##### 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 March 31, 2009
 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
  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  March 31, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Income  Three months ended March 31, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2009 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-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)
 March 31,
    
    
    December 31,2009
    
    
    2008ASSETSCash and cash equivalents
    
    $
    2,109
    
    
    $
    5,047Restricted cash
    
    
    769
    
    
    
    528Net investment in leases:Receivables due in installments
    
    
    150,314
    
    
    
    142,881Estimated residual value
    
    
    16,188
    
    
    
    15,257Initial direct costs
    
    
    1,286
    
    
    
    1,211Less:Advance lease payments and deposits
    
    
    (1,262
    )
    
    
    (982
    )Unearned income
    
    
    (50,996
    )
    
    
    (49,384
    )Allowance for credit losses
    
    
    (12,726
    )
    
    
    (11,722
    )Net investment in leases
    
    
    102,804
    
    
    
    97,261Investment in service contracts, net
    
    
    13
    
    
    
    32Investment in rental contracts, net
    
    
    313
    
    
    
    240Property and equipment, net
    
    
    761
    
    
    
    759Other assets
    
    
    1,028
    
    
    
    983Total assets
    
    $
    107,797
    
    
    $
    104,850LIABILITIES AND STOCKHOLDERS EQUITYRevolving line of credit
    
    $
    35,768
    
    
    $
    33,325Accounts payable
    
    
    1,406
    
    
    
    1,648Capital lease obligation
    
    
    140
    
    
    
    125Dividends payable
    
    
    
    
    
    
    702Other liabilities
    
    
    1,545
    
    
    
    1,308Income taxes payable
    
    
    211
    
    
    
    8Deferred income taxes
    
    
    3,525
    
    
    
    3,396Total liabilities
    
    
    42,595
    
    
    
    40,512Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at March 31, 2009 and December 31, 2008
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares authorized;
14,139,942 and 14,038,257 shares issued at March 31, 2009 and December 31,
2008, respectively
    
    
    141
    
    
    
    140Additional paid-in capital
    
    
    46,034
    
    
    
    45,774Retained earnings
    
    
    19,027
    
    
    
    18,424Total stockholders equity
    
    
    65,202
    
    
    
    64,338Total liabilities and stockholders equity
    
    $
    107,797
    
    
    $
    104,850
  3




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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (In thousands, except share and per share data)
 Three Months EndedMarch 31,2009
    
    
    2008Revenues:Income on financing leases
    
    $
    6,789
    
    
    $
    4,940Rental income
    
    
    2,209
    
    
    
    2,752Income on service contracts
    
    
    189
    
    
    
    259Loss and damage waiver fees
    
    
    986
    
    
    
    688Service fees and other
    
    
    671
    
    
    
    549Interest income
    
    
    13
    
    
    
    60Total revenues
    
    
    10,857
    
    
    
    9,248Expenses:Selling, general and administrative
    
    
    3,572
    
    
    
    3,239Provision for credit losses
    
    
    5,453
    
    
    
    3,357Depreciation and amortization
    
    
    335
    
    
    
    230Interest
    
    
    516
    
    
    
    152Total expenses
    
    
    9,876
    
    
    
    6,978Income before provision for income taxes
    
    
    981
    
    
    
    2,270Provision for income taxes
    
    
    378
    
    
    
    713Net income
    
    $
    603
    
    
    $
    1,557Net income per common share  basic
    
    $
    0.04
    
    
    $
    0.11Net income per common share  diluted
    
    $
    0.04
    
    
    $
    0.11Weighted-average shares:Basic
    
    
    14,103,116
    
    
    
    13,974,904Diluted
    
    
    14,249,712
    
    
    
    14,160,139
  4




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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Three Months EndedMarch 31,2009
    
    
    2008Cash flows from operating activities:Cash received from customers
    
    $
    17,356
    
    
    $
    13,163Cash paid to suppliers and employees
    
    
    (4,074
    )
    
    
    (4,022
    )Cash paid for income taxes
    
    
    (46
    )
    
    
    (125
    )Interest paid
    
    
    (409
    )
    
    
    (151
    )Interest received
    
    
    13
    
    
    
    60Net cash provided by operating activities
    
    
    12,840
    
    
    
    8,925Cash flows from investing activities:Investment in lease and rental contracts
    
    
    (16,892
    )
    
    
    (17,177
    )Investment in direct costs
    
    
    (295
    )
    
    
    (265
    )Investment in property and equipment
    
    
    (106
    )
    
    
    (111
    )Net cash used in investing activities
    
    
    (17,293
    )
    
    
    (17,553
    )Cash flows from financing activities:Proceeds from secured debt
    
    
    18,361
    
    
    
    18,648Repayment of secured debt
    
    
    (15,918
    )
    
    
    (10,672
    )(Increase) decrease in restricted cash
    
    
    (241
    )
    
    
    62Proceeds from capital lease obligation
    
    
    31
    
    
    
