-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AK1Pk5IyV5qasp2zIFuVNWMMcZcWqUiv9fGWsMBL0S6LhJ2TpZMgX9uhYSmau4dn Fjwmvuv//gI6vukEBVRtYQ== 0000950135-98-004444.txt : 19980804 0000950135-98-004444.hdr.sgml : 19980804 ACCESSION NUMBER: 0000950135-98-004444 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980803 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MICROFINANCIAL INC CENTRAL INDEX KEY: 0000827230 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS BUSINESS CREDIT INSTITUTION [6159] IRS NUMBER: 042962824 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-56339 FILM NUMBER: 98675865 BUSINESS ADDRESS: STREET 1: 950 WINTER STREET CITY: WALTHAM STATE: MA ZIP: 02154 BUSINESS PHONE: 7818900177 MAIL ADDRESS: STREET 1: 950 WINTER STREET CITY: WALTHAM STATE: MA ZIP: 02154 FORMER COMPANY: FORMER CONFORMED NAME: BOYLE LEASING TECHNOLOGIES INC DATE OF NAME CHANGE: 19980605 S-1/A 1 MICROFINANCIAL INCORPORATED 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 3, 1998. REGISTRATION NO. 333-56339 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ MICROFINANCIAL INCORPORATED (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ MASSACHUSETTS 6159 04-2962824 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (IRS EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NUMBER)
------------------------ 950 WINTER STREET WALTHAM, MASSACHUSETTS 02154 (781) 890-0177 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ------------------------ PETER R. BLEYLEBEN PRESIDENT AND CHIEF EXECUTIVE OFFICER MICROFINANCIAL INCORPORATED 950 WINTER STREET, SUITE 41000 WALTHAM, MASSACHUSETTS 02154 (781) 890-0177 (NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ------------------------ COPIES TO: LAURA N. WILKINSON, ESQ. JOHN W. WHITE, ESQ. EDWARDS & ANGELL, LLP CRAVATH, SWAINE & MOORE ONE BANKBOSTON PLAZA 825 EIGHTH AVENUE PROVIDENCE, RHODE ISLAND 02903 NEW YORK, NEW YORK 10019 (401) 274-9200 (212) 474-1000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. ------------------------ If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act"), check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [ ] ------------------------ CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- AMOUNT BEING PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE(1) - --------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.01 per share......................... 4,600,000 shares $15.00 $69,000,000 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- - ------------------------------------ ------------------------ - ------------------------------------ ------------------------ AMOUNT OF TITLE OF SECURITIES TO BE REGISTERED REGISTRATION FEE(2) - ------------------------------------ ------------------------ Common Stock, par value $.01 per share......................... $20,355 - -------------------------------------------------------------- - --------------------------------------------------------------
(1) Estimated in accordance with Rule 457 of the Securities Act, assuming exercise of the Underwriters' over-allotment option. (2) Registration fee calculated on the basis of $295 per $1,000,000 or fraction thereof of the proposed maximum offering price. $16,963 was previously paid with the original filing of this Registration Statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED , 1998 PROSPECTUS 4,000,000 SHARES [LOGO] MICROFINANCIAL INCORPORATED COMMON STOCK ------------------ Of the 4,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"), of MicroFinancial Incorporated (the "Company") being offered hereby (the "Offering"), 3,400,000 shares are being sold by the Company and 600,000 shares are being sold by the Selling Stockholders (as defined). See "Selling Stockholders." Because some of the Selling Stockholders are affiliates of the Company, a substantial portion of the proceeds of the Offering will benefit such affiliates. The Company will not receive any of the proceeds from the sale of shares by the Selling Stockholders. Prior to the Offering, there has not been a public market for the Common Stock. It is currently estimated that the initial public offering price will be between $13.00 and $15.00 per share. See "Underwriting" for information relating to the factors considered in determining the initial public offering price. Application has been made to have the Common Stock listed on The New York Stock Exchange ("NYSE") under the symbol "MFI." ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------ UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS AND PROCEEDS TO SELLING PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS(2) - ------------------------------------------------------------------------------------------------------------------ Per Share $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ Total (3) $ $ $ $ - ------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------
(1) For information regarding indemnification of the Underwriters, see "Underwriting." (2) Before deducting expenses estimated at $ payable by the Company. (3) The Selling Stockholders have granted the Underwriters a 30-day option to purchase up to 600,000 additional shares of Common Stock solely to cover over-allotments, if any. See "Underwriting." If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions, and Proceeds to Selling Stockholders will be $ , $ and $ , respectively. ------------------ The shares of Common Stock are being offered by the several Underwriters named herein, subject to prior sale, when, as and if accepted by them and subject to certain conditions. It is expected that certificates for the shares of Common Stock offered hereby will be available for delivery on or about , 1998 at the office of Smith Barney Inc., 333 West 34th Street, New York, New York 10001. ------------------ SALOMON SMITH BARNEY PIPER JAFFRAY INC. , 1998 3 CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this prospectus. In particular, prospective purchasers of shares of Common Stock offered hereby should carefully consider the factors set forth under "Risk Factors." Unless otherwise specified, the information in this Prospectus (i) assumes that the Underwriters do not exercise the over-allotment option described herein under "Underwriting" and (ii) gives effect to a 10-for-1 stock split (the "1997 Stock Split") of the Common Stock effected on June 16, 1997 and a 2-for-1 stock split (the "1998 Stock Split") of the Common Stock effected on July , 1998. Unless otherwise indicated or the context requires otherwise, references in this Prospectus to the "Company" mean MicroFinancial Incorporated (formerly known as Boyle Leasing Technologies, Inc.) and its consolidated subsidiaries. THE COMPANY The Company, which operates primarily through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized commercial finance company that leases and rents "microticket" equipment and provides other financing services in amounts generally ranging from $900 to $2,500, with an average amount financed of approximately $1,400 and an average lease term of 45 months. The Company pioneered the use of proprietary software in developing a sophisticated, risk-adjusted pricing model and automating its credit approval and collection systems, including a fully-automated Internet-based application, credit scoring and approval process. This has enabled the Company to better service its dealer network, to develop economies of scale in originating and servicing over 200,000 leases, contracts and loans and to operate on a nationwide basis in a historically fragmented market. The majority of the Company's leases are currently for authorization systems for point-of-sale card-based payments, by, for example, debit, credit and charge cards ("POS authorization systems"). The Company continues to develop other product lines, including leasing other commercial products and acquiring payment streams from residential security monitoring contracts ("service contracts"). The Company targets owner-operated or other small commercial enterprises, with little business credit history and limited or poor personal credit history at the owner level. The Company provides a convenient source of financing to these lessees who may have few other sources of credit. The Company primarily leases and rents low-priced commercial equipment with limited residual value which is used by these lessees in their daily operations. The Company does not market its services directly to lessees, but sources leasing transactions through a nationwide network of over 1,100 independent sales organizations and other dealer-based origination networks ("Dealers"). The Company's ability to approve applications quickly for a wide range of credit profiles facilitates Dealer sales, thereby enhancing the Company's relationships with its Dealers. The Company commenced operations in 1986 and has been profitable every year since 1987. At March 31, 1998, the Company's gross investment in leases and loans (as defined herein) totaled $262.2 million. The Company generated revenues and net income of $68.2 million and $7.7 million in 1997, increases of 22.7% and 50.6%, respectively, over those amounts in 1996. Revenues and net income for the first quarter of 1998 totaled $18.1 million and $3.1 million, increases of 11.7% and 70.3%, respectively, over the first quarter of 1997. The Company has completed five private securitizations since 1992, pursuant to which $56.3 million of securitized receivables remained on the Company's balance sheet as of March 31, 1998. The Company capitalizes on its unique understanding of its lessees, underwriting higher risk credits with a multi-dimensional credit scoring model that generates risk-adjusted pricing. Additionally, the Company maintains a disciplined and persistent approach to collections which enables the Company to collect delinquent amounts that it believes its competitors often would not pursue due to the perceived high costs of collecting relatively small monthly payments against equipment with low resale value. In each of these areas, the Company has focused on the application of technology to execute its operating strategy by designing proprietary software and systems to operate its business and achieve economies of scale. 3 5 STRATEGY The Company's strategy is to significantly expand its business through internal growth, diversification of product offerings and selective acquisitions of lease portfolios and leasing companies, while maintaining or improving current levels of profitability. The Company has successfully utilized technology to (i) manage the high volume of information associated with originating and servicing its leases, (ii) develop a multi-dimensional credit scoring model for assessing credit risk and pricing its leases and (iii) implement a systematic and efficient collections policy which enables the Company to collect delinquent amounts owed on its leases even several years after the original delinquency. The Company believes its efficiency in these areas will provide it a competitive advantage by allowing it to provide better service to Dealers, facilitating product sales by such Dealers. Furthermore, the Company believes that its system has excess capacity which it believes will decrease the Company's servicing costs per lease, contract and loan as volumes increase. The Company also intends to expand its business by applying its strategy to other products and markets by pursuing selective acquisitions. The Company believes that its operating strategy can facilitate Dealers' sales of most products in the microticket market which are characterized by limited distribution channels and high selling costs by making them available to customers for a small monthly lease payment. Accordingly, the Company believes that it can leverage the competitive advantage it has in its current markets to products with similar characteristics. SELLING STOCKHOLDERS The stockholders listed in the table set forth under "Selling Stockholders" (the "Selling Stockholders") currently own in the aggregate 7,335,810 shares of Common Stock of the Company. The Selling Stockholders intend to sell 600,000 shares of Common Stock in the aggregate (1,200,000 shares of Common Stock if the Underwriters' over-allotment option is exercised in full). See "Selling Stockholders." THE OFFERING Common Stock offered by the Company................ 3,400,000 shares Common Stock offered by the Selling Stockholders... 600,000 shares Total Offering..................................... 4,000,000 shares Common Stock to be outstanding after the Offering......................................... 13,292,636 shares(1)(2) Use of Proceeds.................................... The net proceeds of the Offering will be used to repay portions of the Company's outstanding subordinated debt ("Subordinated Debt") and revolving credit and term loan facilities ("Credit Facilities"). See "Use of Proceeds." Common Stock NYSE symbol........................... "MFI"
- --------------- (1) Includes 19,600 shares of Common Stock to be issued upon conversion of the Company's outstanding redeemable convertible preferred stock upon consummation of the Offering. Excludes an aggregate of 176,964 shares of Common Stock reserved for issuance upon exercise of stock options at exercise prices of $0.6375 and $1.95, outstanding as of March 31, 1998, 400 of which are subject to options which are exercisable within 60 days of the date of this Prospectus. See "Management -- Stock Option Plans" and "Description of Capital Stock." Also excludes 142,590 shares held in the Company's treasury as of March 31, 1998. (2) Does not include up to 600,000 shares of Common Stock which may be sold by the Selling Stockholders pursuant to the Underwriters' over-allotment option. See "Underwriting." RISK FACTORS See "Risk Factors" beginning on page 7 for a discussion of certain factors that should be considered by prospective purchasers of the Common Stock offered hereby. 4 6 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The following table presents summary consolidated financial and operating data of the Company and its subsidiaries as of and for each of the years in the five-year period ended December 31, 1997 and as of and for the three months ended March 31, 1997 and 1998. The summary consolidated financial and certain other data as of December 31, 1993, 1994, 1995, 1996 and 1997, and for each of the years in the five-year period ended December 31, 1997, have been derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants. The Company's summary consolidated financial and operating data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998, are based on the Company's unaudited consolidated financial statements which include all adjustments that, in the opinion of the Company's management, are necessary for a fair presentation of the results at such dates and for such respective interim periods. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results expected for fiscal year 1998 or any interim period. The as adjusted balance sheet data assume that the issuance and sale of shares of Common Stock offered hereby by the Company at $14.00 per share and the application of the net proceeds therefrom as described in "Use of Proceeds" occurred on March 31, 1998. The summary consolidated financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and related notes thereto included elsewhere herein.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 INCOME STATEMENT DATA: ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) REVENUES Income on financing leases and loans............... $10,840 $15,949 $27,011 $38,654 $45,634 $11,089 $11,510 Income on service contracts(1)..................... -- -- -- 6 501 4 288 Rental income...................................... 1,329 2,058 3,688 8,250 10,809 2,593 3,365 Fee income(2)...................................... 2,576 3,840 5,446 8,675 11,236 2,512 2,926 Total revenues................................... 14,745 21,847 36,145 55,585 68,180 16,198 18,089 EXPENSES Selling, general and administrative................ 2,689 4,975 8,485 14,073 17,252 3,515 4,281 Provision for credit losses........................ 5,753 8,179 13,388 19,822(3) 21,713(3) 6,017 4,575 Depreciation and amortization...................... 602 827 1,503 2,981 3,787 863 1,177 Interest........................................... 3,598 5,009 8,560 10,163 11,890 2,709 2,820 ------- ------- ------- ------- ------- ------- ------- Total expenses................................... 12,642 18,990 31,936 47,039 54,642 13,104 12,853 ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES............. 2,103 2,857 4,209 8,546 13,538 3,094 5,236 NET INCOME........................................... 1,325(4) 1,643 2,524 5,080 7,652 1,827 3,111 NET INCOME PER COMMON SHARE Basic(5)........................................... 0.27 0.33 0.34 0.52 0.78 0.19 0.32 Diluted(6)......................................... 0.15 0.18 0.27 0.52 0.77 0.18 0.32 DIVIDENDS PER COMMON SHARE........................... -- -- 0.06 0.10 0.12 0.03 0.03
DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------- 1998 AS 1993 1994 1995 1996 1997 1998 ADJUSTED BALANCE SHEET DATA: ---- ---- ---- ---- ---- ---- -------- (DOLLARS IN THOUSANDS) (UNAUDITED) Gross investment in leases and loans(7)....... $ 69,561 $115,286 $189,698 $247,633 $258,230 $262,245 $262,245 Unearned income............................... (19,952) (33,807) (60,265) (76,951) (73,060) (72,299) (72,299) Allowance for credit losses................... (4,778) (7,992) (15,952) (23,826) (26,319) (27,475) (27,475) Investment in service contracts(1)............ -- -- -- -- 2,145 3,702 3,702 Total assets.............................. 50,810 83,484 126,479 170,192 179,701 183,198 183,198 Notes payable................................. 37,747 57,594 94,900 116,202 116,830 114,791 92,482(8) Subordinated notes payable.................... 5,394 13,436 13,170 27,006 26,382 27,391 6,500(8) Total liabilities......................... 45,041 77,651 118,567 158,013 160,935 161,609 118,409 Total stockholders' equity................ 5,769 5,833 7,912 12,179 18,766 21,589 64,789
5 7
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, -------------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 OTHER DATA: ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT STATISTICAL DATA) (UNAUDITED) Operating Data: Total leases and loans originated(9).................. $ 42,760 $ 81,726 $129,873 $143,855 $126,542 $ 28,697 $ 29,371 Total service contracts acquired(10)................... -- -- 4,427 2,445 2,972 208 1,846 Dealer fundings(11).............. $ 26,232 $ 52,762 $ 76,500 $ 73,886 $ 78,193 $ 17,362 $ 21,283 Average yield on leases and loans.......................... 30.4% 30.5% 32.2% 40.1% 37.1% 36.1% 41.6% Cash flows from (used in): Operating activities............. $ 17,660 $ 26,288 $ 41,959 $ 60,104 $ 77,393 $ 15,100 $ 21,300 Investing activities............. (26,182) (51,528) (76,353) (86,682) (80,127) (17,857) (21,781) Financing activities............. 9,502 27,803 36,155 33,711 (1,789) (1,918) (1,390) -------- -------- -------- -------- -------- -------- -------- Total.......................... 980 2,563 1,761 7,133 (4,523) (4,675) (1,871) Selected Ratios: Return on average assets(12)..... 2.96% 2.45% 2.40% 3.42% 4.37% 4.31% 6.86% Return on average stockholders' equity(12)..................... 29.81 28.32 36.73 50.57 49.46 55.75 61.67 Operating margin(13)............. 53.28 50.51 48.68 51.04 51.70 56.25 54.24 Credit Quality Statistics: Net charge-offs.................. $ 4,033 $ 4,961 $ 5,428 $ 11,948(14) $ 19,220(14) $ 4,805 $ 3,376 Net charge-offs as a percentage of average gross investment(12)(15)............. 6.46% 5.37% 3.56% 5.46%(14) 7.60%(14) 7.64% 5.13% Provision for credit losses as a percentage of average gross investment(12)(16)............. 9.21 8.85 8.78 9.07 8.58 9.58 6.95 Allowance for credit losses as a percentage of gross investment(17)................. 6.87 6.93 8.41 9.62 10.11 11.46 10.33
- --------------- (1) The Company began acquiring fixed term service contracts in 1995. Until December 1996, the Company treated these fixed-term contracts as leases for accounting purposes. Accordingly, income from these service contracts is included in income on financing leases and loans for all periods prior to December 1996 and investments in service contracts were recorded as receivables due in installments on the balance sheet at December 31, 1995 and 1996. Beginning in December 1996, the Company began acquiring month-to-month service contracts, the income from which is included as a separate category in the Consolidated Statements of Operations and the investment in which are recorded separately on the balance sheet. (2) Includes loss and damage waiver fees and service fees. (3) The provision for 1996 includes $5.0 million resulting from a reduction in the time period for charging off the Company's receivables from 360 to 240 days. The provision for 1997 includes a one-time write-off of securitized receivables of $9.5 million and $5.0 million in write-offs of satellite television equipment receivables. (4) 1993 excludes a $1.3 million cumulative increase in net income as a result of the Company's adoption of Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes). Prior to 1993, the Company accounted for income taxes under the deferred method. (5) Net income per common share (basic) is calculated based on weighted average common shares outstanding of 4,996,944, 5,003,014, 7,352,188, 9,682,850, 9,793,140, 9,775,636 and 9,799,822 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998, respectively. (6) Net income per common share (diluted) is calculated based on weighted average common shares outstanding on a fully diluted basis of 9,142,602, 9,148,674, 9,448,206, 9,770,612, 9,925,329, 9,907,825 and 9,865,171 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998, respectively. (7) Consists of receivables due in installments, estimated residual value, and loans receivable. (8) As adjusted reflects (i) the use of approximately $20.9 million of the net proceeds of the Offering to repay amounts outstanding under the Company's subordinated indebtedness and (ii) the use of $22.3 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Credit Facilities. Of the principal amount reflected under subordinated notes payable, $1.5 million was paid by the Company in July 1998. (9) Represents the amount paid to Dealers upon funding of leases and loans plus the associated unearned income. (10) Represents the amount paid to Dealers upon the acquisition of service contracts, including both non-cancelable service contracts and month-to-month service contracts. (11) Represents the amount paid to Dealers upon funding of leases, contracts and loans. (12) Quarterly amounts are annualized. (13) Represents income before provision for income taxes and provision for credit losses as a percentage of total revenues. (14) Charge-offs in 1996 and 1997 were higher due to write-offs related to satellite television equipment lease receivables and higher write-offs in 1996 due to a change in the write-off period from 360 days to 240 days in the third quarter of 1996. See "Business -- Exposure to Credit Losses." (15) Represents net charge-offs as a percentage of average gross investment in leases and loans and investment in service contracts. (16) Represents provision for credit losses as a percentage of average gross investment in leases and loans and investment in service contracts. (17) Represents allowance for credit losses as a percentage of gross investment in leases and loans and investment in service contracts. 6 8 RISK FACTORS In addition to the other information in this Prospectus, the following factors should be considered carefully by prospective investors in evaluating the Company and its business before purchasing shares of the Common Stock offered hereby. Except for historical information contained herein, this Prospectus contains forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere herein. DEPENDENCE ON POS AUTHORIZATION SYSTEMS Reduced demand for financing of POS authorization systems could adversely affect the Company's lease volume, which in turn could have a material adverse effect on the Company's business, financial condition and results of operations. The leasing of POS authorization systems currently represents the Company's largest product, at over 65% of its outstanding portfolio and approximately 61% of new lease originations during the first quarter of 1998. Technological advances may lead to a decrease in the price of POS authorization systems and a consequent decline in the need for financing of such equipment. A price decrease may result in such equipment being sold through conventional retail outlets. In addition, business and technological changes could change the manner in which POS authorization is obtained. These changes could reduce the need for outside financing sources, such as the Company, which would reduce the Company's lease financing opportunities and origination volume in such products. Technological changes and price decreases have in the past required the Company to exit its principal source of lease volume. During the late 1980s, the Company provided financing primarily to lessees of cellular phones, which at the time retailed in excess of $1,000 per unit. Consumers leased cellular phones through dealers due to the product's limited availability and high price. As the price of cellular phones decreased, the demand for financing of cellular phones diminished, and by mid-1991, the Company originated no new leases for cellular phones. In the event that demand for financing POS authorization systems declines, the Company will expand its efforts to provide lease financing for other products. There can be no assurance, however, that the Company will be able to do so successfully. The Company currently originates its leases for POS authorization systems through a network of Dealers who predominantly deal exclusively in that product. It is unlikely that the Company would be able to capitalize on these relationships in the event it shifts its business focus to originating leases of other products. Any failure by the Company to successfully enter into new relationships with dealers of other products or to extend existing relationships with such dealers in the event of reduced demand for financing of POS authorization systems would have a material adverse effect on the Company. RISKS OF EXPANSION STRATEGY The Company's principal growth strategy of expansion into new products and markets may be adversely affected by (i) its inability to cultivate new sources of originations and (ii) its inexperience with products with different characteristics from those currently offered by the Company, including the type of obligor and the amount financed. New Sources. The Company currently originates a significant majority of its leases and contracts through a network of Dealers which deal exclusively in POS authorization systems. The Company is currently unable to capitalize on these relationships in originating leases for products other than POS authorization systems. Any failure by the Company to develop additional relationships with Dealers of other products which it leases or may seek to lease would hinder the Company's growth strategy. New Products. The Company's existing portfolio primarily consists of leases to owner-operated or other small commercial enterprises with little business history and limited or poor personal credit history at the owner level. These leases are characterized by small average monthly payments for equipment with limited residual value at the end of the lease term. The Company's ability to successfully underwrite new products with different characteristics is highly dependent on the Company's ability to (i) successfully analyze the 7 9 credit risk associated with the user of such new products so as to appropriately apply its risk-adjusted pricing to such products and (ii) utilize its proprietary software to efficiently service and collect on its portfolio. The Company has recently entered into markets in which the ultimate obligor on a lease or contract is an individual rather than a commercial enterprise. The results of the Company's most significant venture into financing products for individuals, the leasing of consumer satellite television equipment, failed to meet the Company's expectations principally due to difficulty in assessing the credit risk of lessees and in effectively pricing leases. As a result, the Company significantly scaled back its origination of new leases in this area after July 1996 and no longer originates a significant number of leases for satellite television equipment. There can be no assurance that the Company will be able to successfully apply its operating strategy to provide financing services to non-commercial lessees, which could have a material adverse effect on the Company. The Company also has recently commenced underwriting leases for small-ticket items or services (having a value between $5,000 and $25,000). The Company has no significant experience with providing small-ticket leasing or financing services. Additionally, the larger monthly payments associated with leases for small-ticket items may result in different repayment patterns for lessees of small-ticket items. Accordingly, there can be no assurance that the Company's expertise in analyzing credit risk and applying its collection strategy in the microticket market will be applicable to the small-ticket market. Any failure by the Company to successfully enter this market could materially adversely affect its growth prospects. Because the successful implementation of the Company's expansion strategy will require significant time and resources to cultivate new sources and develop any specialized expertise necessary to enter into new markets, the Company intends to implement its growth strategy gradually. Rapidly diminishing demand for financing of POS authorization systems could force the Company to accelerate its expansion strategy in a less than optimal manner and have a material adverse effect on the Company's business, financial condition and results of operations. DEPENDENCE ON EXTERNAL FINANCING The Company's ability to successfully execute its business strategy and to sustain its operations is dependent on its ability to raise debt and equity capital. The Company funds the majority of its leases, contracts and loans through its Credit Facilities with banks and other institutional lenders, on-balance sheet securitizations ("Securitizations") and issuances of Subordinated Debt. The Company's failure to obtain required financing on favorable terms and on a timely basis would limit its ability to add new originations, which would have a material adverse effect on the Company's business, financial condition and results of operations. Any future debt financings or issuances of preferred stock by the Company will be senior to the rights of the holders of Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." The terms of the Company's Credit Facilities, Securitizations and Subordinated Debt programs impose operating and financial restrictions on the Company. In addition, the Credit Facilities contain, and any future Securitizations may contain, restrictions on the type of product which may be funded with the proceeds of such financings. The Credit Facilities also contain a covenant pursuant to which the Company has agreed not to make any material change in its business. As a result, the ability of the Company to respond to changing business and economic conditions, to implement its expansion strategy and to secure additional financing, if needed, may be significantly restricted, and the Company may be prevented from engaging in transactions that might further its growth strategy or otherwise be considered beneficial to the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." RISK OF DEFAULTS ON LEASES The credit characteristics of the Company's lessee base correspond to a high incidence of delinquencies which in turn may lead to significant levels of defaults. At December 31, 1997, 25.5% of the Company's gross investment in leases and loans (excluding residual value) were contractually past due by 31 days or more (including, with respect to service contracts, only those amounts which have been billed but not collected). Under the Company's charge-off policy, cumulative net charge-offs from the Company's inception to date 8 10 have totaled approximately 7% of total cumulative receivables plus total billed fees. The credit profile of the Company's lessees heightens the importance to the Company of both pricing its leases, loans and contracts for risk assumed, as well as maintaining adequate reserves for losses. Significant defaults by lessees in excess of those anticipated by the Company in setting its prices and reserve levels may adversely affect the Company's cash flow and earnings. Reduced cash flow and earnings could limit the Company's ability to repay debt, obtain financing and effect Securitizations which would have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, the Company utilizes its leases, contracts and loans as collateral under its Credit Facilities and Securitizations. The Company's Credit Facilities and Securitizations provide for events of default in the event of delinquencies beyond certain levels. Actual defaults, as well as delinquencies under leases, contracts and loans above pre-determined thresholds, would reduce the amount of collateral available for financing under its Credit Facilities and future Securitizations and would have a material adverse effect on the Company's business as previously discussed. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." ADVERSE CONSEQUENCES OF COLLECTION POLICY The Company's use of litigation as a means of collection of unpaid receivables exposes it to counterclaims on its suits for collection, to class action lawsuits and to negative publicity surrounding its leasing and collection policies. The Company has been a defendant in attempted class action suits as well as counterclaims filed by individual obligors in attempts to dispute the enforceability of the lease, contract or loan. The Company believes its collection policies and use of litigation comply fully with all applicable laws. Because of the Company's persistent enforcement of its leases, contracts and loans through the use of litigation, the Company may have created ill will toward it on the part of certain lessees and other obligors who were defendants in such lawsuits. The Company's litigation strategy has generated adverse local publicity in certain circumstances. Adverse publicity at a national level could negatively impact public perception of the Company and may materially impact the price of the Common Stock. Any such class action suit, if successful, or any such adverse publicity, if widespread, could have a material adverse effect on the Company's business, financial condition or results of operations. RISK OF INCREASED INTEREST RATES Since the Company generally funds its leases, contracts and loans through its Credit Facilities or from working capital, the Company's operating margins could be adversely affected by an increase in interest rates. The implicit yield to the Company on all of its leases, contracts and loans is fixed due to the leases, contracts and loans having scheduled payments that are fixed at the time of origination. When the Company originates or acquires leases, contracts and loans, it bases its pricing in part on the "spread" it expects to achieve between the implicit yield rate to the Company on each lease, contract and loan and the effective interest cost it will pay when it finances such leases, contracts and loans. Increases in interest rates during the term of each lease, contract and loan could narrow or eliminate the spread, or result in a negative spread, to the extent such lease, contract or loan was financed with floating-rate funding. The Company may undertake to hedge against the risk of interest rate increases, based on the size and interest rate profile of its portfolio. Such hedging activities, however, would limit the Company's ability to participate in the benefits of lower interest rates with respect to the hedged portfolio. In addition, the Company's hedging activities may not protect it from interest rate-related risks in all interest rate environments. Adverse developments resulting from changes in interest rates or hedging transactions could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." RISK OF ECONOMIC DOWNTURN An economic downturn could result in a decline in the demand for some of the types of equipment or services which the Company finances, which could lead to a decline in originations. An economic downturn 9 11 may slow the development and continued operation of small commercial businesses, which are the primary market for POS authorization systems and the other commercial equipment leased by the Company. Such a downturn could also adversely affect the Company's ability to obtain capital to fund lease, contract and loan originations or acquisitions or to complete Securitizations. In addition, such a downturn could result in an increase in delinquencies and defaults by the Company's lessees and other obligors beyond the levels forecasted by the Company, which could have an adverse effect on the Company's cash flow and earnings, as well as on its ability to securitize leases. These results could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, approximately 40% of the Company's portfolio is represented by leases, contracts and loans with lessees and other obligors operating in California, Florida, Texas and New York. Economic conditions in these states may affect the level of collections from, as well as delinquencies and defaults by, these obligors. INTENSE COMPETITION The microticket leasing and financing industry is highly competitive. The Company competes for customers with a number of national, regional and local banks and finance companies. The Company's competitors also include equipment manufacturers that lease or finance the sale of their own products. While the market for microticket financing has traditionally been fragmented, the Company could also be faced with competition from small- or large-ticket leasing companies that could use their expertise in those markets to enter and compete in the microticket financing market. The Company's competitors include larger, more established companies, some of which may possess substantially greater financial, marketing and operational resources than the Company, including lower cost of funds and access to capital markets and to other funding sources which may be unavailable to the Company. If a competitor were to lower lease rates, the Company could be forced to follow suit or lose origination volume, either of which would have a material adverse effect on the Company's business, financial condition and results of operations. In addition, competitors may seek to replicate the automated processes used by the Company to monitor dealer performance, evaluate lessee credit information, appropriately apply risk-adjusted pricing, and efficiently service a nationwide portfolio. The development of computer software similar to that developed by the Company by or for the Company's competitors may jeopardize the Company's strategic position and allow such companies to operate more efficiently than the Company. RISK OF YEAR 2000 NON-COMPLIANCE Failure by third parties with which the Company interacts to remediate any Year 2000 issues in a timely or successful manner could have a material adverse effect on the Company's business. A failure by companies which process POS transactions to remediate any Year 2000 issues in their software could result in the Company's lessees' inability to consummate POS transactions. In that event, lessees of POS authorization systems may become unwilling or unable to comply with their lease obligations. In addition, the Company does and will continue to interconnect certain portions of its network and systems with other companies' networks and systems, certain of which may not be as Year 2000 compliant as those installed by the Company. While the Company has discussed these matters with, and/or obtained written certifications from, such other companies as to their Year 2000 compliance, there can be no assurance that any potential impact associated with incompatible systems after December 31, 1999 would not have a material adverse effect on the Company's business, financial condition or results of operations. The Company believes that any modifications necessary to make its own computer systems and proprietary software Year 2000 compliant will not result in material costs to the Company. There can be no assurance, however, that these cost estimates are accurate, nor can there be any assurance that the Company will be able to successfully identify all relevant Year 2000 issues in its systems in a timely manner. GOVERNMENT REGULATION The Company's leasing business is not currently subject to extensive federal or state regulation. While the Company is not aware of any proposed legislation, the enactment of, or a change in the interpretation of, 10 12 certain federal or state laws affecting the Company's ability to price, originate or collect on receivables (such as the application of usury laws to the Company's leases and contracts) could negatively affect the collection of income on its leases, contracts and loans, as well as the collection of fee income. Any such legislation or change in interpretation, particularly in Massachusetts, whose law governs the majority of the Company's leases, contracts and loans, could have a material adverse effect on the Company's ability to originate leases, contracts and loans at current levels of profitability, which in turn could have a material adverse effect on the Company's business, financial condition or results of operations. RISKS OF ACQUIRING OTHER PORTFOLIOS AND COMPANIES A portion of the Company's growth strategy depends on the consummation of acquisitions of leasing companies or portfolios. An inability by the Company to identify suitable acquisition candidates or portfolios, or to complete acquisitions on favorable terms, could limit the Company's ability to grow its business. Any major acquisition would require a significant portion of the Company's resources. The timing, size and success, if at all, of the Company's acquisition efforts and any associated capital commitments cannot be readily predicted. The Company may finance future acquisitions by using shares of its Common Stock, cash or a combination of the two. Any acquisition made by the Company using Common Stock would result in dilution to existing stockholders of the Company. If the Common Stock does not maintain a sufficient market value, or if potential acquisition candidates are otherwise unwilling to accept Common Stock as part or all of the consideration for the sale of their businesses, the Company may be required to utilize more of its cash resources, if available, or to incur additional indebtedness in order to initiate and complete acquisitions. Additional debt, as well as the potential amortization expense related to goodwill and other intangible assets incurred as a result of any such acquisition, could have a material adverse effect on the Company's business, financial condition or results of operations. In addition, certain of the Company's Credit Facilities and Subordinated Debt agreements contain financial covenants that do not permit the issuance of any shares of its capital stock if, after giving effect to such issuance, certain shareholders of the Company cease to own or control specified percentages of voting capital stock of the Company. These provisions could prevent the Company from making an acquisition using shares of its Common Stock as consideration. See "Use of Proceeds," "Management's Discussion and Analysis of Results of Operations -- Liquidity and Capital Resources" and "Description of Certain Indebtedness." The Company also may experience difficulties in the assimilation of the operations, services, products and personnel of acquired companies, an inability to sustain or improve the historical revenue levels of acquired companies, the diversion of management's attention from ongoing business operations, and the potential loss of key employees of such acquired companies. Any of the foregoing could have a material adverse effect on the Company's business, financial condition or results of operations. DEPENDENCE UPON KEY PERSONNEL The Company's success depends to a large extent upon the abilities and continued efforts of Peter R. Bleyleben, President and Chief Executive Officer and Richard Latour, Executive Vice President, Chief Operating Officer and Chief Financial Officer, and its other senior management. The Company has entered into employment agreements with its two principal executive officers. As required by the Company's Subordinated Note Agreements (as hereinafter defined), the Company maintains a key man life insurance policy of $1.5 million on Dr. Bleyleben. The Company currently intends to continue such policy even if no longer required to do so under the terms of such agreements. The Company also maintains a $500,000 key man life insurance policy on Mr. Latour. The loss of the services of one or more of the key members of the Company's senior management before the Company is able to attract and retain qualified replacement personnel could have a material adverse effect on the Company's financial condition and results of operations. In addition, certain of the Company's Credit Facilities and Subordinated Debt agreements contain financial covenants that do not permit the issuance of any shares of its capital stock if, after giving effect to such issuance, certain shareholders of the Company, including Dr. Bleyleben, cease to own or control specified percentages of voting capital stock of the Company. In addition, under certain of the Company's Subordinated Debt agreements, the Company has agreed that Dr. Bleyleben and Mr. Latour must remain as Chief 11 13 Executive Officer and Chief Financial Officer, respectively, of the Company. The Company's failure to comply with these covenants could have a material adverse effect on the Company's business, financial condition or results of operations. See "Management" and "Description of Certain Indebtedness." CONTROL BY EXISTING SHAREHOLDERS; CERTAIN ANTI-TAKEOVER PROVISIONS Upon completion of the Offering, Dr. Bleyleben, Brian E. Boyle and Torrence C. Harder and their respective affiliates will beneficially own approximately 42.0% of the outstanding Common Stock (approximately 38.0% of the outstanding Common Stock assuming full exercise of the Underwriters' over-allotment option). As a result, these stockholders, if they act as a group, will likely be able to control substantially all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which may have the effect of discouraging certain types of transactions involving an actual or potential change of control of the Company. See "Management," "Principal Stockholders" and "Description of Common Stock." The Company's Restated Articles of Incorporation (the "Articles") and Bylaws ("Bylaws") contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including (i) provisions authorizing the issuance of "blank check" preferred stock, (ii) providing for a Board of Directors with staggered terms, (iii) requiring super-majority or class voting to effect certain amendments to the Articles and Bylaws and to approve certain business combinations, (iv) limiting the persons who may call special stockholders' meetings and (v) establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholders' meetings. In addition, certain provisions of Massachusetts law to which the Company is subject may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals. See "Description of Capital Stock -- Massachusetts Law and Certain Charter Provisions." EFFECT OF SALES OF SUBSTANTIAL AMOUNTS OF COMMON STOCK Sales of a substantial number of shares of Common Stock in the public market following the Offering, or the perception that such sales could occur, could adversely affect the market price for the Common Stock. Upon completion of the Offering, the Company will have 13,292,636 shares of Common Stock outstanding. The 4,000,000 shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act, except for shares sold by persons deemed to be "affiliates" of the Company or acting as "underwriters," as those terms are defined in the Securities Act. Beginning 90 days after the date of this Prospectus, additional shares of Common Stock that are not subject to the 180-day lock-up period described below will be freely tradeable by holders thereof. Following the expiration of the lock-up period, all of the remaining outstanding shares of Common Stock will be freely tradeable subject to the restrictions on resale imposed upon "affiliates" by Rule 144 under the Securities Act. See "Shares Eligible for Future Sale" and "Underwriting." The Company, the Selling Stockholders and the executive officers and directors of the Company have agreed that, for a period of 180 days following the date of this Prospectus, they will neither issue nor sell any shares of Common Stock or securities convertible into, or exercisable for, such stock, held by them now or in the future, without the prior written consent of Smith Barney Inc. See "Underwriting." NO PRIOR MARKET FOR COMMON STOCK; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offering, there has been no public trading market for the Common Stock. There can be no assurance that an active market for the Common Stock will develop upon completion of the Offering or, if developed, that such market will be sustained. The initial public offering price of the Common Stock was determined through negotiations between the Company and the Underwriters based upon several factors and may bear no relationship to the Company's assets, book value, results of operations or net worth or any other generally accepted criteria of value and should not be considered as indicative of the actual value of the Company. For information relating to the factors considered in determining the initial public offering price, 12 14 see "Underwriting." The price at which the Common Stock will trade in the public market after the Offering may be less than the initial public offering price. In addition, the trading price of the Common Stock may be influenced by a number of factors, including the liquidity of the market for the Common Stock, investor perceptions of the Company and the equipment financing industry in general, variations in the Company's quarterly operating results, interest rate fluctuations, variations in financial estimates by securities analysts and general economic and other conditions. Moreover, the stock market recently has experienced significant price and value fluctuations, which have not necessarily been related to corporate operating performance. The volatility of the stock market could adversely affect the market price of the Common Stock and the ability of the Company to raise equity in the public markets. SUBSTANTIAL DILUTION INCURRED BY INVESTORS Investors in the Common Stock offered hereby will experience immediate and substantial dilution in net tangible book value per share of $9.12. See "Dilution." If the Company issues additional Common Stock in the future, including shares which may be issued pursuant to option grants and future acquisitions, purchasers of Common Stock in the Offering may experience further dilution in the net tangible book value per share of the Common Stock. CHANGE IN DIVIDEND POLICY The Company has paid quarterly cash dividends on the Common Stock since the second quarter of 1995. However, there can be no assurance as to the amount and timing of payment of future dividends. The decision as to the amount and timing of future dividends paid by the Company, if any, will be made at the discretion of the Company's Board of Directors in light of the financial condition, capital requirements, earnings and prospects of the Company and any restrictions under the Company's Credit Facilities and agreements governing the Subordinated Debt, as well as other factors the Board of Directors may deem relevant. See "Dividend Policy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." FORWARD-LOOKING STATEMENTS This Prospectus includes forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995 (the "Reform Act")). The "safe harbor" protections of the Reform Act are not available to initial public offerings, including this Offering. Discussions containing such forward-looking statements may be found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as within the Prospectus generally. In addition, when used in this Prospectus, the words "believes," "anticipates," "expects" and similar expressions are intended to identify forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company, or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other important factors include, among others: the Company's dependence on POS authorization systems and expansion into new markets; the Company's significant capital requirements; risks associated with economic downturns; higher interest rates; intense competition; risks associated with acquisitions; and other factors included in this Prospectus. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Prospectus to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Prospectus will in fact transpire. 13 15 USE OF PROCEEDS The net proceeds to the Company from the sale of the shares of Common Stock offered hereby will be approximately $43.2 million, after deducting estimated underwriting discounts and commissions and offering expenses payable by the Company. The following table sets forth the approximate amounts to be used by the Company for each specified purpose:
USE OF PROCEEDS AMOUNT - --------------- ------ (DOLLARS IN MILLIONS) Repayment of Junior Subordinated Notes(1)................... $11.4 Repayment of senior subordinated debt(2).................... 9.5 Repayment of Credit Facilities (2)(3)....................... 22.3 ----- Total(4).................................................... $43.2 =====
- --------------- (1) The Company's junior subordinated notes (the "Junior Subordinated Notes") were issued in private placements to a number of individual investors. The Junior Subordinated Notes have maturities ranging from July 14, 1998 to September 1, 2003 and bear interest at rates ranging from 9.5% to 12.5% per annum at May 31, 1998. The Company has borrowed $2.4 million principal amount of the Junior Subordinated Notes since June 1, 1997, with proceeds thereof used for general corporate purposes, including the funding of leases, contracts and loans which were not otherwise eligible for funding under the Company's Credit Facilities. See "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Description of Certain Indebtedness" and Note E to the Company's consolidated financial statements included elsewhere in this Prospectus. (2) This amount is based on the Company's expectations under current market conditions. If market conditions at the time of consummation of the Offering are substantially different than management's expectations, the Company may choose to use proceeds otherwise earmarked for repayment of senior subordinated debt to repay amounts outstanding under the Credit Facilities. As of March 31, 1998, the Company had (a) $6.0 million outstanding under its subordinated note with Massachusetts Mutual Life Insurance Company, all of which bears interest at a fixed rate of 12.0% per annum and matures on July 15, 2001 and (b) $5.0 million outstanding under its subordinated note with Aegon Insurance Group, all of which bears interest at a fixed rate of 12.5% per annum and matures on October 1, 2001. The Company made a principal payment of $1.5 million under the Massachusetts Mutual Life Insurance Company subordinated note on July 15, 1998. None of such indebtedness was incurred within one year. (3) The Company intends to use the remaining net proceeds of the Offering to repay amounts outstanding under its Credit Facilities (other than $17.5 million principal amount subject to a fixed rate swap agreement which would not be repaid with proceeds of the Offering). As of March 31, 1998, the Company had $37.4 million in revolving credit and term loans outstanding under its facility led by Fleet Bank, N.A. and, excluding the amount subject to the swap agreement, $12.6 million in revolving credit and term loans outstanding under its facility led by BankBoston, N.A. Of these amounts, $4.3 million is a term loan which bears interest at a fixed rate of 8.30% per annum and matures on November 24, 1998; $8.6 million is a term loan which bears interest at a fixed rate of 7.75% per annum and matures on August 2, 1999; and $37.1 million is a revolving credit loan which bears interest at the prime or base rate of each of the agent banks and which converts to a term loan on July 31, 1999 (the "Commitment Termination Date") that matures no later than the fourth anniversary of the Commitment Termination Date as to $24.5 million principal amount and no later than the second anniversary of the Commitment Termination Date as to $12.6 million principal amount. See "Description of Certain Indebtedness" and Note E to the Company's consolidated financial statements included elsewhere in this Prospectus. (4) While the Company currently does not intend to use the net proceeds from the Offering or existing resources to consummate acquisitions, the Company intends, as part of its business strategy, to evaluate future acquisitions of leasing companies or lease portfolios, and may use a portion of the net proceeds from the Offering to make such acquisitions. The Company presently is not negotiating, nor does it have any agreements or understandings, to make any such acquisitions. See "Business -- Strategy." 14 16 DIVIDEND POLICY The Company has paid quarterly cash dividends on the Common Stock since the second quarter of 1995. The following table sets forth the cash dividends per share paid by the Company for the periods indicated, all as adjusted to give effect to the 1997 Stock Split and the 1998 Stock Split:
1996 1997 1998 ---- ---- ---- (AMOUNT PER SHARE) First Quarter............................................ $0.020 $0.025 $0.030 Second Quarter........................................... 0.025 0.030 N/A Third Quarter............................................ 0.025 0.030 N/A Fourth Quarter........................................... 0.025 0.030 N/A
The Company currently intends to continue payment of dividends following consummation of the Offering. Provisions in certain of the Company's Credit Facilities and agreements governing the Subordinated Debt contain, and the terms of any indebtedness issued by the Company in the future are likely to contain, certain restrictions on the payment of dividends on the Common Stock. The decision as to the amount and timing of future dividends paid by the Company, if any, will be made at the discretion of the Company's Board of Directors in light of the financial condition, capital requirements, earnings and prospects of the Company and any restrictions under the Company's Credit Facilities or Subordinated Debt agreements, as well as other factors the Board of Directors may deem relevant, and there can be no assurance as to the amount and timing of payment of future dividends. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources", "Description of Certain Indebtedness" and "Risk Factors -- Change in Dividend Policy." 15 17 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1998 on an actual basis and as adjusted to give effect to the sale of the shares of Common Stock offered hereby (at an assumed offering price of $14.00 per share) and the application of the estimated net proceeds therefrom. The table should be read in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company and related notes thereto included elsewhere in this Prospectus.
