##### 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, 2010
 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(Do not check if a smaller reporting company)
Smaller reporting company þ 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, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Income  Three months ended March 31, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows  Three months ended March 31, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19Part II  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 6.
    
    Exhibits
    
    
    20Signatures
    
    
    21EX-31.1EX-31.2EX-32.1EX-32.2




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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS  (In thousands, except share and per share data)
 March 31,
    
    
    December 31,2010
    
    
    2009ASSETSCash and cash equivalents
    
    $
    1,381
    
    
    $
    391Restricted cash
    
    
    771
    
    
    
    834Net investment in leases:Receivables due in installments
    
    
    178,217
    
    
    
    175,615Estimated residual value
    
    
    19,618
    
    
    
    19,014Initial direct costs
    
    
    1,508
    
    
    
    1,509Less:Advance lease payments and deposits
    
    
    (2,754
    )
    
    
    (2,411
    )Unearned income
    
    
    (56,318
    )
    
    
    (55,821
    )Allowance for credit losses
    
    
    (13,802
    )
    
    
    (13,856
    )Net investment in leases
    
    
    126,469
    
    
    
    124,050Investment in rental contracts, net
    
    
    399
    
    
    
    379Property and equipment, net
    
    
    614
    
    
    
    699Other assets
    
    
    636
    
    
    
    744Total assets
    
    $
    130,270
    
    
    $
    127,097LIABILITIES AND STOCKHOLDERS EQUITYRevolving line of credit
    
    $
    54,776
    
    
    $
    51,906Accounts payable
    
    
    1,802
    
    
    
    2,011Capital lease obligation
    
    
    76
    
    
    
    93Other liabilities
    
    
    1,691
    
    
    
    1,250Income taxes payable
    
    
    153
    
    
    
    209Deferred income taxes
    
    
    4,952
    
    
    
    4,863Total liabilities
    
    
    63,450
    
    
    
    60,332Stockholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized;
no shares issued at March 31, 2010 and December 31, 2009
    
    
    
    
    
    
    Common stock, $.01 par value; 25,000,000 shares authorized;
14,229,420 and 14,174,326 shares issued at March 31, 2010 and December 31,
2009, respectively
    
    
    142
    
    
    
    142Additional paid-in capital
    
    
    46,396
    
    
    
    46,197Retained earnings
    
    
    20,282
    
    
    
    20,426Total stockholders equity
    
    
    66,820
    
    
    
    66,765Total liabilities and stockholders equity
    
    $
    130,270
    
    
    $
    127,097
  3




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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME  (In thousands, except share and per share data)
 Three Months EndedMarch 31,2010
    
    2009Revenues:Income on financing leases
    
    $
    8,122
    
    
    $
    6,789Rental income
    
    
    1,958
    
    
    
    2,209Income on service contracts
    
    
    141
    
    
    
    189Loss and damage waiver fees
    
    
    1,104
    
    
    
    986Service fees and other
    
    
    993
    
    
    
    671Interest income
    
    
    
    
    
    
    13Total revenues
    
    
    12,318
    
    
    
    10,857Expenses:Selling, general and administrative
    
    
    3,230
    
    
    
    3,572Provision for credit losses
    
    
    6,931
    
    
    
    5,453Depreciation and amortization
    
    
    428
    
    
    
    335Interest
    
    
    811
    
    
    
    516Total expenses
    
    
    11,400
    
    
    
    9,876Income before provision for income taxes
    
    
    918
    
    
    
    981Provision for income taxes
    
    
    353
    
    
    
    378Net income
    
    $
    565
    
    
    $
    603Net income per common share  basic
    
    $
    0.04
    
    
    $
    0.04Net income per common share  diluted
    
    $
    0.04
    
    
    $
    0.04Weighted-average shares:Basic
    
    
    14,210,275
    
    
    
    14,103,116Diluted
    
    
    14,409,175
    
    
    
    14,249,712
  4




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MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS  (In thousands)
 Three Months EndedMarch 31,2010
    