    46Repayment of capital lease obligations
    
    
    (16
    )
    
    
    (3
    )Payment of dividends
    
    
    (702
    )
    
    
    (698
    )Net cash provided by financing activities
    
    
    1,515
    
    
    
    7,383Net change in cash and cash equivalents
    
    
    (2,938
    )
    
    
    (1,245
    )Cash and cash equivalents, beginning of period
    
    
    5,047
    
    
    
    7,080Cash and cash equivalents, end of period
    
    $
    2,109
    
    
    $
    5,835Reconciliation of net income to net cash provided by operating activities:Net income
    
    
    603
    
    
    
    1,557Adjustments to reconcile net income to net
cash provided by operating activities:Amortization of unearned income, net of initial direct costs
    
    
    (6,789
    )
    
    
    (4,940
    )Depreciation and amortization
    
    
    335
    
    
    
    230Provision for credit losses
    
    
    5,453
    
    
    
    3,357Recovery of equipment cost and residual value
    
    
    12,696
    
    
    
    8,089Stock-based compensation expense
    
    
    29
    
    
    
    22Changes in assets and liabilities:Current taxes payable
    
    
    203
    
    
    
    (13
    )Deferred income taxes
    
    
    129
    
    
    
    706(Increase) decrease in other assets
    
    
    (45
    )
    
    
    58(Decrease) in accounts payable
    
    
    (11
    )
    
    
    (350
    )Increase in other liabilities
    
    
    237
    
    
    
    209Net cash provided by operating activities
    
    $
    12,840
    
    
    $
    8,925Supplemental disclosure of non-cash activities:Fair market value of stock issued for compensation
    
    $
    231
    
    
    $
    128
  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, 2008
    
    
    
    
    
    $
    11,722Provision for credit losses
    
    
    
    
    
    
    5,453Charge-offs
    
    
    (5,511
    )Recoveries
    
    
    1,062Charge-offs, net of recoveries
    
    
    
    
    
    
    (4,449
    )Allowance for credit losses at March 31, 2009
    
    
    
    
    
    $
    12,726
 Net Income Per Share
  Three Months EndedMarch 31,2009
    
    
    2008Net income
    
    $
    603
    
    
    $
    1,557Weighted average common shares outstanding
    
    
    14,103,116
    
    
    
    13,974,904Dilutive effect of common stock
options, warrants and restricted stock
    
    
    146,596
    
    
    
    185,235Shares used in computation of net income
per common share  diluted
    
    
    14,249,712
    
    
    
    14,160,139Net income per common share  basic
    
    $
    0.04
    
    
    $
    0.11Net income per common share  diluted
    
    $
    0.04
    
    
    $
    0.11
 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
    
    
    Value9.78
    
    
    350,000
    
    
    
    0.9
    
    
    $
    
    
    
    
    9.78
    
    
    
    350,000
    
    
    $
    13.10
    
    
    90,000
    
    
    
    1.89
    
    
    
    
    
    
    
    13.10
    
    
    
    90,000
    
    
    
    6.70
    
    
    235,000
    
    
    
    2.91
    
    
    
    
    
    
    
    6.70
    
    
    
    235,000
    
    
    
    1.59
    
    
    150,000
    
    
    
    3.66
    
    
    
    62,000
    
    
    
    1.59
    
    
    
    150,000
    
    
    
    62,0005.77
    
    
    40,188
    
    
    
    7.92
    
    
    
    
    
    
    
    5.77
    
    
    
    
    
    
    
    5.85
    
    
    176,879
    
    
    
    8.83
    
    
    
    
    
    
    
    5.85
    
    
    
    
    
    
    
    2.30
    
    
    321,058
    
    
    
    9.92
    
    
    
    
    
    
    
    2.30
    
    
    
    
    
    
    
    1,363,125
    
    
    
    5.01
    
    
    $
    62,000
    
    
    
    7.78
    
    
    
    825,000
    
    
    $
    62,000
      C. Revolving line of credit
  8




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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
  Dividends
  E. Recent Accounting Pronouncements
    9




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  (Tables in thousands, except share and per share data)
     Interim
Disclosures about Fair Value of Financial Instruments Disclosures about Fair Value of
Financial Instruments, Interim Financial Reporting,
   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, 2009 compared to the three months ended
March 31, 2008
 Revenue
 Three Months EndedMarch 31,2009
    
    
    Change
    
    
    2008(Dollars in thousands)Income on financing leases
    
    $
    6,789
    
    
    
    37.4
    %
    
    $
    4,940Rental income
    
    
    2,209
    
    
    
    (19.7
    )
    
    
    2,752Income on service contracts
    
    
    189
    
    
    
    (27.0
    )
    
    
    259Loss and damage waiver fees
    
    
    986
    
    
    
    43.3
    
    
    
    688Service fees and other income
    
    
    671
    
    
    
    22.2
    
    
    
    549Interest income
    
    
    13
    
    
    
    (78.3
    )
    
