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

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

(Exact name of registrant as specified in its charter)

Massachusetts		04-2962824
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10 M Commerce Way, Woburn, MA 01801
(Address of principal executive offices)

(781) 994-4800
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(b) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes     o No

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes     o No

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes     þ No

     As of October 31, 2009, 14,174,326 shares of the registrant’s common stock were outstanding.

 

 

MICROFINANCIAL INCORPORATED
TABLE OF CONTENTS

				Page
Part I — FINANCIAL INFORMATION
Item 1.		Financial Statements (unaudited):
		Condensed Consolidated Balance Sheets — September 30, 2009 and December 31, 2008			3
		Condensed Consolidated Statements of Income — Three and nine months ended September 30, 2009 and 2008			4
		Condensed Consolidated Statements of Stockholders’ Equity for the nine months ended September 30, 2009 and the twelve months ended December 31, 2008			5
		Condensed Consolidated Statements of Cash Flows — Nine months ended September 30, 2009 and 2008			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			13
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			23
Item 4.		Controls and Procedures			23
Part II — OTHER INFORMATION
Item 1.		Legal Proceedings			24
Item 1A.		Risk Factors			24
Item 6.		Exhibits			24
Signatures					25
EX-31.1 Section 302 Certification of Chief Executive Officer
EX-31.2 Section 302 Certification of Chief Financial Officer
EX-32.1 Section 906 Certification of Chief Executive Officer
EX-32.2 Section 906 Certification of Chief Financial Officer

MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)

		September 30,				December 31,
		2009				2008
ASSETS
Cash and cash equivalents		$	540			$	5,047
Restricted cash			722				528
Net investment in leases:
Receivables due in installments			169,934				142,881
Estimated residual value			18,216				15,257
Initial direct costs			1,472				1,211
Less:
Advance lease payments and deposits			(2,028	)			(982	)
Unearned income			(55,071	)			(49,384	)
Allowance for credit losses			(13,876	)			(11,722	)
Net investment in leases			118,647				97,261
Investment in service contracts, net			—				32
Investment in rental contracts, net			448				240
Property and equipment, net			695				759
Other assets			1,009				983
Total assets		$	122,061			$	104,850
LIABILITIES AND STOCKHOLDERS’ EQUITY
Revolving line of credit		$	47,207			$	33,325
Accounts payable			2,067				1,648
Capital lease obligation			109				125
Dividends payable			—				702
Other liabilities			1,797				1,308
Income taxes payable			753				8
Deferred income taxes			3,995				3,396
Total liabilities			55,928				40,512
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued at September 30, 2009 and December 31, 2008			—				—
Common stock, $.01 par value; 25,000,000 shares authorized; 14,173,076 and 14,038,257 shares issued at September 30, 2009 and December 31, 2008, respectively			142				140
Additional paid-in capital			46,170				45,774
Retained earnings			19,821				18,424
Total stockholders’ equity			66,133				64,338
Total liabilities and stockholders’ equity		$	122,061			$	104,850

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements.

MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except share and per share data)
(Unaudited)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Revenues:
Income on financing leases		$	7,635			$	6,030			$	21,522			$	16,566
Rental income			2,124				2,330				6,471				7,566
Income on service contracts			162				221				526				720
Loss and damage waiver fees			1,048				849				3,052				2,305
Service fees and other			1,001				632				2,371				1,712
Interest income			—				23				14				110
Total revenues			11,970				10,085				33,956				28,979
Expenses:
Selling, general and administrative			3,349				3,260				10,413				9,697
Provision for credit losses			5,437				3,782				15,883				10,199
Depreciation and amortization			440				245				1,158				705
Interest			751				310				1,928				696
Total expenses			9,977				7,597				29,382				21,297
Income before provision for income taxes			1,993				2,488				4,574				7,682
Provision for income taxes			767				905				1,761				2,670
Net income		$	1,226			$	1,583			$	2,813			$	5,012
Net income per common share — basic		$	0.09			$	0.11			$	0.20			$	0.36
Net income per common share — diluted		$	0.09			$	0.11			$	0.20			$	0.35
Weighted-average shares:
Basic			14,170,079				14,016,167				14,138,374				13,992,951
Diluted			14,328,613				14,179,080				14,242,420				14,174,576

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except share and per share data)
(Unaudited)

										Additional								Total
		Common Stock								Paid-in				Retained				Stockholders’
		Shares				Amount				Capital				Earnings				Equity
Balance at December 31, 2007			13,960,778			$	140			$	45,412			$	15,276			$	60,828
Stock options exercises			17,500				—				28				—				28
Stock issued for deferred compensation			53,729				—				241				—				241
Stock-based compensation			—				—				74				—				74
Amortization of unearned compensation			6,250				—				19				—				19
Common stock dividends ($0.20 per share)			—				—				—				(2,802	)			(2,802	)
Net income			—				—				—				5,950				5,950
Balance at December 31, 2008			14,038,257			$	140			$	45,774			$	18,424			$	64,338
Stock issued for deferred compensation			131,069				2				336				—				338
Stock-based compensation			—				—				49				—				49
Amortization of unearned compensation			3,750				—				11				—				11
Common stock dividends ($0.10 per share)			—				—				—				(1,416	)			(1,416	)
Net income			—				—				—				2,813				2,813
Balance at September 30, 2009			14,173,076			$	142			$	46,170			$	19,821			$	66,133

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

MICROFINANCIAL INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)

