##### 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 1934For the quarterly period ended June 30, 2005oro
    
    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 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 June 30, 2005
    
    
    3Condensed Consolidated Statements of Operations Three and six months ended June 30, 2004 and 2005
    
    
    4Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2004 and 2005
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4
    
    Controls and Procedures
    
    
    25Part II
    
    
    
    OTHER INFORMATIONItem 1
    
    Legal Proceedings
    
    
    26Item 5
    
    Other Information
    
    
    27Item 6
    
    Exhibits
    
    
    28Signatures
    
    
    
    
    29EX-10.1 LEASE EXTENSION #2 FOR THE FACILITY AT 10-M COMMERCE WAYEX-10.2 EMPLOYMENT AGREEMENT PETER B. BLEYLEBENEX-10.3 EMPLOYMENT AGREEMENT JAMES R. JACKSON, JR.EX-10.4 EMPLOYMENT AGREEMENT STEPHEN CONSTANTINOEX-10.5 EMPLOYMENT AGREEMENT STEVEN LACRETAEX-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,
    
    June 30,2004
    
    2005ASSETSCash and cash equivalents
    
    $
    9,709
    
    
    $
    23,480Net investment in leases and loans:Receivables due in installments
    
    
    59,679
    
    
    
    36,227Estimated residual value
    
    
    9,502
    
    
    
    6,142Initial direct costs
    
    
    453
    
    
    
    195Less:Advance lease payments and deposits
    
    
    (25
    )
    
    
    (38
    )Unearned income
    
    
    (6,313
    )
    
    
    (3,525
    )Allowance for credit losses
    
    
    (14,963
    )
    
    
    (9,852
    )Net investment in leases and loans
    
    $
    48,333
    
    
    $
    29,149Investment in service contracts, net
    
    
    4,777
    
    
    
    3,003Investment in rental contracts, net
    
    
    1,785
    
    
    
    2,827Property and equipment, net
    
    
    754
    
    
    
    865Other assets
    
    
    2,412
    
    
    
    1,905Deferred income taxes
    
    
    3,500
    
    
    
    4,866Total assets
    
    $
    71,270
    
    
    $
    66,095LIABILITIES AND STOCKHOLDERS EQUITYNotes payable
    
    $
    34
    
    
    $
    42Subordinated notes payable
    
    
    4,589
    
    
    
    3,280Capitalized lease obligations
    
    
    41
    
    
    
    Accounts payable
    
    
    2,474
    
    
    
    1,899Other liabilities
    
    
    2,039
    
    
    
    2,152Total liabilities
    
    $
    9,177
    
    
    $
    7,373Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at December 31, 2004 and June 30, 2005
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares authorized; 13,410,646
shares issued at December 31, 2004 and 13,712,988 shares at June 30, 2005
    
    
    134
    
    
    
    137Additional paid-in capital
    
    
    45,244
    
    
    
    43,814Retained earnings
    
    
    19,186
    
    
    
    14,966Treasury stock, at cost (225,480 at December 31, 2004 and 15,501 at June 30, 2005)
    
    
    (2,420
    )
    
    
    (152
    )Unearned compensation
    
    
    (51
    )
    
    
    (43
    )Total stockholders equity
    
    
    62,093
    
    
    
    58,722Total liabilities and stockholders equity
    
    $
    71,270
    
    
    $
    66,095
  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 six months endedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Revenues:Income on financing leases and loans
    
    $
    3,235
    
    
    $
    1,103
    
    
    $
    7,402
    
    
    $
    2,611Rental income
    
    
    8,165
    
    
    
    6,431
    
    
    
    16,629
    
    
    
    12,861Income on service contracts
    
    
    1,563
    
    
    
    938
    
    
    
    3,294
    
    
    
    2,026Loss and damage waiver fees
    
    
    1,035
    
    
    
    751
    
    
    
    2,166
    
    
    
    1,570Service fees and other
    
    
    1,784
    
    
    
    947
    
    
    
    4,299
    
    
    
