##### Table of Contents



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, 2008
 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
  Large accelerated filer
o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 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, 2007 and March 31, 2008
    
    
    3Condensed Consolidated Statements of Income -
Three months ended March 31, 2007 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 2007 and 2008
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4. Controls and Procedures
    
    
    18Part II  OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    19Item 1A. Risk Factors
    
    
    19Item 6. Exhibits
    
    
    19Signatures
    
    
    20EX-10.1 COMPENSATORY ARRANGEMENTS WITH DIRECTORSEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEOEX-32.2 SECTION 906 CERTIFICATION OF THE CFO




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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (In thousands, except share and per share data)
 March 31,
    
    
    December 31,2008
    
    
    2007UnauditedASSETSCash and cash equivalents
    
    $
    5,835
    
    
    $
    7,080Restricted cash
    
    
    499
    
    
    
    561Net investment in leases:Receivables due in installments
    
    
    108,864
    
    
    
    92,314Estimated residual value
    
    
    11,567
    
    
    
    9,814Initial direct costs
    
    
    864
    
    
    
    729Less:Advance lease payments and deposits
    
    
    (381
    )
    
    
    (219
    )Unearned income
    
    
    (40,834
    )
    
    
    (35,369
    )Allowance for credit losses
    
    
    (7,771
    )
    
    
    (5,722
    )Net investment in leases
    
    
    72,309
    
    
    
    61,547Investment in service contracts, net
    
    
    141
    
    
    
    203Investment in rental contracts, net
    
    
    96
    
    
    
    106Property and equipment, net
    
    
    806
    
    
    
    782Other assets
    
    
    645
    
    
    
    703Total assets
    
    $
    80,331
    
    
    $
    70,982LIABILITIES AND STOCKHOLDERS EQUITYNotes payable
    
    $
    14,508
    
    
    $
    6,531Accounts payable
    
    
    872
    
    
    
    1,350Capital lease obligation
    
    
    43
    
    
    
    Dividends payable
    
    
    
    
    
    
    698Other liabilities
    
    
    1,010
    
    
    
    801Income taxes payable
    
    
    172
    
    
    
    228Deferred income taxes
    
    
    1,190
    
    
    
    546Total liabilities
    
    
    17,795
    
    
    
    10,154Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at March 31, 2008 and December 31, 2007
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares authorized;
13,986,278 and 13,960,778 shares issued at March 31, 2008 and December 31,
2007, respectively
    
    
    140
    
    
    
    140Additional paid-in capital
    
    
    45,562
    
    
    
    45,412Retained earnings
    
    
    16,834
    
    
    
    15,276Total stockholders equity
    
    
    62,536
    
    
    
    60,828Total liabilities and stockholders equity
    
    $
    80,331
    
    
    $
    70,982
  3




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##### Table of Contents



MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (In thousands, except share and per share data)
 Three Months EndedMarch 31,2008
    
    2007UnauditedRevenues:Income on financing leases
    
    $
    4,940
    
    
    $
    2,033Rental income
    
    
    2,752
    
    
    
    3,924Income on service contracts
    
    
    259
    
    
    
    361Loss and damage waiver fees
    
    
    688
    
    
    
    444Service fees and other
    
    
    549
    
    
    
    386Interest income
    
    
    60
    
    
    
    323Total revenues
    
    
    9,248
    
    
    
    7,471Expenses:Selling, general and administrative
    
    
    3,239
    
    
    
    3,568Provision for credit losses
    
    
    3,357
    
    
    
    1,523Depreciation and amortization
    
    
    230
    
    
    
    463Interest
    
    
    152
    
    
    
    13Total expenses
    
    
    6,978
    
    
    
    5,567Income before provision for income taxes
    
    
    2,270
    
    
    
    1,904Provision for income taxes
    
    
    713
    
    
    
    687Net income
    
    $
    1,557
    
    
    $
    1,217Net income per common share  basic
    
    $
    0.11
    
    
    $
    0.09Net income per common share  diluted
    
    $
    0.11
    
    
    $
    0.09Weighted-average shares:Basic
    
    
    13,974,904
    
    
    
    13,860,534Diluted
    
    
    14,160,139
    
    
    
    14,072,449
  4




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##### Table of Contents



MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 Three Months EndedMarch 31,2008
    
    2007UnauditedCash flows from operating activities:Cash received from customers
    
    $
    13,163
    
    
    $
    9,547Cash paid to suppliers and employees
    
    
    (4,022
    )
    
    
    (3,537
    )Income taxes paid
    
    
    (125
    )
    
    
    (90
    )Interest paid
    
    
    (151
    )
    
    
    (1
    )Interest received
    
    
    60
    
    
    
    323Net cash provided by operating activities
    
    
    8,925
    
    
    
    6,242Cash flows from investing activities:Investment in lease and rental contracts
    
    
    (17,177
    )
    
    
    (10,138
    )Investment in direct costs
    
    
    (265
    )
    
    
    (142
    )Investment in property and equipment
    
    
    (111
    )
    
