dollars in thousands)Depreciation  fixed assets
    
    $
    174
    
    
    
    (66.1
    )%
    
    $
    59Depreciation and amortization  rentals
    
    
    2,033
    
    
    
    (23.3
    )%
    
    
    1,559Depreciation and amortization  contracts
    
    
    954
    
    
    
    (11.2
    )%
    
    
    847Total depreciation and amortization
    
    
    3,161
    
    
    
    (22.0
    )%
    
    
    2,465As a percent of revenue
    
    
    22.2
    %
    
    
    
    
    
    
    26.3
    %
  15




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##### Table of Contents



Interest Expense
 For the three months endedSeptember 30,2004
    
    Change
    
    2005(dollars in thousands)Interest
    
    $
    559
    
    
    
    (63.6
    )%
    
    $
    203As a percent of revenue
    
    
    3.9
    %
    
    
    
    
    
    
    2.0
    %
  Provision (Benefit) for Income Taxes
 For the three months endedSeptember 30,2004
    
    Change
    
    2005(dollars in thousands)Provision (benefit) for income tax
    
    
    ($2,810
    )
    
    
    (111.0
    )%
    
    $
    310As a percent of revenue
    
    
    19.8
    %
    
    
    
    
    
    
    3.3
    %
  16




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Other Operating Data
  17




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##### Table of Contents



Nine months ended September 30, 2005 as compared to the nine months ended September 30, 2004.
 Results of Operations
 For the nine months endedSeptember 30,2004
    
    
    Change
    
    
    2005(dollars in thousands)Income on financing leases and loans
    
    $
    9,962
    
    
    
    (65.4
    )%
    
    $
    3,442Rental income
    
    
    24,177
    
    
    
    (20.0
    )%
    
    
    19,330Income on service contracts
    
    
    4,671
    
    
    
    (39.6
    )%
    
    
    2,818Service fees, waiver fees and other
    
    
    9,205
    
    
    
    (47.7
    )%
    
    
    4,810Total revenues
    
    $
    48,015
    
    
    
    (36.7
    )%
    
    $
    30,400
   Selling, General and Administrative
 For the nine months endedSeptember 30,2004
    
    Change
    
    2005(dollars in thousands)Selling, general and administrative
    
    $
    21,359
    
    
    
    (21.8
    )%
    
    $
    16,699As a percent of revenue
    
    
    44.5
    %
    
    
    
    
    
    
    54.9
    %
  18




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##### Table of Contents



Provision for Credit Losses
 For the nine months endedSeptember 30,2004
    
    Change
    
    2005(dollars in thousands)Provision for credit losses
    
    $
    37,885
    
    
    
    (76.6
    )%
    
    $
    8,870As a percent of revenue
    
    
    78.9
    %
    
    
    
    
    
    
    29.2
    %
  Depreciation and Amortization
 For the nine months endedSeptember 30,2004
    
    
    Change
    
    
    2005(dollars in thousands)Depreciation  fixed assets
    
    $
    649
    
    
    
    (57.9
    )%
    
    $
    273Depreciation and amortization  rentals
    
    
    7,622
    
    
    
    (40.7
    )%
    
    
    4,521Depreciation and amortization  contracts
    
    
    3,120
    
    
    
    (16.0
    )%
    
    
    2,620Total depreciation and amortization
    
    
    11,391
    
    
    
    (34.9
    )%
    
    
    7,414As a percent of revenue
    
    
    23.7
    %
    
    
    
    
    
    
    24.4
    %
   19




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Interest Expense
 For the nine months endedSeptember 30,2004
    
    Change
    
    2004(dollars in thousands)Interest
    
    $
    2,016
    
    
    
    (51.1
    )%
    
    $
    986As a percent of revenue
    
    
    4.2
    %
    
    
    
    
    
    
    3.2
    %
  Benefit for Income Taxes
 For the nine months endedSeptember 30,2004
    
    Change
    
    2005(dollars in thousands)Benefit for income tax
    
    
    ($9,856
    )
    
    
    (89.5
    )%
    
    
    ($1,032
    )As a percent of revenue
    
    
    20.5
    %
    
    
    
    
    
    
    3.4
    %
  Other Operating Data
  20




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Critical Accounting Policies
  Revenue Recognition
   Allowance for Credit Losses
  21




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Income taxes
  Stock Option Accounting
  Exposure to Credit Losses
  22