    1,963Total revenues
    
    
    15,782
    
    
    
    10,170
    
    
    
    33,790
    
    
    
    21,031Expenses:Selling, general and administrative
    
    
    6,845
    
    
    
    5,889
    
    
    
    14,124
    
    
    
    12,238Provision for credit losses
    
    
    14,181
    
    
    
    1,484
    
    
    
    27,590
    
    
    
    7,294Depreciation and amortization
    
    
    3,936
    
    
    
    2,465
    
    
    
    8,230
    
    
    
    4,949Interest
    
    
    611
    
    
    
    578
    
    
    
    1,457
    
    
    
    783Total expenses
    
    
    25,573
    
    
    
    10,416
    
    
    
    51,401
    
    
    
    25,264Net loss before benefit for income taxes
    
    
    (9,791
    )
    
    
    (246
    )
    
    
    (17,611
    )
    
    
    (4,233
    )Benefit for income taxes
    
    
    (3,917
    )
    
    
    (20
    )
    
    
    (7,045
    )
    
    
    (1,342
    )Net Loss
    
    ($
    5,874
    )
    
    ($
    226
    )
    
    ($
    10,566
    )
    
    ($
    2,891
    )Net loss per common share  basic and diluted
    
    ($
    0.45
    )
    
    ($
    0.02
    )
    
    ($
    0.80
    )
    
    ($
    0.22
    )Weighted-average shares used to compute:Basic and diluted net loss per share
    
    
    13,182,666
    
    
    
    13,584,524
    
    
    
    13,181,107
    
    
    
    13,420,592
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MICROFINANCIAL INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 For the six months endedJune 30,2004
    
    2005Cash flows from operating activities:Cash received from customers
    
    $
    47,734
    
    
    $
    30,661Cash paid to suppliers and employees
    
    
    (15,122
    )
    
    
    (11,679
    )Cash received (paid)for income taxes
    
    
    29
    
    
    
    (23
    )Interest paid
    
    
    (1,608
    )
    
    
    (291
    )Interest received
    
    
    7
    
    
    
    120Net cash provided by operating activities
    
    
    31,040
    
    
    
    18,788Cash flows from investing activities:Investment in lease contracts
    
    
    (105
    )
    
    
    (2,529
    )Investment in inventory
    
    
    (77
    )
    
    
    (5
    )Investment in direct costs
    
    
    0
    
    
    
    (18
    )Investment in fixed assets
    
    
    (52
    )
    
    
    (103
    )Net cash used in investing activities
    
    
    (234
    )
    
    
    (2,655
    )Cash flows from financing activities:Proceeds from secured debt
    
    
    
    
    
    
    93Repayment of secured debt
    
    
    (32,484
    )
    
    
    (85
    )Proceeds from issuance of subordinated debt
    
    
    1,500
    
    
    
    Repayment of subordinated debt
    
    
    
    
    
    
    (1,000
    )Decrease in restricted cash
    
    
    1,098
    
    
    
    Repayment of capital leases
    
    
    (83
    )
    
    
    (41
    )Payment of dividends
    
    
    
    
    
    
    (1,329
    )Net cash used in financing activities
    
    
    (29,969
    )
    
    
    (2,362
    )Net increase (decrease) in cash and cash equivalents:
    
    
    837
    
    
    
    13,771Cash and cash equivalents, beginning of period
    
    
    6,533
    
    
    
    9,709Cash and cash equivalents, end of period
    
    $
    7,370
    
    
    $
    23,480
   5




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MICROFINANCIAL INCORPORATED
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 For the six months endedJune 30,2004
    
    2005Reconciliation of net loss to net cash provided
by operating activities:Net loss
    
    
    ($10,566
    )
    
    
    ($2,891
    )Adjustments to reconcile net loss to
cash provided by operating activities:Amortization of unearned income, net of initial direct costs
    
    
    (7,402
    )
    
    
    (2,611
    )Depreciation and amortization
    
    
    8,230
    
    
    
    4,949Provision for credit losses
    
    
    27,590
    
    
    