AS OF MARCH 31, 1998 -------------------- ACTUAL AS ADJUSTED(1) (DOLLARS IN THOUSANDS) ------ -------------- Debt: Notes payable............................................. $114,791 $ 92,482 Subordinated notes payable................................ 27,391 6,500 -------- -------- Total debt............................................. 142,182 98,982 -------- -------- Redeemable convertible preferred stock(2)................... -- -- Stockholders' equity: Common Stock $0.01 par value per share, 25,000,000 shares authorized; 9,873,036 shares issued and outstanding; and 13,292,636 shares issued and outstanding, after giving effect to the Offering(2)(3).................... 99 133 Additional paid-in capital................................ 1,747 44,913 Retained earnings......................................... 20,181 20,181 Treasury stock............................................ (138) (138) Notes receivable from officers and employees.............. (300) (300) -------- -------- Total stockholders' equity............................. 21,589 64,789 -------- -------- Total capitalization.............................. $163,771 $163,771 ======== ========
- --------------- (1) As adjusted reflects (i) the use of approximately $20.9 million of the net proceeds of the Offering to repay amounts outstanding under the Company's subordinated indebtedness and (ii) the use of $22.3 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Credit Facilities. Of the principal amount of $6.5 million reflected under subordinated notes payable, $1.5 million was paid by the Company in July 1998. (2) Actual amount of redeemable convertible preferred stock is $490.00. This preferred stock will convert automatically into 19,600 shares of Common Stock upon consummation of the Offering. "As Adjusted" includes such shares of Common Stock as if such conversion had occurred on March 31, 1998. (3) Shares issued and outstanding do not include an aggregate of 176,964 shares of Common Stock reserved for issuance upon exercise of stock options at exercise prices of $0.6375 and $1.95, outstanding as of March 31, 1998, 400 of which are subject to options which are exercisable within 60 days of the date of this Prospectus. See "Management -- Stock Option Plans" and "Description of Capital Stock". Common Stock issued and outstanding excludes 142,590 shares held in the Company's treasury as of March 31, 1998. DILUTION Dilution per share to new investors represents the difference between the amount per share paid by purchasers of shares of Common Stock in the Offering and the net tangible book value per share of Common Stock offered hereby immediately after completion of the Offering. Net tangible book value per share represents the amount of the Company's stockholders' equity, less intangible assets, divided by the 9,873,036 million shares of Common Stock outstanding as of March 31, 1998 (not including treasury stock). The net tangible book value of the Company as of March 31, 1998 was approximately $21.6 million, or $2.19 per share of Common Stock. After giving effect to the sale of the Common Stock by the Company at an 16 18 assumed initial public offering price of $14.00 per share and after deduction of the underwriting discounts and commissions and estimated expenses of the Offering payable by the Company and the application of the estimated net proceeds of the Offering, the adjusted pro forma net tangible book value, as of March 31, 1998, would have been approximately $64.8 million or $4.88 per share of Common Stock. This represents an immediate increase in net tangible book value of $2.69 per share to existing stockholders and an immediate dilution of $9.12 per share to new investors purchasing the Common Stock in the Offering. The following table illustrates the pro forma per share dilution, as of March 31, 1998: Initial public offering price per share..................... $14.00 Net tangible book value per share at March 31, 1998......... 2.19 Increase per share attributable to new investors............ 2.69 Pro forma net tangible book value per share after the Offering.................................................. 4.88 Net tangible book value dilution per share to new investors................................................. 9.12
The following table sets forth, after giving effect to the Offering, the number of shares of Common Stock purchased from the Company, the total consideration paid therefor and the average price per share paid by existing stockholders and by new investors:
SHARES PURCHASED TOTAL CONSIDERATION ---------------- ------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ------ ------- ------ ------- ------------- Existing stockholders(1)........... 9,873,036 74.7% $ 1,894,730 3.8% $ 0.19 New investors(1)................... 3,400,000 25.3 47,600,000 96.2 14.00 ---------- ----- ----------- ----- ------ Total.................... 13,273,036 100.0% $49,494,730 100.0% $ 3.73 ========== ===== =========== ===== ======
- --------------- (1) Sales by the Selling Stockholders will reduce the number of shares of Common Stock held by existing stockholders to 9,273,036, or 69.9% of the total number of shares to be outstanding after the Offering, and will increase the number of shares to be purchased by new investors to 4,000,000, or 30.1% of the total number of shares of Common Stock to be outstanding after the Offering. See "Principal Stockholders" and "Selling Stockholders." The foregoing tables assume no exercise of outstanding stock options and the conversion of the Company's outstanding Series C Preferred Stock, $1.00 par value (the "Series C Preferred Stock") upon consummation of the Offering. 17 19 SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA The following table presents selected consolidated financial and operating data of the Company and its subsidiaries as of and for each of the years in the five-year period ended December 31, 1997 and as of and for the three months ended March 31, 1997 and 1998. The selected consolidated financial and certain other data as of December 31, 1993, 1994, 1995, 1996 and 1997, and for each of the years in the five-year period ended December 31, 1997, have been derived from consolidated financial statements audited by Pricewaterhouse Coopers LLP, independent accountants. The Company's selected consolidated financial and operating data as of March 31, 1998 and for the three months ended March 31, 1997 and 1998, are based on the Company's unaudited consolidated financial statements which include all adjustments that, in the opinion of the Company's management, are necessary for a fair presentation of the results at such dates and for such respective interim periods. The results of operations for the three months ended March 31, 1998 are not necessarily indicative of the results expected for fiscal year 1998 or any interim period. The as adjusted balance sheet data assume that the issuance and sale of shares of Common Stock offered hereby by the Company at $14.00 per share and the application of the net proceeds therefrom as described in "Use of Proceeds" occurred on March 31, 1998. The selected consolidated financial and operating data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and related notes thereto included elsewhere herein.
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, MARCH 31, ----------------------------------------------- ----------------- 1993 1994 1995 1996 1997 1997 1998 INCOME STATEMENT DATA: ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) REVENUES Income on financing leases and loans................ $10,840 $15,949 $27,011 $38,654 $45,634 $11,089 $11,510 Income on service contracts(1)...................... -- -- -- 6 501 4 288 Rental income....................................... 1,329 2,058 3,688 8,250 10,809 2,593 3,365 Fee income(2)....................................... 2,576 3,840 5,446 8,675 11,236 2,512 2,926 Total revenues.................................... 14,745 21,847 36,145 55,585 68,180 16,198 18,089 EXPENSES Selling, general and administrative................. 2,689 4,975 8,485 14,073 17,252 3,515 4,281 Provision for credit losses......................... 5,753 8,179 13,388 19,822(3) 21,713(3) 6,017 4,575 Depreciation and amortization....................... 602 827 1,503 2,981 3,787 863 1,177 Interest............................................ 3,598 5,009 8,560 10,163 11,890 2,709 2,820 ------- ------- ------- ------- ------- ------- ------- Total expenses.................................... 12,642 18,990 31,936 47,039 54,642 13,104 12,853 ------- ------- ------- ------- ------- ------- ------- INCOME BEFORE PROVISION FOR INCOME TAXES.............. 2,103 2,857 4,209 8,546 13,538 3,094 5,236 NET INCOME............................................ 1,326(4) 1,643 2,524 5,080 7,652 1,827 3,111 NET INCOME PER COMMON SHARE Basic(5)............................................ 0.27 0.33 0.34 0.52 0.78 0.19 0.32 Diluted(6).......................................... 0.15 0.18 0.27 0.52 0.77 0.18 0.32 DIVIDENDS PER COMMON SHARE............................ -- -- 0.06 0.10 0.12 0.03 0.03
DECEMBER 31, MARCH 31, ---------------------------------------------------- ------------------- 1998 AS 1993 1994 1995 1996 1997 1998 ADJUSTED BALANCE SHEET DATA: ---- ---- ---- ---- ---- ---- -------- (DOLLARS IN THOUSANDS) (UNAUDITED) Gross investment in leases and loans(6)........ $ 69,561 $115,286 $189,698 $247,633 $258,230 $262,245 $262,245 Unearned income................................ (19,952) (33,807) (60,265) (76,951) (73,060) (72,299) (72,299) Allowance for credit losses.................... (4,778) (7,992) (15,952) (23,826) (26,319) (27,475) (27,475) Investment in service contracts(1)............. -- -- -- -- 2,145 3,702 3,702 Total assets............................... 50,810 83,484 126,479 170,192 179,701 183,198 183,198 Notes payable.................................. 37,747 57,594 94,900 116,202 116,830 114,791 92,482(8) Subordinated notes payable..................... 5,394 13,436 13,170 27,006 26,382 27,391 6,500(8) Total liabilities.......................... 45,041 77,651 118,567 158,013 160,935 161,609 118,409 Total stockholders' equity................. 5,769 5,833 7,912 12,179 18,766 21,589 64,789
18 20
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------------------------------- ------------------- 1993 1994 1995 1996 1997 1997 1998 OTHER DATA: ---- ---- ---- ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT STATISTICAL DATA) (UNAUDITED) Operating Data: Total leases and loans originated(9).... $ 42,760 $ 81,726 $129,873 $143,855 $126,542 $ 28,697 $ 29,371 Total service contracts acquired(10).... -- -- 4,427 2,445 2,972 208 1,846 Dealer fundings(11)..................... $ 26,232 $ 52,762 $ 76,500 $ 73,886 $ 78,193 $ 17,362 $ 21,283 Average yield on leases and loans....... 30.4% 30.5% 32.2% 40.1% 37.1% 36.1% 41.6% Cash flows from (used in): Operating activities.................... $ 17,660 $ 26,288 $ 41,959 $ 60,104 $ 77,393 $ 15,100 $ 21,300 Investing activities.................... (26,182) (51,528) (76,353) (86,682) (80,127) (17,857) (21,781) Financing activities.................... 9,502 27,803 36,155 33,711 (1,789) (1,918) (1,390) -------- -------- -------- -------- -------- -------- -------- Total................................. 980 2,563 1,761 7,133 (4,523) (4,675) (1,871) Selected Ratios: Return on average assets(12)............ 2.96% 2.45% 2.40% 3.42% 4.37% 4.31% 6.86% Return on average stockholders' equity(12)... 29.81 28.32 36.73 50.57 49.46 55.75 61.67 Operating margin(13).................... 53.28 50.51 48.68 51.04 51.70 56.25 54.24 Credit Quality Statistics: Net charge-offs......................... $ 4,033 $ 4,961 $ 5,428 $ 11,948(14) $19,220(14) $ 4,805 $ 3,376 Net charge-offs as a percentage of average gross investment(12)(15).............. 6.46% 5.37% 3.56% 5.46%(14) 7.57%(14) 7.64% 5.13% Provision for credit losses as a percentage of average gross investment(12)(16)... 9.21 8.85 8.78 9.07 8.55 9.58 6.95 Allowance for credit losses as a percentage of gross investment(17)............... 6.87 6.93 8.41 9.62 10.11 11.46 10.33
- --------------- (1) The Company began acquiring fixed term service contracts in 1995. Until December 1996, the Company treated these fixed-term contracts as leases for accounting purposes. Accordingly, income from these service contracts is included in income on financing leases and loans for all periods prior to December 1996 and investments in service contracts were recorded as receivables due in installments on the balance sheet at December 31, 1995 and 1996. Beginning in December 1996, the Company began acquiring month-to-month service contracts, the income from which is included as a separate category in the Consolidated Statements of Operations and the investment in which are recorded separately on the balance sheet. (2) Includes loss and damage waiver fees and service fees. (3) The provision for 1996 includes $5.0 million resulting from a reduction in the time period for charging off the Company's receivables from 360 to 240 days. The provision for 1997 includes a one-time write-off of securitized receivables of $9.5 million and $5.0 million in write-offs of satellite television equipment receivables. (4) 1993 excludes a $1.3 million cumulative increase in net income as a result of the Company's adoption of Statement of Financial Accounting Standards No. 109 (Accounting for Income Taxes). Prior to 1993, the Company accounted for income taxes under the deferred method. (5) Net income per common share is calculated based on weighted average common shares outstanding of 4,994,296, 5,003,014, 7,352,188, 9,682,850, 9,793,238, 9,775,636 and 9,799,822 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998, respectively. (6) Net income per common share (diluted) is calculated based on weighted average common shares outstanding on a fully diluted basis of 9,142,602, 9,148,674, 9,448,206, 9,770,612, 9,925,329, 9,907,825 and 9,865,171 for the years ended December 31, 1993, 1994, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998, respectively. (7) Consists of receivables due in installments, estimated residual value, and loans receivable. (8) As adjusted reflects (i) the use of approximately $20.9 million of the net proceeds of the Offering to repay amounts outstanding under the Company's subordinated indebtedness and (ii) the use of $22.3 million of the net proceeds of the Offering to repay amounts outstanding under the Company's Credit Facilities. Of the principal amount reflected under subordinated notes payable, $1.5 million was paid by the Company in July 1998. (9) Represents the amount paid to Dealers upon funding of leases and loans plus the associated unearned income. (10) Represents the amount paid to Dealers upon the acquisition of service contracts, including both non-cancelable service contracts and month-to-month service contracts. (11) Represents the amount paid to Dealers upon funding of leases, contracts and loans. (12) Quarterly amounts are annualized. (13) Represents income before provision for income taxes and provision for credit losses as a percentage of total revenues. (14) Charge-offs in 1996 and 1997 were higher due to write-offs related to satellite television equipment lease receivables and higher write-offs in 1996 due to a change in the write-off period from 360 days to 240 days in the third quarter of 1996. See "Business -- Exposure to Credit Losses." (15) Represents net charge-offs as a percentage of average gross investment in leases and loans and investment in service contracts. (16) Represents provision for credit losses as a percentage of average gross investment in leases and loans and investment in service contracts. (17) Represents allowance for credit losses as a percentage of gross investment in leases and loans and investment in service contracts. 19 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the results of operations and financial condition should be read in conjunction with the Company's consolidated financial statements and notes thereto included elsewhere in this Prospectus. Certain matters discussed below are forward-looking statements that involve substantial risks and uncertainties that could cause actual results to differ materially from targets or projected results. Factors that could cause actual results to differ materially include, among others, those factors described in "Risk Factors." Many of these factors are beyond the Company's ability to predict or control. Prospective investors are cautioned not to put undue reliance on forward-looking statements, which statements have been made as of the date of this Prospectus, after which date there may have been changes in the affairs of the Company that would warrant modification of forward-looking statements made herein. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained in this Prospectus to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. In light of these risks and uncertainties, there can be no assurance that the forward-looking information contained in this Prospectus will in fact transpire. GENERAL The Company is a specialized commercial finance company that provides "microticket" equipment leasing and other financing services in amounts generally ranging from $900 to $2,500, with an average amount financed of approximately $1,400. The Company primarily leases POS authorization systems and other small business equipment to small commercial enterprises. For the year ended December 31, 1997, the Company had fundings to Dealers upon origination of leases, contracts and loans ("Dealer Fundings") of $78.2 million and revenues of $68.2 million. The Company derives the majority of its revenues from leases originated and held by the Company, payments on service contracts, rental payments from lessees who continue to rent the equipment beyond the original lease term, and fee income. The Company funds the majority of leases, contracts and loans through its Credit Facilities and on-balance sheet Securitizations, and to a lesser extent, its Subordinated Debt program and internally generated funds. In a typical lease transaction, the Company originates leases through its network of independent Dealers. Upon approval of a lease application by the Company and verification that the lessee has both received the equipment and signed the lease, the Company pays the Dealer the cost of the equipment plus the Dealer's profit margin. In a typical transaction for the acquisition of service contracts, 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 credit approval of the monitoring application and verification with the homeowner that the system is installed, the Company purchases from the Dealer the right to the payment stream under that monitoring contract at a negotiated multiple of the monthly payments. Substantially all leases originated or acquired by the Company are non-cancelable. During the term of the lease, the Company is scheduled to receive payments sufficient, in the aggregate, to cover the Company's borrowing costs and the costs of the underlying equipment, and to provide the Company with an appropriate profit. The Company enhances the profitability of its leases, contracts and loans by charging late fees, prepayment penalties, loss and damage waiver fees and other service fees, when applicable. The initial non-cancelable term of the lease is equal to, or less than, the equipment's estimated economic life, and often provides the Company with additional revenues based on the residual value of the equipment financed at the end of the initial term of the lease. Initial terms of the leases in the Company's portfolio generally range from 12 to 48 months, with an average initial term of 45 months as of March 31, 1998. Substantially all service and rental contracts are month-to-month contracts with an expected term of seven years for service contracts and 15 months for rental contracts. 20 22 CERTAIN ACCOUNTING CONSIDERATIONS The Company's lease contracts are accounted for as financing leases. At origination, the Company records 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. Amortization of unearned lease income and initial direct costs is suspended if, in the opinion of management, full payment of the contractual amount due under the lease agreement is doubtful. In conjunction with the origination of leases, the Company may retain a residual interest in the underlying equipment upon termination of the lease. The value of such interests is estimated at inception of the lease and evaluated periodically for impairment. Other revenues such as loss and damage waiver fees, service fees relating to the leases, contracts and loans and rental revenues are recognized as they are earned. The Company's investments in cancelable service contracts are recorded at cost and amortized over the expected life of the service period. Income on service contracts from monthly billings is recognized as the related services are provided. The Company periodically evaluates whether events or circumstances have occurred that may affect the estimated useful life or recoverability of the investment in service contracts. Rental equipment is recorded at estimated residual value and depreciated using the straight-line method over a period of twelve months. Loans are reported at their outstanding principal balance. Interest income on loans is recognized as it is earned. The Company maintains an allowance for credit losses on its investment in leases, service contracts and loans at an amount that it believes is sufficient to provide adequate protection against losses in its portfolio. The allowance is determined principally on the basis of the historical loss experience of the Company and the level of recourse provided by such lease, service contract or loan, if any, and reflects management's judgment of additional loss potential considering future economic conditions and the nature and characteristics of the underlying lease portfolio. The Company determines the necessary periodic provision for credit losses taking into account actual and expected losses in the portfolio as a whole and the relationship of the allowance to the net investment in leases, service contracts and loans. Such provisions generally represent a percentage of funded amounts of leases, contracts and loans. The resulting charge is included in the provision for credit losses. Leases, service contracts, and loans are charged against the allowance for credit losses and are put on non accrual when they are deemed to be uncollectible. Generally, the Company deems leases, service contracts and loans to be uncollectible when one of the following occur: (i) the obligor files for bankruptcy; (ii) the obligor dies and the equipment is returned; or (iii) when an account has become 360 days delinquent. The typical monthly payment under the Company's leases is between $30 and $50 per month. As a result of these small monthly payments, the Company's experience is that lessees will pay past due amounts later in the process because of the small amount necessary to bring an account current (at 360 days past due, a lessee will only owe lease payments of between $360 and $600). The Company has developed and regularly updates proprietary credit scoring systems designed to improve its risk based pricing. The Company uses credit scoring in most, but not all, of its extensions of credit. In addition, the Company aggressively employs collection procedures and a legal process to resolve any credit problems. RESULTS OF OPERATIONS Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997 Total revenues for the quarter ended March 31, 1998 were $18.1 million, an increase of $1.9 million, or 11.7%, from the quarter ended March 31, 1997, due primarily to increases of $0.8 million, or 29.8%, in rental income and $0.4 million, or 16.0%, in total fee income over such amounts in the previous year's quarter. The increase in rental income was due to an increase in the number of lessees that have continued renting the 21 23 equipment beyond the original lease term. The increase in fee income was a result of the continued growth in the number of leases and contracts in the Company's portfolio. Selling, general and administrative expenses increased $766,000, or 21.8%, for the quarter ended March 31, 1998 as compared to the same period in 1997. Such increase was primarily attributable to a 14% increase in the number of employees needed to maintain and manage the Company's increased portfolio and the general expansion of the Company's operations. Management expects that salaries and employee-related expenses, marketing expenses and other selling, general and administrative expenses will continue to increase as the portfolio grows due to the nature of the maintenance of the Company's microticket portfolio and the Company's focus on collections. The Company's provision for credit losses decreased $1.4 million from the quarter ended March 31, 1997 to $4.6 million for the quarter ended March 31, 1998, primarily due to an increase in recoveries. See "Business -- Exposure to Credit Losses." Depreciation and amortization expense increased by $314,000, or 36.4%, due to the increased number of rental contracts and the amortization of the investment associated with service contracts. Interest expense increased by $0.1 million, or 4.1%, from $2.7 million for the three months ended March 31, 1997 to $2.8 million for the three months ended March 31, 1998 due to an increase in the average outstanding balance of the Company's Credit Facilities. As a result of these factors, net income increased by $1.3 million, or 70.3%, from $1.8 million for the quarter ended March 31, 1997 to $3.1 million for the quarter ended March 31, 1998. Dealer Fundings were $21.3 million during the three months ended March 31, 1998, an increase of $3.9 million, or 22.6%, compared to the three months ended March 31, 1997. This increase primarily resulted from continued growth in leases of equipment other than POS authorization systems, acquisitions of service contracts and loans to commercial businesses. Receivables due in installments, estimated residual values and loans receivable ("gross investment in leases and loans") also increased from $255.0 million at March 31, 1997 to $262.2 million at March 31, 1998, representing a 2.8% increase. Cash collections increased by $4.3 million to $31.3 million during the first quarter of 1998, or 15.8%, from the first quarter of 1997 due to the increase in the size of the Company's overall portfolio as well as the Company's continued emphasis on collections. Unearned income decreased $1.0 million, or 1.4%, from $73.3 million at March 31, 1997 to $72.3 million at March 31, 1998. This decrease resulted primarily from increased acquisitions of service contracts and originations of loans which are accounted for on a cost basis and as a result do not have any unearned income associated with them. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Total revenues for the year ended December 31, 1997 were $68.2 million, an increase of $12.6 million, or 22.7%, from the year ended December 31, 1996, due to increases of $7.0 million, or 18.1%, in income on leases and loans, $2.6 million, or 31.0%, in rental income and $2.6 million, or 29.5%, in fee income. The increase in income on leases and loans was primarily the result of the continued growth in the Company's lease portfolio. The increase in rental income is due to the increased number of lessees who continued to rent the equipment beyond the original lease term. The increase in fee income was a result of the increase in the overall portfolio serviced by the Company. The Company completed two portfolio acquisitions, one in May 1996 for $1.9 million of rental contracts and a second in December 1996 for $7.9 million of leases. Income on leases and loans attributable to these acquired leases and rental contracts represented approximately $2.3 million, or 4.1%, of total income on leases and loans for 1996 and approximately $4.6 million, or 6.6%, of total income on leases and loans for 1997. Selling, general and administrative expenses increased $3.2 million, or 22.6%, for the year ended December 31, 1997 as compared to the year ended December 31, 1996. Such increase was primarily attributable to a 20% increase in the number of employees needed to maintain and manage the Company's 22 24 increased portfolio, the general expansion of the Company's operations and the more competitive employment environment. The Company's provision for credit losses increased by $1.9 million, or 9.5%, from $19.8 million in 1996 to $21.7 million in 1997. The higher provision was due to a one-time write-off of securitized receivables of $9.5 million, $5.0 million in one-time write-offs of satellite television equipment receivables and growth in the overall size of the Company's portfolio. The Company's 1997 provision reflected a cumulative write-off of non-accruing fully reserved receivables in the Company's securitized portfolio. The Company wrote off the $5.0 million in satellite television equipment receivables in 1997 sooner than its normal 360-day policy because it was the Company's experience that certain characteristics of consumer receivables which were different from commercial receivables would render such receivables uncollectible under the Company's normal collection procedures. Depreciation and amortization expense increased by $806,000, or 27.0%, from 1996 to 1997 due to the increased number of rental contracts and the amortization of the investment costs associated with service contracts. Interest expense increased by $1.7 million, from $10.2 million for the year ended December 31, 1996 to $11.9 million in 1997. This increase was primarily due to an increase in the average outstanding balances of the Company's Credit Facilities and Subordinated Debt. As a result of these factors, net income increased by $2.6 million, or 50.6%, from $5.1 million in the year ended December 31, 1996 to $7.7 million in the year ended December 31, 1997. Dealer Fundings were $78.2 million for the fiscal year ended December 31, 1997, an increase of $4.3 million, or 5.8%, compared to $73.9 million for the fiscal year ended December 31, 1996. The Company decided in July 1996 to scale back its Dealer Fundings of consumer satellite television equipment leases, funding to Dealers only $0.8 million of such leases in 1997 compared to $4.9 million in 1996. Excluding this factor, the Company had an increase in Dealer Fundings of $8.4 million, or 12.2%, over 1996. This increase primarily resulted from continued growth in leases of equipment other than POS authorization systems, acquisitions of service contracts and loans to commercial businesses. Gross investment in leases and loans also increased from $247.6 million in 1996 to $258.2 million at December 31, 1997, representing an increase of $10.6 million, or 4.3%. Cash collections increased by $31.3 million, or 35.9%, from $87.1 million in 1996 to $118.4 million in 1997 due to the increase in the size of the Company's overall portfolio, as well as the Company's continued emphasis on collections. Unearned income decreased $3.9 million, or 5.1%, from $77.0 million at December 31, 1996 to $73.1 million at December 31, 1997. This decrease resulted primarily from increased acquisitions of service contracts and originations of loans which are accounted for on a cost basis and as a result do not have any unearned income associated with them, as well as one-time write-offs in 1997 of approximately $5.0 million in consumer satellite television equipment lease receivables and $9.5 million of securitized receivables and the corresponding unearned income associated with those leases. Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995 Total revenues for fiscal year 1996 were $55.6 million, an increase of $19.4 million, or 53.8% over fiscal year 1995, due to increases of $11.6 million, or 43.1%, in income on leases and loans, $4.6 million, or 123.9%, in rental income and $3.2 million, or 59.3%, in total fee income. The increase in income on leases and loans was the result of the continued growth in the Company's lease portfolio in 1996, while the increase in rental income was due to the increased number of lessees who continue to rent the equipment beyond the original lease term including as a result of two lease and rental portfolio acquisitions with fundings of $1.9 million in May 1996 and $7.9 million in December 1996. Income on leases and loans attributable to these acquired leases and rental contracts represented approximately $2.3 million, or 4.1%, of total income on leases and loans for 1996. Fee income increased as a result of the continued growth in the overall portfolio serviced by the Company. 23 25 Selling, general and administrative expenses were $14.1 million in 1996, representing an increase of 65.9% over such expenses in 1995, due primarily to a 34% increase in the number of personnel and the significant growth in the Company's lease portfolio from 1995 to 1996. The Company's provision for credit losses increased by $6.4 million from $13.4 million in 1995 to $19.8 million in 1996. Approximately $5.0 million of the increase was to replenish the allowance for credit losses due to the change in the write-off period from 360 days to 240 days in the third quarter of 1996. See "Business -- Exposure to Credit Losses." Depreciation and amortization expense increased by $1.5 million from $1.5 million in 1995 to $3.0 million in 1996. This increase was due to the increased number of rental contracts in the Company's portfolio. Interest expense increased by $1.6 million, or 18.7%, from $8.6 million in 1995 to $10.2 million in 1996. This increase was primarily due to an increase in the average outstanding balances of the Company's Credit Facilities and Subordinated Debt. As a result of these factors, net income increased by $2.6 million, or 101.3%, from $2.5 million for the year ended December 31, 1995 to $5.1 million in the year ended December 31, 1996. Dealer Fundings were $73.9 million in 1996, a decrease of $2.6 million, or 3.4%, over the $76.5 million funded during 1995. The decrease in Dealer Fundings in 1996, excluding portfolio purchases, was primarily attributable to management's focus on maintaining higher rates of return on POS authorization systems, exiting the business of origination of consumer satellite television equipment leases and performing developmental work to reposition the Company's efforts in other commercial and residential markets, including the design of more competitive products, a product-specific sales approach, and a renewed focus on service contracts. Gross investment in leases and loans also increased from $189.7 million at December 31, 1995, to $247.6 million at December 31, 1996, representing a 30.5% increase. Cash collected was $87.1 million during 1996, an increase of $26.5 million, or 43.7%, over the $60.6 million collected in 1995. This increase was due to the increase in the size of the Company's overall portfolio, as well as the Company's continued emphasis on collections. Unearned income increased $16.7 million, or 27.7%, from $60.3 million at December 31, 1995 to $77.0 million at December 31, 1996. This increase resulted from an increase in the size of the Company's lease portfolio. LIQUIDITY AND CAPITAL RESOURCES General The Company's lease and finance business is capital-intensive and requires access to substantial short-term and long-term credit to fund new leases, contracts and loans. Since inception, the Company has funded its operations primarily through borrowings under its Credit Facilities, issuances of Subordinated Debt and its on-balance sheet Securitizations. The Company will continue to require significant additional capital to maintain and expand its volume of leases, contracts and loans funded, as well as to fund any future acquisitions of leasing companies or portfolios. The Company's uses of cash include the origination and acquisition of leases, contracts and loans, payment of interest expenses, repayment of borrowings under its Credit Facilities, Subordinated Debt and Securitizations, payment of selling, general and administrative expenses, income taxes and capital expenditures. The Company utilizes its Credit Facilities to fund the origination and acquisition of leases that satisfy the eligibility requirements established pursuant to each facility. At March 31, 1998, the Company had an aggregate maximum of $140 million available for borrowing under two Credit Facilities, of which the Company had borrowed an aggregate of approximately $67.5 million. The Company also uses its Subordinated Debt program as a source of funding for potential acquisitions of portfolios and leases which otherwise are not eligible for funding under the Credit Facilities and for potential portfolio purchases. See "Description of Certain Indebtedness" for a description of the terms of the Credit Facilities and the Subordinated Debt. To 24 26 date, cash flow from its portfolio and other fees have been sufficient to repay amounts borrowed under the Credit Facilities and Subordinated Debt. The Company believes that cash flow from its operations, the net proceeds to the Company of the Offering and amounts available under its Credit Facilities will be sufficient to fund the Company's operations for the foreseeable future. Although the Company is not currently involved in negotiations and has no current commitments or agreements with respect to any acquisitions, to the extent that the Company successfully consummates acquisitions, it may be necessary to finance such acquisitions through the issuance of additional debt or equity securities, the incurrence of indebtedness or a combination of both. See "Risk Factors -- Dependence on External Financing." Hedging Transactions The implicit yield to the Company on all of its leases, contracts and loans is on a fixed interest rate basis due to the leases, contracts and loans having scheduled payments that are fixed at the time of origination of the lease. When the Company originates or acquires leases, contracts and loans it bases its pricing in part on the "spread" it expects to achieve between the implicit yield rate to the Company on each lease and the effective interest cost it will pay when it finances such leases, contracts and loans through its Credit Facilities. Increases in interest rates during the term of each lease, contract or loan could narrow or eliminate the spread, or result in a negative spread. See "Risk Factors -- Risk of Increased Interest Rates." The Company has adopted a policy designed to protect itself against interest rate volatility during the term of each lease, contract or loan. Given the relatively short average life of the Company's leases, contracts and loans, the Company's goal is to maintain a blend of fixed and variable interest rate obligations. As of March 31, 1998, the Company's outstanding fixed rate indebtedness, including indebtedness outstanding under the Company's Securitizations and indebtedness subject to the swap described below, represented 67.5% of the Company's outstanding indebtedness. In July 1997, the Company entered into an interest rate swap arrangement with one of its banks. This arrangement, which expires in July 2000, has a notional amount of $17.5 million which represented 22.7% of the Company's fixed rate indebtedness outstanding at March 31, 1998. The interest rate associated with the swap is capped at 6.6%. During the term of the swap, the Company has agreed to match the swap amount with 90-day LIBOR loans. If at any time the 90-day LIBOR rate exceeds the swap cap of 6.6%, the bank would pay the Company the difference. Through March 31, 1998, the Company had entered into LIBOR loans with interest rates ranging from 5.63% to 5.81%. This arrangement effectively changes the Company's floating interest rate exposure on the $17.5 million notional amount to a fixed rate of 8.45%. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS See Note B of the notes to the consolidated financial statements for a discussion of the impact of recently issued accounting pronouncements. YEAR 2000 Many computer programs and microprocessors were designed and developed without consideration of the impact of the transition to the year 2000. As a result, these programs and microprocessors may not be able to differentiate between the year "1900" and "2000"; the year 2000 may be recognized as the two-digit number "00". If not corrected, this could cause difficulties in obtaining accurate system data and support. The Company has designed and purchased numerous computer systems since its inception. The Company's owned software and hardware is, or has already been made, substantially Year 2000 compliant, with minor updates which will be completed by the end of 1998. The costs associated with such compliance will not be material to the Company's liquidity or results of operations. The Company believes, based on written and verbal advice from its vendors, that its critical third party software is generally Year 2000 compliant, with minor issues, and will be capable of functioning after December 31, 1999. However, the Company does and will continue to interconnect certain portions of its network and systems with other companies' networks and systems, certain of which may not be as Year 2000 compliant as those installed by 25 27 the Company. While the Company has discussed these matters with, and/or obtained written certifications from, such other companies as to their Year 2000 compliance, there can be no assurance that any potential impact associated with incompatible systems after December 31, 1999 would not have a material adverse effect on the Company's business, financial condition or results of operations. 26 28 BUSINESS GENERAL The Company, which operates primarily through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized commercial finance company that leases and rents "microticket" equipment and provides other financing services in amounts generally ranging from $900 to $2,500, with an average amount financed of approximately $1,400 and an average lease term of 45 months. The Company pioneered the use of proprietary software in developing a sophisticated, risk-adjusted pricing model and automating its credit approval and collection systems, including a fully-automated Internet-based application, credit scoring and approval process. This has enabled the Company to better service its dealer network, to develop economies of scale in originating and servicing over 200,000 leases, contracts and loans and to operate on a nationwide basis in a historically fragmented market. The majority of the Company's leases are currently for POS authorization systems. The Company continues to develop other product lines, including leasing other commercial products and acquiring payment streams from service contracts. The Company targets owner-operated or other small commercial enterprises, with little business credit history and limited or poor personal credit history at the owner level. The Company provides a convenient source of financing to these lessees who may have few other sources of credit. The Company primarily leases and rents low-priced commercial equipment with limited residual value which is used by these lessees in their daily operations. The Company does not market its services directly to lessees, but sources leasing transactions through a nationwide network of over 1,100 Dealers. The Company's ability to approve applications quickly for a wide range of credit profiles facilitates Dealer sales, thereby enhancing the Company's relationships with its Dealers. The Company commenced operations in 1986 and has been profitable every year since 1987. At March 31, 1998, the Company's gross investment in leases and loans totaled $262.2 million. The Company's investment grew at a compounded annual rate of 34.5% from December 31, 1992 to March 31, 1998. The Company generated revenues and net income of $68.2 million and $7.7 million in 1997, increases of 22.7% and 50.6%, respectively, over those amounts in 1996. Revenues and net income for the first quarter of 1998 totaled $18.1 million and $3.1 million, increases of 11.7% and 70.3%, respectively, over the first quarter of 1997. The Company capitalizes on its unique understanding of its lessees, underwriting higher risk credits with a multi-dimensional credit scoring model that generates risk-adjusted pricing. Additionally, the Company maintains a disciplined and persistent approach to collections which enables the Company to collect delinquent amounts that it believes its competitors often would not pursue due to the perceived high costs of collecting relatively small monthly payments against equipment with low resale value. In each of these areas, the Company has focused on the application of technology to execute its operating strategy by designing proprietary software and systems to operate its business and achieve economies of scale. STRATEGY The Company's goal is to continue to significantly expand its business through internal growth, diversification of product offerings and selective acquisitions of lease portfolios and leasing companies, while maintaining or improving current levels of profitability. The principal strategies to achieve this goal include: Utilizing and Enhancing its Advanced Technology and Servicing Capabilities. The Company's business is operationally intensive, due in part to the small average amount financed. Accordingly, technology and automated processes are critical in keeping origination and servicing costs to a minimum, while at the same time providing quality customer service. Management believes that its proprietary data processing system efficiently manages the high volume of information associated with originating and servicing its leases and other financing products on a nationwide basis. The Company believes this system has excess capacity which it believes will decrease the Company's servicing costs per lease, contract and loan as volumes increase. The Company intends to continue enhancing its proprietary data processing system in order to ensure that its systems can be efficiently utilized for new products as its portfolio grows. 27 29 Employing Multi-Dimensional Credit Scoring. The Company has used its proprietary software to develop a multi-dimensional credit scoring model which generates pricing of its leases, contracts and loans commensurate with the risk assumed, enabling it to underwrite a broad range of credit risks. By analyzing both the quality and amount of credit history available with respect to both obligors and Dealers, the Company improves its ability to assess credit risk. Emphasizing Service to Dealers. The Company has developed value-added services that facilitate the sales of products by its Dealers and differentiate the Company from its competitors. These value-added services include fast responses to applications, consistent underwriting, quick and reliable funding following application approval and identifiable and dedicated support from the Company's customer service employees. Efficient Collections. The Company's technology and its disciplined and persistent approach to collections enable it to collect delinquent amounts, even several years after the account originally became delinquent. The Company believes that, as a result of the small payments associated with microticket transactions, the credit performance of its customers is driven by factors beyond merely an ability to pay. Therefore, it is the Company's policy to pursue virtually all delinquent accounts in a lawful, reasonable and timely fashion and in many instances, to recover amounts due under the Company's leases, contracts and loans through litigation. The Company maintains a highly structured, well-defined and automated system that enables a minimum number of personnel to maximize the collection of delinquent payments. Seeking to Develop New Products and Markets. The Company continues to seek new product lines to which it can successfully apply its operating strategy, both in the microticket market and, more recently, the lower end of the small-ticket market. The Company originates leases for products that typically have limited distribution channels and high selling costs. The Company facilitates sales of such products by making them available to Dealers' customers for a small monthly lease payment rather than a high initial purchase price. The Company believes that it can leverage the competitive advantage it has in its current markets to products with similar characteristics. The Company intends to intensify its marketing effort, including increasing national awareness of the Leasecomm brand name, as part of its strategy to develop new product lines. Expanding its Business through Selective Acquisitions. The Company intends to pursue selective acquisitions of microticket and small-ticket leasing companies and lease portfolios where the Company believes it can gain access to an expanded Dealer base and successfully apply its operating strategy and where such companies or portfolios can be acquired on attractive terms. In particular, the Company seeks to acquire lease portfolios which will expand product lines and ultimately provide a source of additional lease originations or lease portfolios. The Company presently is not negotiating, nor does it have any agreements or understandings to make, any such acquisitions. INDUSTRY OVERVIEW Lease Financing Industry. The equipment financing industry in the United States has grown rapidly during the last decade and includes a wide range of entities that provide funding for the purchase or lease of equipment or services. The leasing industry in the United States is a significant factor in financing capital expenditures of businesses. According to research by the Equipment Leasing Association of America ("ELA"), using United States Department of Commerce data, approximately $180 billion of the $582 billion spent on productive assets in 1997 was financed by means of leasing. The ELA estimates that 80% of all U.S. businesses lease or finance capital assets. The Company considers the microticket segment of the lease financing industry to include lease transactions of less than $5,000. It is served by a wide range of fragmented financing sources primarily on a local and regional level. The segment also includes equipment manufacturers that finance the sale or lease of their own products. The Company believes that the microticket segment is one of the most rapidly growing segments of the financing industry in part due to (i) a technology-driven trend toward instant approvals at the point of sale; (ii) the consolidation of the banking industry, which has eliminated many of the smaller community banks 28 30 that traditionally provided equipment and service financing for small businesses; and (iii) the rate of growth and ongoing viability of small businesses that represent the target market for microticket leasing products. The Company's market focus includes small businesses with limited business credit history. According to the Small Business Administration ("SBA"), small businesses (firms with fewer than 500 employees) contribute 47% of all sales nationwide, employ 53% of the private non-farm workforce and are responsible for 51% of the private gross domestic product. As of December 31, 1996, small businesses represented 99% of the 23.3 million non-farm businesses in the United States. New business formation reached a record level of over 842,000 new employer firms in 1996, a 2.8% increase over 1995. The number of small businesses in the U.S., as measured in business tax returns, has increased 57% since 1982, according to SBA estimates. Point of Sale Payment Systems. In recent years, consumers demanding fast, convenient and secure methods of payment have increasingly substituted POS card-based payments, such as debit, credit and charge cards, for traditional forms of payment, such as checks and cash. To accommodate consumer preferences for card-based payments and to facilitate the electronic delivery of such payments, automated POS authorization systems were introduced in the early 1980s. These new automated capabilities included electronic authorization, data capture, transaction transmission and settlement. These functions require the use of a POS terminal capable of reading a cardholder's account information from the card's magnetic stripe and combining this information with the amount of the sale entered via a POS terminal keypad. The terminal electronically transmits this information over a communications network to a computer data center and then displays the returned authorization or verification response on the POS terminal. According to published reports, by December 31, 1996, there were 13.2 million POS payment terminals worldwide, of which approximately 47% were located in the U.S. Published reports have projected sales of POS terminals in the U.S. to grow at a five-year compound annual rate of 24.6% to approximately 2.4 million terminals by 2000 and revenues from POS terminal sales in the U.S. to grow at a five-year compound annual rate of 21.7% for the same period. The Company believes that card-based verifications will become a part of an increasing number of commercial transactions in the future, including, for example, verification of drivers' licenses by alcohol and tobacco merchants and vendor activations of pre-paid cards. Consequently, the Company believes that as such verifications become more prevalent, demand for POS authorization systems will increase. OVERVIEW OF FINANCING PROGRAMS The Company primarily leases and rents low-priced commercial equipment with limited residual value to small merchants. Many such merchants prefer leasing such equipment for a relatively affordable monthly payment rather than purchasing such equipment outright with a large initial payment. The Company utilizes its expertise at credit analysis and collections to purchase or originate monthly payment streams without regard to the residual value of the leased product. The Company has applied this expertise to leasing a wide variety of equipment in addition to POS authorization systems, including advertising and display equipment, coffee machines, paging systems, water coolers and restaurant equipment. In addition, the Company also acquires service contracts and opportunistically seeks to enter various other financing markets. The Company has enjoyed a long history of portfolio growth, fueled by origination growth in both traditional and developing markets that the Company serves. Since 1992, the Company's Dealer Fundings have experienced a 29% compounded annual growth rate. The Company's commercial originations and financings grew 12% during 1997 compared to 1996, and relate primarily to POS authorization systems used by small merchants. Although leases for POS authorization systems continued to be the major source of the Company's revenues in 1997, leases for other commercial equipment are experiencing significant growth. The 29 31 following table outlines historical Dealer Fundings defined as the amount paid to Dealers upon origination for each type of underlying equipment or service financed:
THREE MONTHS YEARS ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------- ------------------ 1995 1996 1997 1997 1998 (DOLLARS IN THOUSANDS) ---- ---- ---- ---- ---- COMMERCIAL POS authorization systems(a)........... $54,761 $56,278 $55,588 $13,618 $12,743 Other commercial....................... 9,126 10,294 18,816 3,365 6,688 ------- ------- ------- ------- ------- Total commercial.................... $63,887 $66,572 $74,404 $16,983 $19,431 RESIDENTIAL Service contracts...................... $ 4,427 $ 2,445 $ 2,972 $ 208 $ 1,846 Other residential...................... 8,186 4,869 817 171 6 ------- ------- ------- ------- ------- Total residential................... $12,613 $ 7,314 $ 3,789 $ 379 $ 1,852 Total amount funded................. $76,500 $73,886 $78,193 $17,362 $21,283
- --------------- (a) Excludes portfolio acquisitions in 1996 of approximately $9.8 million representing 16,200 separate contracts. The Company's residential financings include acquiring service contracts from Dealers that provide security monitoring services. The Company's residential portfolio also includes leases of satellite television equipment. Despite significant origination volume in this market, the Company made a strategic decision in July 1996 to de-emphasize the satellite television equipment business and has greatly reduced originations of these leases since that time. The Company originates and services leases, contracts and loans in all 50 states of the United States and its territories, taking advantage of the nationwide reach of its Dealer network. As of March 31, 1998, leases in California, Florida, Texas and New York accounted for approximately 40% of the Company's portfolio, with none of the remaining states accounting for more than 5% of such total. TERMS OF EQUIPMENT LEASES Substantially all equipment leases originated or acquired by the Company are non-cancelable. During the term of a typical lease, the Company is scheduled to receive payments sufficient, in the aggregate, to cover the Company's borrowing costs and the costs of the underlying equipment, and to provide the Company with an appropriate profit. Throughout the term of the lease, the Company charges late fees, prepayment penalties, loss and damage waiver fees and other service fees, when applicable, which enhance the profitability of the lease. The initial non-cancelable term of the lease is equal to or less than the equipment's estimated economic life. Initial terms of the leases in the Company's portfolio generally range from 12 to 48 months, with an average initial term of 45 months for leases originated in the first quarter of 1998. The terms and conditions of all of the Company's leases are substantially similar. In most cases, the contracts require lessees to: (i) maintain, service and operate the equipment in accordance with the manufacturer's and government-mandated procedures; (ii) insure the equipment against property and casualty loss; (iii) pay all taxes associated with the equipment; and (iv) make all scheduled contract payments regardless of the performance of the equipment. The Company's standard lease forms provide that in the event of a default by the lessee, the Company can require payment of liquidated damages and can seize and remove the equipment for subsequent sale, refinancing or other disposal at its discretion. Any additions, modifications or upgrades to the equipment, regardless of the source of payment, are automatically incorporated into and deemed a part of the equipment financed. 30 32 RESIDUAL INTERESTS IN UNDERLYING EQUIPMENT The Company typically owns a residual interest in the equipment covered by a lease. The Company's equipment leases outstanding as of March 31, 1998 had an aggregate residual value of approximately $16.9 million, representing 7.0% of the Company's total lease receivables at March 31, 1998. At the end of the lease term, the lease typically converts into a month-to-month rental contract. If the lease does not convert, the lessee either buys the equipment at a price quoted by the Company or returns the equipment. If the equipment is returned, the Company may place the equipment into its used equipment rental and leasing program. The Company may also sell the used equipment through equipment brokers and remarketers in order to maximize the net proceeds from such sale. ORIGINATION AND UNDERWRITING Sales and Marketing. The Company provides financing to obligors under microticket leases, contracts and loans through its Dealers. Since the Company relies primarily on its network of Dealers for its origination volume, the Company considers them its customers. The Company's nationwide Dealer network is the key to the Company's origination volume, with over 1,100 different Dealers originating 56,002 Company leases, contracts and loans in 1997. Cardservice Laguna accounted for approximately 14% of all originations in 1997. No other Dealer accounted for more than 10% of the Company's origination volume during such year. The Company seeks to maintain relationships with its Dealers in order to establish the Company as the provider of financing recommended by such Dealers to their customers. The Company does not sign exclusive agreements with its Dealers, but expects Dealers to conduct a significant portion of their business with the Company in order to ensure a productive, cost-effective relationship. Thousands of Dealers nationwide provide a wide variety of services to small merchants. Dealers interact with merchants directly, and, for example, typically market not only POS authorization systems, but also their financing through the Company and ancillary POS processing services. As such, the Dealers' sales approach appeals to the multiple needs of a small merchant and allows for sales that are driven as much by convenience as by price. The Company believes that lease financing represents a compelling alternative for any product critical to a merchant's ongoing operation whose initial cost exceeds a particular price threshold for small merchants. The Company's marketing strategy is to increase its volume of funding by (i) maintaining, expanding and supporting its network of Dealers, (ii) developing programs for specific vendor or customer groups, (iii) developing and introducing complementary lease finance products that can be marketed and sold through its existing network of Dealers and (iv) increasing national awareness of the Leasecomm brand name. The Company receives on average 7,000 to 10,000 applications per month (10,079 in May 1998) through its network of Dealers. Because of this volume, and in order to continue to expand, cultivate and nurture these relationships, the Company's 45 customer service employees in its two locations work directly with this Dealer network. Management believes that a focused marketing effort with dedicated personnel by product type will ensure the continuation of significant origination growth and profitability in the future. The Company also employs 11 individuals who are dedicated to marketing to Dealers in specific product segments to ensure that the Company adequately addresses the unique characteristics of the product. These employees are responsible for implementing marketing plans and coordinating marketing activities with the Company's Dealers, as well as attending industry conventions and trade shows on behalf of the Company. As new product initiatives are developed, the Company intends to continue to dedicate personnel in this manner. The Company provides a variety of value-added services to its Dealers, including fast responses to applications, consistent underwriting, quick and reliable funding following application approval and identifiable and dedicated support nationwide. In addition, as a further convenience to its Dealers, the Company has developed Leasecomm Direct(TM), an Internet-based application processing, credit approval and Dealer information tool. Using Leasecomm Direct(TM), a Dealer can input an application directly to the Company via the Internet and obtain almost instantaneous approval automatically over the Internet through the Company's computer system, all without any contact with any employee of the Company. The Company also offers Instalease(R), a program that allows a Dealer to submit applications by telephone, telecopy or e-mail to a Company representative, receive approval, and complete a sale from a lessee's location. By assisting the 31 33 Dealers in providing timely, convenient and competitive financing for their equipment or service contracts and offering Dealers a variety of value-added services, the Company simultaneously promotes equipment and service contract sales and the utilization of the Company as the finance provider, thus differentiating the Company from its competitors. Originations. In a typical lease transaction, the Company originates leases referred to it by the Dealer and buys the underlying equipment from the referring Dealer upon funding of an approved application. Leases are structured with limited recourse to the Dealer, with risk of loss in the event of default by the lessee residing with the Company in most cases. The Company owns the underlying equipment covered by a lease and, in substantially all cases, retains a residual interest in such underlying equipment. The Company performs all processing, billing and collection functions under its leases. In a typical transaction for the acquisition of service contracts, a homeowner will purchase a security system and simultaneously sign a contract with the Dealer for the monitoring of that system for a monthly fee. The Dealer will then sell the right to payment under that contract to the Company for a multiple of the monthly payments. The Company performs all processing, billing and collection functions under these contracts. Underwriting. The Company has developed credit underwriting policies and procedures that management believes have been effective in determining pricing which is commensurate with the creditworthiness of its obligors. The nature of the Company's business requires two levels of review, the first focused on the ultimate end-user of the equipment or service and the second focused on the Dealer. The Company's variable pricing approach, which compensates for differing risk profiles through risk-adjusted pricing, allows the Company to underwrite obligors with a broad band of credit quality and provide financing in situations where its competitors may be unwilling to provide such financing. The Company utilizes a proprietary automated computer scoring model to assess the credit of both the lessee and the Dealer along several dimensions. This software does not produce a binary, "yes or no" decision, but rather determines the price at which the lease, contract or loan can be profitably underwritten. The Company has developed its credit-scoring model internally over the past twelve years based on its specific experiences with its portfolio of leases, contracts and loans and its extensive experience with its lessees and Dealers. The Company believes that no general commercially available credit-scoring model is as effective as the Company's model in predicting the payment behavior of the Company's lessee base. The Company reviews its underwriting policies and the computer scoring model on a regular basis and makes adjustments when necessary. The approval process begins with the submission by telephone, facsimile or electronic transmission of a credit application by the Dealer. Upon submission, the Company, either manually or through Leasecomm Direct(TM) over the Internet, conducts its own independent credit investigation of the lessee through its own proprietary data base and recognized commercial credit reporting agencies such as Dun & Bradstreet, TRW, Equifax and TransUnion. The Company's software evaluates this information on a two-dimensional scale, examining both credit depth (how much information exists on an applicant) and credit quality (past payment history). The credit scoring model is complex and automatically adjusts for different transactions. For instance, depending on the size of the credit, different weight is placed on individual pieces of credit information. In situations where the amount financed is over $3,000, the Company may go beyond its own data base and recognized commercial credit reporting agencies and obtain information from less readily available sources such as banks. In certain instances, the Company will require the lessee to provide verification of employment and salary. The second aspect of the credit decision involves an assessment of the originating Dealer. This assessment reflects the Company's experience that the likelihood of lessee compliance is commensurate with Dealer quality. Dealers undergo both an initial screening process and ongoing evaluation, including an examination of Dealer portfolio performance, lessee complaints, cases of fraud or misrepresentation, aging studies, number of applications and conversion rates for applications. This ongoing assessment enables the Company to manage its Dealer relationships, including ending relationships with poor-performing Dealers. 32 34 Upon credit approval, the Company requires receipt of signed lease documentation on the Company's standard or other pre-approved lease form before funding. Once the equipment is shipped and installed, the Dealer invoices the Company, and thereafter the Company verifies that the lessee has received and accepted the equipment. Upon the lessee authorizing payment to the Dealer, the lease is forwarded to the Company's funding and documentation department for funding, transaction accounting and billing procedures. Bulk and Portfolio Acquisitions. In addition to originating leases through its Dealer relationships, the Company from time to time has purchased lease portfolios from Dealers in order to grow its portfolio and diversify the underlying equipment financed. The Company purchases leases from Dealers on an ongoing basis in packages ranging from $20,000 to $200,000. While certain of these leases initially do not meet the Company's underwriting standards, the Company will often purchase the leases once the lessee demonstrates a payment history. The Company will only acquire these smaller lease portfolios in situations where the company selling the portfolio will continue to act as a Dealer following the acquisition. The Company also completed the acquisition of two large POS authorization system lease and rental portfolios in 1996, both of which have contributed to lease yield, fee income and extended rental profits. The first acquisition, completed in May 1996, consisted of over 8,000 rental contracts with total fundings of $1.9 million. The Company acquired approximately 8,200 leases in December 1996 with fundings of $7.9 million. The Company considers portfolio acquisitions to be a lucrative source of immediate lease yield and fee income as well as future rental income, and accordingly, will continue to pursue such acquisitions. SERVICING AND COLLECTIONS The Company performs all servicing functions on its leases, contracts and loans, including its securitized leases, through its automated servicing and collection system. Servicing responsibilities generally include billing, processing payments, remitting payments to Dealers and investors in Securitizations, preparing investor reports, paying taxes and insurance and performing collection and liquidation functions. The Company's business is operationally intensive, due in part to the small average amount financed. Accordingly, technology and automated processes are critical in keeping servicing costs to a minimum while providing quality customer service. The Company's automated lease administration system handles application tracking, invoicing, payment processing, automated collection queuing, portfolio evaluation and report writing. The system is linked with bank accounts for payment processing and provides for direct withdrawal of lease, contract and loan payments. The Company combines its collection efforts with its general relations with obligors. A Lessee Relations Representative ("LRR") is assigned to each lease, contract or loan at the time of funding, giving each lessee or other obligor a specific customer relations contact throughout the term of the lease, contract or loan, including during delinquent collection efforts. The lessee relations department is organized under the Director of Lessee Relations, who manages 2 senior managers, 11 supervisors and 61 LRRs. LRRs are broadly classified as either "front-end" (43 LRRs) or "back-end" (18 LRRs), with the "back-end" LRRs servicing only very delinquent accounts. The "back-end" LRRs generally have several years of experience with delinquent accounts and are entirely dedicated to collections. The Company's collection effort is a key component of its success. The Company believes that its competitors have not energetically pursued collection of microticket delinquent accounts due to the perceived high costs of collecting relatively small monthly payments against equipment with low resale value. In contrast, the Company can cost-effectively pursue such delinquencies due to its highly automated collection process. In addition to writing collection letters, making collection calls and reporting delinquent accounts to the credit reporting agencies, the Company litigates essentially all delinquent accounts where necessary and obtains and enforces judgments through a network of over 100 law firms nationwide. The Company uses several computerized processes in its collection efforts, including the generation of daily priority call lists and scrolling for daily delinquent account servicing, generation and mailing of delinquency letters, routing of incoming calls to appropriate LRRs with instant computerized access to account details, generation of delinquent account lists eligible for litigation, generation of pleadings and litigation monitoring. Collection 33 35 efforts commence immediately, with repeated reminder letters and telephone calls upon payments becoming 10 days past due, with a lawsuit generally filed if an account is more than 85 days past due. The Company takes a team-oriented approach to collections, with supervisors directly overseeing a team of five to six LRRs. Compensation at all levels of the collection effort is linked to the success of the entire collection team. LRRs are assigned daily productivity targets based on dollars collected, phone calls placed and phone calls fielded, with scrolling call lists reprioritized nightly. If these targets are exceeded, LRRs receive a higher percentage of the amounts collected based on a tiered compensation scale. In order to be eligible for the highest scale of commissions, each team member must meet his collection target, providing an incentive to team members to assist in the servicing of each team member's accounts. EXPOSURE TO CREDIT LOSSES The Company's risk-adjusted approach to underwriting allows it to profitably originate and acquire leases, contracts and loans with a high risk of default. The Company's risk-adjusted pricing model and credit analyses are designed to take into account estimated defaults. The Company attempts to maximize the ultimate cash collected through its disciplined and persistent collection procedures. Management evaluates the collectibility of leases, contracts and loans acquired or originated based on the lessee's or other obligor's and Dealer's respective credit profiles, delinquency statistics, historical loss experience, current economic conditions and other relevant factors. The Company maintains an allowance for credit losses on its investment in leases, service contracts and loans at an amount that it believes is sufficient to provide adequate protection against losses in its portfolio. The allowance is determined principally on the basis of the historical loss experience of the Company and the level of recourse provided by such lease, service contract or loan, if any, and reflects management's judgment of additional loss potential considering future economic conditions and the nature and characteristics of the underlying lease portfolio. The Company determines the necessary periodic provision for credit losses taking into account actual and expected losses in the portfolio as a whole and the relationship of the allowance to the net investment in leases, service contracts and loans. Such provisions generally represent a percentage of funded amounts of leases, contracts and loans. The resulting charge is included in the provision for credit losses. Leases, service contracts, and loans are charged against the allowance for credit losses and are put on non accrual when they are deemed to be uncollectible. Generally, the Company deems leases, service contracts and loans to be uncollectible when one of the following occur: (i) the obligor files for bankruptcy; (ii) the obligor dies and the equipment is returned; or (iii) when an account has become 360 days delinquent. The typical monthly payment under the Company's leases is between $30 and $50 per month. As a result of these small monthly payments, the Company's experience is that lessees will pay past due amounts later in the process because of the small amount necessary to bring an account current (at 360 days past due, a lessee will only owe lease payments of between $360 and $600). The Company has developed and regularly updates proprietary credit scoring systems designed to improve its risk based pricing. The Company uses credit scoring in most, but not all, of its extensions of credit. In addition, the Company aggressively employs collection procedures and a legal process to resolve any credit problems. The Company seeks to protect itself from credit exposure relating to poor quality Dealers by entering into recourse agreements with its Dealers, under which the Dealer agrees to reimburse the Company for payment of defaulted amounts under certain circumstances, primarily defaults within the first month following origination and upon evidence of Dealer errors or misrepresentations in originating a lease or contract. In case of Dealer error or misrepresentation, the Company will charge-back the Dealer for both the lessee's delinquent amounts and attorney and court fees. 34 36 The following table sets forth certain information as of December 31, 1995, 1996 and 1997, with respect to delinquent leases, contracts and loans. The percentages in the table below represent the aggregate in each year of actual amounts not paid on each invoice by the number of days past due (rather than the entire balance of a delinquent receivable) over the entire cumulative amount billed on all leases, contracts and loans in the Company's portfolio from the date of origination. For example, if a receivable is over 90 days past due, the portion of the receivable which is over 30 days past due will be placed in the 31-60 days past due category, the portion of the receivable which is over 60 days past due will be placed in the 61-90 days past due category and the portion of the receivable which is over 90 days past due will be placed in the over 90 days past due category. The Company historically has used this methodology of calculating its delinquencies because of its experience that lessees who miss a payment do not necessarily default on the entire lease. Accordingly, the Company includes only the amount past due rather than the entire lease receivable in each category. In the following table, amounts in the "As Adjusted" column represent (i) contractual delinquencies (including the entire lease receivable with the exception of service contracts as to which only the amount billed and collected is included) in each category as a percentage of (ii) the sum of receivables due in installments plus investment in service contracts plus loans receivable ($243.6 million at December 31, 1997).