		Nine Months Ended
		September 30,
		2009				2008
Cash flows from operating activities:
Cash received from customers		$	55,433			$	43,185
Cash paid to suppliers and employees			(11,530	)			(10,928	)
Income taxes paid			(416	)			(249	)
Interest paid			(1,577	)			(696	)
Interest received			14				110
Net cash provided by operating activities			41,924				31,422
Cash flows from investing activities:
Investment in lease and rental contracts			(56,749	)			(50,569	)
Investment in direct costs			(980	)			(836	)
Investment in property and equipment			(256	)			(318	)
Net cash used in investing activities			(57,985	)			(51,723	)
Cash flows from financing activities:
Proceeds from secured debt			66,487				71,176
Repayment of secured debt			(52,605	)			(36,642	)
(Increase) decrease in restricted cash			(194	)			339
Proceeds from capital lease obligation			31				163
Repayment of capital lease obligations			(47	)			(26	)
Payment of dividends			(2,118	)			(2,098	)
Net cash provided by financing activities			11,554				32,912
Net change in cash and cash equivalents			(4,507	)			12,611
Cash and cash equivalents, beginning of period			5,047				7,080
Cash and cash equivalents, end of period		$	540			$	19,691
Reconciliation of net income to net cash provided by operating activities:
Net income		$	2,813			$	5,012
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of unearned income, net of initial direct costs			(21,522	)			(16,566	)
Depreciation and amortization			1,158				705
Provision for credit losses			15,883				10,199
Recovery of equipment cost and residual value			40,968				29,297
Stock-based compensation expense			60				70
Changes in assets and liabilities:
Current taxes payable			745				(39	)
Deferred income taxes			599				2,461
Other assets			(26	)			(430	)
Accounts payable			757				173
Other liabilities			489				540
Net cash provided by operating activities		$	41,924			$	31,422
Supplemental disclosure of non-cash activities:
Fair market value of stock issued for compensation		$	338			$	241

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements

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

A. Nature of Business

     MicroFinancial Incorporated (referred to as “MicroFinancial,” “we,” “us” or “our”) operates primarily through its wholly-owned subsidiaries, TimePayment Corp. and Leasecomm Corporation. TimePayment is a specialized commercial finance company that leases and rents “microticket” equipment and provides other financing services. The average amount financed by TimePayment through 2008 and year to date 2009 was approximately $5,500 while Leasecomm historically financed contracts of approximately $1,900. We primarily source our originations through a nationwide network of independent equipment vendors, sales organizations, brokers and other dealer-based origination networks. We fund our operations through cash provided by operating activities and borrowings under our revolving line of credit.

B. Summary of Significant Accounting Policies

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial statements. Accordingly, our interim statements do not include all of the information and disclosures required for our annual financial statements. In the opinion of our management, the condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of these interim results. These financial statements should be read in conjunction with our consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2008. The results for the nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2009.

     The balance sheet at December 31, 2008 has been derived from the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008.

Allowance for Credit Losses

     We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Given the nature of the “microticket” market and the individual size of each transaction, we do not have a formal credit review committee to review individual transactions. Rather, we have developed a sophisticated, risk-adjusted pricing model and have automated the credit scoring, approval and collection processes. We believe that with the proper risk-adjusted pricing model, we can grant credit to a wide range of applicants provided we have priced appropriately for the associated risk. As a result of approving a wide range of credits, we experience a relatively high level of delinquency and write-offs in our portfolio. We periodically review the credit scoring and approval process to ensure that the automated system is making appropriate credit decisions. Given the nature of the “microticket” market and the individual size of each transaction, we do not evaluate transactions individually for the purpose of developing and determining the adequacy of the allowance for credit losses. Contracts in our portfolio are not re-graded subsequent to the initial extension of credit and the allowance is not allocated to specific contracts. Rather, we view the contracts as having common characteristics and maintain a general allowance against our entire portfolio utilizing historical collection statistics and an assessment of current credit risk in the portfolio as the basis for the amount.

     We have adopted a consistent, systematic procedure for establishing and maintaining an appropriate allowance for credit losses for our microticket transactions. We estimate the likelihood of credit losses net of recoveries in the portfolio at each reporting period based upon a combination of the lessee’s bureau reported credit score at lease inception and the current delinquency status of the account. In addition to these elements, we also consider other relevant factors including general economic trends, trends in delinquencies and credit losses, static pool analyses of our portfolio, trends in recoveries made on charged off accounts, and other relevant factors which might affect the performance of our portfolio. This combination of historical experience, credit scores, delinquency levels, trends in

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

credit losses, and the review of current factors provide the basis for our analysis of the adequacy of the allowance for credit losses. We take charge-offs against our receivables when such receivables are deemed uncollectible. In general a receivable is deemed uncollectible when it is 360 days past due where no contact has been made with the lessee for 12 months or, if earlier, when other adverse events occur with respect to an account. Historically, the typical monthly payment under our microticket leases has been small and as a result, our experience is that lessees will pay past due amounts later in the process because of the small amount necessary to bring an account current.

     A summary of the activity in our allowance for credit losses is as follows:

		Nine Months Ended
		September 30,
		2009				2008
Allowance for credit losses, beginning		$	11,722			$	5,722
Provision for credit losses			15,883				10,199
Charge-offs			(16,871	)			(8,869	)
Recoveries			3,142				3,350
Allowance for credit losses, ending		$	13,876			$	10,402

Net Income Per Share

     Basic net income per common share is computed based on the weighted-average number of common shares outstanding during the period. Diluted net income per common share gives effect to all potentially dilutive common shares outstanding during the period. The computation of diluted net income per share does not assume the issuance of common shares that have an antidilutive effect on net income per common share. For the three months ended September 30, 2009, 849,305 options were excluded from the computation of diluted net income per share because their effect was antidilutive. For the nine months ended September 30, 2009, 1,108,028 options were excluded from the computation of diluted net income per share because their effect was antidilutive. For the three and nine months ended September 30, 2008, 1,292,067 options were excluded from the computation of diluted net income per share because their effect was antidilutive.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2009				2008				2009				2008
Net income		$	1,226			$	1,583			$	2,813			$	5,012
Weighted average common shares outstanding			14,170,079				14,016,167				14,138,374				13,992,951
Dilutive effect of common stock options, warrants and restricted stock			158,534				162,913				104,046				181,625
Shares used in computation of net income per common share — diluted			14,328,613				14,179,080				14,242,420				14,174,576
Net income per common share — basic		$	0.09			$	0.11			$	0.20			$	0.36
Net income per common share — diluted		$	0.09			$	0.11			$	0.20			$	0.35

Stock-Based Employee Compensation

     Under our 2008 Equity Incentive Plan, we reserved 1,000,000 shares of common stock for issuance. In February 2009, under that plan, we granted 10 year options to our executive officers to purchase 321,058 shares of common stock at an exercise price of $2.30 per share. The fair value of these awards was $0.55 per share. The options were valued at the date of grant using the following assumptions: expected life in years of 6.50, annualized

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

volatility of 55.54%, expected dividend yield of 8.70%, and a risk—free interest rate of 2.28%. The options vest over five years beginning on the second anniversary of the grant date. In February 2008, under our 1998 Equity Incentive Plan, we granted 10 year options to our executive officers to purchase 176,879 shares of common stock at an exercise price of $5.85 per share. The fair value of these awards was $1.78 per share. The options were valued at the date of grant using the following assumptions: expected life in years of 6.25, annualized volatility of 41.30%, expected dividend yield of 3.70%, and a risk—free interest rate of 2.66%. The options vest over five years beginning on the second anniversary of the grant date. During the nine months ended September 30, 2009, 400,000 options originally granted to members of the Board of Directors in February 1999 expired. In addition, 105,097 options granted to the former VP of Sales were forfeited upon his last date of employment in May 2009.