    
    60Total revenues
    
    $
    10,857
    
    
    
    17.4
    %
    
    $
    9,248
  12




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Selling,
General and Administrative Expenses
 Three Months EndedMarch 31,2009
    
    Change
    
    2008(Dollars in thousands)Selling, general and administrative
    
    $
    3,572
    
    
    
    10.3
    %
    
    $
    3,239As a percent of revenue
    
    
    32.9
    %
    
    
    
    
    
    
    35.0
    %
  Provision for Credit Losses
 Three Months EndedMarch 31,2009
    
    Change
    
    2008(Dollars in thousands)Provision for credit losses
    
    $
    5,453
    
    
    
    62.4
    %
    
    $
    3,357As a percent of revenue
    
    
    50.2
    %
    
    
    
    
    
    
    36.3
    %
  Depreciation and Amortization
 Three Months EndedMarch 31,2009
    
    
    Change
    
    
    2008(Dollars in thousands)Depreciation  fixed assets
    
    $
    105
    
    
    
    19.3
    %
    
    $
    88Depreciation  rental equipment
    
    
    214
    
    
    
    167.5
    
    
    
    80Amortization  service contracts
    
    
    16
    
    
    
    (74.2
    )
    
    
    62Total depreciation and amortization
    
    $
    335
    
    
    
    45.7
    %
    
    $
    230As a percent of revenue
    
    
    3.1
    %
    
    
    
    
    
    
    2.5
    %
 13




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Interest Expense
 Three Months EndedMarch 31,2009
    
    Change
    
    2008(Dollars in thousands)Interest
    
    $
    516
    
    
    
    239.5
    %
    
    $
    152As a percent of revenue
    
    
    4.8
    %
    
    
    
    
    
    
    1.6
    %
  Provision for Income Taxes
 Three Months EndedMarch 31,2009
    
    Change
    
    2008(Dollars in thousands)Provision for income taxes
    
    $
    378
    
    
    
    (47.0
    )%
    
    $
    713As a percent of revenue
    
    
    3.5
    %
    
    
    
    
    
    
    7.7
    %As a percent of income before taxes
    
    
    38.5
    %
    
    
    
    
    
    
    31.4
    %
   14




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Fair Value of Financial Instruments
  Other Operating Data
  Exposure to Credit Losses
  (dollars in thousands)
    
    March 31, 2009
    
    December 31, 2008Current
    
    $
    117,086
    
    
    
    77.9
    %
    
    $
    110,423
    
    
    
    77.3
    %31-60 days past due
    
    
    5,341
    
    
    
    3.6
    
    
    
    6,941
    
    
    
    4.861-90 days past due
    
    
    5,262
    
    
    
    3.5
    
    
    
    5,079
    
    
    
    3.6Over 90 days past due
    
    
    22,625
    
    
    
    15.0
    
    
    
    20,438
    
    
    
    14.3Gross receivables due in installments
    
    $
    150,314
    
    
    
    100.0
    %
    
    $
    142,881
    
    
    
    100.0
    %
 Liquidity and Capital Resources
 General
  15




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Borrowings
  March 31, 2009
    
    December 31, 2008Maximum
    
    
    
    
    
    
    
    
    
    
    
    
    
    MaximumAmounts
    
    Interest
    
    Unused
    
    Facility
    
    Amounts
    
    Interest
    
    Unused
    
    Facility(dollars in 000)
    
    Outstanding
    
    Rate
    
    Capacity
    
    Amount
    
    Outstanding
    
    Rate
    
    Capacity
    
    AmountRevolving credit
facility(1)
    
    $
    35,768
    
    
    
    5.0
    %
    
    $
    49,232
    
    
    $
    85,000
    
    
    $
    33,325
    
    
    
    3.25
    %
    
    $
    26,675
    
    
    $
    60,000
 
 (1)
    
    The unused capacity is subject to the borrowing base formula.  Dividends
  16




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Contractual Obligations and Lease Commitments
 Contractual Obligations
  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
    
    Agreement and Amendment No. 1 to Restated Credit Agreement dated February 10,  2009 (incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2009).10.2
    
    Additional Lender Supplement dated February 10, 2009  (incorporated by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on February 17, 2009).10.3
    
    Commitment Increase  Supplement (incorporated by reference to Exhibit 10.3 to the Registrants  Current Report on Form 8-K filed  with the Securities and Exchange Commission on February 17,  2009).10.4
    
    Commerce Bank & Trust Company
Note dated February 10, 2009 (incorporated by reference to Exhibit 10.14.17 to the Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission March 31, 2009).10.5
    
    Danversbank Note dated February 10, 2009 (incorporated by reference to Exhibit 10.14.18 to the
Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission March 31, 2009).10.6
    
    Wells Fargo Bank Note dated February 10, 2009 (incorporated by reference to Exhibit 10.14.19 to the Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission March 31, 2009).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 2002.32.2*
    
    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 Officer  20