Mail Stop 4561
September 13, 2005
By U.S. Mail and Facsimile to (781) 994-4710
James R. Jackson, Jr.
Vice President and Chief Financial Officer
MicroFinancial Incorporated
10M Commerce Way
Woburn, MA 01801
Re: MicroFinancial Incorporated
Form 10-K for Fiscal Year Ended December 31, 2004
Filed March 30, 2005
File No. 001-14771
Dear Mr. Jackson:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your future filings in
response to these comments. If you disagree, we will consider
your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Critical Accounting Policies - Revenue Recognition, page 15
1. Please explain to us your policy for measuring the residual
value
of the equipment that you lease under direct financing leases.
* Tell us how you determine the fair value of the leased equipment
at
the end of the lease term.
* Tell us if you consider the cash flows expected to be received
after the lease term during which you continue to bill the lessee
on
a month-to-month basis in your determination of the residual value
of
the leased asset.
* Tell us how often you evaluate the residual value of leased
assets
for impairment.
2. We note your disclosure that if a lessee continues to rent
equipment after the lease term expires, you record an investment
in
rental contracts at the estimated residual value. Please confirm
to
us that you record these new "month-to-month" leases as operating
leases in accordance with SFAS 13. Furthermore, please provide us
with sample journal entries to describe how you record the
termination of the prior financing lease and the inception of the
new
operating lease.
Results of Operations
Depreciation and Amortization, page 18
3. Please tell us and revise future filings to more clearly
explain
your accounting policy for recording and depreciating rental
equipment under operating leases. For example, explain why you
record some equipment at estimated residual value and other
equipment
at acquisition cost. In addition, tell us how you determined
depreciation periods of 12 months and 36 months.
4. Please tell us how you determined the estimated life of service
contracts to be 84 months. Tell us whether this represents the
contractual term of your monitoring agreements
Financial Statements
Note C - Net Investment in Leases, page F-14
5. Please tell us and in future filings revise to include a
complete
description of your accounting policy for the allowance for credit
losses. Describe your systematic analysis and procedural
discipline,
required by FRR-28, for determining the amount of your allowance
for
losses. Specifically discuss the following:
* Explain how you determine each element of the allowance.
* Explain which loans, leases and contracts are evaluated
individually and which are evaluated as a group.
* Explain how you determine both the allocated and unallocated
portions of the allowance for credit losses.
* Explain how you determine the loss factors you apply to your
graded
loans to develop a general allowance.
* Explain how you consider any recourse provisions in determining
each element of your allowance.
6. Specifically tell us how you determined your allowance for
credit
losses as of December 31, 2004 of $15 million to be sufficient to
cover losses inherent in your portfolio given the fact that your
net
charge-offs during each of the last three years were in excess of
$65
million.
Note E - Notes Payable and Subordinated Debt, page F-16
7. We note your disclosure in your Form 8-K filed on May 4, 2005
that
portions of debt have been forgiven in exchange for the exercise
of
warrants. Please tell us and in future filings revise to explain
the
terms of the warrants and explain how you accounted for the
related
forgiveness of debt.
Note H - Income Taxes, page F-21
8. Please explain to us the reason for the $7.9 million reduction
in
your estimate of certain tax liabilities in the fourth quarter of
2004. In your response, please include the rationale for the
timing
of the reduction and the rationale for the dollar amount of such
reduction.
Note I - Commitments and Contingencies
Legal Matters, page F-23
9. Please revise future filings to provide the disclosures
required
by SFAS 5 with respect to your loss contingencies. Specifically
provide an estimate of the possible loss or range of loss when
such
estimate can be made. For example, we note that you have entered
into settlement agreements with plaintiffs in several cases.
Please
disclose the settlement amounts and confirm that they have been
recorded in your financial statements.
As appropriate, please respond to these comments within 10
business days or tell us when you will provide us with a response.
You may wish to provide us with marked copies of your intended
revisions to expedite our review. Please furnish a cover letter
with
that keys your responses to our comments and provides any
requested
information. Detailed cover letters greatly facilitate our
review.
Please understand that we may have additional comments after
reviewing your intended revisions and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities
Exchange Act of 1934 and that they have provided all information
investors require for an informed investment decision. Since the
company and its management are in possession of all facts relating
to
a company`s disclosure, they are responsible for the accuracy and
adequacy of the disclosures they have made.
In connection with responding to our comments, please
provide,
in writing, a statement from the company acknowledging that:
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with
respect to the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in our review of your filing or in
response to our comments on your filing.
You may contact Margaret Fitzgerald at (202) 551-3556 or me
at
(202) 551-3426 if you have questions regarding comments on the
financial statements and related matters.
Sincerely,
Angela Jackson
Senior Accountant
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James R. Jackson, Jr.
MicroFinancial Incorporated
September 13, 2005
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