     Directors Fritz von Mering and John Everets were appointed to the Board as non employee directors on February 4, 2004, and August 15, 2006, respectively. In connection with their appointments, each director was granted 25,000 shares of restricted stock which vested 20% upon grant and 5% on the first day of each quarter subsequent to the grant date. The restricted share fair values were $3.17 per share for Mr. von Mering and $3.35 per share for Mr. Everets. The compensation expense associated with the grants is recognized as vesting occurs. As of September 30, 2009, 5,000 restricted shares remain unvested under Mr. Everets’ grant.

     Information relating to our outstanding stock options at September 30, 2009 is as follows:

Outstanding																Exercisable
								Weighted-								Weighted-
Exercise								Average				Intrinsic				Average								Intrinsic
Price				Shares				Life (Years)				Value				Exercise Price				Shares				Value
$	9.78				350,000				0.40				—			$	9.78				350,000				—
	13.10				90,000				1.39				—				13.10				90,000				—
	6.70				235,000				2.41				—				6.70				235,000				—
	1.59				150,000				3.16				282,000				1.59				150,000				282,000
	5.77				31,923				7.42				—				5.77				—				—
	5.85				142,382				8.33				—				5.85				—				—
	2.30				258,723				9.42				303,000				2.30				—				—
					1,258,028				4.11			$	585,000				7.78				825,000			$	282,000

     During the three months ended September 30, 2009 and 2008, the total share based employee compensation cost recognized was $27,000 and $24,000, respectively. During the nine months ended September 30, 2009 and 2008, the total share based employee compensation cost recognized was $60,000 and $70,000, respectively.

Fair Value of Financial Instruments

     For financial instruments including cash and cash equivalents, restricted cash, accounts payable, and other liabilities, we believe that the carrying amount approximates fair value due to their short-term nature. The fair value of the revolving line of credit is calculated based on the incremental borrowing rates currently available on loans with similar terms and maturities. The fair value of our revolving line of credit at September 30, 2009 approximates its carrying value.

Cash and Cash Equivalents

     Cash and cash equivalents include demand deposits with various commercial banks and highly liquid investments with maturities of three months or less when acquired. Cash equivalents are stated at cost, which approximates market value.

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

Concentration of Credit Risk

     We deposit our cash and invest in short-term investments primarily through national commercial banks. Deposits in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) are exposed to loss in the event of nonperformance by the institution. The Company maintains cash deposits in excess of the FDIC insurance coverage.

C. Revolving line of credit

     On August 2, 2007, we entered into a three-year $30 million revolving line of credit with Sovereign Bank (“Sovereign”) based on qualified TimePayment lease receivables. On July 9, 2008, we entered into an amended agreement to increase our revolving line of credit with Sovereign to $60 million. The maturity date of the amended agreement is August 2, 2010. Outstanding borrowings are collateralized by eligible lease contracts and a security interest in all of our other assets and, until February 2009, bore interest at Prime or at a London Interbank Offered Rate (“LIBOR”) plus 2.75%. Under the terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed at maturity it automatically converts to a Prime Rate Loan. On February 10, 2009, we entered into an amended agreement to increase our revolving line of credit with Sovereign to $85 million. Under the amended agreement, outstanding borrowings bear interest at Prime plus 1.75% or LIBOR plus 3.75%, in each case subject to a minimum interest rate of 5%. All other terms of the facility remained the same. At September 30, 2009 and 2008 all of our loans were Prime Rate Loans. The interest rate on our revolving line of credit was 5.00% at September 30, 2009. The amount available on our revolving line of credit at September 30, 2009 was $37.8 million. The revolving line of credit has financial covenants that we must comply with to obtain funding and avoid an event of default. As of September 30, 2009, we were in compliance with all covenants under the revolving line of credit.

D. Commitments and Contingencies

Legal Matters

     We are subject to claims and suits arising in the ordinary course of business. At this time, it is not possible to estimate the ultimate loss or gain, if any, related to these lawsuits, nor if any such loss will have a material adverse effect on our results of operations or financial position.

Lease Commitments

     We accept lease applications on a daily basis and, as a result, we have a pipeline of applications that have been approved, where a lease has not been originated. Our commitment to lend does not become binding until all of the steps in the lease origination process have been completed, including the receipt of the lease, supporting documentation and verification with the lessee. Since we fund on the same day a lease is verified, we have no outstanding commitments to lend.

Dividends

     On October 19, 2009 we declared a dividend of $.05 payable on November 13, 2009 to the shareholders of record on October 30, 2009.

E. Recent Accounting Pronouncements

     In June 2008, the Financial Accounting Standards Board (FASB) issued Emerging Issues Task Force (EITF) 03-6-1,“Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities”, effective for fiscal years beginning after December 15, 2008. This standard was subsequently codified into Accounting Standards Codification Topic (ASC 260-10-45). ASC 260-10-45 clarifies that unvested share-based awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in computation of EPS pursuant to the two class method. The adoption

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

of ASC 260-10-45 (EITF 03-6-1) did not have a material effect on our consolidated financial position or results of operations.

     In June 2008, the FASB issued EITF 07-05, “Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock”, which was codified into ASC Topic 815-40-15 effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. This topic addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under the relative paragraphs of Statement 133 is indexed to an entity’s own stock, it is still necessary to evaluate whether it is classified in stockholders’ equity (or would be classified in stockholders’ equity if it were a freestanding instrument). The guidance in this topic shall be applied to outstanding instruments as of the beginning of the fiscal year in which this Issue is initially applied. The cumulative effect of the change in accounting principle shall be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year, presented separately. However, in circumstances in which a previously bifurcated embedded conversion option in a convertible debt instrument no longer meets the bifurcation criteria in Statement 133 at initial application of this topic, the carrying amount of the liability for the conversion option (that is, its fair value on the date of adoption) shall be reclassified to shareholders’ equity. Any debt discount that was recognized when the conversion option was initially bifurcated from the convertible debt instrument shall continue to be amortized. The adoption of ASC 815-40-15 did not have a material effect on our consolidated financial position or results of operations.