AS OF DECEMBER 31, -------------------------------------------- 1997, 1995 1996 1997 AS ADJUSTED ---- ---- ---- ----------- Cumulative amount billed (in thousands)... $120,947 $189,798 $260,958 -- 31-60 days past due....................... 1.0% 1.6% 1.6% 3.2% 61-90 days past due....................... 0.8 1.2 1.1 2.4 Over 90 days past due..................... 5.7 6.6 7.0 19.9 Total past due....................... 7.5 9.4 9.7 25.5
The following table sets forth the Company's allowance for credit losses as of December 31, 1994, 1995, 1996 and 1997 and the related provisions, charge-offs and recoveries for the years ended December 31, 1995, 1996 and 1997 (in thousands): Balance at December 31, 1994................................ $ 7,992 Provision for credit losses................................. 13,388 Charge-offs................................................. 5,964 Recoveries.................................................. 536 ------- Charge-offs, net of recoveries.............................. 5,428 ------- Balance at December 31, 1995................................ $15,952 Provision for credit losses................................. 19,822 Charge-offs................................................. 15,675 Recoveries.................................................. 3,727 ------- Charge-offs, net of recoveries.............................. 11,948 ------- Balance at December 31, 1996................................ $23,826 Provision for credit losses................................. 21,713 Charge-offs................................................. 24,290 Recoveries.................................................. 5,070 ------- Charge-offs, net of recoveries.............................. 19,220 ------- Balance at December 31, 1997................................ $26,319
35 37 The following table sets forth for the indicated period the Company's charge-offs, provision for credit losses and allowance for credit losses as a percentage of the sum of average gross investment in leases and loans plus investment in service contracts:
1995 1996 1997 ---- ---- ---- Average gross investment in leases and loans and investment in service contracts (in thousands)(1).................................... $152,492 $218,665 $254,004 Net charge-offs.................................... 3.56% 5.46% 7.57% Provision for credit losses........................ 8.78% 9.07% 8.55% Allowance for credit losses........................ 10.46% 10.90% 10.36%
- --------------- (1) Consists of receivables due in installments, estimated residual value, loans receivable and investment in service contracts. Charge-offs in 1996 and 1997 were higher due to (i) an increase in charge-offs by a total of approximately $5.0 million to replenish the allowance for credit losses due to the change in the write-off period from 360 to 240 days, as more fully described below; (ii) $5.0 million in write-offs related to satellite television equipment receivables in 1997; and (iii) a one-time write-off of securitized receivables of $9.5 million in 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." Cumulative net charge-offs after recoveries from the Company's inception through December 31, 1997 were 6.78% of total cumulative originations plus total billed fees over such period. The Company historically took charge-offs against its receivables when such receivables were 360 days past due. During this period, cumulative net charge-offs from the Company's inception to date were approximately 7% of total cumulative receivables plus total billed fees over such period. In September and October 1996, the Company reduced the time period for charging off its receivables from 360 to 240 days and, as a result, increased its charge-offs by a total of approximately $5.0 million. As a result of this change, recoveries increased significantly indicating that a 240-day charge-off period was too early in the collection process to determine ultimate collectibility. As such, during 1997 and the first quarter of 1998, net charge-offs after recoveries were not significantly different than the Company's historical net charge-off experience. For this reason, in January 1998, the Company changed its charge-off policy for its receivables back to 360 days to better reflect the Company's collection experience. FUNDING SOURCES The Company maintains a diverse mix of funding sources which include its Credit Facilities, Subordinated Debt, and Securitizations. Historically, the Company has fulfilled its liquidity needs by utilizing each of these three sources. See "Description of Certain Indebtedness." COMPETITION The microticket leasing and financing industry is highly competitive. The Company competes for customers with a number of national, regional and local banks and finance companies. The Company's competitors also include equipment manufacturers that lease or finance the sale of their own products. While the market for microticket financing has traditionally been fragmented, the Company could also be faced with competition from small- or large-ticket leasing companies that could use their expertise in those markets to enter and compete in the microticket financing market. The Company's competitors include larger, more established companies, some of which may possess substantially greater financial, marketing and operational resources than the Company, including a lower cost of funds and access to capital markets and to other funding sources which may be unavailable to the Company. FACILITIES The Company's corporate headquarters and operations center are located in leased space of 34,851 square feet at 950 Winter Street, Waltham, Massachusetts 02154. The Company's telephone number is (781) 36 38 890-0177. The lease for this space expires on June 30, 1999. The Company also leases 2,933 square feet of office space for its West Coast office in Newark, California under a lease which expires on August 31, 2001. As of March 31, 1998, the aggregate monthly rent under these leases was approximately $76,964. EMPLOYEES As of March 31, 1998, the Company had 231 full-time employees, of which 45 were engaged in credit activities and Dealer service, 115 were engaged in servicing and collection activities, 11 were engaged in marketing activities, and 60 were engaged in general administrative activities. Management believes that its relationship with its employees is good. No employees of the Company are members of a collective bargaining unit in connection with their employment by the Company. LEGAL PROCEEDINGS The Company and its subsidiaries are frequently parties to various claims, lawsuits and administrative proceedings arising in the ordinary course of business. Although the outcome of these lawsuits cannot be predicted with certainty, the Company does not expect such matters to have a material adverse effect on the financial condition or results of operations of the Company. 37 39 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth the name, age and position with the Company of each of the directors and executive officers of the Company:
NAME AGE POSITION - ---- --- -------- Peter R. Bleyleben(1)........................... 45 President, Chief Executive Officer and Director Brian E. Boyle(1)(2)............................ 50 Director Torrence C. Harder(1)(2)........................ 54 Director Jeffrey Parker(2)............................... 54 Director Alan Zakon(1)(2)................................ 62 Director Richard F. Latour............................... 45 Executive Vice President, Chief Operating Officer and Chief Financial Officer J. Gregory Hines................................ 37 Vice President, Funding John Plumlee.................................... 45 Vice President, MIS Carol A. Salvo.................................. 31 Vice President, Legal
- --------------- (1) Member of Audit Committee (2) Member of Compensation Committee Set forth below is a brief description of the business experience of the directors and executive officers of the Company. PETER R. BLEYLEBEN has served as President, Chief Executive Officer and Director of the Company or its predecessor since June 1987. Before joining the Company, Dr. Bleyleben was Vice President and Director of the Boston Consulting Group, Inc. ("BCG") in Boston. During his more than eight years with BCG, Dr. Bleyleben focused his professional strategic consulting practice on the financial services and telecommunications industries. Prior to joining BCG, Dr. Bleyleben earned an M.B.A. with distinction and honors from the Harvard Business School, an M.B.A. and a Ph.D. in Business Administration and Economics, respectively, from the Vienna Business School in Vienna, Austria and a B.S. in Computer Science from the Vienna Institute of Technology. BRIAN E. BOYLE, the Chief Executive Officer of the Company from 1985 to 1987 and Chairman of the Board of Directors from 1985 to 1995, has served as a Director of the Company or its predecessor since 1985. He is currently the Vice Chairman and a Director of Boston Communications Group, Inc. ("Communications"), a Boston-based provider of switch-based call processing to the global wireless industry. Prior to joining Communications, Dr. Boyle was the Chairman and Chief Executive Officer of Credit Technologies, Inc., a Massachusetts-based provider of credit decision and customer acquisition software, from 1989 to 1993. He is also a Director of Saville Systems, a global telecommunications billing software company, with its United States headquarters in Burlington, Massachusetts, as well as of several private companies. Dr. Boyle earned his A.B. in Mathematics and Economics from Amherst College and a B.S. in Electrical Engineering and Computer Science, an M.S. in Operations Research, an E.E. in Electrical Engineering and Computer Science and a Ph.D. in Operations Research, all from the Massachusetts Institute of Technology. TORRENCE C. HARDER has served as a Director of the Company since 1986. He has been the President and Director of Harder Management Company, Inc., a registered investment advisory firm, since its establishment in 1971. He has also been the President and Director of Entrepreneurial Ventures, Inc., a venture capital investment firm, since its founding in 1986. Mr. Harder is a Director of Lightbridge, Inc., a wireless industry software services provider, Dent-A-Med, Inc., RentGrow, Inc., GWA Information Systems, Inc., Trade Credit Corporation and UpToDate in Medicine, Inc. Mr. Harder earned an M.B.A. from the Wharton School of the University of Pennsylvania, and a B.A. with honors in the Philosophy of Economic Thought from Cornell University. 38 40 JEFFREY PARKER has served as a Director of the Company since 1992. He is the founder and has served since 1997 as the Chief Executive Officer of CCBN.COM, a world wide web information services company based in Boston. He is also the founder and has served since 1991 as the managing director of Private Equity Investments, a venture capital firm focusing on start-up and early stage companies. Mr. Parker is a Director of Boston Treasury Systems, FaxNet Corporation, Pacific Sun Industries, Vintage Partners and XcelleNet, Inc. Mr. Parker earned a B.A., an M.A. in Engineering and an M.B.A. from Cornell University. ALAN ZAKON has served as a Director of the Company since 1988. Since 1995, he has been the Vice Chairman and a Director, and since November 1997, Chairman of the Executive Committee, of Autotote Corporation, a New York-based global gaming and simulcasting company. He served as Managing Director of Bankers Trust Corporation from 1989 to 1995 where he was Chairman of the Strategic Policy Committee. Dr. Zakon is a Director of Arkansas-Best Freight Corporation, a nationwide commercial transportation and trucking company. Dr. Zakon holds a B.A. from Harvard University, an M.S. in Industrial Management from the Sloane School at the Massachusetts Institute of Technology and a Ph.D. in Economics and Finance from the University of California at Los Angeles. RICHARD F. LATOUR has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company since 1995. From 1986 to 1995, Mr. Latour was Vice President of Finance and Chief Financial Officer of the Company. Prior to joining the Company, Mr. Latour was Vice President, Finance for TRAK, Incorporated, an international manufacturer and distributor of consumer products, where he was responsible for all financial and related administrative functions. J. GREGORY HINES has served as Vice President, Funding since 1993. From the time he joined the Company in 1992 until 1993, Mr. Hines served as funds manager of the Company. Prior to joining the Company, Mr. Hines was an assistant vice president in the Equipment Finance Division at the Bank of New England, N.A. and Fleet National Bank. JOHN PLUMLEE has served as Vice President, MIS, of the Company since 1990. Prior to joining the Company, Mr. Plumlee was Vice President of M.M.C., Inc., a firm focusing on the delivery of software services to local governments. CAROL SALVO has served as Vice President, Legal, of the Company since 1996. From 1992 to 1995, Ms. Salvo served as Litigation Supervisor of the Company. From 1995 to 1996, Ms. Salvo served as Director of Legal Collection Services of the Company. Prior to joining the Company, Ms. Salvo was a junior accountant with InfoPlus Inc. Each of the above-named directors of the Company serves until the next annual meeting of the stockholders of the Company or until their respective earlier removal or resignation. Each of the above-named executive officers of the Company serves until his or her successor is appointed by the Board of Directors. COMPENSATION OF DIRECTORS The Board of Directors of the Company is comprised of five Directors, one of whom, Peter Bleyleben, is a salaried employee of the Company who receives no additional compensation for services rendered as a Director. The members of the Company's Board of Directors who are not employees of the Company ("Non- Employee Directors") receive compensation under the Company's Board of Directors Stock Unit Compensation Plan (the "Stock Unit Plan") for their service on the Board of Directors. Directors also are reimbursed for out-of-state travel expenses incurred in connection with attendance at meetings of the Board of Directors and committees thereof. The Company adopted the Stock Unit Plan in February 1997. Under the Stock Unit Plan, Non-Employee Directors who do not serve as committee chairpersons receive up to $30,000 per year, payable $3,750 per meeting in cash and $3,750 per meeting in stock units (the "Stock Units"). Committee chairpersons receive up to $35,000 per year, payable $4,375 per meeting in cash and $4,375 per meeting in Stock Units. In addition, the Company pays for health care insurance for each Non-Employee Director. Under the Stock Unit Plan, the Company pays the participant the cash amount currently and credits Stock Units in the appropriate amounts to a deferred fee account on the date of the Board of Directors or Committee 39 41 meeting. Each Stock Unit in the deferred fee account is valued at the time each such credit is made at the then-current value of the Common Stock, as that value is determined from time to time by the Board of Directors. The number of Stock Units credited to each Non-Employee Director's deferred fee account and the value placed on each Stock Unit is appropriately adjusted in the event of a stock dividend, stock split or other similar change affecting the Common Stock. If any person or group acquires the right to obtain beneficial ownership of 51% or more of the outstanding Common Stock, each Non-Employee Director may elect to convert his or her Stock Units into cash at the per share price to be paid by such person or group if such price is higher than the value at which the Stock Unit was granted. A participant is not entitled to payment for any Stock Unit with a value less than such per share price. If a Director dies prior to the receipt of the distribution under the Stock Unit Plan, the distributable balance thereunder shall be distributed to the Non-Employee Director's designated beneficiary. The Board of Directors may terminate the Stock Unit Plan at any time in its discretion. The Stock Unit Plan is automatically terminated upon completion of all distributions required thereunder. As of March 31, 1998, Dr. Boyle, Mr. Harder, Mr. Parker and Dr. Zakon had 2,632.34, 3,071.06, 2,632.34 and 3,071.06 Stock Units in their respective accounts. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth certain information concerning the compensation payable by the Company to its Chief Executive Officer and its other four most highly compensated executive officers for the years ended December 31, 1997, 1996 and 1995 (the "Named Executive Officers"). SUMMARY COMPENSATION TABLE(1)
LONG TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES NAME AND -------------------- UNDERLYING ALL OTHER PRINCIPAL POSITION YEAR SALARY BONUS(2) OPTIONS(#) COMPENSATION(3) ------------------ ---- ------ -------- ---------- --------------- Peter R. Bleyleben............... 1997 $218,798 $276,736 0 $71,073(4) President, Chief Executive 1996 187,837 214,073 0 73,674 Officer and Director 1995 182,208 173,285 0 8,779 Richard F. Latour................ 1997 169,495 153,255(5) 0 49,680(6) Executive Vice President, 1996 141,535 36,000 0 44,381 Chief Operating Officer 1995 129,787 26,559 85,000 4,623 and Chief Financial Officer J. Gregory Hines................. 1997 87,348 26,950 0 3,206(7) Vice President, Funding 1996 79,853 10,320 0 1,986 1995 71,602 6,122 40,000 1,657 John Plumlee..................... 1997 124,624 29,769 0 20,687(8) Vice President, MIS 1996 108,657 14,346 0 17,903 1995 91,727 6,713 30,000 2,245 Carol Salvo...................... 1997 73,347 8,802 0 2,170(9) Vice President, Legal 1996 47,190 3,817 0 1,502 1995 44,182 0 30,000 988
- --------------- (1) Columns required by the Rules and regulations of the Securities and Exchange Commission that contain no entries have been omitted. (2) Bonuses are paid over a three-year period, with one-third payable each year. The remaining two-thirds is subject to discretionary review by the Company and, therefore, does not vest to the employee. The bonus amount set forth for each fiscal year thus represents the amount actually paid for such fiscal year, plus amounts relating to the prior two fiscal years. 40 42 (3) All other compensation for 1995 does not include amounts paid by the Company for split dollar life insurance premiums and executive disability insurance policy premiums because the Company paid these premiums in a lump sum and did not calculate amounts attributable to each individual. (4) Amounts for Dr. Bleyleben include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1997 ($4,470), 1996 ($4,500) and 1995 ($4,620); (b) split dollar life insurance premiums paid by the Company in 1997 ($62,461) and 1996 ($60,515) (in the event of the death of Dr. Bleyleben, the Company is entitled to the cash value under such plan with the beneficiary receiving the life insurance portion thereof); (c) executive disability insurance policy premiums paid by the Company in 1997 ($3,546) and 1996($3,546); and (d) the benefit to the executive of interest-free loans from the Company based on the applicable federal rate in effect on the date of issuance of such loan, in 1997 ($596), 1996 ($5,113) and 1995 ($4,159). (5) Does not include $179,745 which related to bonuses awarded in prior years and deferred until 1997 at Mr. Latour's option. (6) Amounts for Mr. Latour include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1997 ($4,500), 1996 ($4,435) and 1995 ($3,176); (b) split dollar life insurance premiums paid by the Company in 1997 ($40,501) and 1996 ($35,067) (in the event of the death of Mr. Latour, the Company is entitled to the cash value under such plan with the beneficiary receiving the life insurance portion thereof); (c) executive disability insurance policy premiums paid by the Company in 1997 ($1,586) and 1996 ($2,460); and (d) the benefit to the executive of interest-free loans from the Company based on the applicable federal rate in effect on the date of issuance of each loan, in 1997 ($3,093), 1996 ($2,419) and 1995 ($1,447). (7) Amounts for Mr. Hines include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1997 ($2,273), 1996 ($1,963) and 1995 ($1,657); (b) term life insurance premiums paid by the Company in 1997 ($84) and 1996 ($76); (c) executive disability insurance policy premiums paid by the Company in 1997 ($434) and 1996 ($217); and (d) the benefit to the executive in 1997 of an interest-free loan from the Company based on the applicable federal rate in effect on the date of issuance of such loan ($415). (8) Amounts for Mr. Plumlee include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1997 ($3,722), 1996 ($2,291) and 1995 ($2,245); (b) split dollar life insurance premiums paid by the Company in 1997 ($15,113) and 1996 ($15,104) (in the event of the death of Mr. Plumlee, the Company is entitled to the cash value under such plan with the beneficiary receiving the life insurance portion thereof); (c) executive disability insurance policy premiums paid by the Company in 1997 ($1,016) and 1996 ($508); and (d) the benefit to the executive in 1997 of interest-free loans from the Company based on the applicable federal rate in effect on the date of issuance of each loan ($836). (9) Amounts for Ms. Salvo include: (a) contributions by the Company under the Company's 401(k) retirement/profit sharing plan in 1997 ($1,686), 1996 ($1,447) and 1995 ($988); (b) term life insurance premiums paid by the Company in 1997 ($69) and 1996 ($55); and (c) the benefit to the executive in 1997 of an interest-free loan from the Company based on the applicable federal rate in effect on the date of issuance of such loan ($415). STOCK OPTION PLANS 1998 Equity Incentive Plan The Company intends to adopt the 1998 Equity Incentive Plan (the "1998 Plan") to attract and retain the best available talent and encourage the highest level of performance by directors, employees and other persons who perform services for the Company. The 1998 Plan permits the Compensation Committee of the Board of Directors (or such other committee designated by the Board) to make various long-term incentive awards as described below ("Awards"), generally equity-based, to eligible persons. The Board of Directors believes that by including various kinds of Awards in the 1998 Plan, the Compensation Committee will have maximum flexibility in determining what vehicle is best suited at any particular time to act as a long-term 41 43 incentive. The Company intends to reserve 2,000,000 shares of Common Stock for issuance pursuant to the 1998 Plan. The 1998 Plan is administered by the Compensation Committee. So long as it acts consistently with the express provisions of the 1998 Plan, the Compensation Committee has the authority to (a) grant Awards; (b) determine the persons to whom Awards shall be granted; (c) determine the size of Awards; (d) determine the terms and conditions applicable to Awards; (e) determine the terms and provisions of Award agreements; (f) interpret the 1998 Plan; and (g) prescribe, amend and rescind rules and regulations relating to the 1998 Plan. The 1998 Plan provides for grants of Awards including, but not limited to (a) options to purchase shares of Common Stock consisting of (i) incentive stock options at not less than the full market value on the date of grant (except in the case of a shareholder possessing more than 10% of the total combined voting power of all classes of Common Stock, in which case the exercise price shall be not less than 110% of the fair market value on the date of grant); (ii) non-qualified stock options at an exercise price determined by the Compensation Committee; (b) stock appreciation rights (either tandem or freestanding) which are rights to receive an amount equal to the increase, between the date of grant and the date of exercise, in the fair market value of the number of shares of Common Stock subject to the stock appreciation right; (c) shares of restricted stock which are shares of Common Stock granted to an eligible person but which have certain conditions attached to them which must be satisfied in order for the holder to have unencumbered rights to the restricted stock; and (d) performance Awards which are awards in shares of Common Stock or cash and which may be awarded based on the extent to which the person achieves selected performance objectives over a specified period of time. All material terms of such Awards shall be determined by the Compensation Committee. At the discretion of the Compensation Committee, in the event of a Change in Control (as hereinafter defined), certain Awards may vest immediately. The Board of Directors may suspend, terminate, modify or amend the 1998 Plan at any time without shareholder approval except to the extent that shareholder approval is required by law or by the rules of the principal stock exchange on which the Common Stock is listed. The Board of Directors may not, however, without the consent of the person to whom an Award was previously granted, adversely affect the rights of that person under the Award. 1987 Stock Option Plan The Company has adopted the 1987 Stock Option Plan (the "1987 Stock Option Plan") to align the interests of the officers, employees, directors, consultants and agents of the Company with those of its stockholders and to encourage participants therein to acquire an ownership interest in the Company through the granting of options. The Company has reserved 1,220,000 shares of Common Stock for issuance pursuant to the 1987 Stock Option Plan, which the Board of Directors of the Company administers. Pursuant to the terms and conditions of the 1987 Stock Option Plan, the Board of Directors (or a committee designated by the Board of Directors) shall effect the grant of options under the 1987 Stock Option Plan, determine the form of options to be granted in each case, and make any other determinations under, and interpretation of, any provision of the 1987 Stock Option Plan. The Board of Directors may amend and make such changes in and to the 1987 Stock Option Plan as it may deem proper and in the best interests of the Company. The 1987 Stock Option Plan provides for two separate forms of options to be granted: incentive stock options pursuant to Section 422A of the Internal Revenue Code of 1954, as amended (the "Code"), and non-qualified stock options. Incentive stock options may only be granted to employees of the Company. Non- qualified stock options may be granted to any officer, employee, director (except a disinterested director, as defined in the 1987 Stock Option Plan), consultant or agent of the Company. The Board of Directors of the Company, acting by a majority of its disinterested directors, determines the persons to be granted options, the number of shares subject to each option, whether the options shall be incentive stock options or non-qualified stock options, and the terms of the options, consistent with the provisions of the 1987 Stock Option Plan. The Board of Directors may appoint from its disinterested directors a committee of three or more persons who may exercise the powers of the Board of Directors in granting options under the 1987 Stock Option Plan. A 42 44 disinterested director is defined as a director who is not currently eligible, and has not been eligible at any time within one year prior to the granting of the options in question, to receive any option granted under the 1987 Stock Option Plan, or any stock, stock option or stock appreciation rights under any other plan of the Company or its affiliates. The exercise price for the shares of Common Stock which may be purchased under each incentive stock option must be at least equal to the fair market value per share of the outstanding Common Stock of the Company at the time the option is granted as determined by the Board of Directors in its discretion. The aggregate fair market value (determined as of the time the option is granted) of the Common Stock for which an individual may be granted incentive stock options in any calendar year is subject to the maximum permitted by the Code. The exercise price for the shares of Common Stock which may be purchased under each incentive stock option issued to a person who, immediately prior to the grant of such option, owns (directly or indirectly) Common Stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of its parent or subsidiaries (a "Restricted Individual"), shall be at least equal to one hundred and ten percent (110%) of the fair market value of the Common Stock subject to the option. The exercise price for the shares of Common Stock which may be purchased under each non-qualified stock option shall be at least equal to fifty percent (50%) of the fair market value of the Common Stock subject to the option. Each incentive stock option is exercisable at such time or times as are set forth in the option agreement with respect to such option, but in no event after the expiration of ten years from the date such option is granted. An incentive stock option granted to a Restricted Individual shall not be exercisable after the expiration of five years from the date such option is granted. A non-qualified stock option shall be exercisable for such consideration, in such manner and at such time or times as shall be set forth in an option agreement containing such provisions as the Board of Directors shall determine in granting such an option, and may be exercisable for a period of ten years and one day from the date such option is granted, but in no event after such period. Each option granted under the 1987 Stock Option Plan is not transferable by the optionee. The terms of the options and the number of shares of Common Stock subject to the 1987 Stock Option Plan shall be equitably adjusted in such a manner as to prevent dilution or enlargement of option rights in the event of a declaration of a dividend payable to the holders of Common Stock in stock of the same class; a split or a reverse split of the Common Stock; or a recapitalization of the Company under which shares of one or more different classes are distributed in exchange for or upon the Common Stock without payment of any valuable consideration by the holders thereof. The Board of Directors shall conclusively determine the terms of any such adjustment. 43 45 There were no stock options awarded in 1997 under the 1987 Stock Option Plan. The following table indicates the aggregate option exercises in 1997 by the Named Executive Officers and fiscal year-end option values: AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997 AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT FISCAL SHARES AT FISCAL YEAR-END(#) YEAR-END(1) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE (#) REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- ------------ ----------- ----------- ------------- ----------- ------------- Peter R. Bleyleben..... 8,200 $ 39,340 0 0 $ 0 $ 0 Richard F. Latour...... 36,000 150,161 21,026 58,014 142,050 386,831 J. Gregory Hines....... 9,080 35,608 7,130 21,210 47,856 142,271 John Plumlee........... 22,060 97,879 6,006 17,934 39,069 116,661 Carol Salvo............ 6,060 21,119 6,006 17,934 39,069 116,661
- --------------- (1) The amounts in these columns are calculated using the difference between the fair market value, estimated to be $5.435 at March 31, 1997 and $8.355 at December 31, 1997, of the Company's Common Stock at exercise or at the end of the Company's 1997 fiscal year, as the case may be, and the option exercise prices. The Board of Directors determines the fair market value of the Company's Common Stock in connection with the Stock Unit Plan based on a formula which values the Company at a multiple (determined by reference to an index of publicly traded companies) of the Company's most recent four quarters net income, multiplied by a discount factor to take into account the illiquidity of the Common Stock. The most recent value as so determined by the Board of Directors was used in such calculations. PROFIT SHARING PLAN AND DISCRETIONARY BOARD OF DIRECTOR BONUS PROGRAMS The Company pays annual bonuses and makes profit sharing payments as determined by the Compensation Committee of the Board of Directors. These payments are made under informal arrangements and are based on an employee's performance during the prior fiscal year. Historically, the Board of Directors has determined annual bonus and profit sharing payments for Dr. Bleyleben and Mr. Latour. The Board of Directors also establishes a pool to be allocated by Dr. Bleyleben and Mr. Latour on an annual basis among senior executives of the Company. Each employee is paid one-third of his or her bonus and profit sharing at the time such amount is determined. The remaining two-thirds is paid over the next two years in the discretion of the Board of Directors or Dr. Bleyleben and Mr. Latour based on Company and employee performance. EMPLOYMENT AGREEMENTS The Company intends to enter into Employment Agreements with Dr. Bleyleben and Mr. Latour for a three-year period commencing the date of execution, subject to automatic successive one-year renewals unless terminated pursuant to the terms thereof. In the event of a termination of the Employment Agreements by the Company without cause, or by Dr. Bleyleben or Mr. Latour for specified good reason, or by either party in connection with a Change of Control, the Employment Agreements provide for three years of severance payments to Dr. Bleyleben and Mr. Latour, respectively, on the basis of their highest base salary during the employment period. In addition, Dr. Bleyleben and Mr. Latour would also be entitled to a prorated payment of base salary and bonus to the date of termination, and the acceleration of deferred compensation and accrued but unpaid amounts under the Company's bonus and/or profit sharing plans. Dr. Bleyleben's and Mr. Latour's current base salaries, respectively, are $250,000 and $200,000. The bonus for the current fiscal year will be determined by the Board of Directors. If, in connection with a Change of Control, Dr. Bleyleben or Mr. Latour shall incur any excise tax liability on the receipt of "excess parachute payments" as defined in Section 280G of the Internal Revenue Code of 1986, as amended, the Employment Agreements provide for gross-up payments to return them to the after-tax position they would have been in if no excise tax had been imposed. As used in each Employment Agreement, "Change of Control" means (i) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act of 44 46 beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of either the then outstanding shares of Common Stock or the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors; (ii) individuals who, as of the date of the Employment Agreement constitute the Board of Directors, cease for any reason to constitute at least a majority of the Board of Directors except with respect to any director who was approved by a vote of at least a majority of the directors then comprising the Board of Directors; (iii) approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, more than 60% of the then outstanding shares of Common Stock continues to be owned by the shareholders who were the beneficial holders of such stock prior to such transaction; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company. As used in each Employment Agreement, "for good reason" means the assignment to the executive of duties inconsistent with the executive's position, authority, duties or responsibilities; the failure by the Company to pay the agreed base salary and provide the executive with benefits; moving the executive to a location more than 35 miles from the executive's location immediately prior to the Change of Control; any termination other than as expressly permitted by the Employment Agreement; and the failure by the Company to require a successor to assume all obligations under the Employment Agreement. The Company has also entered into separate employment agreements with each of the remaining Named Executive Officers which are designed to provide an incentive to each executive to remain with the Company pending and following a Change of Control. Each Employment Agreement has an initial term of one year following a Change of Control, with automatic extensions upon the expiration of the initial one-year term for successive one-month periods. Pursuant to each Employment Agreement, the executive will be entitled to receive an annual base salary of not less than twelve times the highest monthly base salary paid or payable to the executive within the twelve months preceding the Change of Control. If the Agreement is terminated by the Board other than for cause, death or disability, or is terminated by the executive for specified good reason, the Company shall pay to the executive in a cash lump sum within 30 days after the date of termination, the aggregate of the following amounts: (i) the executive's annual base salary through the date of termination; (ii) a special bonus in the amount of $575,000, $600,000 and $585,000 for Messrs. Hines and Plumlee and Ms. Salvo, respectively; (iii) any other compensation previously deferred by the executive, together with any accrued interest or earnings thereon; and (iv) any accrued vacation pay. CERTAIN TRANSACTIONS During 1995, 1997 and 1998, Richard F. Latour, Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company, borrowed an aggregate of $152,776 from the Company to exercise vested options to purchase Common Stock (the "Exercised Options"). The loans are non-interest bearing unless the principal amount thereof is not paid in full when due, at which time interest accrues and is payable at a rate per annum equal to the prime rate published by The Wall Street Journal plus 4.0%. The outstanding principal balance of these loans is reduced by any dividends payable upon the stock underlying the Exercised Options. All principal amounts outstanding under such loans are due on the earlier of the end of employment or December 27, 2005. During the fiscal year ended December 31, 1997, the largest aggregate amount outstanding under this loan was $86,297, with $106,300 remaining outstanding at March 31, 1998. The Parker Family Limited Partnership, controlled by Jeffrey Parker, a director of the Company, loaned the Company an aggregate of $2.0 million in the form of Junior Subordinated Notes as follows: $500,000 on June 1, 1996 at an interest rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing June 1, 2000; $250,000 on December 1, 1996 at an interest rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing December 1, 1998; $250,000 on December 1, 1996 at an interest rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing December 1, 1999; $500,000 on December 1, 1996 at an interest rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing December 1, 2002; $250,000 on December 1, 1996 at an interest rate per annum equal to the higher of 12% or a bank prime rate plus 3% maturing December 1, 2001; $125,000 on September 1, 1997 at an 45 47 interest rate per annum equal to 11% maturing September 1, 2001; and $125,000 on September 1, 1997 at an interest rate per annum equal to 11% maturing September 1, 2003. Peter R. Bleyleben, the President and Chief Executive Officer and a Director of the Company, loaned the Company $100,000 on December 1, 1996 at 12% interest per annum in the form of a Junior Subordinated Note maturing December 1, 2001. Alan J. Zakon, a director of the Company, loaned the Company $100,000 on March 18, 1998 at 10.5% interest per annum through his IRA in the form of a Junior Subordinated Note maturing April 1, 1999. Ingrid R. Bleyleben, the mother of Peter R. Bleyleben, the President and Chief Executive Officer and a Director of the Company, loaned the Company the following amounts in the form of Junior Subordinated Notes: $120,000 on February 16, 1996 at an interest rate per annum equal to 11.5% maturing March 1, 2001; $25,000 on December 17, 1996 at an interest rate per annum equal to 11.5% maturing January 1, 2002 and $20,000 on June 4, 1997 at an interest rate per annum equal to 11.5% maturing May 1, 2002. All of the foregoing transactions, with the exception of the loan to Mr. Latour, are on terms similar to those that would have been obtained through arms-length negotiations. PRINCIPAL STOCKHOLDERS The following table sets forth information as of July 7, 1998 with respect to the beneficial ownership of Common Stock of each person known by the Company to be the beneficial owner of more than 5% of the 9,875,798 outstanding shares of Common Stock, each director and executive officer of the Company and all directors and executive officers of the Company (not including treasury stock) as a group. Each person named has sole voting and investment power with respect to the shares indicated, except as otherwise stated in the notes to the table.
NUMBER OF SHARES PERCENTAGE OF OUTSTANDING NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) COMMON STOCK - ------------------------------------ --------------------- ------------------------- Peter R. Bleyleben(2)............................... 1,684,960 17.06% Brian E. Boyle(3)................................... 2,240,000 22.68% Torrence C. Harder(4)............................... 2,183,452 22.11% Jeffrey Parker(5)................................... 340,840 3.45% Alan Zakon.......................................... 40,000 * Richard F. Latour................................... 326,378 3.30% J. Gregory Hines(6)................................. 19,546 * John Plumlee........................................ 29,546 * Carol Salvo......................................... 13,546 * All directors and executive officers as a group (9 persons).......................................... 6,878,268 69.65%
- --------------- * Less than 1%. (1) Unless otherwise indicated in the footnotes, each of the stockholders named in this table has sole voting and investment power with respect to the shares of Common Stock shown as beneficially owned by such stockholder, except to the extent that authority is shared by spouses under applicable law. (2) Includes 19,600 shares of Common Stock owned by Dr. Bleyleben's mother for which Dr. Bleyleben disclaims beneficial ownership. (3) Includes 716,800 shares of Common Stock owned by Dr. Boyle's former spouse over which Dr. Boyle retains voting control, for which Dr. Boyle disclaims beneficial ownership. (4) Includes 100,000 shares of Common Stock held in trust for Mr. Harder's daughter, Lauren E. Harder, over which Mr. Harder retains sole voting and investment power as the sole trustee; 100,000 shares of Common Stock held in trust for Mr. Harder's daughter, Ashley J. Harder, over which Mr. Harder maintains voting and investment power as the sole trustee; 375,572 shares of Common Stock owned by Entrepreneurial Ventures, Inc. over which Mr. Harder retains shared voting and investment power 46 48 through his ownership in, and positions as President and Director of, Entrepreneurial Ventures, Inc.; and 34,046 shares of Common Stock owned by Lightbridge, Inc. over which Mr. Harder retains shared voting and investment power through his ownership in, and position as Director of, Lightbridge, Inc. (5) Owned by the Parker Family Limited Partnership over which Mr. Parker retains shared voting and investment power through his ownership in, and position as Director of, the general partner of the Parker Family Limited Partnership. (6) Includes 400 shares of Common Stock issuable under options granted to Mr. Hines pursuant to the 1987 Stock Option Plan. SELLING STOCKHOLDERS Set forth below is information as to each Selling Stockholder, the number of shares of Common Stock of the Company beneficially owned prior to the Offering, the number of shares of Common Stock which may be offered as set forth on the cover of this Prospectus and the number and percentage (if one percent or more) of shares of Common Stock to be beneficially owned after the Offering by such Selling Stockholder assuming all offered shares are sold and assuming that in each case that the Underwriters do not exercise their over-allotment option.