    2009Cash flows from operating activities:Cash received from customers
    
    $
    21,856
    
    
    $
    17,356Cash paid to suppliers and employees
    
    
    (4,034
    )
    
    
    (4,074
    )Cash paid for income taxes
    
    
    (321
    )
    
    
    (46
    )Interest paid
    
    
    (432
    )
    
    
    (409
    )Interest received
    
    
    
    
    
    
    13Net cash provided by operating activities
    
    
    17,069
    
    
    
    12,840Cash flows from investing activities:Investment in lease and rental contracts
    
    
    (17,978
    )
    
    
    (16,892
    )Investment in direct costs
    
    
    (277
    )
    
    
    (295
    )Investment in property and equipment
    
    
    (31
    )
    
    
    (106
    )Net cash used in investing activities
    
    
    (18,286
    )
    
    
    (17,293
    )Cash flows from financing activities:Proceeds from secured debt
    
    
    24,192
    
    
    
    18,361Repayment of secured debt
    
    
    (21,322
    )
    
    
    (15,918
    )Decrease (increase) in restricted cash
    
    
    63
    
    
    
    (241
    )Proceeds from capital lease obligation
    
    
    
    
    
    
    31Repayment of capital lease obligations
    
    
    (17
    )
    
    
    (16
    )Payment of dividends
    
    
    (709
    )
    
    
    (702
    )Net cash provided by financing activities
    
    
    2,207
    
    
    
    1,515Net change in cash and cash equivalents
    
    
    990
    
    
    
    (2,938
    )Cash and cash equivalents, beginning of period
    
    
    391
    
    
    
    5,047Cash and cash equivalents, end of period
    
    $
    1,381
    
    
    $
    2,109Reconciliation of net income to net cash provided by operating activities:Net income
    
    
    565
    
    
    
    603Adjustments to reconcile net income to net
cash provided by operating activities:Amortization of unearned income, net of initial direct costs
    
    
    (8,122
    )
    
    
    (6,789
    )Depreciation and amortization
    
    
    428
    
    
    
    335Provision for credit losses
    
    
    6,931
    
    
    
    5,453Recovery of equipment cost and residual value
    
    
    16,693
    
    
    
    12,696Stock-based compensation expense
    
    
    30
    
    
    
    29Changes in assets and liabilities:Current taxes payable
    
    
    (56
    )
    
    
    203Deferred income taxes
    
    
    89
    
    
    
    129Decrease (increase) in other assets
    
    
    108
    
    
    
    (45
    )Decrease in accounts payable
    
    
    (38
    )
    
    
    (11
    )Increase in other liabilities
    
    
    441
    
    
    
    237Net cash provided by operating activities
    
    $
    17,069
    
    
    $
    12,840Supplemental disclosure of non-cash activities:Fair market value of stock issued for compensation
    
    $
    171
    
    
    $
    231
  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)
   Three Months EndedMarch 31,2010
    
    2009Allowance for credit losses beginning balance
    
    $
    13,856
    
    
    $
    11,722Provision for credit losses
    
    
    6,931
    
    
    
    5,453Charge-offs
    
    
    (7,901
    )
    
    
    (5,511
    )Recoveries
    
    
    916
    
    
    
    1,062Allowance for credit losses ending balance
    
    $
    13,802
    
    
    $
    12,726
 Fair Value of Financial Instruments
  Net Income Per Share
   Three Months EndedMarch 31,2010
    
    2009Net income
    
    $
    565
    
    
    $
    603Weighted average common shares outstanding
    
    
    14,210,275
    
    
    
    14,103,116Dilutive effect of common stock
options, warrants and restricted stock
    
    
    198,900
    
    
    
    146,596Shares used in computation of net income
per common share  diluted
    
    
    14,409,175
    
    
    
    14,249,712Net income per common share  basic
    
    $
    0.04
    
    
    $
    0.04Net income per common share  diluted
    
    $
    0.04
    
    
    $
    0.04
 7




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
 Stock-Based Employee Compensation
   Weighted-AverageShares
    