    7,294Recovery of equipment cost and residual value
    
    
    10,704
    
    
    
    12,067Share based compensation expense
    
    
    
    
    
    
    851Amortization of unearned compensation
    
    
    20
    
    
    
    8Non-cash interest expense
    
    
    16
    
    
    
    492Change in assets and liabilities:Current taxes payable
    
    
    29
    
    
    
    (23
    )Deferred income taxes
    
    
    (7,045
    )
    
    
    (1,342
    )Other assets
    
    
    (91
    )
    
    
    488Accounts payable
    
    
    (154
    )
    
    
    (575
    )Other liabilities
    
    
    (1,038
    )
    
    
    81Net cash provided by operating activities
    
    $
    31,040
    
    
    $
    18,788Supplemental disclosure of non-cash activities:Treasury stock issued for option exercises
    
    $
    
    
    
    $
    2,018Treasury stock issued for warrants exercised
    
    $
    
    
    
    $
    222Subordinated debt forgiven for warrants exercised
    
    $
    
    
    
    $
    779Fair market value of restricted stock issued
    
    $
    79
    
    
    $
    
 6




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MICROFINANCIAL INCORPORATED
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
      7




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Basis of Presentation:
   Allowance for Credit Losses:
   Balance of allowance for credit losses at December 31, 2004
    
    
    
    
    
    $
    14,963Provision for credit losses
    
    
    
    
    
    
    7,294Charge-offs
    
    
    
    
    
    
    (15,822
    )Recoveries
    
    
    
    
    
    
    3,417Charge-offs, net of recoveries
    
    
    
    
    
    
    (12,405
    )Balance of allowance for credit losses at June 30, 2005
    
    
    
    
    
    $
    9,852
 Net Income (Loss) Per Share:
  8




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  For three months ended
    
    For six months endedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net income (loss)
    
    ($
    5,874
    )
    
    ($
    226
    )
    
    ($
    10,566
    )
    
    ($
    2,891
    )Shares used in computation:Weighted average common shares
outstanding used in computation
of net income (loss) per common share
    
    
    13,182,666
    
    
    
    13,584,524
    
    
    
    13,181,107
    
    
    
    13,420,592Dilutive effect of common stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Shares used in computation of net
income (loss) per common share 
assuming dilution
    
    
    13,182,666
    
    
    
    13,584,524
    
    
    
    13,181,107
    
    
    
    13,420,592Net income (loss) per common share -
basic and diluted
    
    ($
    0.45
    )
    
    ($
    0.02
    )
    
    ($
    0.80
    )
    
    ($
    0.22
    )
 Stock Options
   Stock-based Employee Compensation
 Accounting for Stock Issued to
Employees
 Accounting for Stock-Based Compensation
 9




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 For the three months
    
    For the six monthsended
    
    endedJune 30,
    
    June 30,2004
    
    2005
    
    2004
    
    2005Net loss, as reported
    
    ($
    5,874
    )
    
    ($
    226
    )
    
    ($
    10,566
    )
    
    ($
    2,891
    )Add: Stock-based employee compensation
expense included in reported net income, net of
related tax effects
    
    
    4
    
    
    
    103
    
    
    
    20
    
    
    
    855Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects
    
    
    (120
    )
    
    
    (103
    )
    
    
    (297
    )
    
    
    (855
    )Pro forma net loss
    
    ($
    5,990
    )
    
    ($
    226
    )
    
    ($
    10,843
    )
    
    ($
    2,891
    )Earnings (loss) per share:As reported  basic and diluted
    
    ($
    0.45
    )
    
    ($
    0.02
    )
    
    ($
    0.80
    )
    
    ($
    0.22
    )Proforma  basic and diluted
    
    ($
    0.45
    )
    
    ($
    0.02
    )
    
    ($
    0.82
    )
    
    ($
    0.22
    )
  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 June 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
    
    
    
    3.66
    
    
    $
    2,321,176
    
    
    $
    12.3125
    
    
    