SHARES BENEFICIALLY SHARES TO BE OWNED PRIOR TO BENEFICIALLY OWNED THE OFFERING(1) SHARES AFTER THE OFFERING(1) -------------------- BEING ---------------------- NAME OF SELLING STOCKHOLDER NUMBER PERCENT OFFERED NUMBER PERCENT - --------------------------- --------- ------- ------- --------- --------- Peter R. Bleyleben(2)....................... 1,665,360 16.82% Torrence C. Harder(3)....................... 1,773,834 18.31 Brian E. Boyle(4)........................... 1,523,200 15.42 Rosemary Boyle(5)........................... 716,800 7.26 Entrepreneurial Ventures, Inc............... 375,572 3.80 Spindle Limited Partnership................. 368,688 3.73 Richard F. Latour(6)........................ 326,378 3.30 Rock Creek Partnership...................... 241,660 2.45 Arthur J. Epstein........................... 227,680 2.31 Maureen Curran.............................. 73,546 * John Plumlee(7)............................. 29,546 * Steven Obana(8)............................. 13,546 *
- --------------- * Less than 1%. (1) Unless otherwise indicated in the footnotes, each of the stockholders named in this table has sole voting and investment power with respect to the shares of Common Stock shown as beneficially owned by such stockholder, except to the extent that authority is shared by spouses under applicable law. (2) Excludes 19,600 shares of Common Stock owned by Dr. Bleyleben's mother for which Dr. Bleyleben disclaims beneficial ownership. Dr. Bleyleben has served as President, Chief Executive Officer and Director of the Company or its predecessor since June 1987. (3) Includes 100,000 shares of Common Stock held in trust for Mr. Harder's daughter, Lauren E. Harder over which Mr. Harder retains sole voting and investment power as the sole trustee; and 100,000 shares of Common Stock held in trust for Mr. Harder's daughter, Ashley J. Harder over which Mr. Harder maintains voting and investment power as the sole trustee. Excludes 34,046 shares of Common Stock owned by Lightbridge, Inc. over which Mr. Harder retains shared voting and investment power through his ownership in, and position as Director of, Lightbridge, Inc. and 375,572 shares of Common Stock owned by Entrepreneurial Ventures, Inc. over which Mr. Harder retains shared voting and investment power through his ownership in, and position as President and Director of, Entrepreneurial Ventures, Inc. Mr. Harder has served as a Director of the Company since 1986. 47 49 (4) Includes 1,523,200 shares held in Dr. Boyle's individual retirement account ("IRA"). Excludes 716,800 shares of Common Stock owned by Rosemary Boyle, Dr. Boyle's former spouse, over which Dr. Boyle retains voting control, for which Dr. Boyle disclaims beneficial ownership. Dr. Boyle, Chairman of the Board of Directors from 1985 to 1995, has served as a Director of the Company or its predecessor since 1985. (5) Held in Ms. Boyle's IRA. (6) Mr. Latour has served as Executive Vice President, Chief Operating Officer and Chief Financial Officer of the Company since 1995. (7) John Plumlee has served as Vice President, MIS, of the Company since 1990. (8) Steven Obana has served as Vice President, Marketing--West Coast of Leasecomm since January 1995. DESCRIPTION OF CERTAIN INDEBTEDNESS The Company maintains a diverse mix of funding sources which include its Credit Facilities, Subordinated Debt, and an asset securitization program. Historically, the Company has used each of these three sources to fulfill its liquidity needs. Credit Facilities. Leasecomm Corporation is the borrower (the "Borrower") under agreements with two separate bank groups which provide revolving credit and term loan facilities. The Borrower draws on its facilities regularly, using them as principal sources of funds for its operations. The first facility, led by Fleet Bank, N.A., is a $105 million revolving credit and term loan facility, of which $37.4 million in revolving credit and term loans was outstanding as of March 31, 1998 (the "Fleet Facility"). The second facility, led by BankBoston, N.A., is a $35 million revolving credit and term loan facility, of which $30.1 million in revolving credit and term loans was outstanding as of March 31, 1998 (the "BankBoston Facility"). The Borrower and the lenders under these facilities have entered into an intercreditor agreement which governs the relationship among the lenders under each facility as secured creditors of the Company. The terms of the two facilities are substantially similar. Both are two-year facilities, with the Borrower retaining the option to renew for one year. All balances under the revolving lines of credit will be automatically converted to term loans ("Conversion Term Loans") on July 31, 1999 (the "Commitment Termination Date"), provided the line of credit is not renewed and no event of default exists at that date. All amounts outstanding under the Conversion Term Loans under the Fleet Facility are payable in monthly installments over the weighted average life of the underlying leases and contracts relating to such loans, but in any case no later than the fourth anniversary of the Commitment Termination Date. Amounts outstanding under the Conversion Term Loan under the BankBoston Facility are payable in monthly installments over the two-year period following the Commitment Termination Date. Both facilities provide for a maximum borrowing amount equal to specified percentages of the present value of the remaining scheduled payments due on the leases and contracts funded with advances under such facilities or, in the case of certain eligible leases, the lesser of such specified percentage or 100% of the adjusted cost basis of the equipment underlying such lease. Prior to the Commitment Termination Date, amounts may be borrowed under the Fleet Facility as revolving credit loans or term loans ("Fleet Credit Period Term Loans"). Fleet Credit Period Term Loans are repaid in monthly installments over the weighted average life of the underlying leases or contracts funded with such loans, but in any event, no later than the fourth anniversary of the Commitment Termination Date. Under the BankBoston Facility, $2.0 million was borrowed as a term loan (the "BankBoston Credit Period Term Loans"), all of which is due on the Commitment Termination Date, and the remaining availability may be borrowed as revolving credit loans. Outstanding borrowings with respect to the revolving lines of credit bear interest at LIBOR plus 1.85% or the applicable agent's prime or base rate. Outstanding Fleet Credit Period Term Loans and Conversion Term Loans bear interest at LIBOR plus 2.50% or the applicable agent's prime or base rate plus 2.25%. $1.1 million principal amount of the BankBoston Credit Period Term Loans bears interest at 7.75%. The remaining $0.9 million principal amount bears interest at 8.3%. All loans may be prepaid at any time in whole or in part, subject to breakage fees for termination of a LIBOR loan prior to the 48 50 last day of the interest period for such LIBOR loan. Borrowings are collateralized by pledged leases and service contracts and are guaranteed by the Company. Each of the facilities limits the payment of dividends in any fiscal year to no more than 50% of Consolidated Net Income (as hereinafter defined) of the Company and its subsidiaries for the immediately preceding fiscal year, determined in accordance with generally accepted accounting principles ("GAAP"). Each of the facilities is also subject to covenants, events of default and other standard terms and conditions usual in facilities of this nature, including: the Company and its subsidiaries may not (i) permit the existence of certain liens; (ii) guarantee certain obligations of other persons; (iii) merge or consolidate with any other person, acquire all or substantially all of the assets or stock of any other person or sell all or any substantial part of its assets or create new subsidiaries; (iv) make any material change in its business; (v) prepay any other indebtedness for borrowed money, including the Subordinated Debt; (vi) make capital expenditures in any year in excess of 20% of Consolidated Tangible Net Worth (as hereinafter defined) as of the end of the immediately preceding fiscal year; and (vii) enter into certain transactions with affiliates. Further, the Company may not incur additional indebtedness, other than (i) indebtedness under each Credit Facility; (ii) purchase money indebtedness; (iii) unsecured indebtedness; (iv) certain existing indebtedness, including Subordinated Debt; and (v) indebtedness under lender hedge agreements. In addition, under the Fleet Facility, the Company may not issue any shares of its capital stock or any security convertible into capital stock, if, after giving effect to such issuance, Peter R. Bleyleben, Brian E. Boyle and Torrence C. Harder (the "Principal Stockholders") own less than 45%, or own and/or control in the aggregate less than 80%, of the issued and outstanding shares of capital stock of the Company on a fully diluted basis (assuming the exercise of all outstanding stock options), having ordinary voting rights for the election of directors. The Company is also required to maintain certain financial covenants, including, among others, (i) to maintain at all times a ratio of Consolidated Indebtedness (as hereinafter defined) to Consolidated Tangible Capital Funds (as hereinafter defined) of not more than 6.5:1.0; (ii) to maintain at all times a Consolidated Tangible Net Worth (as hereinafter defined) of not less than the sum of (a) $5,500,000 and (b) 50% of the aggregate amount of Consolidated Net Income of the Company and its subsidiaries for each of the fiscal quarters ending after December 31, 1994 but without deducting therefrom any amount of Consolidated Net Deficit (as hereinafter defined) for any of such fiscal quarters; (iii) to maintain at all times an allowance for bad debt of the Company and its subsidiaries of at least 5% of Gross Lease Installments (as hereinafter defined); and (iv) to achieve as of the end of each fiscal quarter a Fixed Charge Ratio (as hereinafter defined) of the Company and its subsidiaries of not less than 1.25:1.00. As of March 31, 1998, the Company was in compliance with all covenants under these facilities. As used in each Credit Facility, the term "Consolidated Indebtedness" means the consolidated Indebtedness (excluding Subordinated Debt but including non-recourse indebtedness) of the Company and its subsidiaries determined in accordance with GAAP; "Consolidated Net Income" and "Consolidated Net Deficit" mean the consolidated net income (or deficit) of the Company and its subsidiaries, determined in accordance with GAAP; provided, however, that Consolidated Net Income and Consolidated Net Deficit shall not include amounts added to such net income (or deficit) in respect of the write-up of any asset; the term "Consolidated Tangible Capital Funds" means the sum, with respect to the Company and its subsidiaries, on a consolidated basis, of (a) capital stock, (b) additional paid-in capital, (c) retained earnings and (d) Subordinated Debt less (x) organizational costs and good will, (y) treasury stock and (z) 25% of debt issue costs determined in accordance with GAAP; the term "Consolidated Tangible Net Worth" means the sum, with respect to the Company and its subsidiaries on a consolidated basis, of (a) capital stock, (b) additional paid-in capital and (c) retained earnings, less the sum of (x) organizational costs and goodwill, (y) treasury stock and (z) 25% of debt issue costs determined in accordance with GAAP; the term "Fixed Charge Ratio" means the ratio of Consolidated Earnings, during any fixed period consisting of the preceding four consecutive fiscal quarters, to Fixed Charges, payable during such period; and the term "Gross Lease Installments" means the aggregate receivables due to the Borrower from all leases of equipment. In addition, "Consolidated Earnings" means the sum of Consolidated Net Income plus, on a consolidated basis for the Company and its subsidiaries, (a) all provisions for any deferred federal, state or other taxes plus (b) interest on indebtedness (including payments on capitalized lease obligations in the nature of interest), all as 49 51 determined in accordance with GAAP; and "Fixed Charges" means on a consolidated basis for the Company and its subsidiaries, the scheduled payments of interest on all indebtedness (including payments on capitalized lease obligations in the nature of interest). As of March 31, 1998, on a pro forma basis after giving effect to the consummation of the Offering and the anticipated use of $11.4 million of the net proceeds thereof to repay Junior Subordinated Notes, $9.5 million of the net proceeds to repay indebtedness outstanding under the senior Subordinated Debt and $22.3 million of the net proceeds to repay indebtedness outstanding under the Credit Facilities, (i) the Company's ratio of Consolidated Indebtedness to Consolidated Tangible Capital Funds would have been 1.55:1.0; and (ii) Consolidated Tangible Net Worth would have been $65.1 million, which was $54.2 million in excess of the sum of (a) $5.5 million and (b) $5.4 million (50% of the aggregate amount of Consolidated Net Income of the Company and its subsidiaries for each of the fiscal quarters ending after December 31, 1994 but without deducting therefrom any amount of Consolidated Net Deficit for any of such fiscal quarters). As of such date, the Company's allowance for bad debt was 10.7% of the Company's Gross Lease Installments as of such date. On a pro forma basis, assuming that the Offering and the repayment of indebtedness occurred on April 1, 1997, the Company's Fixed Charge Ratio would have been 3.56:1.0. The Company has obtained a permanent waiver of the covenants contained in the Fleet Facility which prohibit the prepayment of any Subordinated Debt and require the Principal Stockholders to continue to own at least 45%, or own and/or control in the aggregate at least 80%, of the capital stock of the Company. Set forth below is a summary of the material terms of the Company's notes payable under these facilities as of March 31, 1998.
PRINCIPAL AMOUNT BANK OUTSTANDING FIXED/FLOATING RATE MATURITY - ---- ---------------- -------------- ---- -------- (DOLLARS IN MILLIONS) Fleet Bank, N.A.............. $ 4.3 Fixed 8.30% November 24, 1998 Fleet Bank, N.A./Commerzbank AG......................... 8.6 Fixed 7.75 August 2, 1999 BankBoston, N.A.............. 17.5 Floating 8.25(a) July 10, 1998 Fleet Bank, N.A./BankBoston............ 37.1 Floating Prime Revolving ----- $67.5 =====
- --------------- (a) Based on LIBOR as of March 31, 1998 plus 1.85%. The Company periodically enters into interest rate swaps to hedge its floating rate exposure. Rate shown represents swapped fixed rate. SUBORDINATED DEBT Since the Company's founding in 1986, Subordinated Debt has been an important component of its funding program for two reasons. First, the Company's Subordinated Debt is treated as equity in calculating the financial covenants under the Company's Credit Facilities, allowing the Company to leverage its common equity to a greater extent. Second, the Company uses its Subordinated Debt program as a source of funding for leases, contracts and loans of certain products which otherwise are not eligible for funding under the Credit Facilities and for potential portfolio purchases. Over the last decade, the Company has expanded its Subordinated Debt program by extending maturities, increasing issuance frequency, and expanding its investor 50 52 universe to include banks, insurance companies, and individual investors. The table below sets forth selected information as of March 31, 1998 with respect to the Company's current outstanding issuances:
DATE OF PRINCIPAL AMOUNT ------------------------------------ OUTSTANDING RATE ISSUE MATURITY ---------------- ---- ----- -------- (DOLLARS IN MILLIONS) Massachusetts Mutual Life Insurance Co.............. $ 6.0 12.0% August 1, 1994 July 15, 2001(a) Rothschild Inc.............. 5.0 12.5 October 17, 1996 October 1, 2001(b) Aegon Insurance Group....... 5.0 12.6 October 15, 1996 October 15, 2003(c) ----- 16.0 Others(d)................... 11.4 ----- $27.4 =====
- --------------- (a) Repayment schedule requires annual principal payments of $1.5 million, commencing July 15, 1997, until the note matures. The Company made a principal payment of $1.5 million under the Massachusetts Mutual Life Insurance Company subordinated note on July 15, 1998. (b) Repayment schedule requires monthly principal payments of $125,000 for the period from November 1, 1998 through October 1, 2000, after which time principal payments increase to $167,000 per month from November 1, 2000 until maturity. (c) Repayment schedule requires quarterly payments of $250,000 commencing March 15, 1999 until maturity. (d) Issued in private placements to various individual investors at interest rates ranging from 9.5% to 14.0% at May 31, 1998, with maturities ranging from July 14, 1998 to September 1, 2003. Other than as set forth above, the terms of the Note Agreements covering the Massachusetts Mutual Life Insurance Co. subordinated notes (the "MassMutual Agreement"), the Rothschild Inc. subordinated notes (the "Rothschild Agreement") and the Aegon Insurance Group subordinated notes (the "Aegon Agreement", and together with the MassMutual Agreement and the Rothschild Agreement, collectively, the "Subordinated Note Agreements") are substantially similar. All amounts outstanding under the Subordinated Note Agreements may be prepaid, subject to the payment of a "Make-Whole Amount" equal to the excess of (i) the present value of the remaining principal payments due and owing under each agreement plus the amount of interest that would have been payable in respect of such dollar amount, determined by discounting amounts at the Reinvestment Rate from the respective dates on which they would have been payable over (ii) 100% of the principal amount of the outstanding notes being prepaid. The "Reinvestment Rate" is 2.00% plus the arithmetic mean of the treasury constant maturity yields corresponding to the weighted average life to maturity of the principal being repaid. In the case of the Aegon Note Agreement and the MassMutual Agreement, if the Reinvestment Rate is equal to or higher than the interest rate on the applicable note, the Make-Whole Amount would be zero. In addition, principal amounts outstanding under the Aegon Agreement may not be prepaid until after October 15, 1998. Each Subordinated Note Agreement permits the payment of dividends on the Common Stock so long as the aggregate amount paid during the period from January 1, 1994 (January 1, 1996 in the case of the Aegon Agreement) to and including the date of the dividend payment would not exceed the sum of (A) 35% of consolidated net income for such period, computed on a cumulative basis for the entire period (or if such consolidated net income is a deficit figure, then minus 100% of such deficit) plus (B) the net cash proceeds from the sale after January 1, 1994 (January 1, 1996 in the case of the Aegon Agreement) of capital stock of the Company plus (C) the aggregate principal amount of any debt of the Company which has been converted after January 1, 1994 (January 1, 1996 in the case of the Aegon Agreement) into capital stock of the Company minus (D) since January 1, 1994 (January 1, 1996 in the case of the Aegon Agreement), the aggregate amount of dividends paid on the Preferred Stock, prepayments of principal under the subordinated notes listed under "Others" in the above table ("Junior Subordinated Notes") and amounts paid to purchase, redeem or retire any shares of its capital stock. In addition, the Company is required to make an offer of 51 53 prepayment to holders of the notes outstanding under the Subordinated Note Agreements upon a change of control, defined as any issue, sale or other disposition of shares of capital stock of the Company which results in any person or group of persons acting in concert (other than Dr. Bleyleben, Dr. Boyle and Mr. Harder and their affiliates) owning more than 50% of the voting stock of the Company. Each of the Subordinated Note Agreements is also subject to covenants, events of default and other standard terms and conditions usual in agreements of this nature, including the following: the Company and its subsidiaries may not (i) permit the existence of certain liens; (ii) guarantee certain obligations of other persons; (iii) merge or consolidate with any other person, acquire all or substantially all of the assets or stock of any other person or sell all or any substantial part of its assets or create new subsidiaries; (iv) make any material change in its business; (v) prepay the Junior Subordinated Notes, except for limited principal amounts in any 12-month period; (vi) enter into certain transactions with affiliates; and (vii) incur additional indebtedness, other than certain permitted indebtedness. In addition, at all time while the notes are outstanding under the Subordinated Note Agreements, the Company must maintain a $1,500,000 key man life insurance policy on Dr. Bleyleben, and under the Rothschild Agreement, Dr. Bleyleben must continue to serve as Chief Executive Officer and hold at least 12.0% of the voting stock of the Company on a fully diluted basis. The Company has obtained a permanent waiver of the prohibition on prepayment of the Junior Subordinated Notes and the requirement that Dr. Bleyleben hold at least 12.0% of the Common Stock. The Company is also required under the Subordinated Note Agreements to maintain certain financial covenants, including, among others, (i) to maintain at all times an allowance for bad debts reserve in an amount not less than 100% of Delinquent Billed Lease Receivables (as hereinafter defined) (150% in the Aegon Agreement for any period during which the Adjusted Interest Coverage Ratio (as hereinafter defined) is less than 1.10 to 1.00); (ii) maintain at all times consolidated net worth at least equal to the greater of (a) $9.0 million and (b) the sum of stockholders' equity plus an amount equal to 65% of consolidated net income for the period from January 1, 1994 to the date of any determination thereof, computed on a consolidated basis for the entire period; and (iii) maintain for each period of four consecutive quarters a ratio of Net Income Available for Interest Charges (as hereinafter defined) to interest charges of 1.25 to 1.00. In addition, the Rothschild Agreement requires the Company to maintain the following financial covenants, (i) to ensure at all times that consolidated senior debt does not exceed 700% of Adjusted Consolidated Net Worth (as hereinafter defined); (ii) to ensure at all times that consolidated Subordinated Debt other than Junior Subordinated Notes does not exceed 150% of Consolidated Net Worth (as hereinafter defined); and (iii) to maintain at all time a ratio of senior debt plus consolidated Subordinated Debt other than Junior Subordinated Notes to stockholders' equity of not more than 18.0:1.0 As used herein, "Adjusted Consolidated Net Worth" means an amount equal to the sum of (i) Consolidated Net Worth plus (ii) Senior Subordinated Debt; "Adjusted Interest Coverage Ratio" means the ratio of Adjusted Net Income Available for Interest Charges to interest charges; "Adjusted Net Income Available for Interest Charges" means Net Income Available for Interest Charges less the Bad Debts Reserve Deficiency; "Bad Debts Reserve Deficiency" means 150% of Delinquent Billed Lease Receivables less the bad debts reserve; "Consolidated Net Worth" means, as of the date of any determination thereof, the sum of (a) stockholders' equity plus (b) the aggregate principal amount of the Junior Subordinated Notes outstanding; "Delinquent Billed Lease Receivables" shall mean receivables due in respect of leases of equipment which remain unpaid 90 or more days after the due date thereof; and "Net Income Available for Interest Charges" means, for any period, the sum of (i) consolidated net income during such period plus (to the extent deducted in determining consolidated net income), (ii) all provisions for any Federal, state or other income taxes made by the Company and its subsidiaries during such period and (iii) interest charges of the Company and its subsidiaries during such period. As of March 31, 1998, on a pro forma basis after giving effect to the consummation of the Offering and the anticipated use of $11.4 million of the net proceeds thereof to repay Junior Subordinated Notes, $9.5 million of the net proceeds to repay indebtedness outstanding under the senior Subordinated Debt and $22.3 million of the net proceeds to repay indebtedness outstanding under the Credit Facilities, (i) the Company's consolidated net worth would have been $65.4 million, which was $40.5 million in excess of the greater of (a) $9.0 million and (b) the sum of stockholders' equity plus an amount equal to 65% of 52 54 consolidated net income for the period from January 1, 1994 to March 31, 1998 (assuming that the Offering and the repayment of indebtedness occurred on January 1, 1994); (ii) consolidated senior debt would have been 137% of Adjusted Consolidated Net Worth; (iii) consolidated Subordinated Debt other than Junior Subordinated Notes would have been 9.9% of Consolidated Net Worth; and (iv) the ratio of senior debt plus consolidated Subordinated Debt other than Junior Subordinated Notes to stockholders' equity would have been 1.60:1.0. As of March 31, 1998, the Company's allowance for bad debts reserve was 129% of Delinquent Billed Lease Receivables. On a pro forma basis, assuming that the Offering and the repayment of indebtedness occurred on April 1, 1997, the ratio of Net Income Available for Interest Charges to interest charges would have been 3.56:1.0. SECURITIZATION PROGRAM The Company has completed five private Securitizations since its inception for an aggregate amount of $101 million. The securitized receivables remain on the Company's balance sheet. As a result, the Company does not use gain-on-sale accounting. MBIA, Inc. has provided credit enhancement for all Securitizations except the first offering. Each Securitization except the first offering was rated 'AAA' by Standard and Poor's and 'Aaa' by Moody's Investor Services, Inc. The first securitization was rated 'AA' by Duff & Phelps. Pricing has improved on each successive transaction, most recently culminating in pricing of 51 basis points over the 2-year US Treasury on its $44.8 million Securitization dated August 12, 1997. The table below sets forth selected information as of March 31, 1998 with respect to the Company's five Securitizations:
PRINCIPAL AMOUNT --------------------- STATED SERIES ORIGINAL REMAINING COUPON(a) MATURITY - ------ -------- --------- --------- -------- (DOLLARS IN MILLIONS) 1992-1............................. $ 7.9 -- 7.23% (b) 1993-1............................. 6.1 -- 5.17 (b) 1994-A............................. 18.9 -- 7.33 (b) 1996-A............................. 23.4 $11.2 6.69 May 16, 2000 1997-A............................. 44.8 35.6 6.42 January 16, 2003 ------ ----- $101.0 $46.8 ====== =====
- --------------- (a) Monthly equivalent. (b) Repaid. Each of the Indentures pursuant to which each of the Series 1996-A and 1997-A Lease-Backed Term Notes were issued (the "1996-A Indenture" and the "1997-A Indenture", respectively) requires the Company to repurchase leases from the respective trusts if the status of such leases result in the Company breaching the representations and warranties made by the Company at the time of the Securitization. Each Indenture also contains "Trigger Events" which would have the effect of increasing the amount of principal distributable to holder of each series of notes on each payment date thereafter and which may cause the removal of the Company as servicer under each pool of leases. A "Trigger Event" is defined as the occurrence of any one of the following: (i) for any three consecutive due periods, the average of the Annualized Default Rates (as hereinafter defined) for such consecutive due periods shall be equal to or greater than the Maximum Default Rate (as hereinafter defined); (ii) in any due period, the Annualized Default Rate is equal to or greater than three times the Maximum Default Rate; (iii) in any two consecutive due periods, the sum of the Annualized Default Rates for such due periods is equal to or greater than three times the Maximum Default Rate; (iv) for any three consecutive due periods, the average of the Delinquency Rates (as hereinafter defined) is equal to or greater than the Maximum Delinquency Rate (as hereinafter defined); (v) the Net Worth Requirement (as hereinafter defined) is not met; (vi) both of Peter von Bleyleben and Richard Latour cease working for the Company or Leasecomm or become deceased or unable to work for six months or more; (vii) the issuer or the trust estate is required to register as an "investment company" under the Investment Company Act of 1940, as amended; or (viii) an event of default occurs under 53 55 the Indenture or certain events of bankruptcy or insolvency occur with respect to the Company as servicer. Each of the Indentures permits the Company to repurchase leases that are being prepaid, that are terminated early or that have defaulted or gone delinquent and to deliver a substitute lease under certain circumstances in order to prevent such Trigger Event from occurring. As used herein, (i) "Annualized Default Rate" means, for any due period, the sum of the Implicit Principal Balances (as hereinafter defined) as of the calculation date occurring in such due period of leases that became defaulted leases during such due period (including any leases that have been purchased or substituted) minus the sum of recoveries, residual proceeds, and servicing charges received during such due period, divided by the Aggregate IPB (as hereinafter defined) on the calculation date immediately preceding such due period, multiplied by twelve; (ii) "Delinquency Rate" means, for any due period, the sum of the Implicit Principal Balances as of the calculation date occurring in such due period of leases that are more than 30 days delinquent, as of such calculation date (including any leases that have been purchased or substituted), divided by the Aggregate IPB on such calculation date (including any leases that have been purchased or substituted); (iii) "Implicit Principal Balance" of a lease receivable is equal to, as of any date of determination, the present value of the remaining stream of scheduled payments due with respect to such lease receivable after the applicable calculation date at a specified formula; (iv) "Aggregate Implicit Principal Balance" as of any time is equal to the sum of the Implicit Principal Balances for each series of notes outstanding at that time; (v) "Maximum Default Rate" equals 7%; (vi) "Maximum Delinquency Rate" equals 14.5%; and (vii) "Net Worth Requirement" means the aggregate consolidated stockholders' equity of the Company, Leasecomm and their affiliates (the "Reported Companies"), as reflected in the most recent Reported Companies' financial statements, is equal to at least $5,900,000 computed in accordance with generally accepted accounting principles as in effect on May 1, 1996. The Company intends to use securitizations and other similar structured finance transactions as vehicles for minimizing the Company's cost of funds associated with financing its leases. While the Company currently intends to keep its Securitizations on its balance sheet, the Company may in the future securitize receivables which will not remain on its balance sheet. DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 25,000,000 shares of common stock, par value $.01 per share ("Common Stock"), and 5,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). The following summary does not purport to be complete and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Company's Restated Articles of Incorporation, as amended (the "Articles") and By-Laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part, and to the applicable provisions of the Massachusetts Business Corporations Act. COMMON STOCK As of March 31, 1998, 9,873,036 shares of Common Stock were outstanding and held of record by 85 persons. Upon completion of the Offering, 13,292,636 shares of Common Stock will be outstanding, excluding 176,964 shares of Common Stock issuable upon exercise of options granted under the 1987 Stock Option Plan and 142,590 shares held in the Company's treasury as of March 31, 1998. The holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of holders of Common Stock. The Common Stock does not have cumulative voting rights, which means that the holders of a majority of the voting power of shares of Common Stock outstanding are able to elect all the directors and the holders of the remaining shares are not able to elect any directors. Each share of Common Stock is entitled to participate equally in dividends, if, as and when declared by the Company's Board of Directors, and in the distribution of assets in the event of liquidation, subject in all cases to any prior rights of outstanding shares of Preferred Stock. The Company has paid cash dividends quarterly on its 54 56 Common Stock since August 1995. See "Risk Factors -- Change in Dividend Policy" and "Dividend Policy." The shares of Common Stock have no preemptive rights, redemption rights, or sinking fund provisions. The outstanding shares of Common Stock are, and the shares of Common Stock offered hereby upon issuance and sale will be, duly authorized, validly issued, fully paid and nonassessable. PREFERRED STOCK The Company's authorized Preferred Stock consisted of 5,000,000 shares of Preferred Stock, none of which is outstanding. Shares of Preferred Stock may be issued from time to time in one or more series as may be determined by the Board of Directors of the Company with such designations, voting powers, preferences and relative participating optional or other special rights, and qualifications, limitations and restrictions on such rights, as the Board of Directors of the Company may authorize, including, but not limited to: (i) the number of shares that will constitute such series; (ii) the voting rights, if any, of shares of such series and whether the shares of any such series having voting rights shall have multiple votes per share; (iii) the dividend rate on the shares of such series, any restriction, limitation or condition upon the payment of such dividends, whether dividends shall be cumulative and the dates on which dividends are payable; (iv) the prices at which, and the terms and conditions on which, the shares of such series may be redeemed, if such shares are redeemable; (v) the purchase or sinking fund provisions, if any, for the purchase or redemption of shares of such series; (vi) any preferential amount payable upon shares of such series in the event of the liquidation, dissolution or winding-up of the Company or the distribution of its assets; and (vii) the prices or rates of conversion of which, and the terms and conditions on which, the shares are convertible. MASSACHUSETTS LAW AND CERTAIN CHARTER PROVISIONS Following the Offering, the Company expects that it will have more than 200 stockholders, thus making it subject to Chapter 110F of the Massachusetts General Laws, an anti-takeover law. This statute generally prohibits a publicly-held Massachusetts corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and the holders of two-thirds of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder). An "interested stockholder" is a person who, together with affiliates and associates, owns (or at any time within the prior three years did own) 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, a stock or asset sale, and certain other transactions resulting in a financial benefit to the interested stockholder. By a vote of a majority of its stockholders, the Company may elect not to be governed by Chapter 110F, but such an amendment would not be effective for 12 months and would not apply to a business combination with any person who became an interested stockholder prior to the adoption of the amendment. The Company has not elected to opt out of this coverage. Chapter 156B, Section 50A of the Massachusetts General Laws generally requires that publicly-held Massachusetts corporations have a classified board of directors consisting of three classes as nearly equal in size as possible, unless the corporation elects to opt out of the statute's coverage. While the Board of Directors currently has opted out of the statute's coverage, it intends to opt into the statute's coverage prior to the consummation of the Offering. The Company is subject to Chapter 110D of the Massachusetts General Laws which governs "control share acquisitions," which are certain acquisitions of beneficial ownership of shares which raise the voting power of the acquiring person (which can be a group of persons or entities sharing beneficial ownership) above any one of three thresholds: one-fifth, one-third or one-half of the total voting power. All shares acquired by the person making the control share acquisition within the period beginning 90 days before and ending 90 days after each threshold is crossed ("Affected Shares") obtain voting rights only (i) upon authorization by a majority of the stockholders other than the holder of the Affected Shares, officers of the Company and 55 57 directors of the Company who also are employees of the Company or (ii) when disposed of in non-control share acquisitions. The Company's stockholders, at a duly constituted meeting, may, by amendment to the By-Laws or the Articles of Incorporation, provide that the provisions of Chapter 110D shall not apply to future control share acquisitions of the Company. Management currently has no plans to propose such an amendment. Chapter 110D may have the effect of delaying or preventing a change of control of the Company at a premium price. In addition, because the number of shares of Common Stock entitled to vote is substantially less than the total number of outstanding shares of Common Stock, holders of shares of Common Stock purchased in transactions which are not control share acquisitions, and which occur at a time when there are Affected Shares outstanding, will obtain voting rights which are disproportionate to the number of shares held as a percentage of all outstanding shares (including Affected Shares), which may facilitate the acquisition of shareholdings which may permit the exercise of a controlling influence on the management or policies of the Company. In certain circumstances in connection with a control share acquisition, stockholders of the Company will be entitled to appraisal of their shares in accordance with the provisions of Section 86 to 98, inclusive, of Chapter 156B of the Massachusetts General Laws. The Company's Articles and Bylaws contain certain provisions that may have the effect of discouraging, delaying or preventing a change in control of the Company or unsolicited acquisition proposals that a stockholder might consider favorable, including provisions authorizing the issuance of "blank check" preferred stock, providing for a Board of Directors with staggered terms, requiring super-majority or class voting to effect certain amendments to the Articles and Bylaws and to approve certain business combinations, limiting the persons who may call special stockholders' meetings, and establishing advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholders' meetings. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is State Street Bank and Trust Company. 56 58 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have 13,292,636 shares of Common Stock outstanding without taking into account any outstanding options or options which may be granted following consummation of the Offering. All of the shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act, except for shares sold by persons deemed to be "affiliates" of the Company ("Affiliates") or acting as "underwriters," as those terms are defined in the Securities Act. All of the Common Stock held by existing stockholders of the Company were issued and sold by the Company in reliance on exemptions from the registration requirements of the Securities Act ("Restricted Shares"). These shares may be sold in the public market only if registered or pursuant to an exemption from registration such as those afforded by Rules 144 and 701 under the Securities Act. Subject to the lock-up period described below (See "Underwriting"), all of the remaining outstanding shares of Common Stock and the shares of Common Stock issuable upon conversion of the Series C Preferred Stock will be freely tradeable at the end of the 90-day period after the date of this Prospectus under Rules 144 and 701, subject to the restrictions on resale imposed upon Affiliates by Rule 144 under the Securities Act. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Prospectus, an Affiliate of the Company or other person (or persons whose shares are aggregated) who has beneficially owned Restricted Shares for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding Common Stock or (ii) the average weekly trading volume of the Common Stock on the NYSE during the four calendar weeks immediately preceding such sale. Sales pursuant to Rule 144 are also subject to certain requirements relating to manner of sale, notice and availability of current public information about the Company. A person (or persons whose shares are aggregated) who is not deemed to have been an Affiliate of the Company at any time during the 90 days immediately preceding the sale and who has beneficially owned Restricted Shares for at least two years is entitled to sell such shares pursuant to Rule 144(k) without regard to the limitations described above. Under Rule 701, an employee of the Company who purchased shares of Common Stock or was awarded options to purchase shares pursuant to a written compensation plan or contract meeting the requirements of Rule 701 under the Securities Act is entitled to rely on the resale provisions of Rule 701, which permits Affiliates and non-Affiliates to sell their Rule 701 shares without having to comply with the holding period restrictions of Rule 144, in each case commencing 90 days after the date of this Prospectus. In addition, non- Affiliates may sell Rule 701 shares without complying with the public information, volume and notice provisions of Rule 144. Subject to the lock-up period described below and the restrictions imposed on Affiliates of the Company under Rule 144, all of the Restricted Shares will be eligible for sale at the end of the 90-day period after the date of this Prospectus pursuant to Rules 144 and 701 under the Securities Act, without any restrictions imposed under those Rules. An aggregate of 2,176,964 shares of Common Stock are reserved for issuance to directors, executives, consultants and employees of the Company pursuant to the Stock Option Plans. The Company intends to file a registration statement on Form S-8 covering the issuance of shares of Common Stock pursuant to the Stock Option Plans. Accordingly, shares issued pursuant to the Stock Option Plans will be freely tradeable, subject to the restrictions on resale imposed on Affiliates by Rule 144 under the Securities Act. Prior to the Offering, there has been no public market for the Common Stock. Trading of the Common Stock is expected to commence following the completion of the Offering. There can be no assurance that an active trading market will develop or continue after the completion of the Offering or that the market price of the Common Stock will not decline below the initial public offering price. No predictions can be made as to the effect, if any, that future sales of shares of Common Stock, or the availability of such shares for sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock, or the ability of the Company to raise capital through the issuance of additional equity securities. 57 59 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS A general discussion of certain United States federal income and estate tax consequences of the acquisition, ownership and disposition of Common Stock applicable to Non-U.S. Holders (as defined) of Common Stock is set forth below. In general, a "Non U.S. Holder" is a person other than: (i) a citizen or resident (as defined for United States federal income or estate tax purposes, as the case may be) of the United States; (ii) a corporation or partnership organized in or under the laws of the United States or a political subdivision thereof; (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust if and only if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and (B) one or more United States trustees have the authority to control all substantial decisions of the trust. The discussion is based on current law and is provided for general information only. The discussion does not address aspects of United States federal taxation other than income and estate taxation and does not address all aspects of federal income and estate taxation. The discussion does not consider any specific facts or circumstances that may apply to a particular Non-U.S. Holder and does not address all aspects of United States federal income estate tax laws that may be relevant to Non-U.S. Holders that may be subject to special treatment under such laws (for example, insurance companies, tax-exempt organizations, financial institutions or broker-dealers). This discussion is based on the Internal Revenue Code of 1986, as amended, Treasury Regulations promulgated thereunder and administrative and judicial interpretations thereof, all of which are subject to change, possibly with retroactive effect. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK. DIVIDENDS In general, the gross amount of dividends paid to a Non-U.S. Holder will be subject to United States withholding tax at a 30% rate (or any lower rate prescribed by an applicable tax treaty) unless the dividends are (i) effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States and a Form 4224 is filed with the withholding agent or (ii) if a tax treaty applies, are attributable to a United States permanent establishment of the Non-U.S. Holder. If either exception applies, the dividend will be taxed at ordinary U.S. federal income tax rates. A Non-U.S. Holder may be required to satisfy certain certification requirements in order to claim the benefit of an applicable treaty rate or otherwise claim a reduction of, or exemption from, the withholding obligation pursuant to the above described rules. In the case of a Non-U.S. Holder that is a corporation, effectively connected income may also be subject to the branch profits tax, except to the extent that an applicable tax treaty provides otherwise. SALE OF COMMON STOCK Generally, a Non-U.S. Holder will not be subject to United States federal income tax on any gain realized upon the disposition of his Common Stock unless: (i) the Company has been, is, or becomes a "U.S. real property holding corporation" for federal income tax purposes and certain other requirements are met; (ii) the gain is effectively connected with a trade or business carried on by the Non-U.S. Holder within the United States; (iii) the Common Stock is disposed of by an individual Non-U.S. Holder who holds the Common Stock as a capital asset and is present in the United States for 183 days or more in the taxable year of the disposition or (iv) the Non-U.S. Holder is an individual who lost his U.S. citizenship within the last 10 years and such loss had, as one of its principle purposes, the avoidance of taxes, and the gains are considered derived from sources within the United States. The Company believes that it has not been, is not currently and, based upon its current business plans, is not likely to become a U.S. real property holding corporation. Non-U.S. Holders should consult applicable treaties, which may exempt from United States taxation gains realized upon the disposition of Common Stock in certain cases. 58 60 ESTATE TAX Common Stock owned or treated as owned by an individual Non-U.S. Holder at the time of his death will be includible in the individual's gross estate for United States federal estate tax purposes, unless an applicable treaty provides otherwise, and may be subject to United States federal estate tax. BACKUP WITHHOLDING AND INFORMATION REPORTING REQUIREMENTS On October 14, 1997, the IRS issued final regulations relating to withholding, information reporting and backup withholding that unify current certification procedures and forms and clarify reliance standards (the "Final Regulations"). The Final Regulations were intended to be effective with respect to payments made after December 31, 1998. The IRS has, however, recently issued a notice stating that such Final Regulations will not be effective until January 1, 2000. Except as provided below, this section describes rules applicable to payments made on or before the Final Regulations take effect. Backup withholding (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting and backup withholding rules) generally will not apply to (i) dividends paid to Non-U.S. Holders that are subject to the 30% withholding discussed above (or that are not so subject because a tax treaty applies that reduces or eliminates such 30% withholding) or (ii) dividends paid on the Common Stock to a Non-U.S. Holder at an address outside the United States. The Company will be required to report annually to the IRS and to each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with respect to, such holder, regardless of whether any tax was actually withheld. This information may also be made available to the tax authorities in the Non-U.S. Holder's country of residence. In the case of a Non-U.S. Holder that sells Common Stock to or though a United States office of a broker, the broker must backup withhold at a rate of 31% and report the sale to the IRS, unless the holder certifies its Non-U.S. status under penalties of perjury or otherwise establishes an exemption. In the case of a Non-U.S. Holder that sells Common Stock to or though the foreign office of a United States broker, or a foreign broker with certain types of relationships to the United States, the broker must report the sale to the IRS (but not backup withhold) unless the broker has documentary evidence in its files that the seller is a Non-U.S. Holder or certain other conditions are met, or the holder otherwise establishes an exemption. A Non-U.S. Holder will generally not be subject to information reporting or backup withholding if such Non-U.S. Holder sells the Common Stock to or through a foreign office of a Non-United States broker. Any amount withheld under the backup withholding rules from a payment to a holder is allowable as a credit against the holder's U.S. federal income tax, which may entitle the holder to a refund, provided that the holder furnishes the required information to the IRS. In addition, certain penalties may be imposed by the IRS on a holder who is required to supply information but does not do so in the proper manner. The Final Regulations eliminate the general current law presumption that dividends paid to an address in a foreign country are paid to a resident of that country. In addition, the Final Regulations impose certain certification and documentation requirements on Non-U.S. Holders claiming the benefit of a reduced withholding rate with respect to dividends under a tax treaty. Prospective purchasers of Common Stock are urged to consult their own tax advisors as to the application of the current rules regarding backup withholding and information reporting and as to the effect, if any, of the Final Regulations on their purchase, ownership and disposition of the Common Stock. 59 61 UNDERWRITING Upon the terms and subject to the conditions stated in the Underwriting Agreement dated , 1998, each Underwriter named below has severally agreed to purchase, and the Company and the Selling Stockholders have agreed to sell to such Underwriter, the number of shares of Common Stock set forth opposite the name of such Underwriter.