     Effective January 1, 2009, we have early adopted FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments — an amendment to FASB Statement No. 107 (FAS 107) and APB Opinion No. 28 (APB 28) which were codified into ASC Topics 825-10-50 and 270-10-05. The FSP amends FAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. This also amends APB 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. The adoption of ASC 825-10-50 and ASC 270-10-05 has been included in the disclosures in this Form 10-Q.

     In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” which provides further clarification for guidance provided regarding measurement of fair values of assets and liabilities when the market activity has significantly decreased and in identifying transactions that are not orderly. This was codified into ASC Topic ACS 820-10-65-4. The adoption of this ASC did not have a material effect on our consolidated financial position or results of operations.

     In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 , “Recognition and Presentation of Other-than-Temporary Impairments” which was codified into ASC 320-10-65. This topic amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This ASC does not amend existing recognition and measurement guidance related to other-than- temporary impairments of equity securities. The adoption of this ASC did not have a material effect on our consolidated financial position or results of operations.

     In August 2009, the FASB issued ASC 820-10, Fair Value Measurements and Disclosures, Measuring Liabilities at Fair Value which provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using a valuation technique. A valuation technique that uses the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities or similar liabilities when traded as assets. Another valuation technique that is consistent with the principles of Topic 820. The guidance provided in this update is effective for the first reporting period beginning after issuance. Management is currently evaluating ASC 820-10 to determine if it will have a material impact on the Company’s future financial statements.

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

     In May 2009, the FASB issued Statement No. 165, Subsequent Events (“SFAS 165”) Subsequent Events. which was codified into ASC 855-10-5. This topic establishes general standards of accounting for and disclosure of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. The Statement is effective for interim and annual fiscal periods ending after June 15, 2009. The Company has evaluated the effect of the adoption of this standard and has concluded it has no material effect on our financial position or results of operations. Management has reviewed events occurring through November 16, 2009, the date the financial statements were issued, and the Company has determined that no subsequent events occurred requiring accrual or additional disclosure other than events that have been disclosed elsewhere in this Form 10-Q.

     In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the hierarchy of Generally Accepted Accounting Principles” which was codified into ASC 105-10-65. This topic established the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non governmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Following this statement, the Board will not issue new standards in the forms of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead it will issue Accounting Standards Updates. This statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

     The following information should be read in conjunction with our condensed consolidated financial statements and notes thereto in Part I, Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2008.

Forward-Looking Information

     Statements in this document that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as “believes,” “anticipates,” “expects,” and similar expressions are intended to identify forward-looking statements. We caution that a number of important factors could cause actual results to differ materially from those expressed in any forward-looking statements made by us or on our behalf. Such statements contain a number of risks and uncertainties, including but not limited to: our need for financing in order to originate leases and contracts; our dependence on point-of-sale authorization systems and expansion into new markets; our significant capital requirements; risks associated with economic downturns including the higher delinquency rates associated with such downturns; higher interest rates; intense competition; changes in our regulatory environment; the availability of qualified personnel, and risks associated with acquisitions. Readers should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly revise these forward-looking statements to reflect subsequent events or circumstances. We cannot assure that we will be able to anticipate or respond timely to changes which could adversely affect our operating results. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of our common stock. Statements relating to past dividend payments or our current dividend policy should not be construed as a guarantee that any future dividends will be paid. For a more complete description of the prominent risks and uncertainties inherent in our business, see the risk factors included in our most recent Annual Report on Form 10-K and other documents we file from time to time with the Securities and Exchange Commission.

Overview

     We are a specialized commercial finance company that provides “microticket” equipment leasing and other financing services. The average amount financed by TimePayment through 2008 and year to date 2009 was approximately $5,500 while Leasecomm historically financed contracts of approximately $1,900. Our existing portfolio consists of business equipment leased or rented primarily to small commercial enterprises.

     We finance the funding of our leases and contracts primarily through cash on hand and our revolving line of credit. On August 2, 2007, we entered into a new three-year $30 million revolving line of credit with Sovereign Bank based on qualified TimePayment lease receivables. On July 9, 2008 we entered into an amended agreement to increase this revolving line of credit with Sovereign to $60 million. Outstanding borrowings are collateralized by eligible lease contracts and a security interest in all of our other assets and, until February 2009, bore interest at Prime Rate or at LIBOR plus 2.75%. Under the terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed at maturity it automatically converts to a Prime Rate Loan.

     On February 10, 2009 we entered into an amended agreement to increase our revolving line of credit with Sovereign to $85 million. Under the amended agreement, outstanding borrowings bear interest at Prime plus 1.75% or LIBOR plus 3.75%, in each case subject to a minimum interest rate of 5%. The facility matures on August 2, 2010.

     In a typical lease transaction, we originate a lease through a nationwide network of equipment vendors, independent sales organizations and brokers. Upon our approval of a lease application and verification that the lessee has received the equipment and signed the lease, we pay the dealer for the cost of the equipment, plus the dealer’s profit margin.

     In the past, we have also from time to time acquired service contracts under which a homeowner purchases a security system and simultaneously signs a contract with the dealer for the monitoring of that system for a monthly fee. Upon approval of the monitoring application and verification with the homeowner that the system is installed, we would purchase the right to the payment stream under the monitoring contract from the dealer at a negotiated multiple of the monthly payments. We have not purchased any new security monitoring contracts since 2004, and anticipate that service contract revenue will continue to decline over time.

     Substantially all leases originated or acquired by us are non-cancelable. During the term of the lease, we are scheduled to receive payments sufficient to cover our borrowing costs and the cost of the underlying equipment and provide us with an appropriate profit. We pass along some of the costs of our leases and contracts by charging late fees, prepayment penalties, loss and damage waiver fees and other service fees, when applicable. Collection fees are imposed based on our estimate of the costs of collection. The loss and damage waiver fees are charged if a customer fails to provide proof of insurance and are reasonably related to the cost of replacing the lost or damaged equipment or product. The initial non-cancelable term of the lease is equal to or less than the equipment’s estimated economic life and often provides us with additional revenues based on the residual value of the equipment at the end of the lease. Initial terms of the leases in our portfolio generally range from 12 to 60 months, with an average initial term of 45 months as of December 31, 2008.