    359,391
    
    
    $
    2,321,176$13.5440
    
    
    40,609
    
    
    
    3.66
    
    
    $
    288,479
    
    
    $
    13.5440
    
    
    
    40,609
    
    
    $
    288,479$9.7813
    
    
    350,000
    
    
    
    4.66
    
    
    $
    1,907,883
    
    
    $
    9.7813
    
    
    
    350,000
    
    
    $
    1,907,883$13.1000
    
    
    90,000
    
    
    
    5.65
    
    
    $
    538,208
    
    
    $
    13.1000
    
    
    
    72,000
    
    
    $
    466,447$6.7000
    
    
    235,000
    
    
    
    6.67
    
    
    $
    875,455
    
    
    $
    6.7000
    
    
    
    141,000
    
    
    $
    583,637$1.5850
    
    
    167,500
    
    
    
    7.41
    
    
    $
    179,929
    
    
    $
    1.5850
    
    
    
    107,500
    
    
    $
    119,060$ 1.585 to $13.544
    
    
    1,242,500
    
    
    
    5.16
    
    
    $
    6,111,130
    
    
    $
    9.8453
    
    
    
    1,070,500
    
    
    $
    5,686,682
 10




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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
    
    $
    1.585
    
    
    $
    6.700
    
    
    $
    13.100
    
    
    $
    9.781
    
    
    $
    13.544
    
    
    $
    12.313Expected life (in years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    3.5
    
    
    
    3.0
    
    
    
    2.5
    
    
    
    2.5Annualized volatility
    
    
    82.09
    %
    
    
    82.09
    %
    
    
    82.09
    %
    
    
    82.09
    %
    
    
    82.09
    %
    
    
    82.09
    %Dividend yield
    
    
    4.30
    %
    
    
    4.30
    %
    
    
    4.30
    %
    
    
    4.30
    %
    
    
    4.30
    %
    
    
    4.30
    %Risk free rate
    
    
    4.050
    %
    
    
    4.050
    %
    
    
    3.910
    %
    
    
    3.910
    %
    
    
    3.820
    %
    
    
    3.820
    %
  Notes Payable:
  Amounts outstanding as ofInterest
    
    December 31,
    
    June 30,(dollars in thousands)
    
    Rate
    
    2004
    
    2005Revolving credit facility
    
    prime + 1.5%
    
    $
    34
    
    
    $
    42Subordinated notes
    
    
    7.75%-13.0
    %
    
    
    5,152
    
    
    
    3,372$
    5,186
    
    
    $
    3,414
 11




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




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MICROFINANCIAL INCORPORATED
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
  Subsequent Events:
   13




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ITEM 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
 Three months ended June 30, 2005 as compared to the three months ended June 30, 2004.
 Results of Operations
 For the three months endedJune 30,2004

    
    Change
    
    2005(dollars in thousands)Income on financing leases and loans
    
    $
    3,235
    
    
    
    (65.9
    )%
    
    $
    1,103Rental income
    
    
    8,165
    
    
    
    (21.2
    )%
    
    
    6,431Income on service contracts
    
    
    1,563
    
    
    
    (40.0
    )%
    
    
    938Service fees waiver fees and other
    
    
    2,819
    
    
    
    (39.7
    )%
    
    
    1,698Total revenues
    
    
    15,782
    
    
    
    (35.6
    )%
    
    
    10,170
   Selling, General and Administrative
 For the three months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Selling, general and administrative
    
    
    6,845
    
    
    
    (14.0
    )%
    
    
    5,889As a percent of revenue
    
    
    43.4
    %
    
    
    
    
    
    
    57.9
    %
  14




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Provision for Credit Losses
 For the three months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Provision for credit losses
    
    
    14,181
    
    
    
    (89.5
    )%
    
    
    1,484As a percent of revenue
    
    
    89.9
    %
    
    
    
    
    
    
    14.6
    %
  Depreciation and Amortization
 For the three months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Depreciation  fixed assets
    
    $
    224
    
    
    