UNDERWRITERS NUMBER OF SHARES - ------------ ---------------- Smith Barney Inc. .......................................... Piper Jaffray Inc........................................... --------- Total.................................................. 4,000,000 =========
The Underwriting Agreement provides that the obligations of the several Underwriters to pay for and accept delivery of the shares are subject to approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to take and pay for all shares of Common Stock offered hereby (other than those covered by the over-allotment option described below) if any such shares are taken. The Underwriters, for whom Smith Barney Inc. and Piper Jaffray Inc. are acting as the Representatives, propose to offer part of the shares directly to the public at the public offering price set forth on the cover page of this Prospectus and part of the shares to certain Dealers at a price which represents a concession not in excess of $ per share under the public offering price. The Underwriters may allow, and such Dealers may reallow, a concession not in excess of $ per share to certain other Dealers. After the initial offering of the shares to the public, the public offering price and such concessions may be changed by the Representatives. The Representatives of the Underwriters have advised the Company and the Selling Stockholders that the Underwriters do not intend to confirm any shares to any accounts over which they exercise discretionary authority. The Selling Stockholders have granted to the Underwriters an option, exercisable for 30 days from the date of this Prospectus, to purchase up to 600,000 additional shares of Common Stock at the price to public set forth on the cover page of this Prospectus minus the underwriting discounts and commissions. The Underwriters may exercise such option solely for the purpose of covering over-allotments, if any, in connection with the Offering of the shares offered hereby. To the extent such option is exercised, each Underwriter will be obligated, subject to certain conditions, to purchase approximately the same percentage of such additional shares as the number of shares set forth opposite each Underwriter's name in the preceding table bears to the total number of shares listed in such table. The Company and the Selling Stockholders have agreed that, without the prior written consent of Smith Barney Inc., they will not, directly or indirectly, offer to sell, contract to sell, sell or otherwise dispose of, or announce the offering of, any shares of Common Stock or securities convertible into or exchangeable for Common Stock (except the shares sold to the Underwriters in connection with the Offering or pursuant to the Underwriters' over-allotment option or issuances by the Company pursuant to certain stock-based employment arrangements or agreements or shares issued pursuant to acquisitions) for a period of 180 days after the date of the Underwriting Agreement. Each executive officer, director and Selling Stockholder of the Company has agreed that, without the prior written consent of Smith Barney Inc., he or she will not, directly or indirectly, offer to sell, contract to sell, sell or otherwise dispose of any Common Stock, or securities convertible into or exchangeable for Common Stock (except Common Stock disposed of as bona fide gifts by such executive officers or directors, transferred upon exercise of existing warrants or options granted by them or transferred to a trust, partnership, corporation or other entity the beneficial ownership of which is solely owned by such person) for a period of 180 days after the date of the Underwriting Agreement. Smith Barney Inc. currently does not intend to release any securities subject to such lock-up agreements, but may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to such lock-up agreements. 60 62 At the request of the Company, the Underwriters have reserved up to 200,000 shares of Common Stock for sale at the public offering price to directors, officers and employees of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the Underwriters on the same basis as all other shares offered hereby. In connection with this Offering and in compliance with applicable law, the Underwriters may over-allot (i.e., sell more Common Stock than the total amount shown on the list of Underwriters and participations which appears above) and may effect transactions which stabilize, maintain or otherwise affect the market price of the Common Stock at levels above those which might otherwise prevail in the open market. Such transactions may include placing bids for the Common Stock or effecting purchases of the Common Stock for the purpose of pegging, fixing or maintaining the price of the Common Stock or for the purpose of reducing a syndicate short position created in connection with the Offering. A syndicate short position may be covered by exercise of the option described above in lieu of or in addition to open market purchases. In addition, the contractual arrangements among the Underwriters include a provision whereby if the Representatives purchase Common Stock in the open market for the account of the underwriting syndicate and the securities purchased can be traced to a particular Underwriter or member of the selling group, the underwriting syndicate may require the Underwriter or selling group member in question to purchase the Common Stock in question at the cost price to the syndicate or may recover from (or decline to pay to) the Underwriter or selling group member in question the selling concession applicable to the securities in question. The Underwriters are not required to engage in any of these activities and any such activities, if commenced, may be discontinued at any time. Prior to this Offering, there has not been any public market for the Common Stock of the Company. Consequently, the initial public offering price for the Shares of Common Stock included in this Offering has been determined by negotiations among the Company, the Selling Stockholders and the Representatives. Among the factors considered in determining such price were the history of and prospects for the Company's business and the industry in which it competes, an assessment of the Company's management and the present state of the Company's development, the past and present revenues and earnings, the current state of the economy in the United States and the current level of economic activity in the industry in which the Company competes and in related or comparable industries, and currently prevailing conditions in the securities markets, including current market valuations of publicly traded companies which are comparable to the Company. The Underwriting Agreement provides that the Company and the Selling Stockholders will indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriters may be required to make in respect thereof. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Edwards & Angell, LLP, Boston, Massachusetts. The Underwriters have been represented by Cravath, Swaine & Moore, New York, New York. EXPERTS The consolidated balance sheets as of December 31, 1996 and 1997 and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1997, included in this Prospectus and elsewhere in the registration statement, have been included herein in reliance upon the report of PricewaterhouseCoopers LLP, independent accountants, given upon the authority of said firm as experts in accounting and auditing. 61 63 AVAILABLE INFORMATION The Company has not previously been subject to the reporting requirements of the Securities Exchange Act of 1934, as amended. The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") with respect to the Common Stock offered hereby. This Prospectus, which constitutes a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information pertaining to the Company and the Common Stock offered by this Prospectus, reference is made to the Registration Statement and to the exhibits filed as a part thereof. Statements contained in this Prospectus concerning the contents of any contract, agreement or other document filed as an exhibit to the Registration Statement are summaries of the terms of such contracts, agreements or documents and are not necessarily complete. Reference is made to each such exhibit for a more complete description of the matters involved and such statements shall be deemed qualified in their entirety by such reference. The Registration Statement and the exhibits and schedules thereto may be inspected, without charge, and copies may be obtained at prescribed rates, at the public reference facility maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, Suite 300, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1300, Chicago, Illinois 60661-2511. The Registration Statement and other information filed by the Company with the Commission are also available at the web site maintained by the Commission on the World Wide Web at http://www.sec.gov. The Company intends to furnish its stockholders with annual reports containing audited financial statements certified by independent auditors and quarterly reports for the first three quarters of each fiscal year containing unaudited financial statements. 62 64 MICROFINANCIAL INCORPORATED INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-2 Financial Statements: Consolidated Balance Sheets as of December 31, 1996 and 1997, and March 31, 1998 (unaudited)...................... F-3 Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997, and for the three months ended March 31, 1997 (unaudited) and March 31, 1998 (unaudited)............................................... F-4 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1996 and 1997, and the three months ended March 31, 1998 (unaudited)............. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997, and for the three months ended March 31, 1997 (unaudited) and March 31, 1998 (unaudited)............................................... F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 65 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MicroFinancial Incorporated: We have audited the accompanying consolidated balance sheets of MicroFinancial Incorporated as of December 31, 1996 and 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 31, 1995, 1996 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MicroFinancial Incorporated as of December 31, 1996 and 1997, and the consolidated results of its operations and its cash flows for the years ended December 31, 1995, 1996 and 1997, in conformity with generally accepted accounting principles. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 27, 1998 F-2 66 MICROFINANCIAL INCORPORATED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31, ------------------- MARCH 31, 1996 1997 1998 -------- -------- ------------ (UNAUDITED) ASSETS Assets: Net investment in financing leases and loans: Receivables due in installments........................ $232,693 $238,979 $241,103 Estimated residual value............................... 14,702 16,784 16,907 Initial direct costs................................... 2,692 2,777 2,939 Loans receivable....................................... 238 2,467 4,235 Less: Advance lease payments and deposits.................. (186) (334) (428) Unearned income...................................... (76,951) (73,060) (72,299) Allowance for credit losses.......................... (23,826) (26,319) (27,475) -------- -------- -------- Net investment in financing leases and loans.............. 149,362 161,294 164,982 Investment in service contracts........................... -- 2,145 3,702 Cash and cash equivalents................................. 13,775 9,252 7,381 Property and equipment, net............................... 5,143 4,265 4,455 Other assets.............................................. 1,912 2,745 2,678 -------- -------- -------- Total assets...................................... $170,192 $179,701 $183,198 ======== ======== ======== LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Notes payable............................................... 116,202 116,830 114,791 Subordinated notes payable.................................. 27,006 26,382 27,391 Capitalized lease obligations............................... 1,523 1,071 1,069 Accounts payable............................................ 561 89 242 Dividends payable........................................... 242 294 296 Other liabilities........................................... 5,801 5,300 4,743 Income taxes payable........................................ 606 -- -- Deferred income taxes....................................... 6,072 10,969 13,077 -------- -------- -------- Total liabilities................................. 158,013 160,935 161,609 -------- -------- -------- Commitments and contingencies (Note J)...................... -- -- -- Redeemable convertible preferred stock (liquidation preference $12, at December 31, 1996 and 1997, and March 31, 1998)................................................. -- -- -- Stockholders' equity: Common stock.............................................. 97 98 99 Additional paid-in capital................................ 1,442 1,604 1,747 Retained earnings......................................... 10,841 17,366 20,181 Treasury stock, at cost................................... (100) (138) (138) Notes receivable from officers and employees.............. (101) (164) (300) -------- -------- -------- Total stockholders' equity........................ 12,179 18,766 21,589 -------- -------- -------- Total liabilities and stockholders' equity........ $170,192 $179,701 $183,198 ======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements. F-3 67 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
FOR THE THREE FOR THE YEARS ENDED MONTHS ENDED DECEMBER 31, MARCH 31, ----------------------------- ------------------ 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- (UNAUDITED) Revenues: Income on financing leases and loans... $27,011 $38,654 $45,634 $11,089 $11,510 Income on service contracts............ -- 6 501 4 288 Rental income.......................... 3,688 8,250 10,809 2,593 3,365 Loss and damage waiver fees............ 2,648 4,188 5,448 1,241 1,395 Service fees........................... 2,798 4,487 5,788 1,271 1,531 ------- ------- ------- ------- ------- Total revenues................. 36,145 55,585 68,180 16,198 18,089 ------- ------- ------- ------- ------- Expenses: Selling, general and administrative.... 8,485 14,073 17,252 3,515 4,281 Provision for credit losses............ 13,388 19,822 21,713 6,017 4,575 Depreciation and amortization.......... 1,503 2,981 3,787 863 1,177 Interest............................... 8,560 10,163 11,890 2,709 2,820 ------- ------- ------- ------- ------- Total expenses................. 31,936 47,039 54,642 13,104 12,853 Income before provision for income taxes.................................. 4,209 8,546 13,538 3,094 5,236 Provision for income taxes............... 1,685 3,466 5,886 1,267 2,125 ------- ------- ------- ------- ------- Net income............................... $ 2,524 $ 5,080 $ 7,652 $ 1,827 $ 3,111 ======= ======= ======= ======= ======= Net income per common share -- basic..... $ 0.34 $ 0.52 $ 0.78 $ 0.19 $ 0.32 ======= ======= ======= ======= ======= Net income per common share -- diluted... $ 0.27 $ 0.52 $ 0.77 $ 0.18 $ 0.32 ======= ======= ======= ======= ======= Dividends per common share............... $ 0.06 $ 0.10 $ 0.12 $ 0.03 $ 0.03 ======= ======= ======= ======= =======
F-4 68 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended December 31, 1995, 1996 and 1997, and the three months ended March 31, 1998 (unaudited) (in thousands, except share data)
NOTES COMMON STOCK ADDITIONAL RECEIVABLE TOTAL ------------------ PAID-IN RETAINED TREASURY FROM STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS STOCK OFFICERS EQUITY --------- ------ ---------- -------- -------- ---------- ------------- Balance at December 31, 1994...... 5,003,880 $50 $1,063 $ 4,737 $(100) $ 5,750 Exercise of stock options......... 1,399,400 14 326 340 Common stock dividends............ (580) (580) Conversion of preferred stock to common stock.................... 3,274,440 33 49 82 Notes receivable from officers.... $(205) (205) Net income........................ 2,524 2,524 --------- --- ------ ------- ----- ----- ------- Balance at December 31, 1995...... 9,677,720 97 1,438 6,681 (100) (205) 7,911 Exercise of options............... 5,620 4 4 Common stock dividends............ (920) (920) Notes receivable from officers.... 104 104 Net income........................ 5,080 5,080 --------- --- ------ ------- ----- ----- ------- Balance at December 31, 1996...... 9,683,340 97 1,442 10,841 (100) (101) 12,179 Exercise of stock options......... 120,910 1 162 163 Common stock dividends............ (1,127) (1,127) Purchase of treasury stock........ (5,250) (38) (38) Notes receivable from officers and employees....................... (63) (63) Net income........................ 7,652 7,652 --------- --- ------ ------- ----- ----- ------- Balance at December 31, 1997...... 9,799,000 98 1,604 17,366 (138) (164) 18,766 Exercise of options............... 74,036 1 143 144 Common stock dividends............ (296) (296) Notes receivable from officers and employees....................... (136) (136) Net income........................ -- 3,111 3,111 --------- --- ------ ------- ----- ----- ------- Balance at March 31, 1998 (unaudited)..................... 9,873,036 $99 $1,747 $20,181 $(138) $(300) $21,589 ========= === ====== ======= ===== ===== =======
The accompanying notes are an integral part of the consolidated financial statements. F-5 69 MICROFINANCIAL INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
FOR THE THREE MONTHS ENDED FOR THE YEARS ENDED DECEMBER 31, MARCH 31, --------------------------------- ----------------- 1995 1996 1997 1997 1998 -------- ---------- --------- ------- ------- (UNAUDITED) Cash flows from operating activities: Cash received from customers.............................. $60,632 $ 87,130 $118,444 $27,000 $31,259 Cash paid to suppliers and employees...................... (10,710) (16,708) (29,113) (8,937) (7,185) Interest paid............................................. (8,248) (10,724) (12,334) (3,082) (2,984) Interest received......................................... 285 406 396 119 210 ------- --------- -------- ------- ------- Net cash provided by operating activities........... 41,959 60,104 77,393 15,100 21,300 ------- --------- -------- ------- ------- Cash flows from investing activities: Investment in leased equipment............................ (74,133) (83,734) (72,347) (17,310) (17,227) Investment in direct costs................................ (1,992) (2,186) (2,354) (547) (757) Investment in service contracts........................... -- -- (2,568) -- (1,773) Investment in loans....................................... -- -- (2,538) -- (1,768) Purchase of property and equipment........................ (274) (628) (288) (56) (120) Proceeds from notes receivable from officers and employees............................................... -- -- (150) -- (144) Repayment of notes receivable from officers and employees............................................... 46 104 87 12 8 Investment in notes receivable............................ -- (349) (160) -- -- Repayment of notes receivable............................. -- 111 191 44 -- ------- --------- -------- ------- ------- Net cash used in investing activities............... (76,353) (86,682) (80,127) (17,857) (21,781) ------- --------- -------- ------- ------- Cash flows from financing activities: Proceeds from secured debt................................ 87,881 181,006 56,639 9,641 18,174 Repayment of secured debt................................. (17,023) (29,946) (56,194) (12,097) (20,211) Proceeds from refinancing of secured debt................. -- -- 203,580 40,000 49,500 Prepayment of secured debt................................ (33,390) (129,049) (203,580) (40,000) (49,500) Proceeds from notes payable............................... 548 123 497 110 -- Repayment of notes receivable from officers and employees............................................... (710) (833) (315) (54) -- Proceeds from issuance of subordinated debt............... 187 15,410 2,123 903 1,000 Repayment of subordinated debt............................ (619) (1,740) (2,891) (36) (20) Proceeds from exercise of common stock options............ 90 4 162 19 144 Repayment of capital leases............................... (159) (393) (697) (162) (186) Purchase of treasury stock................................ -- -- (38) -- -- Payment of dividends...................................... (650) (871) (1,075) (242) (291) ------- --------- -------- ------- ------- Net cash provided by (used in) financing activities........................................ 36,155 33,711 (1,789) (1,918) (1,390) ------- --------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents........ 1,761 7,133 (4,523) (4,675) (1,871) Cash and cash equivalents, beginning of period.............. 4,881 6,642 13,775 13,775 9,252 ------- --------- -------- ------- ------- Cash and cash equivalents, end of period.................... $ 6,642 $ 13,775 $ 9,252 $ 9,100 $ 7,381 ======= ========= ======== ======= ======= Reconciliation of net income to net cash provided by operating activities: Net income................................................ $ 2,524 $ 5,080 $ 7,652 $ 1,827 $ 3,111 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................... 1,503 2,981 3,787 863 1,177 Provision for credit losses............................. 13,388 19,822 21,713 6,017 4,575 Recovery of equipment cost and residual value, net of revenue recognized.................................... 20,972 29,378 41,334 7,109 10,666 Increase (decrease) in current taxes.................... 985 (379) (1,266) (601) -- Increase in deferred income taxes....................... 701 1,892 4,897 995 2,108 Change in assets and liabilities: Decrease (increase) in other assets..................... 317 (603) (173) (587) 67 (Decrease) increase in accounts payable................. (11) 711 65 385 153 Increase (decrease) in accrued liabilities.............. 1,580 1,222 (616) (908) (557) ------- --------- -------- ------- ------- Net cash provided by operating activities........... $41,959 $ 60,104 $ 77,393 $15,100 $21,300 ======= ========= ======== ======= ======= Cash paid for income taxes.................................. $ 34 -- $ 2,254 ======= ========= ======== Supplemental disclosure of noncash activities: Property acquired under capital leases.................... $ 849 $ 985 $ 246 $ 109 $ 183 Accrual of common stock dividends......................... $ 194 $ 242 $ 294 $ 267 $ 296 Conversion of preferred stock to common stock............. $ 82 -- -- -- --
The accompanying notes are an integral part of the consolidated financial statements. F-6 70 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (tables in thousands, except per share data) A. NATURE OF BUSINESS: MicroFinancial Incorporated (the "Company") which operates primarily through its wholly-owned subsidiary, Leasecomm Corporation, is a specialized commercial finance company that leases and rents "microticket" equipment and provides other financing services in amounts generally ranging from $900 to $2,500, with an average amount financed of approximately $1,400 and an average lease term of 45 months. The Company does not market its services directly to lessees but sources leasing transactions through a network of independent sales organizations and other dealer-based origination networks nationwide. The Company funds its operations primarily through borrowings under its credit facilities, issuances of subordinated debt and securitizations. One dealer accounted for 14% of originations in the year ended December 31, 1997. In July 1998, the Company changed its name from Boyle Leasing Technologies, Inc. to MicroFinancial Incorporated. In December 1992, May 1993 and November 1994, Leasecomm Corporation created wholly-owned subsidiaries, BLT Finance Corporation I ("BLT I"), BLT Finance Corporation II ("BLT II") and BLT Finance Corporation III ("BLT III"), respectively, which are special purpose corporations for the securitization and financing of lease receivables. In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 125"). SFAS No. 125 is effective for transactions entered into after December 31, 1996. Under SFAS No. 125, an entity will recognize the financial and servicing assets it controls and the liabilities it has incurred, derecognize financial assets when control has been surrendered and derecognize liabilities when extinguished. Effective January 1997, the Company adopted SFAS No. 125. While the Company generally does not sell its interests in leases, service contracts or loans to third parties after origination, the Company does, however, from time to time, contribute certain leases to special purpose corporations for purposes of obtaining financing in connection with its lease receivables. As these transfers do not result in a change in control over the lease receivables, sale treatment and related gain recognition under SFAS No. 125 does not occur. Accordingly, the lease receivable and related liability remain on the balance sheet. If SFAS No. 125 were effective for transactions prior to 1997, there would have been no change in the accounting for these financing transactions. During 1997 and 1996, the credit facilities related to the securitization on BLT I and BLT II were paid off, respectively. Both of these subsidiaries were dissolved on December 31, 1997. B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Presentation The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Unaudited Interim Financial Statements The interim financial data as of March 31, 1998, and for the three months ended March 31, 1997 and 1998, is unaudited; however, in the opinion of the Company, all adjustments necessary for a fair presentation of interim results of operations (consisting only of normal recurring accruals and adjustments) have been made to the interim consolidated financial statements. The consolidated results of operations for interim periods are not necessarily indicative of results of operations for the respective full year. F-7 71 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid instruments purchased with initial maturities of less than three months to be cash equivalents. Cash equivalents consist principally of overnight investments. Leases and Loans The Company's lease contracts are accounted for as financing leases. At origination, the Company records 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 which results in a level rate of return on the net investment in leases. Amortization of unearned lease income and initial direct costs is suspended if, in the opinion of management, the lease agreement is determined to be impaired. It is management's opinion given the nature of its business and the large number of small balance lease receivables that a lease is impaired when one of the following occur: (i) the obligor files for bankruptcy; (ii) the obligor dies and the equipment is returned; or (iii) when an account has become 360 days past due. It is also management's policy to maintain an allowance for credit losses that will be sufficient to provide adequate protection against losses in its portfolio. Management regularly reviews the collectibility of its lease receivables based upon all of its communications with the individual lessees through its extensive collection efforts and through further review of the creditworthiness of the lessee. In conjunction with the origination of leases, the Company may retain a residual interest in the underlying equipment upon termination of the lease. The value of such interests is estimated at inception of the lease and evaluated periodically for impairment. An impairment is recognized when expected cash flows to be realized subsequent to the end of the lease are expected to be less than the residual value recorded. Other revenues such as loss and damage waiver and service fees relating to the leases, contracts and loans and rental revenues are recognized as they are earned. Loans are reported at their outstanding principal balance. Interest income on loans is recognized as it is earned. Allowance for Credit Losses The Company maintains an allowance for credit losses on its investment in leases, service contracts and loans at an amount that it believes is sufficient to provide adequate protection against losses in its portfolio. The allowance is determined principally on the basis of the historical loss experience of the Company and the level of recourse provided by such lease, service contract or loan, if any, and reflects management's judgment of additional loss potential considering future economic conditions and the nature and characteristics of the underlying lease portfolio. The Company determines the necessary periodic provision for credit losses taking into account actual and expected losses in the portfolio as a whole and the relationship of the allowance to the net investment in leases, service contracts and loans. F-8 72 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) Investment in Service Contracts The Company's investments in cancelable service contracts are recorded at cost and amortized over the expected life of the service period. Income on service contracts from monthly billings is recognized as the related services are provided. The Company periodically evaluates whether events or circumstances have occurred that may affect the estimated useful life or recoverability of the investment in service contracts. Property and Equipment Rental equipment is recorded at estimated residual value and depreciated using the straight-line method over a period of twelve months. Office furniture, equipment and capital leases are recorded at cost and depreciated using the straight-line method over a period of three to five years. Leasehold improvements are amortized over the shorter of the life of the lease or the asset. Upon retirement or other disposition, the cost and related accumulated depreciation of the assets are removed from the accounts and the resulting gain or loss is reflected in income. Fair Value of Financial Instruments For financial instruments including cash and cash equivalents, investments in financing leases and loans, accounts payable, and accrued expenses, it is assumed that the carrying amount approximates fair value due to their short maturity. Interest-Rate Hedging Agreements The Company enters into interest-rate hedging agreements to hedge against potential increases in interest rates on the Company's outstanding borrowings. The Company's policy is to accrue amounts receivable or payable under such agreements as reductions or increases in interest expense, respectively. Debt Issuance Costs Debt issuance costs incurred in securing credit facility financing are capitalized and subsequently amortized over the term of the credit facility. Income Taxes Deferred income taxes are determined under the liability method. Differences between the financial statement and tax bases of assets and liabilities are measured using the currently enacted tax rates expected to be in effect when these differences reverse. Deferred tax expense is the result of changes in the liability for deferred taxes. The principal differences between assets and liabilities for financial statement and tax return purposes are the treatment of leased assets, accumulated depreciation and provisions for doubtful accounts. The deferred tax liability is reduced by loss carryforwards and alternative minimum tax credits available to reduce future income taxes. F-9 73 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) Net Income Per Common Share The Company has adopted Statement of Financial Accounting Standard No. 128, "Earnings Per Share," ("SFAS No. 128") which specifies the computation, presentation and disclosure requirements for net income per common share. Basic net income per common share is computed based on the weighted average number of common shares outstanding during the period, adjusted for a 10-to-1 stock split as described in Note H. Diluted net income per common share gives effect to all dilutive potential common shares outstanding during the period. Under SFAS No. 128, the computation of diluted earnings 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 FOR THE YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------------------ ----------------------- 1995 1996 1997 1997 1998 ---------- ---------- ---------- ---------- ---------- (UNAUDITED) Net income........................... $ 2,524 $ 5,080 $ 7,652 $ 1,827 $ 3,111 Shares used in computation: Weighted average common shares outstanding used in computation of net income per common share.................. 7,352,188 9,682,850 9,793,140 9,775,636 9,799,822 Dilutive effect of redeemable convertible preferred stock... 1,676,420 39,200 19,600 19,600 19,600 Dilutive effect of common stock options....................... 419,598 48,562 112,589 112,589 45,749 ---------- ---------- ---------- ---------- ---------- Shares used in computation of net income per common share -- assuming dilution........................... 9,448,206 9,770,612 9,925,329 9,907,825 9,865,171 ========== ========== ========== ========== ========== Net income per common share.......... $ 0.34 $ 0.52 $ 0.78 $ 0.19 $ 0.32 ========== ========== ========== ========== ========== Net income per common share -- assuming dilution.................. $ 0.27 $ 0.52 $ 0.77 $ 0.18 $ 0.32 ========== ========== ========== ========== ==========
Options to purchase 4,246 shares of common stock were outstanding during the year ended December 31, 1995, but were not included in the calculation of diluted net income per common share because the option price was greater than the average market price of the common shares during the period. New Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This statement requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for fiscal years beginning after December 15, 1997 and the Company has adopted its provisions in 1998. The Company has evaluated the impact this statement will have on its financial statements and determined that no additional disclosure is required. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Internal Use Software," ("SOP 98-1") which provides guidance on the accounting for the costs of software developed or obtained for internal use. SOP 98-1 is effective for fiscal years beginning after December 15, 1998. The Company does not expect the statement to have a material impact on its financial position or results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting and reporting standards for derivative instruments and requires that an F-10 74 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. SFAS No. 133 is effective for companies with fiscal years beginning after June 15, 1999 and the Company will adopt its provisions in 2000. The Company has not yet evaluated the impact this statement will have on its financial position or results of operations. Reclassification of Prior Year Balances Certain reclassifications have been made to prior years' consolidated financial statements to conform to the current presentation. C. LEASES AND LOANS At December 31, 1997, future minimum payments on the Company's lease receivables are as follows:
FOR THE YEAR ENDED DECEMBER 31, - ------------------ 1998................................................... $110,801 1999................................................... 73,752 2000................................................... 42,500 2001................................................... 11,105 2002................................................... 669 Thereafter............................................. 152 -------- Total.................................................. $238,979 ========
At December 31, 1997, the weighted average remaining life of leases in the Company's lease portfolio is approximately 28 months and the implicit rate of interest is approximately 35%. The Company's business is characterized by a high incidence of delinquencies which in turn may lead to significant levels of defaults. The Company evaluates the collectibility of leases originated and loans based on the level of recourse provided, if any, delinquency statistics, historical lease experience, current economic conditions and other relevant factors. The Company provides an allowance for credit losses for leases which are considered impaired. The Company historically took charge-offs against its receivables when such receivables were 360 days past due. During this period, cumulative net charge-offs after recoveries from the Company's inception to date were approximately 7% of total cumulative receivables plus total billed fees over such period. In September and October 1996, the Company reduced the time period for charging off its non-securitized receivables from 360 to 240 days and, as a result, increased its charge-offs by a total of approximately $5.0 million. As a result of this change, recoveries increased significantly, indicating that a 240-day charge-off period was too early in the collection process to determine ultimate collectibility. As such, during 1997 and the first quarter of 1998, net charge-offs after recoveries were not significantly different than the Company's historical net charge-off experience. For this reason, in January 1998, the Company changed its charge-off policy for its receivables back to 360 days to better reflect the Company's collection experience. F-11 75 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) The following table sets forth the Company's allowance for credit losses as of December 31, 1994, 1995, 1996 and 1997 and the related provisions, charge-offs and recoveries for the years ended December 31, 1995, 1996 and 1997 (in thousands): Balance at December 31, 1994................................ $ 7,992 Provision for credit losses................................. 13,388 Charge-offs................................................. 5,964 Recoveries.................................................. 536 ------- Charge-offs, net of recoveries.............................. 5,428 ------- Balance at December 31, 1995................................ $15,952 Provision for credit losses................................. 19,822 Charge-offs................................................. 15,675 Recoveries.................................................. 3,727 ------- Charge-offs, net of recoveries.............................. 11,948 ------- Balance at December 31, 1996................................ $23,826 Provision for credit losses................................. 21,713 Charge-offs................................................. 24,290 Recoveries.................................................. 5,070 ------- Charge-offs, net of recoveries.............................. 19,220 ------- Balance at December 31, 1997................................ $26,319
In conjunction with the origination of leases, the Company may retain a residual interest in the underlying equipment upon termination of the lease. The value of such interests is estimated at inception of the lease and evaluated periodically for impairment. The following table sets forth the Company's estimated residual value as of December 31, 1994, 1995, 1996 and 1997 and changes in the Company's estimated residual value as a result of new originations and lease terminations for the years ended December 31, 1995, 1996 and 1997 (in thousands): Balance of Estimated Residual Value at December 31, 1994.... $ 7,971 New Originations............................................ 5,338 Lease Terminations.......................................... 2,342 Balance of Estimated Residual Value at December 31, 1995.... $10,967 New Originations............................................ 6,335 Lease Terminations.......................................... 2,600 Balance of Estimated Residual Value at December 31, 1996.... $14,702 New Originations............................................ 6,056 Lease Terminations.......................................... 3,974 Balance of Estimated Residual Value at December 31, 1997.... $16,784
- --------------- * New originations represent the residual value added to the Company's estimated residual value upon origination of new leases. Lease terminations represent the residual value deducted from the Company's estimated residual value upon the termination of a lease (i) that is bought out during or at the end of the lease term; (ii) upon expiration of the original lease term when the lease converts to an extended rental contract and (iii) that has been charged off by the Company. F-12 76 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) D. PROPERTY AND EQUIPMENT: At December 31, 1996 and 1997, property and equipment consisted of the following:
DECEMBER 31, ---------------- 1996 1997 ------ ------ Rental equipment............................................ $4,845 $5,588 Computer equipment.......................................... 2,628 2,998 Office equipment............................................ 571 634 Leasehold improvements...................................... 224 224 ------ ------ 8,268 9,444 Less accumulated depreciation and amortization.............. 3,125 5,179 ------ ------ Total....................................................... $5,143 $4,265 ====== ======