    
    Price Per Share
    
    
    Exercise PriceOutstanding at December 31, 2009
    
    
    1,258,028
    
    
    $
    1.585 to $13.10
    
    
    $
    6.38Granted
    
    
    Expired
    
    
    (350,000
    )
    
    $
    9.78
    
    
    $
    9.78Forfeited
    
    
    Outstanding at March 31, 2010
    
    
    908,028
    
    
    $
    1.585 to $13.10
    
    
    $
    6.27
    Restricted Stock
    
    Restricted Stock UnitsNumber
    
    Amortized
    
    Number
    
    Amortizedof
    
    Compensation
    
    of
    
    CompensationShares
    
    Expense
    
    Shares
    
    ExpenseNon-vested at December 31, 2009
    
    
    3,750
    
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    53,844
    
    
    
    
    
    
    
    33,518
    
    
    
    Vested
    
    
    (55,094
    )
    
    $
    3,400
    
    
    
    
    
    
    $
    3,500Non-vested at March 31, 2010
    
    
    2,500
    
    
    $
    3,400
    
    
    
    33,518
    
    
    $
    3,500
 8




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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$
    13.10
    
    
    
    90,000
    
    
    
    .89
    
    
    
    
    
    
    
    
    $
    13.10
    
    
    
    90,000
    
    
    
    6.70
    
    
    
    235,000
    
    
    
    1.91
    
    
    
    
    
    
    
    
    
    6.70
    
    
    
    235,000
    
    
    
    1.59
    
    
    
    150,000
    
    
    
    2.66
    
    
    
    356,000
    
    
    
    
    
    1.59
    
    
    
    150,000
    
    
    
    356,0005.77
    
    
    
    31,923
    
    
    
    6.92
    
    
    
    
    
    
    
    
    
    5.77
    
    
    
    
    
    
    
    5.85
    
    
    
    142,382
    
    
    
    7.83
    
    
    
    
    
    
    
    
    
    5.85
    
    
    
    35,596
    
    
    
    2.30
    
    
    
    258,723
    
    
    
    8.92
    
    
    
    429,000
    
    
    
    
    
    2.30
    
    
    
    
    
    
    
    908,028
    
    
    
    5.03
    
    
    $
    785,000
    
    
    
    
    
    6.27
    
    
    
    510,596
    
    
    $
    356,000
  Cash and Cash Equivalents
  Concentration of Credit Risk
  C. Revolving line of credit
   9




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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. Subsequent Events
  F. Recent Accounting Pronouncements
   10




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MICROFINANCIAL INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tables in thousands, except share and per share data)
   1.
    
    Transfers in and out of Levels 1 and 2. A reporting entry should disclose
separately the amounts of significant transfers in and out of Level 1 and Level 2 fair
value measurements and describe the reasons for the transfers.2.
    
    Activity in level3.
    
    Fair value measurements.
  11




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ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Introduction
  Forward-Looking Information
  Overview
    12




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Critical Accounting Policies
   13




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Results of Operations  Three months ended March 31, 2010 compared to the three months
ended March 31, 2009
 Revenue
 Three Months Ended March 31,2010
    
    
    Change
    
    
    2009(Dollars in thousands)Income on financing leases
    
    $
    8,122
    
    
    
    19.6
    %
    
    $
    6,789Rental income
    
    
    1,958
    
    
    
    (11.4
    )
    
    
    2,209Income on service contracts
    
    
    141
    
    
    
    (25.4
    )
    
    
    189Loss and damage waiver fees
    
    
    1,104
    
    
    
    12.0
    
    
    
    986Service fees and other income
    
    
    993
    
    
    
    48.0
    
    
    
    671Interest income
    
    
    
    
    
    
    (100.0
    )
    
    
    13Total revenues
    
    $
    12,318
    
    
    
    13.5
    %
    
    $
    10,857
   Selling, General and Administrative Expenses
 Three Months Ended March 31,2010
    
    Change
    
    2009(Dollars in thousands)Selling, general and administrative
    
    $
    3,230
    
    
    
    (9.6
    %)
    
    $
    3,572As a percent of revenue
    
    
    26.2
    %
    
    
    
    
    