    (57.5
    )%
    
    $
    95Depreciation and amortization  rentals
    
    
    2,703
    
    
    
    (43.2
    )%
    
    
    1,533Depreciation and amortization  contracts
    
    
    1,009
    
    
    
    (17.0
    )%
    
    
    837Total depreciation and amortization
    
    
    3,936
    
    
    
    (37.3
    )%
    
    
    2,465As a percent of revenue
    
    
    24.9
    %
    
    
    
    
    
    
    24.2
    %
  Interest Expense
 For the three months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Interest
    
    
    611
    
    
    
    (5.4
    )%
    
    
    578As a percent of revenue
    
    
    3.9
    %
    
    
    
    
    
    
    5.6
    %
  15




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Benefit for Income Taxes
 For the three months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Benefit for income tax
    
    
    (3,917
    )
    
    
    (99.5
    )%
    
    
    (20
    )As a percent of revenue
    
    
    24.8
    %
    
    
    
    
    
    
    0.2
    %
  Other Operating Data
  16




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Six months ended June 30, 2005 as compared to the six months ended June 30, 2004.
 Results of Operations
 For the six months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Income on financing leases and loans
    
    $
    7,402
    
    
    
    (64.7
    )%
    
    $
    2,611Rental income
    
    
    16,629
    
    
    
    (22.7
    )%
    
    
    12,861Income on service contracts
    
    
    3,294
    
    
    
    (38.5
    )%
    
    
    2,026Service fees waiver fees and other
    
    
    6,465
    
    
    
    (45.4
    )%
    
    
    3,533Total revenues
    
    
    33,790
    
    
    
    (37.8
    )%
    
    
    21,031
   Selling, General and Administrative
 For the six months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Selling, general and administrative
    
    
    14,124
    
    
    
    (13.4
    )%
    
    
    12,238As a percent of revenue
    
    
    41.8
    %
    
    
    
    
    
    
    58.2
    %
  Provision for Credit Losses
 For the six months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Provision for credit losses
    
    
    27,590
    
    
    
    (73.6
    )%
    
    
    7,294As a percent of revenue
    
    
    81.7
    %
    
    
    
    
    
    
    34.7
    %
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##### Table of Contents



Depreciation and Amortization
 For the six months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Depreciation  fixed assets
    
    $
    475
    
    
    
    (55.1
    )%
    
    $
    213Depreciation and amortization  rentals
    
    
    5,589
    
    
    
    (47.0
    )%
    
    
    2,962Depreciation and amortization  contracts
    
    
    2,166
    
    
    
    (18.0
    )%
    
    
    1,774Total depreciation and amortization
    
    
    8,230
    
    
    
    (39.9
    )%
    
    
    4,949As a percent of revenue
    
    
    24.3
    %
    
    
    
    
    
    
    23.5
    %
  Interest Expense
 For the six months endedJune 30,2004
    
    Change
    
    2004(dollars in thousands)Interest
    
    
    1,457
    
    
    
    (46.3
    )%
    
    
    783As a percent of revenue
    
    
    4.3
    %
    
    
    
    
    
    
    3.7
    %
  18




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##### Table of Contents



Benefit for Income Taxes
 For the six months endedJune 30,2004
    
    Change
    
    2005(dollars in thousands)Benefit for income tax
    
    
    (7,045
    )
    
    
    (80.4
    )%
    
    
    (1,377
    )As a percent of revenue
    
    
    20.8
    %
    
    
    
    
    
    
    6.5.
    %
  Other Operating Data
  Critical Accounting Policies
  Revenue Recognition
  19




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##### Table of Contents



Allowance for Credit Losses
    Income taxes
  20




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##### Table of Contents



Stock Option Accounting
  Exposure to Credit Losses
  As of December 31,
    
    As of June 30,(dollars in thousands)
    
    2004
    
    2005Cumulative amounts billed
    
    $
    303,695
    
    
    
    
    
    
    $
    257,78631-60 days past due
    
    $
    1,858
    
    
    