Depreciation and amortization expense totaled $1,503,000, $2,981,000, and $3,787,000 for the years ended December 31, 1995, 1996 and 1997, respectively. At December 31, 1996 and 1997, computer equipment includes $2,092,287 and $2,339,000, respectively, under capital leases. Accumulated amortization related to capital leases amounted to $611,000 and $1,306,000 at December 31, 1996 and 1997, respectively. At December 31, 1997, accumulated depreciation related to rental equipment amounted to $3,060,000. E. NOTES PAYABLE: The Company has a revolving line of credit and term loan facility with a group of financial institutions whereby it may borrow a maximum of $105,000,000 based upon qualified lease receivables. Outstanding borrowings with respect to the revolving line of credit bear interest based either at prime for prime rate loans or London Interbank Offered Rate (LIBOR) plus 1.85% for LIBOR loans. If the LIBOR loans are not renewed upon their maturity then they automatically convert into prime rate loans. The prime rates at December 31, 1997 and 1996 were 8.5% and 8.25%, respectively. The 90-day LIBOR at December 31, 1997 and 1996 was 5.91% and 5.78%, respectively. At December 31, 1997, the Company had borrowings outstanding under the agreement with the following terms:
TYPE EXPIRATION RATE AMOUNT - ---- ---------- ------ ------- Prime...................................... Revolving 8.5000% $ 6,634 LIBOR...................................... 2/10/98 7.7250% 12,000 Fixed...................................... 11/24/98 8.3000% 5,798 Fixed...................................... 8/2/99 7.7500% 9,273 ------- Total $33,705 =======
F-13 77 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) At December 31, 1996, the Company had borrowings outstanding under the agreement with the following terms:
TYPE EXPIRATION RATE AMOUNT - ---- ---------- ------ ------- Prime...................................... Revolving 8.2500% $ 6,966 LIBOR...................................... 1/13/97 8.0976% 5,000 LIBOR...................................... 2/10/97 8.0000% 25,000 Fixed...................................... 1/1/97 8.0000% 5 Fixed...................................... 11/24/98 8.3000% 12,030 Fixed...................................... 8/2/99 7.7500% 15,054 ------- Total $64,055 =======
Outstanding borrowings are collateralized by leases and service contracts pledged specifically to the financial institutions. All balances under the revolving line of credit will be automatically converted to a term loan on July 31, 1999 provided the line of credit is not renewed and no event of default exists at that date. All converted term loans are repayable over the term of the underlying leases, but not in any event to exceed 48 monthly installments. The most restrictive covenants of the agreement have minimum net worth and income requirements and limit payment of dividends to no more than 50% of consolidated net income, as defined, for the immediately preceding fiscal year. The Company has an additional revolving credit agreement and term loan with a group of financial institutions whereby it may borrow up to a maximum of $35,000,000 based on qualified lease receivables. Outstanding borrowings with respect to the revolving line of credit bear interest based either at prime for prime rate loans or LIBOR plus 1.85% for LIBOR loans. If the LIBOR loans are not renewed upon their maturity then they automatically convert into prime rate loans. At December 31, 1997, the Company had borrowings outstanding under the agreement with the following terms:
TYPE EXPIRATION RATE AMOUNT - ---- ---------- ------- ------- Variable Revolving 8.5000% $ 2,816 LIBOR 1/6/98 7.5688% 17,500 LIBOR 3/10/98 8.4375% 5,000 LIBOR 2/10/98 7.6273% 3,000 Fixed 11/24/98 8.3000% 68 Fixed 8/2/99 7.7500% 797 ------- Total $29,181 =======
At December 31, 1996, the Company had borrowings outstanding under the agreement with the following terms:
TYPE EXPIRATION RATE AMOUNT - ---- ---------- ------- ------- Prime Revolving 8.2500% $ 3,123 LIBOR 1/10/97 8.9770% 5,000 LIBOR 3/12/97 8.0313% 10,000 Fixed 11/24/98 8.3000% 605 Fixed 8/2/99 7.7500% 1,091 ------- Total $19,819 =======
Outstanding borrowings are collateralized by leases and service contracts pledged specifically to the financial institutions. All balances under the revolving line of credit will be automatically converted to a term F-14 78 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) loan on July 31, 1999 provided the line of credit is not renewed and no event of default exists at that date. All converted term loans are repayable over the term of the underlying leases, but not in any event to exceed 24 monthly installments. The most restrictive covenants of the agreement have minimum net worth and income requirements and limit payment of dividends to no more than 50% of consolidated net income, as defined, for the immediately preceding fiscal year. BLT I has one term facility with a group of financial institutions whereby it borrowed $7,870,000 based upon qualified lease receivables. At December 31, 1996, the outstanding balance on this term facility was $614,000. The outstanding borrowings bear interest at a fixed rate of 7.23%. At December 31, 1997, no amounts were outstanding on this term facility. BLT III has four series of notes, the 1994-A Notes, the 1996-A Notes, the 1997-A Notes and the Warehouse Notes. In November 1994, BLT III issued the 1994-A Notes in aggregate principal amount of $18,885,000. In May 1996, BLT III issued the 1996-A Notes in aggregate principal amount of $23,407,000, and in August 1997, BLT III issued the 1997-A Notes in aggregate principal amount of $44,763,000. Pursuant to a Master Financing Indenture, the Company may issue one additional series of Term Notes, the warehouse notes, with a maximum principal amount of $20,000,000. At December 31, 1996, the Company had an outstanding balance on the warehouse notes of $5,809,000. The warehouse notes expired in August of 1997, at which time they were converted to BLT III 1997-A Notes. \ At December 31, 1996 and 1997, BLT III had borrowings outstanding under the three series of notes with the following terms:
NOTE SERIES EXPIRATION RATE 1996 1997 - ----------- ---------- ----------- ------- ------- 1994-A Notes....................... 12/16/98 7.3300% $ 6,619 $ 721 1996-A Notes....................... 5/16/00 6.6900% 19,081 13,214 1997-A Notes....................... 1/16/03 6.4200% -- 39,620 Warehouse Notes.................... LIBOR + .45% 5,809 -- ------- ------- Total $31,509 $53,555 ======= =======
Outstanding borrowings are collateralized by a specific pool of lease receivables. At December 31, 1996 and 1997, the Company also has other notes payable which totaled $205,000 and $389,000, respectively. The notes are due on demand and bear interest at a rate of prime less 1.00%. Other notes payable include amounts due to stockholders of the Company at December 31, 1996 and 1997, of $197,000 and $337,000, respectively. Interest paid to stockholders under such notes was not material for the years ended December 31, 1995, 1996 and 1997. Subordinated Notes Payable At December 31, 1996 and 1997, the Company also has senior subordinated and subordinated debt outstanding amounting to $27,006,000 and $26,382,000 respectively, net of unamortized discounts of $357,000 and $213,000, respectively. This debt is subordinated in the rights to the Company's notes payable to the primary lenders as described above. Outstanding borrowings bear interest ranging from 9.5% to 14% for fixed rate financing and prime plus 3% to 4% for variable rate financing. These notes have maturity dates ranging from January 1998 to October 2003. The Company has three senior subordinated notes. The first was issued in August 1994 at 12% to a financial institution with an aggregate principal amount of $7,500,000. Cash proceeds from this note were $6,743,000 net of a discount of $757,000 which is being amortized over the life of the note. This senior note requires annual payments of $1,500,000 commencing on July 15, 1997 until the note matures in July 2001. The second senior subordinated note was issued in October 1996 at 12.25% to a financial institution with an aggregate principal amount of $5,000,000. This senior note requires monthly payments of F-15 79 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) (i) $125,000 for the period November 1, 1998 through October 1, 2000 and (ii) $166,667 for the period November 1, 2000 until the note matures in October 1, 2001. The third senior subordinated note was issued in October 1996 at 12.60% to a financial institution with an aggregate principal amount of $5,000,000. This senior note requires quarterly payments of $250,000 commencing on March 15, 1999 until the note matures in October 2003. The most restrictive covenants of the senior subordinated note agreements consist of minimum net worth and interest coverage ratio requirements and restrictions on payment of dividends. Subordinated notes payable include $2,712,000 due to stockholders. Interest paid to stockholders under such notes, at rates ranging between 8% and 14%, amounted to $207,000, $183,000 and $472,000 for the years ended December 31, 1995, 1996, and 1997, respectively. At December 31, 1997, the repayment schedule, assuming conversion of the revolving line of credit to a term loan, for outstanding notes and subordinated notes is as follows:
FOR THE YEAR ENDED DECEMBER 31, - ------------------ 1998 $ 62,512 1999........................................................ 52,576 2000........................................................ 17,269 2001........................................................ 7,372 2002........................................................ 2,345 Thereafter.................................................. 1,351 -------- 143,425 Unamortized discount on senior subordinated debt............ (213) -------- Total....................................................... $143,212 ========
It is estimated that the carrying amounts of the Company's borrowings under its variable rate revolving credit agreements approximate their fair value. The fair value of the Company's short-term and long-term fixed rate borrowings is estimated using discounted cash flow analysis, based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. At December 31, 1996 and 1997, the aggregate carrying value of the Company's fixed rate borrowings was approximately $82,500,000 and $96,900,000, respectively, with an estimated fair value of approximately $75,700,000 and $92,900,000, respectively. F. NOTES RECEIVABLE FROM OFFICERS AND EMPLOYEES: During 1995 and 1997, the Company issued notes to certain officers and employees in connection with the exercise of common stock options amounting to $251,000 and $63,000, respectively, in exchange for recourse loans with fixed maturity dates prior to the expiration date of the original grant. The notes are non-interest bearing unless the principal amount thereof is not paid in full when due, at which time interest accrues and is payable at a rate per annum equal to the prime rate plus 4.0%. The notes can be repaid from the application of dividends paid on the common stock but in all cases are to be paid in full at the maturity date or upon the employee leaving the Company. At December 31, 1996 and 1997, notes receivable outstanding from officers and employees were $101,000 and $164,000, respectively. G. REDEEMABLE PREFERRED STOCK: At December 31, 1996 and 1997, the Company had authorized 88,231 shares of convertible preferred stock ("preferred stock") with a par value of $1.00, of which 490 shares of the Series C Convertible Preferred Stock were issued and outstanding, respectively, at December 31, 1996 and 1997. F-16 80 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) Shares of preferred stock are convertible into shares of common stock at the option of the holder according to a conversion formula (which would currently result in a one-for-forty exchange) with mandatory conversion upon the completion of a public offering meeting certain minimum proceeds, as defined. Holders of the preferred stock are entitled to an annual cumulative dividend of $.765 per share, if and when declared. The holder of the preferred stock has a liquidation preference of $25.50 for preferred stock, plus earned and unpaid dividends. In addition, the preferred shareholder is entitled to vote as a class, proportional to the number of common shares into which his preferred shares are convertible. H. STOCKHOLDERS' EQUITY: Common Stock The Company had 2,400,000 and 25,000,000 authorized shares of common stock with a par value of $.01 per share of which 9,683,340 and 9,799,000 shares were issued and outstanding at December 31, 1996 and 1997, respectively. Treasury Stock The Company had 137,340 and 142,590 shares of common stock in treasury at December 31, 1996 and 1997, respectively, and 490 shares of preferred stock in treasury at December 31, 1996 and 1997. Stock Split On June 16, 1997, the Company's Board of Directors authorized a ten-for-one stock split. This resulted in the issuance of 4,471,353 additional shares of common stock. On June 12, 1998, the Company's Board of Directors authorized a two-for-one stock split. This resulted in the issuance of 10,015,626 additional shares of common stock. All share and per share amounts have been restated to reflect these stock splits. Stock Options In 1987, the Company adopted its 1987 Stock Option Plan (the "Plan") which provides for the issuance of qualified or nonqualified options to purchase shares of the Company's common stock. In 1997, the Company's Board of Directors approved an amendment to the Plan, as a result of the stock split. The aggregate number of shares issued shall not exceed 1,220,000 and the exercise price of any outstanding options issued pursuant to the Plan shall be reduced by a factor of ten and the number of outstanding options issued pursuant to the Plan shall be increased by a factor of ten. Qualified stock options, which are intended to qualify as "incentive stock options" under the Internal Revenue Code, may be issued to employees at an exercise price per share not less than the fair value of the common stock at the date granted as determined by the Board of Directors. Nonqualified stock options may be issued to officers, employees and directors of the Company as well as consultants and agents of the Company at an exercise price per share not less than fifty percent of the fair value of the common stock at the date of grant as determined by the Board. The vesting periods and expiration dates of the grants are determined by the Board of Directors. The option period may not exceed ten years. F-17 81 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) The following summarizes the stock option activity:
WEIGHTED AVERAGE SHARES PRICE PER SHARE EXERCISE PRICE ------ --------------- -------------- Outstanding at December 31, 1994......... 1,466,680 $0.10625 to $0.6375 $ 0.275 Exercised................................ (1,399,400) $0.10625 to $0.6375 $ 0.260 Granted.................................. 320,000 $0.6375 to $1.95 $ 1.910 ----------- Outstanding at December 31, 1995......... 387,280 $0.6375 to $1.95 $ 1.690 Exercised................................ (5,620) $0.6375 $0.6375 ----------- Outstanding at December 31, 1996......... 380,760 $0.6375 to $1.95 $ 1.705 Exercised................................ (120,910) $0.6375 to $1.95 $ 0.975 Canceled................................. (9,750) $1.95 $ 1.950 ----------- Outstanding at December 31, 1997......... 251,000 $0.6375 to $1.95 $ 1.870 ===========
The options vest over five years and are exercisable only after they become fully vested. At December 31, 1996 and 1997, 114,220 and 65,988 of the outstanding options were fully vested. At December 31, 1996 and 1997, 401,260 and 270,600 shares of common stock were reserved for conversion of redeemable convertible preferred stock and common stock option exercises. Information relating to stock options at December 31, 1997, summarized by exercise price is as follows:
OUTSTANDING EXERCISABLE ---------------------------------------- ------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE EXERCISE PRICE SHARES LIFE (YEARS) EXERCISE PRICE SHARES ---------------- ------- ------------ ---------------- ------ $0.6375 15,620 3.6 $0.6375 5,144 $1.95 235,380 5.0 $ 1.95 60,844 ------- ------ $0.6375 to $1.95 250,000 4.9 $ 1.85 65,988 ======= ======
All stock options issued to employees have an exercise price not less than the fair market value of the Company's common stock on the date of grant. In accordance with accounting for such options utilizing the intrinsic value method there is no related compensation expense recorded in the Company's financial statements. Effective for fiscal 1996, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that compensation under a fair value method be determined using a Black-Scholes option pricing model and disclosed in a pro forma effect on earnings and earnings per share. Had compensation cost for stock based compensation been determined based on the fair value at the grant dates consistent with the method of SFAS No. 123, the Company's pro forma net income applicable to common stock for the years ended December 31, 1995, 1996 and 1997 would have been $2,516,000, $5,072,000 and $7,644,000, respectively. Pro forma net income per common share would not have been different than net income per common share as reported. The fair value of option grants is estimated on the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1995: an expected life of the options of seven years, a risk-free interest rate of approximately 5.5%, a dividend yield of 4%, and no volatility. The weighted average fair value at date of grant for options granted during 1995 approximated $.27 per option. There were no options granted in 1996 or 1997. F-18 82 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) I. INCOME TAXES: The provision for income taxes consists of the following:
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1995 1996 1997 ---- ---- ---- Current: Federal............................................... $ 985 $1,556 $ 898 State................................................. -- 18 91 ------ ------ ------ 985 1,574 989 ------ ------ ------ Deferred: Federal............................................... 299 1,100 3,703 State................................................. 401 792 1,194 ------ ------ ------ 700 1,892 4,897 ------ ------ ------ Total............................................ $1,685 $3,466 $5,886 ====== ====== ======
At December 31, 1996 and 1997, the components of the net deferred tax liability were as follows:
1996 1997 ---- ---- Investment in leases, other than allowance.................. $ 61,832 $ 64,405 Allowance for credit losses................................. (9,478) (108) Operating lease depreciation................................ (44,892) (45,001) Debt issue costs............................................ 648 455 Other....................................................... 1,257 1,947 Alternative minimum tax..................................... (2,536) (3,983) Loss carryforwards.......................................... (759) (6,746) --------- -------- Total............................................. $ 6,072 $ 10,969 ========= ========
The following is a reconciliation between the effective income tax rate and the applicable statutory federal income tax rate:
FOR THE YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ---- ---- ---- Federal statutory rate...................................... 34.0% 34.0% 34.0% State income taxes, net of federal benefit.................. 6.3 6.3 6.7 Nondeductible expenses and other............................ 1.0 0.3 2.8 ---- ---- ---- Effective income tax rate................................... 41.3% 40.6% 43.5% ==== ==== ====
At December 31, 1997, the Company had passive loss carryforwards of approximately $16,752,000 which may be used to offset future passive income. These loss carryforwards are available indefinitely for use against future passive income. J. COMMITMENTS AND CONTINGENCIES: The Company's lease for its facility in Waltham, Massachusetts expires in 1999. This lease contains one five-year renewal option with escalation clauses for increases in the lessor's operating costs. The Company's lease for its facilities in Newark, California expires in 2001. F-19 83 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) The Company has entered into various operating lease agreements ranging from three to four years for additional office equipment. At December 31, 1997, future minimum lease payments under noncancelable operating leases with remaining terms in excess of one year are as follows:
FOR THE YEAR ENDED DECEMBER 31: - ------------------------------- 1998........................................................ $ 930 1999........................................................ 570 2000........................................................ 55 2001........................................................ 38 ------ Total............................................. $1,593 ======
Rental expense under operating leases totaled $793,000, $788,000 and $991,000 for the years ended December 31, 1995, 1996 and 1997, respectively. The Company has entered into various capital lease agreements ranging from three to four years for office equipment, computer equipment and telecommunication systems. At December 31, 1997, future minimum lease payments under capital leases were as follows:
FOR THE YEAR ENDED DECEMBER 31: - ------------------------------- 1998........................................................ $ 682 1999........................................................ 383 2000........................................................ 42 ------ Total minimum lease payments................................ 1,107 Less amounts representing interest.......................... (36) ------ Total....................................................... $1,071 ======
The Company and its subsidiaries are frequently parties to various claims, lawsuits and administrative proceedings arising in the ordinary course of business. Although the outcome of these lawsuits cannot be predicted with certainty, the Company does not expect such matters to have a material adverse effect on the financial condition or results of operations of the Company. K. EMPLOYEE BENEFIT PLAN: The Company has a defined contribution plan under Section 401(k) of the Internal Revenue Code to provide retirement and profit sharing benefits covering substantially all full-time employees. Employees are eligible to contribute up to 15% of their gross salary. The Company will contribute $.50 for every $1.00 contributed by an employee up to 3% of the employee's salary. Vesting in the Company contributions is over a five-year period based upon 20% per year. The Company's contribution to the defined contribution plan were $52,000, $72,000 and $106,000 for the years ended December 31, 1995, 1996 and 1997, respectively. L. INTEREST RATE SWAP: Interest rate swap contracts involve the exchange by the Company with another party of their respective commitments to pay or receive interest, e.g., an exchange of floating rate payments for fixed rate payments with respect to a notional amount of principal. The Company has entered into this contract to reduce the impact of changes in interest rates on its floating rate debt. The Company has entered into this interest rate swap agreement only on a net basis, which means that the two payment streams are netted out, with the Company receiving or paying, as the case may be, only the net amount of the two payments. Interest rate swaps do not involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate swaps is limited to the net amount F-20 84 MICROFINANCIAL INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (tables in thousands, except per share data) of payments that the Company is contractually entitled to receive, if any. Interest rate swaps entered into by the Company may not be readily marketable. At December 31, 1997, the Company had outstanding one interest rate swap agreement with one of its banks, having a total notional principal amount of $17,500,000. The agreement effectively changes the Company's interest rate exposure on $17,500,000 of its floating rate $35,000,000 revolving line of credit due July 31, 1999 to a fixed 8.45%. The interest rate swap matures on July 10, 2000. The interest differential paid or received on the swap agreement is recognized as an adjustment to interest expense. Interest expense related to the swap was $78,000 for the year ended December 31, 1997. At December 31, 1997, the fair value of this interest rate swap, which represents the amount the Company would receive or pay to terminate the agreement, is a net payable of $333,000, based on dealer quotes. The market risk exposure from the interest rate swap is assessed in light of the underlying interest rate exposures. Credit risk exposure from the swap is minimized as the agreement is with a major financial institution. The Company monitors the creditworthiness of this financial institution and full performance is anticipated. M. CONCENTRATION OF CREDIT RISK: The Company's financial instruments that are exposed to concentrations of credit risk consist primarily of lease and loan receivables and cash and cash equivalent balances. To reduce the risk to the Company, stringent credit policies are followed in approving leases and loans, and lease pools are closely monitored by management. In addition, the cash and cash equivalents are maintained with several high quality financial institutions. F-21 85 =============================================================================== NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary.................... 3 Risk Factors.......................... 7 Use of Proceeds....................... 14 Dividend Policy....................... 15 Capitalization........................ 16 Dilution.............................. 16 Selected Consolidated Financial and Operating Data...................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 20 Business.............................. 27 Management............................ 38 Certain Transactions.................. 45 Principal Stockholders................ 46 Selling Stockholders.................. 47 Description of Certain Indebtedness... 48 Description of Capital Stock.......... 54 Shares Eligible for Future Sale....... 57 Certain United States Tax Consequences to Non-United States Holders........ 58 Underwriting.......................... 60 Legal Matters......................... 61 Experts............................... 61 Available Information................. 62 Index to Financial Statements......... F-1
Until , 1998 (25 days after the commencement of the Offering), all Dealers effecting transactions in the Common Stock, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of Dealers to deliver a Prospectus when acting as Underwriters and with respect to their unsold allotments or subscriptions. =============================================================================== =============================================================================== 4,000,000 SHARES MICROFINANCIAL INCORPORATED COMMON STOCK [LOGO] SALOMON SMITH BARNEY PIPER JAFFRAY INC. =============================================================================== 86 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee, the NYSE filing fee and the NYSE listing fee. SEC registration fee........................................ $16,963 NYSE filing fee............................................. * NYSE listing fee............................................ * NASD filing fee............................................. * Transfer Agent fees and expenses............................ * Printing expenses........................................... * Legal fees and expenses..................................... * Blue Sky fees and expenses.................................. * Accounting fees and expenses................................ * Appraisal fee............................................... * Directors and Officers insurance premiums................... * Trustees' and Transfer Agent fees........................... * Miscellaneous............................................... * ------- Total....................................................... $ * =======
- --------------- * To be filed by amendment ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 67 of Chapter 156B of the Massachusetts General Laws ("Section 67") provides that a corporation may indemnify its directors and officers to the extent specified in or authorized by (i) the articles of organization, (ii) a by-law adopted by the stockholders, or (iii) a vote adopted by the holders of a majority of the shares of stock entitled to vote on the election of directors. In all instances, the extent to which a corporation provides indemnification to its directors and officers under Section 67 is optional. The Company's by-laws provide that the Company shall, to the extent legally permissible, indemnify any person serving or who has served as a director or officer of the corporation against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by the director or officer in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he or she may be involved or with which he or she may be threatened, while serving or thereafter, by reason of being or having been such a director or officer, except with respect to any matter as to which he or she shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his or her action was in the best interests of the Company; provided, however, that as to any matter disposed of by a compromise payment by such director or officer, no indemnification for said payment or expenses shall be provided unless such compromise is approved as in the best interests of the Company. Expenses reasonably incurred by any such director or officer in connection with the defense or disposition of any such action, suit or other proceeding may be paid from time to time by the Company in advance of final disposition. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES Except as set forth below, the Registrant did not sell any securities which were not registered under the Securities Act during the three-year period ended May 19, 1998. II-1 87 COMMON STOCK
NO. OF SHARES OF AGGREGATE EXEMPTION PURCHASER ISSUANCE DATE COMMON STOCK CONSIDERATION CLAIMED* - --------- ------------- ---------------- ------------- --------- Richard F. Latour..................... June, 1995 13,240 $ 8,440.50 Rule 701 Michael Lannon........................ June, 1995 11,380 7,254.75 Rule 701 J. Gregory Hines...................... June, 1995 580 369.75 Rule 701 Eliot Vestner......................... July, 1995 12,000 7,650.00 Rule 701 Jeffrey Parker........................ July, 1995 20,000 12,750.00 Rule 701 Thomas Layton......................... July, 1995 20,000 12,750.00 Rule 701 Alan Zakon............................ July, 1995 40,000 25,500.00 Rule 701 J. Gregory Hines...................... July, 1995 580 369.75 Rule 701 Maureen Curran........................ July, 1995 50,000 5,375.00 Rule 701 Brian Boyle........................... July, 1995 13,600 8,670.00 Rule 701 Torrence Harder....................... July, 1995 13,600 8,670.00 Rule 701 Michael Lannon........................ September, 1995 11,380 7,254.75 Rule 701 Peter R. Bleyleben.................... December, 1995 31,800 20,272.50 Rule 701 Richard F. Latour..................... December, 1995 12,720 8,109.00 Rule 701 J. Gregory Hines...................... December, 1995 1,000 637.50 Rule 701 Michael Lannon........................ January, 1996 4,620 2,945.25 Rule 701 J. Gregory Hines...................... June, 1996 1,000 637.50 Rule 701 J. Gregory Hines...................... January, 1997 6,060 11,817.00 Rule 701 John Plumlee.......................... January, 1997 16,000 10,200.00 Rule 701 John Plumlee.......................... January, 1997 6,060 11,817.00 Rule 701 Maureen Curran........................ January, 1997 10,000 6,375.00 Rule 701 Maureen Curran........................ January, 1997 6,060 11,817.00 Rule 701 Stephen Obana......................... January, 1997 6,060 11,817.00 Rule 701 James Anderson........................ January, 1997 6,060 11,817.00 Rule 701 Stephen Constantino................... January, 1997 3,040 5,928.00 Rule 701 Carol Salvo........................... January, 1997 6,060 11,817.00 Rule 701 Kerry Frost........................... January, 1997 3,040 5,928.00 Rule 701 Richard F. Latour..................... January, 1997 17,180 33,501.00 Rule 701 J. Gregory Hines...................... March, 1997 3,020 1,925.25 Rule 701 Peter R. Bleyleben.................... March, 1997 8,200 5,227.50 Rule 701 Richard F. Latour..................... March, 1997 15,540 9,906.75 Rule 701 Richard F. Latour..................... March, 1997 3,280 2,091.00 Rule 701 Sabrina Abruzzese..................... October, 1997 15,000 29,250.00 Rule 701 Sabrina Abruzzese..................... October, 1997 5,250 10,237.50 Rule 701 Richard F. Latour..................... March, 1998 458 291.98 Rule 701 Richard F. Latour..................... March, 1998 21,198 41,336.10 Rule 701 Maureen Curran........................ March, 1998 7,486 14,597.70 Rule 701 John Plumlee.......................... March, 1998 7,486 14,597.70 Rule 701 J. Gregory Hines...................... March, 1998 7,486 14,597.70 Rule 701 Stephen Obana......................... March, 1998 7,486 14,597.70 Rule 701
- --------------- * Shares issued pursuant to exercises of options granted under the Company's 1987 Stock Option Plan. II-2 88
NO. OF SHARES OF AGGREGATE EXEMPTION PURCHASER ISSUANCE DATE COMMON STOCK CONSIDERATION CLAIMED* - --------- ------------- ---------------- ------------- --------- James Andersen........................ March, 1998 7,486 $14,597.70 Rule 701 Stephen Constantino................... March, 1998 3,732 7,277.40 Rule 701 Carol Salvo........................... March, 1998 7,486 14,597.70 Rule 701 Kerry Frost........................... March, 1998 3,732 7,277.40 Rule 701
- --------------- * Shares issued pursuant to exercises of options under the Company's 1987 Stock Option Plan. SUBORDINATED DEBT
ISSUE AGGREGATE EXEMPTION PURCHASER DATE PRINCIPAL AMOUNT CLAIMED** - --------- ----- ---------------- --------- Parker Family Ltd. Partnership.......... May 1, 1995 $ 200,000 Section 4(2) Bay Resource Corporation MPP/........... June 1, 1995 38,000 Section 4(2) Bay Resource Corporation................ December 1, 1995 104,000 Section 4(2) Ingrid R. Bleyleben..................... February 16, 1996 120,000 Section 4(2) Dorothy B. Watkins...................... March 12, 1996 50,000 Section 4(2) Parker Family Ltd. Partnership.......... June 1, 1996 500,000 Section 4(2) Joan S. Cushman......................... July 1, 1996 50,000 Section 4(2) Maud P. Barton.......................... July 1, 1996 100,000 Section 4(2) Richard M. Barton 1992 Trust............ July 1, 1996 100,000 Section 4(2) Sally Mann.............................. July 1, 1996 100,000 Section 4(2) DKFM Fritz Froehlich.................... September 1, 1996 25,000 Section 4(2) Laura Hentschel......................... September 1, 1996 20,000 Section 4(2) Aegon Insurance Group................... October 15, 1996 5,000,000 Section 4(2) Rothschild Inc.......................... October 17, 1996 5,000,000 Section 4(2) A. Harold Howell........................ November 1, 1996 260,000 Section 4(2) Phyllis Pace............................ November 18, 1996 50,000 Section 4(2) Wakefield Management Inc................ November 18, 1996 500,000 Section 4(2) Alan & Virginia Jones................... November 21, 1996 90,000 Section 4(2) Carolyn G. Harder....................... November 21, 1996 50,000 Section 4(2) Charles Everett MDPA.................... November 25, 1996 45,000 Section 4(2) David D. Williams....................... November 26, 1996 45,000 Section 4(2) The Planetary Trust..................... November 26, 1996 45,000 Section 4(2) Peter R. Bleyleben...................... December 1, 1996 100,000 Section 4(2) Parker Family Ltd. Partnership.......... December 2, 1996 1,250,000 Section 4(2) Ken & Jill Duckman 1992 Char............ December 3, 1996 45,000 Section 4(2) Glimer Enterprises Ltd.................. December 5, 1996 45,000 Section 4(2) Rosemary Broton Boyle................... December 5, 1996 45,000 Section 4(2) Harold P. Weintraub..................... December 6, 1996 22,500 Section 4(2) Mary H. Thomsen......................... December 6, 1996 22,500 Section 4(2) Webjake Partnership Ltd................. December 6, 1996 45,000 Section 4(2) Virginia A. Santonelli.................. December 9, 1996 22,500 Section 4(2) Bender Living Trust 12/3/96............. December 13, 1996 45,000 Section 4(2) Meredith Dickinson...................... December 13, 1996 22,500 Section 4(2) Dean R. Wasserman Essex................. December 16, 1996 45,000 Section 4(2) Dorothy R. Johns Living Trust........... December 16, 1996 45,000 Section 4(2) - ------------------------------------------------------------------------------------------------ ** Securities issued to (i) directors, executive officers or their immediate family members, (ii) accredited investors or (iii) less than 35 non-accredited investors in any 12-month period.
II-3 89
ISSUE AGGREGATE EXEMPTION PURCHASER DATE PRINCIPAL AMOUNT CLAIMED** - --------- ----- ---------------- --------- Charles E. Johns........................ December 17, 1996 $ 67,500 Section 4(2) Ingrid R. Bleyleben..................... December 17, 1996 25,000 Section 4(2) Elaine F. Shimberg...................... December 18, 1996 90,000 Section 4(2) U/W/O Edward C. Mack 1973 Trust......... December 18, 1996 45,000 Section 4(2) Barnet Fain............................. December 19, 1996 45,000 Section 4(2) Judith Harper IRA 230-96X28............. December 20, 1996 45,000 Section 4(2) Mandell Shimberg IRA MLPFS.............. December 20, 1996 90,000 Section 4(2) Marjorie & Mark Steinberg............... December 20, 1996 45,000 Section 4(2) MLPFS IRA BANK 23075R16................. December 20, 1996 45,000 Section 4(2) MLPFS Sherwood IRA 23096W47............. December 20, 1996 45,000 Section 4(2) Barry W. Fain........................... December 23, 1996 45,000 Section 4(2) Elaine B. Fain.......................... December 23, 1996 45,000 Section 4(2) Max & Diane Weissberg................... December 23, 1996 45,000 Section 4(2) Sadelle Bernstein, TTE.................. December 23, 1996 54,000 Section 4(2) SEFF Living Trust 2/1/89................ December 23, 1996 45,000 Section 4(2) Barnet Fain IRA......................... December 24, 1996 45,000 Section 4(2) David & Janet Handelman................. December 24, 1996 45,000 Section 4(2) MLPFS Patricia B. McCord IRA............ December 24, 1996 90,000 Section 4(2) Foresight Foundation.................... December 27, 1996 45,000 Section 4(2) Gretchen Ingram......................... December 27, 1996 45,000 Section 4(2) Richard C. Warmer....................... December 27, 1996 90,000 Section 4(2) Ann A. Groves........................... January 2, 1997 50,000 Section 4(2) Bishop Living Trust..................... January 2, 1997 36,000 Section 4(2) Edith Bishop............................ January 2, 1997 18,000 Section 4(2) Elizabeth B. Alvord Trust U/W........... January 2, 1997 200,000 Section 4(2) Harvey S. Stein......................... January 2, 1997 45,000 Section 4(2) Sheng Ren Trust......................... January 2, 1997 45,000 Section 4(2) John B. Power........................... February 1, 1997 22,500 Section 4(2) Ted L. Carelock......................... February 26, 1997 90,000 Section 4(2) The Riddle Foundation................... March 20, 1997 90,000 Section 4(2) Joanne T. Witt.......................... March 27, 1997 22,500 Section 4(2) Ted L. Carelock......................... March 27, 1997 100,000 Section 4(2) Ms. Ann Elkins.......................... April 4, 1997 90,000 Section 4(2) CPC Defined Benefit Trust............... April 15, 1997 90,000 Section 4(2) Charles T. Zwicker TTEE................. May 27, 1997 100,000 Section 4(2) Ingrid R. Bleyleben..................... June 4, 1997 20,000 Section 4(2) Alan Goldfine Irrevocable Trust......... July 1, 1997 300,000 Section 4(2) Elie Rivollier Jr. IRA Rollover......... July 1, 1997 100,000 Section 4(2) Mary Rivollier JR IRA Rollover.......... July 1, 1997 150,000 Section 4(2) Mr. & Mrs. J. Bryan Mims................ July 1, 1997 300,000 Section 4(2) Steven Puskar........................... August 18, 1997 30,000 Section 4(2) Parker Family Ltd. Partnership.......... September 1, 1997 250,000 Section 4(2) George E. & Joanna Copoulos............. September 9, 1997 20,000 Section 4(2) Andrew Mills............................ December 1, 1997 100,000 Section 4(2) Gary L. Roubos & Terie A. Roubos........ January 23, 1998 1,000,000 Section 4(2) Alan J. Zakon IRA Rollover.............. March 18, 1998 100,000 Section 4(2) - ------------------------------------------------------------------------------------------------ ** Issued to (i) directors, executive officers or their immediate family members, (ii) accredited investors or (iii) less than 35 non-accredited investors in any 12-month period.