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##### Table of Contents



As of December 31,
    
    As of September 30,(dollars in thousands)
    
    2004
    
    2005Cumulative amounts billed
    
    $303,695
    
    $239,10931-60 days past due
    
    $
    1,858
    
    
    
    0.6
    %
    
    $
    1,145
    
    
    
    0.5
    %61-90 days past due
    
    
    1,818
    
    
    
    0.6
    %
    
    
    1,210
    
    
    
    0.5
    %Over 90 days past due
    
    
    29,673
    
    
    
    9.8
    %
    
    
    17,715
    
    
    
    7.4
    %Total past due
    
    $
    33,349
    
    
    
    11.0
    %
    
    $
    20,070
    
    
    
    8.4
    %
  (dollars in thousands)
    
    December 31, 2004
    
    September 30, 2005Current
    
    $
    19,945
    
    
    
    33.40
    %
    
    $
    8,667
    
    
    
    27.54
    %31-60 days past due
    
    
    1,079
    
    
    
    1.80
    %
    
    
    681
    
    
    
    2.17
    %61-90 days past due
    
    
    987
    
    
    
    1.70
    %
    
    
    721
    
    
    
    2.29
    %Over 90 days past due
    
    
    37,668
    
    
    
    63.10
    %
    
    
    21,373
    
    
    
    68.00
    %Gross receivables due in installments
    
    $
    59,679
    
    
    
    100.00
    %
    
    $
    31,442
    
    
    
    100.00
    %
 Liquidity and Capital Resources
 General
    23




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##### Table of Contents



Borrowings
   As of
    
    
    As ofDecember 31, 2004
    
    
    September 30, 2005MaximumAmounts
    
    
    Interest
    
    
    Amounts
    
    
    Interest
    
    
    Unused
    
    
    Facility(dollars in thousands)
    
    Outstanding
    
    
    Rate
    
    
    Outstanding
    
    
    Rate
    
    
    Capacity
    
    
    AmountRevolving credit facility (1)
    
    $
    34
    
    
    Prime + 1.5%
    
    $
    113
    
    
    Prime + 1.5%
    
    $
    29,887
    
    
    $
    30,000Subordinated notes(2)
    
    
    5,152
    
    
    
    7.75%-13.0
    %
    
    
    2,873
    
    
    
    7.75%-13.0
    %
    
    
    
    
    
    
    $
    5,186
    
    
    
    
    
    
    $
    2,986
    
    
    
    
    
    
    $
    29,887
    
    
    $
    30,000
 
 (1)
    
    The unused capacity is subject to lease eligibility and the borrowing
base formula. Amounts shown exclude debt discounts associated with warrants(2)
    
    Subordinated notes are generally one-time fundings, without any ability for
the Company to draw down additional amounts. Amounts shown exclude debt discounts
associated with warrants  Financial Covenants
  
    
    Consolidated tangible capital funds not less than $42.5 million
    
    Allowance for credit losses of at least 9.0% of gross lease installments
    
    Maximum leverage ratio of not more than 3:1
  24




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##### Table of Contents



Contractual Obligations and Commercial Commitments
   RevolvingFor the period ended
    
    Credit
    
    Long-Term
    
    OperatingDecember 31,
    
    Facility(1)
    
    Debt
    
    Leases
    
    Total2005
    
    $
    112
    
    
    $
    273
    
    
    $
    292
    
    
    $
    6772006
    
    
    
    
    
    
    2,600
    
    
    
    237
    
    
    
    2,8372007
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    2372008
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    2372009
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    2372010
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    237Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    112
    
    
    $
    2,873
    
    
    $
    1,477
    
    
    $
    4,462
 
 (1)
    
    The Companys obligation to repay the revolving credit facility in the
current year is subject to lease collateral availability and the borrowing base formula.
The credit facility expires on September 29, 2007. Commitments
  Other
  25




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Note on Forward-Looking Information
  26




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##### Table of Contents



ITEM 3 Quantitative and Qualitative Disclosures about Market Risk
 Market-Rate-Sensitive Instruments and Risk Management
   Interest Rate Risk Management
    
 ITEM 4 Controls and Procedures
   27




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##### Table of Contents



Part II. Other Information
 
 ITEM 1 Legal Proceedings
     28




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ITEM 5 Other Information:
    29




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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 30




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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
  31