Critical Accounting Policies

     Our significant accounting policies are more fully described in Note B to the condensed consolidated financial statements included in this Quarterly Report and in Note B to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission. Certain accounting policies are particularly important to the portrayal of our consolidated financial position and results of operations. These policies require the application of significant judgment by us and as a result, are subject to an inherent degree of uncertainty. In applying these policies, we make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. We base our estimates and judgments on historical experience, terms of existing contracts, observance of trends in the industry, information obtained from dealers and other sources, and on various other assumptions that we believe to be reasonable and appropriate under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     Our critical accounting policies, including revenue recognition, maintaining the allowance for credit losses, determining provisions for income taxes, and accounting for share-based compensation are each discussed in more detail in our Annual Report on Form 10-K. We have reviewed and determined that those policies remain our critical accounting policies and we did not make any changes in those policies during the nine months ended September 30, 2009.

Results of Operations — Three months ended September 30, 2009 compared to the three months ended September 30, 2008

     Revenue

		Three Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Income on financing leases		$	7,635				26.6	%		$	6,030
Rental income			2,124				(8.8	)			2,330
Income on service contracts			162				(26.7	)			221
Loss and damage waiver fees			1,048				23.4				849
Service fees and other income			1,001				58.4				632
Interest income			—				(100.0	)			23
Total revenues		$	11,970				18.7	%		$	10,085

     Our lease contracts are accounted for as financing leases. At origination, we record the gross lease receivable, the estimated residual value of the leased equipment, initial direct costs incurred and the unearned lease income. Unearned lease income is the amount by which the gross lease receivable plus the estimated residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs incurred are amortized over the related lease term using the interest method. Other revenues such as loss and damage waiver fees, service fees relating to the leases and contracts, and rental revenues are recognized as they are earned.

     Total revenues for the three months ended September 30, 2009 were $12.0 million, an increase of $1.9 million, or 18.7%, from the three months ended September 30, 2008. The overall increase was due to an increase of $1.6 million in income on financing leases, an increase of $0.6 million in fees and other income, partially offset by a decrease of $0.2 million in rental income, a decrease of $0.1 million in income on service contracts, and a decrease of $23,000 in interest income. The increase in income on financing leases is a result of the continued growth in new lease originations. The decline in rental income is the result of the attrition of Leasecomm rental contracts which is partially offset by TimePayment lease contracts coming to term and converting to rentals. Service contract revenue continues to decline since we have not funded any new service contracts since 2004.

     Selling, General and Administrative

		Three Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Selling, general and administrative		$	3,349				2.7	%		$	3,260
As a percent of revenue			28.0	%							32.3	%

     Our selling, general and administrative (SG&A) expenses include costs of maintaining corporate functions including accounting, finance, collections, legal, human resources, sales and underwriting, and information systems. SG&A expenses also include service fees and other marketing costs associated with our portfolio of leases and rental contracts. SG&A expenses increased by $89,000 for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. The increase was primarily driven by increases in employee related expenses associated with increased headcount. Headcount as of September 30, 2009 was 106 as compared to 94 at the same period in 2008.

     Provision for Credit Losses

		Three Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Provision for credit losses		$	5,437				43.8	%		$	3,782
As a percent of revenue			45.4	%							37.5	%

     We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Our provision for credit losses increased by $1.7 million, or 43.8%, for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, while net charge-offs increased by 76.2% to $5.1 million. The 90-day delinquent lease payments receivable on an exposure basis increased by 36.5% to $24.5 million at September 30, 2009 compared to $17.9 million at September 30, 2008. The increase in the allowance for credit losses reflects both the increased size of our lease portfolio and increased delinquency levels.

     Depreciation and Amortization

		Three Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Depreciation — fixed assets		$	110				10.0	%		$	100
Depreciation — rental equipment			327				205.6				107
Amortization — service contracts			3				(92.1	)			38
Total depreciation and amortization		$	440				79.6	%		$	245
As a percent of revenue			3.7	%							2.4	%

     Depreciation and amortization expense consists of depreciation on fixed assets and rental equipment, and the amortization of service contracts. Fixed assets are recorded at cost and depreciated over their expected useful lives. Certain rental contracts are originated as a result of the renewal provisions of our lease agreements where at the end of lease term, the customer may elect to continue to rent the equipment on a month-to-month basis. The rental equipment is recorded at its residual value and depreciated over a term of 12 months. This term represents the estimated life of a previously leased piece of equipment and is based upon our historical experience. In the event the contract terminates prior to the end of the 12 month period, the remaining net book value is expensed.

     Depreciation expense on lease contracts that have converted to rental contracts increased by $220,000 and amortization of service contracts decreased by $35,000 for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. The increase in depreciation is due to TimePayment lease contracts coming to term and converting to rentals. The decreases in amortization are due to the decrease in the overall size of our portfolio of service contracts as well as the fact that a greater percentage of the service contracts are fully amortized. Depreciation and amortization of property and equipment increased by $10,000 for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008.

     Service contracts were recorded at cost and amortized over their estimated life of 84 months. In a typical service contract acquisition, a homeowner will purchase a home security system and simultaneously sign a contract with the security dealer for monthly monitoring of the system. The security dealer would then sell the rights to that monthly payment to us. We perform all of the processing, billing, collection and administrative work on the service contract. The estimated life is based upon the expected life of such contracts in the security monitoring industry and our historical experience. In the event the contract terminates prior to the end of the 84 month term, the remaining net book value is expensed. We have not originated any new service contracts since 2004.

      Interest Expense

		Three Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Interest		$	751				142.3	%		$	310
As a percent of revenue			6.3	%							3.1	%

     We pay interest on borrowings under our revolving line of credit. Interest expense increased by $441,000 for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. This increase resulted primarily from our increased level of borrowings and debt closing costs on our revolving line of credit. At September 30, 2009, the outstanding balance under our revolving line of credit was $47.2 million compared to a balance of $41.1million at September 30, 2008.