    
    32.9
    %
  Provision for Credit Losses
 Three Months Ended March 31,2010
    
    Change
    
    2009(Dollars in thousands)Provision for credit losses
    
    $
    6,931
    
    
    
    27.1
    %
    
    $
    5,453As a percent of revenue
    
    
    56.3
    %
    
    
    
    
    
    
    50.2
    %
  14




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Depreciation and Amortization
 Three Months Ended March 31,2010
    
    
    Change
    
    2009(Dollars in thousands)Depreciation  fixed assets
    
    $
    115
    
    
    
    9.5
    %
    
    $
    105Depreciation  rental equipment
    
    
    313
    
    
    
    46.3
    
    
    
    214Amortization  service contracts
    
    
    
    
    
    
    (100.0
    )
    
    
    16Total depreciation and amortization
    
    $
    428
    
    
    
    27.8
    %
    
    $
    335As a percent of revenue
    
    
    3.5
    %
    
    
    
    
    
    
    3.1
    %
    Interest Expense
 Three Months Ended March 31,2010
    
    Change
    
    2009(Dollars in thousands)Interest
    
    $
    811
    
    
    
    57.2
    %
    
    $
    516As a percent of revenue
    
    
    6.6
    %
    
    
    
    
    
    
    4.8
    %
  Provision for Income Taxes
 Three Months Ended March 31,2010
    
    Change
    
    2009(Dollars in thousands)Provision for income taxes
    
    $
    353
    
    
    
    (6.6
    )%
    
    $
    378As a percent of revenue
    
    
    2.9
    %
    
    
    
    
    
    
    3.5
    %As a percent of income before taxes
    
    
    38.5
    %
    
    
    
    
    
    
    38.5
    %
  15




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Fair Value of Financial Instruments
  Other Operating Data
  Exposure to Credit Losses
  (dollars in thousands)
    
    March 31, 2010
    
    December 31, 2009Current
    
    $
    145,415
    
    
    
    81.6
    %
    
    $
    140,000
    
    
    
    79.7
    %31-60 days past due
    
    
    5,294
    
    
    
    3.0
    
    
    
    6,233
    
    
    
    3.661-90 days past due
    
    
    4,671
    
    
    
    2.6
    
    
    
    5,336
    
    
    
    3.0Over 90 days past due
    
    
    22,837
    
    
    
    12.8
    
    
    
    24,046
    
    
    
    13.7Gross receivables due in installments
    
    $
    178,217
    
    
    
    100.0
    %
    
    $
    175,615
    
    
    
    100.0
    %
 16




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Liquidity and Capital Resources
 General
      Borrowings
  March 31, 2010
    
    December 31, 2009Maximum
    
    
    
    
    
    
    
    
    
    
    
    
    
    MaximumAmounts
    
    Interest
    
    Unused
    
    Facility
    
    Amounts
    
    Interest
    
    Unused
    
    Facility(dollars in 000)
    
    Outstanding
    
    Rate
    
    Capacity
    
    Amount
    
    Outstanding
    
    Rate
    
    Capacity
    
    AmountRevolving credit
facility(1)
    
    $
    54,776
    
    
    
    5.00
    %
    
    $
    30,224
    
    
    $
    85,000
    
    
    $
    51,906
    
    
    
    5.00
    %
    
    $
    33,094
    
    
    $
    85,000
 
 (1)
    
    The unused capacity is subject to the borrowing base formula.  17




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Dividends
    Contractual Obligations and Lease Commitments
     Recent Accounting Pronouncements
  18




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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
      
 ITEM 4. Controls and Procedures
   19




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Part II  Other Information
 
 ITEM 1. Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 6. Exhibits
  3.1
    
    Restated Articles of Organization, as amended (incorporated by reference to Exhibit 3.1
in the Registrants Registration Statement on Form S-1, No. 333-56639, filed with the
Securities and Exchange Commission on June 9, 1998).3.2
    
    Restated Bylaws, as amended (incorporated by reference to Exhibit 3.2 in the
Registrants Annual Report on Form 10-K filed with the Securities and Exchange Commission
on March 28, 2007).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 20




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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  21