    
    (57
    )Net cash used in investing activities
    
    
    (17,553
    )
    
    
    (10,337
    )Cash flows from financing activities:Proceeds from secured debt
    
    
    18,648
    
    
    
    19Repayment of secured debt
    
    
    (10,672
    )
    
    
    Decrease in restricted cash
    
    
    62
    
    
    
    Proceeds from capital lease obligation
    
    
    46
    
    
    
    Repayment of capital lease obligations
    
    
    (3
    )Payment of dividends
    
    
    (698
    )
    
    
    (691
    )Net cash provided by (used in) financing activities
    
    
    7,383
    
    
    
    (672
    )Net change in cash and cash equivalents
    
    
    (1,245
    )
    
    
    (4,767
    )Cash and cash equivalents, beginning of period
    
    
    7,080
    
    
    
    28,737Cash and cash equivalents, end of period
    
    $
    5,835
    
    
    $
    23,970Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    1,557
    
    
    
    1,217Adjustments to reconcile net income to net
cash provided by operating activities:Amortization of unearned income, net of initial direct costs
    
    
    (4,939
    )
    
    
    (2,033
    )Depreciation and amortization
    
    
    230
    
    
    
    463Provision for credit losses
    
    
    3,357
    
    
    
    1,523Recovery of equipment cost and residual value
    
    
    8,088
    
    
    
    4,232Stock-based compensation expense
    
    
    22
    
    
    
    392Non-cash interest expense (amortization of debt discount)
    
    
    
    
    
    
    12Changes in assets and liabilities:Current taxes payable
    
    
    (13
    )
    
    
    597Deferred income taxes
    
    
    706
    
    
    
    Other assets
    
    
    58
    
    
    
    132Accounts payable
    
    
    (350
    )
    
    
    (219
    )Other liabilities
    
    
    209
    
    
    
    (74
    )Net cash provided by operating activities
    
    $
    8,925
    
    
    $
    6,242Supplemental disclosure of non-cash activities:Fair market value of stock issued for compensation
    
    $
    128
    
    
    $
    307
  5




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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, 2007
    
    
    
    
    
    $
    5,722Provision for credit losses
    
    
    
    
    
    
    3,357Charge-offs
    
    
    (2,329
    )Recoveries
    
    
    1,021Charge-offs, net of recoveries
    
    
    
    
    
    
    (1,308
    )Allowance for credit losses at March 31, 2008
    
    
    
    
    
    $
    7,771
 Net Income Per Share
  Three Months EndedMarch 31,2008
    
    
    2007Net income
    
    $
    1,557
    
    
    $
    1,217Weighted average common shares outstanding
    
    
    13,974,904
    
    
    
    13,860,534Dilutive effect of common stock
options, warrants and restricted stock
    
    
    185,235
    
    
    
    211,915Shares used in computation of net income
per common share  diluted
    
    
    14,160,139
    
    
    
    14,072,449Net income per common share  basic
    
    $
    0.11
    
    
    $
    0.09Net income per common share  diluted
    
    $
    0.11
    
    
    $
    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-Exercise
    
    
    
    
    
    Average
    
    
    Intrinsic
    
    
    Average
    
    
    
    
    
    
    IntrinsicPrice
    
    Shares
    
    
    Life (Years)
    
    
    Value
    
    
    Exercise Price
    
    
    Shares
    
    
    Value$12.31
    
    
    359,391
    
    
    
    .91
    
    
    $
    
    
    
    $
    12.31
    
    
    
    359,391
    
    
    $
    13.54
    
    
    40,609
    
    
    
    .91
    
    
    
    
    
    
    
    13.54
    
    
    
    40,609
    
    
    
    9.78
    
    
    350,000
    
    
    
    1.9
    
    
    
    
    
    
    
    9.78
    
    
    
    350,000
    
    
    
    13.10
    
    
    90,000
    
    
    
    2.89
    
    
    
    
    
    
    
    13.10
    
    
    
    90,000
    
    
    
    6.70
    
    
    235,000
    
    
    
    3.91
    
    
    
    
    
    
    
    6.70
    
    
    
    235,000
    
    
    
    1.59
    
    
    167,500
    
    
    
    4.66
    
    
    
    610,000
    
    
    
    1.59
    
    
    
    167,500
    
    
    
    610,0005.77
    
    
    40,188
    
    
    
    8.92
    
    
    
    
    
    
    
    5.77
    
    
    
    
    
    
    
    5.85
    
    
    176,879
    
    
    
    9.83
    
    
    
    
    
    
    
    5.85
    
    
    
    
    
    
    
    1,459,567
    
    
    
    3.48
    
    
    $
    610,000
    
    
    
    9.19
    
    
    
    1,242,500
    
    
    $
    610,000
      8




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
  C. Notes Payable
   D. Commitments and Contingencies
 Legal Matters
  Lease Commitments
  E. Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets and Financial Liabilities
 9




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
  10




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  Forward-Looking Information
  Overview
     11




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Critical Accounting Policies
   Results of Operations  Three months ended March 31, 2008 compared to the three months ended
March 31, 2007
 Revenue
 Three Months Ended March 31,2008
    