      Provision for Income Taxes

		Three Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Provision for income taxes		$	767				(15.2	)%		$	905
As a percent of revenue			6.4	%							9.0	%
As a percent of income before taxes			38.5	%							36.4	%

     The provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets, involves summarizing temporary differences resulting from the different treatment of items, such as leases, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and to the extent we believe recovery is more likely than not, a valuation allowance is unnecessary. The provision for income taxes decreased by $138,000 for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008. This decrease resulted primarily from the $495,000 decrease in pre-tax income and was partially offset by an increase in the

effective tax rate from 36.4% for the three months ended September 30, 2008 to 38.5% for the three months ended September 30, 2009.

     As of June 30, 2009, we had a liability of $293,000 for unrecognized tax benefits and a liability of $170,000 for accrued interest and penalties related to various state income tax matters. As of September 30, 2009 we had a liability of $286,000 for unrecognized tax benefits and a liability of $156,000 for accrued interest and penalties. Of these amounts, approximately $288,000 would impact our effective tax rate after a $155,000 federal tax benefit for state income taxes. The decrease in the unrecognized tax benefits and interest is due to the release of certain state reserves related to the expiration of various state statutes of limitations on exposure items. It is reasonably possible that the total amount of unrecognized tax benefits may change significantly within the next twelve months; however, at this time we are unable to estimate the change.

     Our federal income tax returns are subject to examination for tax years ended on or after December 31, 2005 and our state income tax returns are subject to examination for tax years ended on or after December 31, 2003.

     Other Operating Data

     Dealer funding was $20.7 million for the three months ended September 30, 2009, an increase of $4.7 million or 29.0%, compared to the three months ended September 30, 2008. We continue to concentrate on our business development efforts, which include increasing the size of our vendor base and sourcing a larger number of applications from those vendors. Receivables due in installments, estimated residual values, net investment in service contracts and net investment in rental contracts increased from $180.6 million at June 30, 2009 to $191.7 million at September 30, 2009. Net cash provided by operating activities increased by $3.6 million, or 31.8%, to $14.8 million during the three months ended September 30, 2009 as compared to the three months ended September 30, 2008.

Results of Operations — Nine months ended September 30, 2009 compared to the nine months ended September 30, 2008

     Revenue

		Nine Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Income on financing leases		$	21,522				29.9	%		$	16,566
Rental income			6,471				(14.5	)			7,566
Income on service contracts			526				(26.9	)			720
Loss and damage waiver fees			3,052				32.4				2,305
Service fees and other income			2,371				38.5				1,712
Interest income			14				(87.3	)			110
Total revenues		$	33,956				17.2	%		$	28,979

     Our lease contracts are accounted for as financing leases. At origination, we record the gross lease receivable, the estimated residual value of the leased equipment, initial direct costs incurred and the unearned lease income. Unearned lease income is the amount by which the gross lease receivable plus the estimated residual value exceeds the cost of the equipment. Unearned lease income and initial direct costs incurred are amortized over the related lease term using the interest method. Other revenues such as loss and damage waiver fees, service fees relating to the leases and contracts, and rental revenues are recognized as they are earned.

     Total revenues for the nine months ended September 30, 2009 were $34.0 million, an increase of $5.0 million, or 17.2%, from the nine months ended September 30, 2008. The overall increase was due to an increase of $5.0 million in income on financing leases, and a $1.4 million increase in fees and other income partially offset by a decrease of $1.1 million in rental income, a decrease of $0.2 million in income on service contracts and a decrease of $0.1 million in interest income. The increase in income on financing leases is a result of the continued growth in new lease originations. The decline in rental income is the result of attrition of Leasecomm rental contracts which is partially offset by TimePayment lease contracts coming to term and converting to rentals. Service contract revenue continues to decline since we have not been actively funding new service contracts.

     Selling, General and Administrative

		Nine Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Selling, general and administrative		$	10,413				7.4	%		$	9,697
As a percent of revenue			30.7	%							33.5	%

     Our selling, general and administrative (SG&A) expenses include costs of maintaining corporate functions including accounting, finance, collections, legal, human resources, sales and underwriting, and information systems. SG&A expenses also include service fees and other marketing costs associated with our portfolio of leases and rental contracts. SG&A expenses increased by $716,000 for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The increase was primarily driven by increases in employee related expenses associated with increased headcount.

     Provision for Credit Losses

		Nine Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Provision for credit losses		$	15,883				55.7	%		$	10,199
As a percent of revenue			46.8	%							35.2	%

     We maintain an allowance for credit losses on our investment in leases, service contracts and rental contracts at an amount that we believe is sufficient to provide adequate protection against losses in our portfolio. Our provision for credit losses increased by $5.7 million, or 55.7%, for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, while net charge-offs increased by 148.8% to $13.7 million. The 90-day delinquent lease payments receivable on an exposure basis increased by 36.5% to $24.5 million at September 30, 2009 compared to $17.9 million at September 30, 2008. The increase in the allowance for credit losses reflects both the increased size of our lease portfolio and increased delinquency levels.

      Depreciation and Amortization

		Nine Months Ended
						September 30,
		2009				Change				2008
		(Dollars in thousands)
Depreciation — fixed assets		$	319				12.3	%		$	284
Depreciation — rental equipment			810				200.0				270
Amortization — service contracts			29				(80.8	)			151
Total depreciation and amortization		$	1,158				64.3	%		$	705
As a percent of revenue			3.4	%							2.4	%

     Depreciation and amortization expense consists of depreciation on fixed assets and rental equipment, and the amortization of service contracts. Fixed assets are recorded at cost and depreciated over their expected useful lives. Certain rental contracts are originated as a result of the renewal provisions of our lease agreements where at the end of lease term, the customer may elect to continue to rent the leased equipment on a month-to-month basis. The rental equipment is recorded at its residual value and depreciated over a term of 12 months. This term represents the estimated life of a previously leased piece of equipment and is based upon our historical experience. In the event the contract terminates prior to the end of the 12 month period, the remaining net book value is expensed.

     Depreciation expense on rental contracts increased by $540,000 and amortization of service contracts decreased by $122,000 for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. The increase in depreciation is due primarily to the increase in the number of TimePayment lease contracts coming to term and converting to rentals. Depreciation and amortization of property and equipment increased by $35,000 for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008.

     Service contracts are recorded at cost and amortized over their estimated life of 84 months. In a typical service contract acquisition, a homeowner will purchase a home security system and simultaneously sign a contract with the security dealer for monthly monitoring of the system. The security dealer will then sell the rights to that monthly payment to us. We perform all of the processing, billing, collection and administrative work on the service contract. The estimated life is based upon the expected life of such contracts in the security monitoring industry and our historical experience. In the event the contract terminates prior to the end of the 84 month term, the remaining net book value is expensed. We have not funded any new service contracts since 2004.