    0.6
    %
    
    $
    1,360
    
    
    
    0.5
    %61-90 days past due
    
    
    1,818
    
    
    
    0.6
    %
    
    
    1,219
    
    
    
    0.4
    %Over 90 days past due
    
    
    29,673
    
    
    
    9.8
    %
    
    
    19,009
    
    
    
    7.3
    %Total past due
    
    $
    33,349
    
    
    
    11.0
    %
    
    $
    21,588
    
    
    
    8.3
    %
  21




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##### Table of Contents



(dollars in thousands)
    
    December 31, 2004
    
    June 30, 2005Current
    
    $
    19,945
    
    
    
    33.40
    %
    
    $
    10,986
    
    
    
    30.33
    %31-60 days past due
    
    
    1,079
    
    
    
    1.80
    %
    
    
    831
    
    
    
    2.29
    %61-90 days past due
    
    
    987
    
    
    
    1.70
    %
    
    
    687
    
    
    
    1.90
    %Over 90 days past due
    
    
    37,668
    
    
    
    63.10
    %
    
    
    23,723
    
    
    
    65.48
    %Gross receivables due in installments
    
    $
    59,679
    
    
    
    100.00
    %
    
    $
    36,227
    
    
    
    100.00
    %
 Liquidity and Capital Resources
 General
      Borrowings
   As of
    
    As ofDecember 31, 2004
    
    June 30, 2005MaximumAmounts
    
    Interest
    
    Amounts
    
    Interest
    
    Unused
    
    Facility(dollars in thousands)
    
    Outstanding
    
    Rate
    
    Outstanding
    
    Rate
    
    Capacity
    
    AmountRevolving credit facility (1)
    
    $
    34
    
    
    Prime + 1.5%
    
    $
    42
    
    
    Prime + 1.5%
    
    $
    29,958
    
    
    $
    30,000Subordinated notes(2)
    
    
    5,152
    
    
    
    7.75%13.0
    %
    
    
    3,373
    
    
    
    7.75%13.0
    %
    
    
    
    
    
    
    $
    5,186
    
    
    
    
    
    
    $
    3,415
    
    
    
    
    
    
    $
    29,958
    
    
    $
    30,000
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##### Table of Contents



(1)
    
    The unused capacity is subject to lease eligibility and the borrowing
base formula(2)
    
    Subordinated notes are generally one-time fundings, without any ability for
the Company to draw down additional amounts.  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
  Contractual Obligations and Commercial Commitments
   RevolvingFor the period ended
    
    Credit
    
    Long-Term
    
    Operating
    
    CapitalDecember 31,
    
    Facility(1)
    
    Debt
    
    Leases
    
    Leases
    
    Total2005
    
    $
    42
    
    
    $
    773
    
    
    $
    292
    
    
    
    
    
    
    $
    1,1072006
    
    
    
    
    
    
    2,600
    
    
    
    237
    
    
    
    
    
    
    
    2,8372007
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    2372008
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    2372009
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    2372010
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    237Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    42
    
    
    $
    3,373
    
    
    $
    1,477
    
    
    
    
    
    
    $
    4,892
 
 (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
 23




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Other
  Note on Forward-Looking Information
  24




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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
   25




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##### Table of Contents



Part II. Other Information
 
 ITEM 1 Legal Proceedings
     26




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ITEM 5 Other Information
   27




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##### Table of Contents



ITEM 6 Exhibits
  10.1*
    
    Lease Extension # 2 for the facility at 10-M Commerce Way, Woburn, MA dated July
15, 2005 among MicroFinancial Incorporated and Cummings Properties, LLC.10.2*W
    
    Employment Agreement between the Company and Peter R. Bleyleben.10.3*W
    
    Employment Agreement between the Company and James R. Jackson, Jr..10.4*W
    
    Employment Agreement between the Company and Stephen Constantino.10.5*W
    
    Employment Agreement between the Company and Steven LaCreta.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 herewithW
    
    Management contract or compensatory plan or arrangement 28




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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: August 12, 2005
 29