    
    Change
    
    
    2007(Dollars in thousands)Income on financing leases
    
    $
    4,940
    
    
    
    143.0
    %
    
    $
    2,033Rental income
    
    
    2,752
    
    
    
    (29.9
    )
    
    
    3,924Income on service contracts
    
    
    259
    
    
    
    (28.3
    )
    
    
    361Loss and damage waiver fees
    
    
    688
    
    
    
    55.0
    
    
    
    444Service fees and other income
    
    
    549
    
    
    
    42.2
    
    
    
    386Interest income
    
    
    60
    
    
    
    (81.4
    )
    
    
    323Total revenues
    
    $
    9,248
    
    
    
    23.8
    %
    
    $
    7,471
   12




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Selling, General and Administrative
 Three Months Ended March 31,2008
    
    Change
    
    2007(Dollars in thousands)Selling, general and administrative
    
    $
    3,239
    
    
    
    (9.2
    )%
    
    $
    3,568As a percent of revenue
    
    
    35.0
    %
    
    
    
    
    
    
    47.8
    %
  Provision for Credit Losses
 Three Months Ended March 31,2008
    
    Change
    
    2007(Dollars in thousands)Provision for credit losses
    
    $
    3,357
    
    
    
    120.4
    %
    
    $
    1,523As a percent of revenue
    
    
    36.3
    %
    
    
    
    
    
    
    20.4
    %
  Depreciation and Amortization
 Three Months Ended March 31,2008
    
    
    Change
    
    
    2007(Dollars in thousands)Depreciation  fixed assets
    
    $
    88
    
    
    
    49.2
    %
    
    $
    59Depreciation  rental equipment
    
    
    80
    
    
    
    (70.6
    )
    
    
    272Amortization  service contracts
    
    
    62
    
    
    
    (53.0
    )
    
    
    132Total depreciation and amortization
    
    $
    230
    
    
    
    (50.3
    )%
    
    $
    463As a percent of revenue
    
    
    2.5
    %
    
    
    
    
    
    
    6.2
    %
  13




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Interest Expense
 Three Months Ended March 31,2008
    
    Change
    
    2007(Dollars in thousands)Interest
    
    $
    152
    
    
    
    1,069.2
    %
    
    $
    13As a percent of revenue
    
    
    1.6
    %
    
    
    
    
    
    
    0.2
    %
  Provision for Income Taxes
 Three Months Ended March 31,2008
    
    Change
    
    2007(Dollars in thousands)Provision for income taxes
    
    $
    713
    
    
    
    3.8
    %
    
    $
    687As a percent of revenue
    
    
    7.7
    %
    
    
    
    
    
    
    9.2
    %As a percent of income before taxes
    
    
    31.4
    %
    
    
    
    
    
    
    36.1
    %
  14




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Other Operating Data
  Exposure to Credit Losses
  (dollars in thousands)
    
    March 31, 2008
    
    December 31, 2007Current
    
    $
    86,830
    
    
    
    79.8
    %
    
    $
    75,528
    
    
    
    81.8
    %31-60 days past due
    
    
    4,596
    
    
    
    4.2
    
    
    
    4,565
    
    
    
    5.061-90 days past due
    
    
    4,053
    
    
    
    3.7
    
    
    
    3,016
    
    
    
    3.2Over 90 days past due
    
    
    13,385
    
    
    
    12.3
    
    
    
    9,205
    
    
    
    10.0Gross receivables due in installments
    
    $
    108,864
    
    
    
    100.0
    %
    
    $
    92,314
    
    
    
    100.0
    %
 Liquidity and Capital Resources
 General
  15




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Borrowings
  March 31, 2008
    
    
    December 31, 2007Maximum
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    MaximumAmounts
    
    
    Interest
    
    
    Unused
    
    
    Facility
    
    
    Amounts
    
    
    Interest
    
    
    Unused
    
    
    Facility(dollars in 000)
    
    Outstanding
    
    
    Rate
    
    
    Capacity
    
    
    Amount
    
    
    Outstanding
    
    
    Rate
    
    
    Capacity
    
    
    AmountRevolving credit
facility(1)
    
    $
    14,508
    
    
    
    5.25
    %
    
    $
    15,492
    
    
    $
    30,000
    
    
    $
    6,531
    
    
    
    7.25
    %
    
    $
    23,469
    
    
    $
    30,000$
    14,508
    
    
    
    
    
    
    $
    15,492
    
    
    $
    30,000
    
    
    $
    6,531
    
    
    
    
    
    
    $
    23,469
    
    
    $
    30,000
 
 (1)
    
    The unused capacity is subject to the borrowing base formula.   16




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Dividends
    Contractual Obligations and Lease Commitments
     Recent Accounting Pronouncements
  17




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
      
 ITEM 4. Controls and Procedures
   18




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Part II  Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 6. Exhibits
  10.1*
    
    Compensatory Arrangements with Directors31.1*
    
    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 19




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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 OfficerDate: May 14, 2008
 20