      Interest Expense

		Nine Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Interest		$	1,928				177.0	%		$	696
As a percent of revenue			5.7	%							2.4	%

     We pay interest on borrowings under our revolving line of credit. Interest expense increased by $1.2 million for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. This increase resulted primarily from our increased level of borrowings and debt closing costs on our revolving line of credit. At September 30, 2009, the outstanding balance under our revolving line of credit was $47.2 million compared to $41.1 million, at September 30, 2008.

      Provision for Income Taxes

		Nine Months Ended
		September 30,
		2009				Change				2008
		(Dollars in thousands)
Provision for income taxes		$	1,761				(34.0	)%		$	2,670
As a percent of revenue			5.2	%							9.2	%
As a percent of income before taxes			38.5	%							34.8	%

     The provision for income taxes, deferred tax assets and liabilities and any necessary valuation allowance recorded against net deferred tax assets, involves summarizing temporary differences resulting from the different treatment of items, such as leases, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are recorded on the balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability and to the extent we believe recovery is more likely than not, a valuation allowance is unnecessary. The provision for income taxes decreased by $909,000 for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008. This decrease resulted primarily from the $3.1 million decrease in pre-tax income partially offset by an increase in the effective tax rate from 34.8% for the nine months ended September 30, 2008 to 38.5% for the nine months ended September 30, 2009.

     As of December 31, 2008, we had a liability of $293,000 for unrecognized tax benefits and a liability of $152,000 for accrued interest and penalties related to various state income tax matters. As of September 30, 2009 we had a liability of $286,000 for unrecognized tax benefits and a liability of $156,000 for accrued interest and penalties. Of these amounts, approximately $288,000 would impact our effective tax rate after a $155,000 federal tax benefit for state income taxes. The decrease in the unrecognized tax benefits and interest is due to the release of certain state reserves related to the expiration of various state statutes of limitations on exposure items. It is reasonably possible that the total amount of unrecognized tax benefits may change significantly within the next 12 months; however at this time we are unable to estimate the change.

     Our federal income tax returns are subject to examination for tax years ended on or after December 31, 2005 and our state income tax returns are subject to examination for tax years ended on or after December 31, 2003.

     Other Operating Data

     Dealer funding was $57.4 million for the nine months ended September 30, 2009, an increase of $6.0 million or 11.7%, compared to the nine months ended September 30, 2008. We continue to concentrate on our business development efforts, which include increasing the size of our vendor base and sourcing a larger number of applications from those vendors. Receivables due in installments, estimated residual values, net investments in service contracts and investment in rental contracts increased from $162.1 million at December 31, 2008 to $191.7 million at September 30, 2009. Net cash provided by operating activities increased by $10.5 million, or 33.4%, to $41.9 million during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008.

Exposure to Credit Losses

     The amounts in the table below represent the balance of delinquent receivables on an exposure basis for all leases, rental contracts, and service contracts in our portfolio. An exposure basis aging classifies the entire receivable based on the invoice that is the most delinquent. For example, in the case of a rental or service contract, if a receivable is 90 days past due, all amounts billed and unpaid are placed in the over 90 days past due category. In the case of lease receivables, where the minimum contractual obligation of the lessee is booked as a receivable at the inception of the lease, if a receivable is 90 days past due, the entire receivable, including all amounts billed and unpaid as well as the minimum contractual obligation yet to be billed, will be placed in the over 90 days past due category.

(dollars in thousands)		September 30, 2009								December 31, 2008
Current		$	134,469				79.1	%		$	110,423				77.3	%
31-60 days past due			5,815				3.4				6,941				4.8
61-90 days past due			5,194				3.1				5,079				3.6
Over 90 days past due			24,456				14.4				20,438				14.3
Gross receivables due in installments		$	169,934				100.0	%		$	142,881				100.0	%

Liquidity and Capital Resources

     General

     Our lease and finance business is capital-intensive and requires access to substantial credit to fund lease originations. Since inception, we have funded our operations primarily through borrowings under our credit facilities, on-balance sheet securitizations, the issuance of subordinated debt, free cash flow and our initial public offering completed in February 1999. We will continue to require significant additional capital to maintain and expand our funding of leases and contracts, as well as to fund any future acquisitions of leasing companies or portfolios. In the near term, we expect to finance our business utilizing the cash on hand and our revolving line of credit which matures in August 2010. Additionally, our uses of cash include the payment of interest and principal on borrowings, selling, general and administrative expenses, income taxes and capital expenditures.

     For the nine months ended September 30, 2009 and 2008, our primary sources of liquidity were cash provided by operating activities and borrowings on our revolving line of credit. We generated cash flow from operations of $41.9 million for the nine months ended September 30, 2009 compared to $31.4 million for the nine months ended September 30, 2008. At September 30, 2009, we had approximately $47.2 million outstanding under our revolving credit facility and had available borrowing capacity of approximately $37.8 million as described below. During the quarter ended September 30, 2008, we drew down additional cash against our revolving line of credit as a precautionary measure. Cash on hand was $1.3 million at September 30, 2009 compared to a cash balance of $20.0 million at September 30, 2008.

     We used net cash in investing activities of $58.0 million during the nine months ended September 30, 2009 and $51.7 million for the nine months ended September 30, 2008. Investing activities primarily relate to the origination of leases and the increase in cash used is consistent with our focused and targeted sales and marketing effort.

     Net cash provided by financing activities was $11.6 million for the nine months ended September 30, 2009 and net cash provided by financing activities was $32.9 million for the nine months ended September 30, 2008. Financing activities primarily consist of the borrowings and repayments under our revolving line of credit and dividend payments.

     We believe that cash flows from our existing portfolio, cash on hand, and available borrowings under our amended credit facility will be sufficient to support our operations and lease origination activity in the near term. Given the tight credit conditions in the current marketplace, it may be difficult for us to obtain additional low cost capital. An inability to renew or replace our existing credit facility would significantly impact our ability to grow the business. Our existing credit facility is scheduled to mature in August 2010.

Borrowings

     We utilize our credit facilities to fund the origination and acquisition of leases that satisfy the eligibility requirements established pursuant to the facility. Borrowings outstanding consist of the following:

		September 30, 2009																December 31, 2008
														Maximum																Maximum
		Amounts				Interest				Unused				Facility				Amounts				Interest				Unused				Facility
(dollars in 000)		Outstanding				Rate				Capacity				Amount				Outstanding				Rate				Capacity				Amount
Revolving credit facility (1)		$	47,207				5.0	%		$	37,793			$	85,000			$	33,325				3.25	%		$	26,675			$	60,000

     On August 2, 2007, we entered into a three-year $30 million revolving line of credit with Sovereign based on qualified TimePayment lease receivables. On July 9, 2008 we entered into an amended agreement to increase our revolving line of credit with Sovereign to $60 million. The maturity date of the amended agreement is August 2, 2010. Outstanding borrowings are collateralized by eligible lease contracts and a security interest in all of our other assets and, until February 2009, bore interest at Prime or at LIBOR plus 2.75%. Under the terms of the facility, loans are Prime Rate Loans, unless we elect LIBOR Loans. If a LIBOR Loan is not renewed at maturity it automatically converts to a Prime Rate Loan.

     On February 10, 2009 we entered into an amended agreement to increase our revolving line of credit with Sovereign to $85 million. Under the amended agreement, outstanding borrowings bear interest at Prime plus 1.75% or LIBOR plus 3.75%, in each case subject to a minimum interest rate of 5%. All other terms of the facility remained the same. As of September 30, 2009 and 2008, all of our loans were Prime Rate Loans.

Dividends

     On October 19, 2009 we declared a dividend of $0.05 payable on November 13, 2009 to shareholders of record on October 30, 2009. On July 14, 2009 we declared a dividend of $0.05 payable on August 14, 2009 to shareholders of record on July 30, 2009. On April 16, 2009 we declared a dividend of $0.05 payable on May 8, 2009 to shareholders of record on April 30, 2009. During the three months ended December 31, 2008, we declared a dividend of $0.05 payable on January 19, 2009 to shareholders of record as of January 5, 2009.

     On October 24, 2008 we declared a dividend of $0.05 payable on November 14, 2008 to the shareholders of record on November 5, 2008. On July 25, 2008 we declared a dividend of $0.05 payable on August 15, 2008 to the shareholders of record on August 5, 2008. On April 25, 2008 we declared a dividend of $0.05 payable on May 15, 2008 to shareholders of record on May 5, 2008. During the three months ended March 31, 2008 we did not declare a dividend.

     Future dividend payments are subject to ongoing review and evaluation by our Board of Directors. The decision as to the amount and timing of future dividends, if any, will be made in light of our financial condition, capital requirements and growth plans, as well as our external financing arrangements and any other factors our Board of Directors may deem relevant. We can give no assurance as to the amount and timing of future dividends.

Contractual Obligations and Lease Commitments

     Contractual Obligations

     We have entered into various agreements, such as debt and operating lease agreements, that require future payments. At December 31, 2008, the outstanding balance under our revolving line of credit was $33.3 million. During the nine months ended September 30, 2009 we borrowed $66.5 million against our revolving line of credit and repaid $52.6 million. The $47.2 million of outstanding borrowings as of September 30, 2009 will be repaid by the application of TimePayment receipts and other payments to our outstanding balance. Our future minimum lease payments under non-cancelable operating leases are $237,000 annually for the years December 2009 and 2010.

     Lease Commitments

     We accept lease applications on a daily basis and have a pipeline of applications that have been approved, where a lease has not been originated. Our commitment to lend does not become binding until all of the steps in the lease origination process have been completed, including but not limited to the receipt of a complete and accurate lease document, all required supporting information and successful verification with the lessee. Since we fund on the same day a lease is successfully verified, we have no firm outstanding commitments to lend.

Recent Accounting Pronouncements

     See Note E of the notes to the unaudited condensed consolidated financial statements for a discussion of the impact of recent accounting pronouncements.

ITEM 3.		Quantitative and Qualitative Disclosures about Market Risk

     The following discussion about our risk management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. In the normal course of operations, we also face risks that are either non-financial or non-quantifiable. Such risks principally include credit risk and legal risk, and are not represented in the analysis that follows.

     The implicit yield on all of our leases and contracts is on a fixed interest rate basis due to the leases and contracts having scheduled payments that are fixed at the time of origination. When we originate or acquire leases or contracts, we base our pricing in part on the spread we expect to achieve between the implicit yield on each lease or contract and the effective interest rate we expect to incur in financing such lease or contract through our credit facility. Increases in interest rates during the term of each lease or contract could narrow or eliminate the spread, or result in a negative spread.

     Given the relatively short average life of our leases and contracts, our goal is to maintain a blend of fixed and variable interest rate obligations which limits our interest rate risk. As of September 30, 2009, we had repaid all of our fixed-rate debt and had $47.2 million of outstanding variable interest rate obligations under our revolving line of credit.

     Our revolving line of credit bears interest at rates which fluctuate with changes in the Prime Rate or LIBOR; therefore, our interest expense is sensitive to changes in market interest rates. The effect of a 10% adverse change in market interest rates, sustained for one year, on our interest expense would be immaterial.

     We maintain an investment portfolio in accordance with our investment policy guidelines. The primary objectives of the investment guidelines are to preserve capital, maintain sufficient liquidity to meet our operating needs, and to maximize return. We minimize investment risk by limiting the amount invested in any single security and by focusing on conservative investment choices with short terms and high credit quality standards. We do not use derivative financial instruments or invest for speculative trading purposes.

ITEM 4.		Controls and Procedures

     Disclosure controls and procedures: As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15. Based upon the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

     Internal controls over financial reporting: During the fiscal quarter ended September 30, 2009, no changes were made in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II — Other Information

ITEM 1.		Legal Proceedings

     We are subject to claims and suits arising in the ordinary course of business. At this time, it is not possible to estimate the ultimate loss or gain, if any, related to these lawsuits, nor if any such loss will have a material adverse effect on our results of operations or financial position.

ITEM 1A.		Risk Factors

     For a discussion of the material risks that we face relating to our business, financial performance and industry, as well as other risks that an investor in our common stock may face, see the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008. The risks described in our Annual Report on Form 10-K and elsewhere in this report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition or operating results.

ITEM 6.		Exhibits

(a)

Exhibits index

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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: November 16, 2009