II-4 90 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement(1). 3.1 Restated Articles of Incorporation, as amended. 3.2 Bylaws. 4.1 Specimen of Common Stock Certificate(1). 5.1 Opinion of Edwards & Angell, LLP. 10.1 Amended and Restated Revolving Credit Agreement among The First National Bank of Boston, Commerzbank Bank AG, New York Branch, and Leasecomm Corporation dated August 6, 1996(2). 10.2 Agreement and Amendment No. 1 to Amended and Restated Revolving Credit Agreement among The First National Bank of Boston, Commerzbank Bank AG, New York Branch, and Leasecomm Corporation dated September 23, 1997(2). 10.3 Amended and Restated Loan Agreement between Leasecomm Corporation and NatWest Bank N.A. dated July 28, 1995(2). 10.4 First Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and NatWest Bank N.A. dated October 30, 1995(2). 10.5 Second Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and Fleet Bank, N.A. (formerly NatWest Bank N.A.) dated August 6, 1996(2). 10.6 Third Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and Fleet Bank, N.A. dated August 11, 1997(2). 10.7 Office Lease Agreement by and between AJ Partners Limited Partnership and Leasecomm Corporation dated July 12, 1993 for facilities in Newark, California(2). 10.8 Office Lease Agreement by and between MicroFinancial Incorporated and Desmond Taljaard and Howard Friedman, Trustees of London and Leeds Bay Colony I Realty Trust, dated April 14, 1994 for facilities in Waltham, Massachusetts(2). 10.9 1987 Stock Option Plan(2). 10.10 Forms of Grant under 1987 Stock Option Plan(2). 10.11 Board of Directors Stock Unit Compensation Plan(2). 10.12 1998 Equity Incentive Plan(1). 10.13 Employment Agreement between the Company and Peter R. Bleyleben(1). 10.14 Employment Agreement between the Company and Richard F. Latour(1). 10.15 Standard Terms and Condition of Indenture dated as of November 1, 1994 governing the BLT Finance Corp. III ("BLT III") 6.42% Lease-Backed Notes, Series 1997-A (the "1997-A Notes") and the BLT Finance Corp. III 6.69% Lease-Backed Notes, Series 1996-A (the "1996-A Notes"). 10.16 Specific Terms and Conditions of Indenture dated as of November 1, 1994 and amended and restated as of May 1, 1996 governing the 1996-A Notes and the 1997-A Notes. 10.17 Supplement to Indenture dated May 1, 1996 governing the 1996-A Notes. 10.18 Supplement to Indenture dated August 1, 1997 governing the 1997-A Notes. 10.19 Specimen 1997-A Note. 10.20 Specimen 1996-A Note. 10.21 Standard Terms and Conditions of Servicing governing the 1996-A Notes and the 1997-A Notes.
II-5 91
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.22 Specific Terms and Conditions of Servicing governing the 1996-A Notes and the 1997-A Notes. 11.1 Statement regarding computation of per share earnings(2). 21.1 Subsidiaries of Registrant(2). 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Edwards & Angell, LLP (see Exhibit 5.1). 24.1 Powers of Attorney(2). 27 Financial Data Schedule(2).
- --------------- (1) To be filed by amendment. (2) Previously filed. (b) FINANCIAL STATEMENT SCHEDULES Not applicable ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as are required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to any arrangement, provisions or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than that payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (i) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (ii) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement for the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-6 92 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Waltham, Commonwealth of Massachusetts, on the 3rd day of August, 1998. MICROFINANCIAL INCORPORATED BY: /s/ PETER R. BLEYLEBEN -------------------------------------- Peter R. Bleyleben President, Chief Executive Officer and Director Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 1 to the Registration Statement on Form S-1 has been signed below by the following persons in the capacities and on the dates indicated:
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ PETER R. BLEYLEBEN President, Chief Executive Officer August 3, 1998 - --------------------------------------------------- and Director Peter R. Bleyleben /s/ RICHARD F. LATOUR Executive Vice President, Chief August 3, 1998 - --------------------------------------------------- Operating Officer and Chief Richard F. Latour Financial Officer * Director August 3, 1998 - --------------------------------------------------- Brian E. Boyle * Director August 3, 1998 - --------------------------------------------------- Torrence C. Harder * Director August 3, 1998 - --------------------------------------------------- Jeffrey Parker * Director August 3, 1998 - --------------------------------------------------- Alan Zakon
*BY: /S/ PETER R. BLEYLEBEN ------------------------------------------------ Peter R. Bleyleben Attorney-in-Fact II-7 93 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement(1). 3.1 Restated Articles of Incorporation, as amended. 3.2 Bylaws. 4.1 Specimen of Common Stock Certificate(1). 5.1 Opinion of Edwards & Angell, LLP. 10.1 Amended and Restated Revolving Credit Agreement among The First National Bank of Boston, Commerzbank Bank AG, New York Branch, and Leasecomm Corporation dated August 6, 1996(2). 10.2 Agreement and Amendment No. 1 to Amended and Restated Revolving Credit Agreement among The First National Bank of Boston, Commerzbank Bank AG, New York Branch, and Leasecomm Corporation dated September 23, 1997(2). 10.3 Amended and Restated Loan Agreement between Leasecomm Corporation and NatWest Bank N.A. dated July 28, 1995(2). 10.4 First Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and NatWest Bank N.A. dated October 30, 1995(2). 10.5 Second Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and Fleet Bank, N.A. (formerly NatWest Bank N.A.) dated August 6, 1996(2). 10.6 Third Amendment to Amended and Restated Loan Agreement between Leasecomm Corporation and Fleet Bank, N.A. dated August 11, 1997(2). 10.7 Office Lease Agreement by and between AJ Partners Limited Partnership and Leasecomm Corporation dated July 12, 1993 for facilities in Newark, California(2). 10.8 Office Lease Agreement by and between MicroFinancial Incorporated and Desmond Taljaard and Howard Friedman, Trustees of London and Leeds Bay Colony I Realty Trust, dated April 14, 1994 for facilities in Waltham, Massachusetts(2). 10.9 1987 Stock Option Plan(2). 10.10 Forms of Grant under 1987 Stock Option Plan(2). 10.11 Board of Directors Stock Unit Compensation Plan(2). 10.12 1998 Equity Incentive Option Plan(1). 10.13 Employment Agreement between the Company and Peter R. Bleyleben(1). 10.14 Employment Agreement between the Company and Richard F. Latour(1). 10.15 Standard Terms and Condition of Indenture dated as of November 1, 1994 governing the BLT Finance Corp. III ("BLT III") 6.42% Lease-Backed Notes, Series 1997-A (the "1997-A Notes") and the BLT Finance Corp. III 6.69% Lease-Backed Notes, Series 1996-A (the "1996-A Notes"). 10.16 Specific Terms and Conditions of Indenture dated as of November 1, 1994 and amended and restated as of May 1, 1996 governing the 1996-A Notes and the 1997-A Notes. 10.17 Supplement to Indenture dated May 1, 1996 governing the 1996-A Notes. 10.18 Supplement to Indenture dated August 1, 1997 governing the 1997-A Notes. 10.19 Specimen 1997-A Note. 10.20 Specimen 1996-A Note. 10.21 Standard Terms and Conditions of Servicing governing the 1996-A Notes and the 1997-A Notes. 10.22 Specific Terms and Conditions of Servicing governing the 1996-A Notes and the 1997-A Notes. 11.1 Statement regarding computation of per share earnings(2).
94
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 21.1 Subsidiaries of Registrant(2). 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Edwards & Angell, LLP (see Exhibit 5.1). 24.1 Powers of Attorney(2). 27 Financial Data Schedule(2).
- --------------- (1) To be filed by amendment. (2) Previously filed. 2 EX-3.1 2 ARTICLES OF INCORPORATION 1 EXHIBIT 3.1 FEDERAL IDENTIFICATION NO. 04-2962824 ----------- - -------- Examiner THE COMMONWEALTH OF MASSACHUSETTS WILLIAM FRANCIS GALVIN Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 RESTATED ARTICLES OF ORGANIZATION - -------- (GENERAL LAWS, CHAPTER 156B, SECTION 74) Name Approved We, Peter R. Bleyleben , *President --------------------------------------------------- and Richard F. Latour , *Clerk -------------------------------------------------- of Boyle Leasing Technologies, Inc. , -------------------------------------------------- (Exact name of corporation) located at 950 Winter Street, Waltham, MA 02154 , ------------------------------------------------------ (Street address of corporation in Massachusetts) do hereby certify that the following Restatement of the Articles of Organization was duly adopted at a meeting held on JULY 9, 1998 by a vote of: 4,026,797 shares of Common Stock of 4,936,518 shares outstanding, - -------------- ------------------------------ ------------------------------- (type, class & series, if any) shares of of shares outstanding, and - -------------- ------------------------------ ------------------------------- (type, class & series, if any) shares of of shares outstanding, - -------------- ------------------------------ ------------------------------- (type, class & series, if any)
**being at least a majority of each type, class or series outstanding and entitled to vote thereon: ARTICLE I C [ ] The name of the corporation is: P [ ] MicroFinancial Incorporated M [ ] ARTICLE II The purpose of the corporation is to engage in the following business activities: R.A. [ ] See attached Article II. *Delete the inapplicable words. **delete the inapplicable clause. NOTE: IF THE SPACE PROVIDED UNDER ANY ARTICLE OR ITEM ON THIS FORM IS INSUFFICIENT, ADDITIONS SHALL BE SET FORTH ON SEPARATE 8 1/2 X 11 SHEETS OF PAPER WITH A LEFT MARGIN OF AT LEAST 1 INCH. ADDITIONS TO MORE THAN ONE ARTICLE MAY BE MADE ON A SINGLE SHEET SO LONG AS EACH ARTICLE REQUIRING EACH ADDITION IS CLEARLY - ------- INDICATED. P.C. 2 ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue.
- --------------------------------------------------------------------------------------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE - --------------------------------------------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - --------------------------------------------------------------------------------------------------------------------- Common: Common 25,000,000 $.01 - --------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------- Preferred: Preferred 5,000,000 $.01 - --------------------------------------------------------------------------------------------------------------------- Series C 1987 9,800 $1.00 Convertible Preferred - ---------------------------------------------------------------------------------------------------------------------
ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See attached Article IV ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See attached Article VI **If there are no provisions state "None". NOTE: THE PRECEDING SIX (6) ARTICLES ARE CONSIDERED TO BE PERMANENT AND MAY ONLY BE CHANGED BY FILING APPROPRIATE ARTICLES OF AMENDMENT. 3 ARTICLE VII The effective date of the restated Articles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE ARTICLES OF ORGANIZATION. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 950 Winter Street, Waltham, MA 02154 b. The name, residential address and post office address of each director and officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Peter R. Bleyleben 66 Norfolk Road Chestnut Hill, MA 02467 Treasurer: Richard F. Latour 29 Cherubs Way Hampstead, NH 03841 Clerk: Richard F. Latour 29 Cherubs Way Hampstead, NH 03841 Directors: Peter R. Bleyleben 66 Norfolk Road Chestnut Hill, MA 02467 Brian E. Boyle 11 Whispering Lane Weston, MA 02193 Torrence C. Harder 675 Sudbury Road Concord, MA 01742 Jeffrey Parker 253 Meadowbrook Road Weston, MA 02193 Alan Zakon 31A Pumpkin Cay Road Key Largo, FL 33037
c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and business address of the resident agent, if any, of the corporation is: Gerald P. Hendrick c/o Edwards & Angell, LLP, 101 Federal Street, Boston, MA 02110 **We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendments to the following articles. Briefly describe amendments below: See Attached Article VIII** SIGNED UNDER THE PENALTIES OF PERJURY, this 9 day of JULY , 1998, --- --------------- -- , *President - ------------------------------------------------------------------- , *Clerk - ----------------------------------------------------------------------- *Delete the inapplicable words. **If there are no amendments, state "None". 4 THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B, SECTION 74) ======================================== I hereby approve the within Restated Articles of Organization and, the filing fee in the amount of $____ having been paid, said articles are deemed to have been filed with me this ___ day of_______ 19__. Effective date:______________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: JOEL S. GOLDBERG, ESQ. -------------------------------------------- c/o EDWARDS & ANGELL, LLP -------------------------------------------- 101 Federal Street BOSTON, MA 02110 Telephone: (617) 951-2244 ---------------------------------- 5 ARTICLE II a. To provide services to businesses engaged in the leasing industry and other related service industries, including but not limited to the sale of computer software systems. b. To carry on any business or other activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, whether or not related to those referred to in the foregoing paragraph. 6 ARTICLE IV The total number of shares which the Corporation is authorized to issue is 30,009,800 shares of which 25,000,000 shares shall be designated "Common Stock" and 5,000,000 shares shall be designated "Preferred Stock," each with a par value of $0.01 per share, and 9,800 shares shall be designated "Series C 1987 Convertible Preferred Stock" with a par value of $1.00 per share. The designations, preferences, voting powers, qualifications and special or relative rights or privileges of the Preferred Stock, shall be as determined by the Board of Directors of the Corporation. Any and all shares issued and for which full consideration has been paid or delivered shall be deemed fully paid stock and the holder thereof shall not be liable for any further payment thereon. A. PREFERRED STOCK Shares of Preferred Stock, par value $.01 per share (the "Preferred Stock") may be issued from time to time in one or more series as may be determined by the Board of Directors of the Corporation. Subject to the provisions of these Articles of Organization and this Article IV, the Board of Directors of the Corporation is authorized to determine or alter the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued class or series of Preferred Stock and, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors of the Corporation originally fixing the number of shares constituting any such additional series, to increase or decrease (but not below the number of shares of such series then outstanding) the number of shares of any such additional series subsequent to the issue of shares of that series. Authorized and unissued shares of Preferred Stock may be issued with such designations, voting powers, preferences and relative participating optional or other special rights, and qualifications, limitations and restrictions on such rights, as the Board of Directors of the Corporation may authorize by resolutions duly adopted prior to the issuance of any shares of any class or series of Preferred Stock, including, but not limited to: (i) the distinctive designation of each series and the number of shares that will constitute such series; (ii) the voting rights, if any, of shares of such series and whether the shares of any such series having voting rights shall have multiple votes per share; (iii) the dividend rate on the shares of such series, any restriction, limitation or condition upon the payment of such dividends, whether dividends shall be cumulative and the dates on which dividends are payable; (iv) the prices at which, and the terms and conditions on which, the shares of such series may be redeemed, if such shares are redeemable; (v) the purchase or sinking fund provisions, if any, for the purchase or redemption of shares of such series; (vi) any preferential amount payable upon shares of such series in the event of the liquidation, dissolution or winding-up of the Corporation or the distribution of its assets; and (vii) the prices or rates of conversion at which, and the terms and conditions on which, the shares are convertible. 7 B. SERIES C 1987 CONVERTIBLE PREFERRED STOCK SECTION 1. DIVIDEND RIGHTS. 1.1 The holders of the Series C 1987 Convertible Preferred Stock, par value $1.00 per share ("Series C Preferred Stock"), shall be entitled to receive, out of the net income of the Corporation, after taxes, but before extraordinary items ("Net Income"), cash dividends at the rate of $.765 per share, per annum, payable yearly on the 31st day of December. 1.2. If, in any year, the Corporation does not have sufficient Net Income to make the full dividend payments required hereunder, it shall make payments to the holders of the outstanding shares of Series C Preferred Stock ratably in proportion to the respective amounts the holders of such shares of Series C Preferred Stock would be entitled to receive if they were paid in full all preferential amounts pursuant to Section 2.1 hereof, to the extent that the Corporation has sufficient Net Income, and shall accumulate the unpaid dividends and pay the same when there is sufficient Net Income, providing no agreement with any lender or lending institution is thereby violated. SECTION 2. LIQUIDATION RIGHTS. 2.1. Upon the voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the holders of the shares of the Series C Preferred Stock then outstanding shall be entitled to receive out of the assets of the Corporation (whether representing capital or surplus), before any payment or distribution shall be made on the Common Stock or upon any other class or series of stock ranking junior to the Series C Preferred Stock as to liquidation rights or dividends, $25.50 per share, plus dividends earned and unpaid in respect of the Series C Preferred Stock pursuant to Section 1.1 hereof, and no more. 2.2 If the assets distributable on any dissolution, liquidation or winding up of the Corporation, whether voluntary or involuntary, shall be insufficient to permit the payment to the holders of the Series C Preferred Stock of the full preferential amounts attributable thereto, then the entire assets of the Corporation, or the proceeds thereof, shall be distributed among the holders of the Series C Preferred Stock ratably, in proportion to the respective amounts the holders of such shares of Series C Preferred Stock would be entitled to receive if they were paid in full all preferential amounts pursuant to Section 2.1 hereof. 2.3 Upon any such liquidation, dissolution or winding up of the Corporation after the holders of the Series C Preferred Stock shall have been paid in full the amounts to which they shall be entitled, the remaining net assets of the Corporation shall be distributed pro rata to the holders of Common Stock. 2.4 Written notice of such liquidation, dissolution or winding up, stating a payment date or dates, the aggregate amount of all liquidation payments to be made, the place where said sums shall be payable and an estimate comparing the amounts of liquidating payments per share of Series C Preferred Stock which a holder thereof would receive if (a) every share of Series C Preferred Stock (including such holder's shares) were converted prior to liquidation and (b) if no shares of Series C Preferred Stock outstanding as of the date of said notice were converted, shall -2- 8 be given by first class mail, postage prepaid, not less than 30 days prior to the payment date stated therein, to the holders of record of the Series C Preferred Stock, such notice to be addressed to each holder of the Series C Preferred Stock at his post office address as shown by the records of the Corporation. Neither the consolidation nor merger of the Corporation into or with any other corporation or corporations, nor any other corporation's merger into the Corporation, nor reduction of the capital stock of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of any of the provisions of this Section 2. 2.5 Upon the conversion of the shares of Series C Preferred Stock into shares of Common Stock pursuant to Section 4 hereof, the holder of such shares of Common Stock shall not be entitled to any preferential payment or distribution in case of any dissolution, liquidation or winding up of the Corporation subsequent thereto, but shall share ratably in any distribution of the assets of the Corporation, or the proceeds thereof, to all the holders of Common Stock. SECTION 3. VOTING RIGHTS. 3.1 Each holder of record of Series C Preferred Stock shall be entitled to vote at all meetings of stockholders and shall, except with respect to matters as to which the Series C Preferred Stock shall be entitled as a matter of law to a class vote, have at any such meeting that number of votes as shall equal the number of shares of Common Stock into which said holder's shares of Series C Preferred Stock would be convertible, pursuant to Sections 4 and 5 hereof. 3.2 Unless the vote or consent of the holders of a greater number of shares of Series C Preferred Stock shall at the time be required by law, the consent of the holders of at least a majority in interest of all the Series C Preferred Stock at the time outstanding (given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of the Series C Preferred Stock shall vote separately from the Common Stock but as a single class) shall be necessary for authorizing, effecting or validating any one or more of the following: (a) any amendment or repeal of any of the provisions of the Articles of Organization, as amended, or of any by-law of the Corporation or of any certificate filed pursuant to law and setting forth the designation, description and terms of the Series C Preferred Stock, which amendment or repeal would increase or decrease the aggregate number of authorized shares of Series C Preferred Stock or would otherwise adversely affect the rights or preferences of the Series C Preferred Stock or of the holders thereof; and (b) the consolidation or merger of the Corporation with another corporation or the sale of all or substantially all of the assets of the Corporation. SECTION 4. CONVERSION. 4.1 The holder of shares of Series C Preferred Stock shall have the right, subject to the terms and conditions set forth below, to convert each such share, at any time, into a number of fully paid and non-assessable shares of the Common Stock of the Corporation equal to the then current Applicable Conversion Factor for such share of Series C Preferred Stock determined as hereinafter provided. -3- 9 4.2 Any holder of one or more shares of Series C Preferred Stock electing to convert any or all of such shares into Common Stock shall surrender the certificate or certificates evidencing such shares at the principal office of the Corporation, at any time during its usual business hours, and shall simultaneously with such surrender give written notice of his or its intention to convert, stating therein the number of shares of Series C Preferred Stock to be converted and the name or names (with addresses) in which the certificate or certificates for Common Stock shall be issued. Each certificate evidencing shares so surrendered shall be duly endorsed to the Corporation by means of signatures which shall be guaranteed by either a national bank or a member of a national securities exchange. 4.3 Such conversion shall be deemed to have been made as of the date of receipt by the Corporation of the certificate or certificates (endorsed as hereinabove provided) representing the shares of Series C Preferred Stock to be converted and receipt by the Corporation of written notice, as above prescribed; and after such receipt, the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock. 4.4 As promptly as practicable after surrender and notice as hereinabove provided, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder of the shares of Series C Preferred Stock surrendered for conversion: (1) a certificate or certificates for the number of whole shares of Common Stock into which such Preferred Stock has been converted; (2) the cash, if any, to which such holder is entitled as provided in Section 5.5 hereof; and (3) if necessary in the case of a conversion of less than all of the shares of Series C Preferred Stock held by such holder, a new certificate or certificates representing the unconverted shares of Preferred Stock. 4.5 In case of any conversion of Series C Preferred Stock pursuant to Sections 4 and 5 hereof, cash dividends declared but theretofore unpaid on the shares of Series C Preferred Stock so converted after the record date for such dividend shall instead be paid on the shares of Common stock into which such Preferred Stock has been converted, pro rata, at such time as cash dividends shall be paid to record holders of the Common Stock generally. 4.6 Subject to the terms and conditions set forth below, each outstanding share of Series C Preferred Stock shall be converted on the Mandatory Conversion Date (as defined in Subsection 4.7 hereof) into a number of fully paid and non-assessable shares of the Common Stock of the Corporation equal to its then current Applicable Conversion Factor fixed or determined as hereinafter provided. 4.7 The "Mandatory Conversion Date" shall be the date of the closing of an underwritten public offering of the Corporation's Common Stock, pursuant to a Registration Statement filed by the Corporation with the United States Securities and Exchange Commission, but only if (i) the Corporation shall have given notice not less than ten (10) days prior to the filing thereof to each holder of record of the Series C Preferred Stock, in the manner hereinafter set forth, of the Corporation's intention to file such Registration statement and (ii) the Corporation shall have received proceeds from such public offering, net of underwriting fees, in an amount equal to or greater than $5,000,000. -4- 10 4.8 With respect to the requirement of notice set forth in Section 4.7 hereof, notice shall be deemed to be given by the Corporation when it is deposited in the United States mail, first class postage prepaid, addressed to each holder of record of the Series C Preferred Stock at his, her or its address as it appears on the books of the Corporation. Such notice shall state (i) the Applicable Conversion Factor in effect on the date of such notice, (ii) that on the Mandatory Conversion Date, the Corporation shall set aside for the benefit of the holders of the Series C Preferred Stock the shares of Common Stock to which such holders shall be entitled as of the Mandatory Conversion Date, and (iii) that the Series C Preferred Stock shall no longer be deemed outstanding from and after such Mandatory Conversion Date. 4.9 Promptly after the Mandatory Conversion Date, and not more than forty-five (45) days after such date, each holder of Series C Preferred Stock shall surrender the certificate or certificates (endorsed in the manner prescribed in Subsection 4.2 hereof) evidencing all of his, her or its shares of Series C Preferred Stock at the principal office of the Corporation, or its designated transfer agent, at anytime during its usual business hours, together with a statement of the name or names (with addresses) in which the certificate or certificates for shares of Common Stock shall be issued. As promptly as practicable after the surrender of the certificate or certificates representing shares of Series C Preferred Stock and delivery of such statement, the Corporation shall issue and deliver, or cause to be issued and delivered, to the holder of the shares of Series C Preferred Stock so converted, a certificate or certificates for the number of whole shares of Common Stock into which such shares have been converted, and the cash, if any, to which such holder is entitled as provided in Section 5.5 hereof; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless certificates evidencing such shares of the Series C Preferred Stock being converted are either delivered to the Corporation or any transfer agent, as hereinbefore provided, or the holder notifies the Corporation or any transfer agent that such certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection therewith. 4.10 To the extent permitted by law, the conversion of the shares of Series C Preferred Stock into shares of Common Stock shall be deemed to have been effected as of the close of business on the Mandatory Conversion Date. At such time, all rights of the holders of shares of Series C Preferred Stock as stockholders of the Corporation by reason of the ownership of said shares of Series C Preferred Stock shall cease, except the right to surrender said shares to the Corporation and receive a certificate or certificates for the number of whole shares of Common Stock issuable on the conversion of such shares, plus the fair market value of any fractional interests, in accordance with the procedure specified in this Section 4 and Subsection 5.5 hereof. Every holder of the Series C Preferred Stock shall be deemed to have become the holder of record of the shares of Common Stock on such date. 4.11 All shares of Series C Preferred Stock at any time converted as herein provided shall be forthwith permanently retired and canceled and shall under no circumstances be reissued. 4.12 The Applicable Conversion Factor, for each share of Common Stock issuable pursuant to the conversion of Series C Preferred Stock shall initially be one (1), and shall, from -5- 11 and after any adjustment of such initial Applicable Conversion Factor as hereinafter provided, be the initial Applicable Conversion Factor as so adjusted. 4.13 The "Applicable Conversion Price" for each share of Common Stock issuable pursuant to the conversion of Series C Preferred Stock shall initially be $25.50 and shall be adjusted as hereinafter provided. Section 5. ADJUSTMENT OF APPLICABLE CONVERSION PRICES AND APPLICABLE CONVERSION FACTORS. If and whenever the Corporation shall issue any shares of its Common Stock for a consideration per share which is less than an Applicable Conversion Price hereunder in effect immediately prior to such issue (other than in a transaction described in Subsection 5.3 hereof), such Applicable Conversion Price hereunder shall be reduced to a price determined by dividing (a) the sum of (i) the number of shares of Common Stock outstanding immediately prior to such issue, multiplied by such Applicable Conversion Price hereunder in effect immediately prior to such issue, plus (ii) the consideration, if any, received by the Corporation upon such issue, by (b) the number of shares of Common Stock outstanding immediately after such issue. Each such adjustment of an Applicable Conversion Price hereunder shall be calculated to the nearest cent. No such adjustment shall be made in an amount less than $.01, but any such amount shall be carried forward and shall be given effect in connection with the next subsequent adjustment. The Applicable Conversion Factor for a series of Series C Preferred Stock to be used hereunder shall be adjusted at each time that the Applicable Conversion Price for such series is adjusted, as follows: The adjusted Applicable Conversion Factor shall be equal to (a) the Applicable Conversion Price in effect immediately prior to such adjustment, divided by (b) the New Applicable Conversion Price. In case the Corporation shall issue shares of its Common Stock for a consideration wholly or partly other than cash, the value of the consideration other than cash received by the Corporation shall be deemed to be the fair value of such consideration, as determined in good faith by the Board of Directors of the Corporation. Consideration received by the Corporation for issuance of its Common Stock shall be determined in all cases without deduction therefrom of any expenses, underwriting commissions or concessions incurred in connection therewith. Notwithstanding any other provision of this Section 5, no adjustment to any Applicable Conversion Price shall be made pursuant to the provisions of this Section upon: (a) the issuance of shares of Common Stock for a consideration per share which is greater than or equal to such Applicable Conversion Price in effect immediately prior to such issuance; (b) the issuance of shares of Common Stock upon the conversion of shares of Preferred Stock; (c) the issuance of shares of Common Stock as part of an arms length sale of such shares by the Corporation or otherwise for fair market value in connection with a public offering thereof; and -6- 12 (d) the issuance of up to 610,000 shares of Common Stock sold after April 1, 1987 to employees of the Corporation or issued pursuant to the exercise of options granted to persons who, on the date of issuance of such options, were employees of the Corporation. 5.l ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. In case the Corporation shall effect a subdivision of the outstanding Common Stock, each Applicable Conversion Factor then in effect immediately before that subdivision shall be proportionately increased, and conversely, if the Corporation shall combine the outstanding shares of Common Stock, each Applicable Conversion Factor then in effect immediately before the combination shall be proportionately decreased. Any adjustment under this Subsection 5.1 shall become effective at the close of business on the date the subdivision or combination becomes effective. 5.2 ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event each Applicable Conversion Factor then in effect shall be increased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying such Applicable Conversion Factor then in effect by a fraction: (i) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date; and (ii) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, such Applicable Conversion Factor shall be recomputed accordingly as of the close of business on such record date and thereafter such Applicable Conversion Factor shall be adjusted pursuant to this Subsection 5.2 as of the time of actual payment of such dividends or distributions. The number of shares of Common Stock outstanding at any given time shall not include shares owned or held by or for the account of the Corporation, and the disposition of any such shares so owned or held, other than by retirement, shall be considered an issue of Common Stock. 5.3 ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR SUBSTITUTION. If the Common Stock issuable upon the conversion of the Series C Preferred Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or stock dividend provided for above, or a reorganization, merger or consolidation, provided for elsewhere in this Section 5), then and in each such event the holder of each share of Series C Preferred Stock shall have the right thereafter to convert such share into the kind and amount of shares of stock and -7- 13 other securities and property receivable upon such reorganization, reclassification, or other change, by holders of the number of shares of Common Stock into which such shares of Series C Preferred Stock might have been converted immediately prior to such reorganization, reclassification, or change, all subject to further adjustment as provided herein. 5.4 REORGANIZATION, MERGER, OR CONSOLIDATION. If at any time or from time to time there shall be a capital reorganization of the Common Stock (other than a subdivision, combination, reclassification, or exchange of shares provided for elsewhere in this Section 5) or a merger or consolidation of the Corporation with or into another corporation, then, as a part of such reorganization, merger, or consolidation, provision shall be made so that the holders of the Series C Preferred Stock shall thereafter be entitled to receive, upon conversion of the Series C Preferred Stock, the number of shares of stock or other securities or property of the Corporation, or of the successor corporation resulting from such merger or consolidation, to which a holder of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger, or consolidation. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 5 with respect to the rights of the holders of the Series C Preferred Stock after the reorganization, merger, consolidation, or sale to the end that the provisions of this Section 5 (including adjustment of each Applicable Conversion Factor then in effect and the number of shares purchasable upon conversion of the Series C Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable. Any sale of the Corporation's assets for consideration other than shares of stock in the acquiring corporation shall be treated as a liquidation under Section 2 hereof. 5.5 The Corporation shall not be required, in connection with any conversion of Preferred Stock, to issue a fraction of a share of Common Stock, but, in lieu thereof, the Corporation shall make a cash payment (calculated to the next higher cent for purposes of this and similar computations) equal to such fraction multiplied by the market price of a share of Common Stock on the last business day prior to the date of conversion, such market price to be determined by the Board of Directors pursuant to any method they deem appropriate. 5.6 For the purpose of effecting the conversion of the Series C Preferred Stock, the Corporation shall at all times reserve and keep available out of its authorized but unissued shares of its duly authorized Common Stock such number of such shares as shall from time to time be sufficient to effect the conversion of all outstanding Preferred Stock. 5.7 Not more than thirty days after any event giving rise to an adjustment in an Applicable Conversion Factor in accordance with the provisions of this Section 5, the Corporation shall give written notice hereof, by first class mail, postage prepaid, addressed to each registered holder of affected Preferred Stock at the address of such holder as shown on the books of the Corporation, which notice shall state the Applicable Conversion Factor resulting from such adjustment, setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. -8- 14 ARTICLE VI Other lawful provisions for the conduct and regulation of the business and affairs of the Corporation, for its voluntary dissolution, or for limiting, defining or regulating the powers of the Corporation, or of its directors or stockholders, or any class of stockholders: (a) The directors may make, amend or repeal the Corporation's by-laws in whole or in part, except with respect to any provision thereof which by law or the Corporation's by-laws requires action by the stockholders. (b) Meetings of the stockholders may be held anywhere in the United States. (c) The Corporation may be a partner in any business enterprise it would have power to conduct by itself. (d) The directors shall have the power to fix from time to time their compensation. No person shall be disqualified from holding any office by reason of any interest. In the absence of fraud, any director, officer or stockholder of the Corporation, or any concern which is a stockholder of the Corporation individually, or any individual having any interest in any concern which is a stockholder of the Corporation, or any concern in which any such directors, officers, stockholders or individuals have any interest, may be a party to, or may be pecuniarily or otherwise interested in, any contract, transaction or other act of the Corporation; and (1) such contract, transaction or act shall not be in any way invalidated or otherwise affected by that fact; (2) no such director, officer, stockholder or individual shall be liable to account to the Corporation for any profit or benefit realized through any such contract, transaction or act; and (3) any such director of the Corporation may be counted in determining the existence of a quorum at any meeting of the directors or of any committee thereof which shall authorize any such contract, transaction or act, and may vote to authorize the same; the term "interest" including personal interest and interest as a director, officer, stockholder, shareholder, trustee, member or beneficiary of any concern; and the term "concern" meaning any corporation, association, trust, partnership, firm, person or other entity other than the Corporation. (e) No Director shall be personally liable to the Corporation or any stockholder for monetary damages for breach of fiduciary duty as a director, except for any matter in respect of which such director shall be liable under Sections 61 and 62 of Chapter 156B of the Massachusetts General Laws or any amendment thereto or successor provision thereto or shall be liable by reason that, in addition to any and all other requirements for such liability, he (i) shall have breached his duty of loyalty to the Corporation or its stockholders, (ii) shall not have acted in good faith or, in failing to act, shall not have acted in good faith, (iii) shall have acted in a 15 manner involving intentional misconduct or a knowing violation of law, or, in failing to act, shall have acted in a manner involving intentional misconduct or knowing violation of law, or (iv) shall have derived an improper personal benefit. Neither the amendment nor repeal of this paragraph, shall eliminate or reduce the effect of this paragraph in respect of any matter occurring, or any cause of action, suit or claim that, but for this paragraph would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. (f) The Board of Directors shall consist of no more than seven (7) or less than three (3) Directors divided into three (3) classes in accordance with the provisions of these Articles. (g) Commencing with the 1998 annual meeting of stockholders of the Corporation, the directors of the Corporation shall be divided, with respect to the time for which they severally hold office, into three classes, as nearly equal in number as possible, with the term of office of the first class to expire at the annual meeting of the stockholders of the Corporation to be held in 1999, the term of office of the second class to expire at the annual meeting of the stockholders of the Corporation to be held in 2000 and the term of office of the third class to expire at the annual meeting of the stockholders of the Corporation to be held in 2001, with each director to hold office until his or her successor shall have been duly elected and qualified. Subject to the foregoing, at each annual meeting of stockholders, commencing at the annual meeting to be held in 1999, the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and until their successors shall be duly elected and qualified. Any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors, acting by vote of eighty percent (80%) of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their respective successors shall be duly elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this provision. (h) Unless a higher percentage is required by law, these Articles or the Corporation's by-laws, any director of the Corporation may be removed from office at any time, but only for cause (as defined below) and only by the affirmative vote (i) of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class or (ii) at least sixty-six and two-thirds percent (66 2/3%) of the directors then in office, though less than a quorum, but excluding from such vote any director(s) who is (are) then the subject of the removal vote. For purposes of this provision, "cause" shall mean (i) gross negligence, fraud or dishonesty, (ii) conviction of a felony offense, (iii) breach of a fiduciary duty involving personal profit, or (iv) willful violation of any material written Corporation policy. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this provision. -2- 16 (i) Unless a higher percentage is required by law, these Articles or the Corporation's by-laws, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal any provision of the these Articles. Notwithstanding the foregoing, unless a higher percentage is required by law, these Articles or the Corporation's by-laws, if the affirmative vote of at least eighty percent (80%) of the directors then in office recommend to the stockholders the adoption of an amendment to these Articles, the affirmative vote of the holders of at least a majority of the then-outstanding shares of Common Stock of the Corporation voting together as a single class, shall be required to alter, amend or repeal any provision of these Articles. Unless a higher percentage is required by law, these Articles or the Corporation's by-laws, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this provision. (j) Unless a higher percentage is required by law, these Articles or the Corporation's by-laws, the affirmative vote of the holders of at least seventy-five percent (75%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to approve the consolidation or merger of the Corporation with another corporation or the sale of all or substantially all of the assets of the Corporation. Notwithstanding the foregoing, unless a higher percentage is required by law, these Articles or the Corporation's by-laws, if the affirmative vote of at least eighty percent (80%) of the directors then in office recommend to the stockholders the consolidation or merger of the Corporation with another corporation or the sale of all or substantially all of the assets of the Corporation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to approve the consolidation or merger of the Corporation with another corporation or the sale of all or substantially all of the assets of the Corporation. Unless a higher percentage is required by law, these Articles or the Corporation's by-laws, the affirmative vote of the holders of at least seventy-five percent (75%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this provision. (k) At an annual meeting of the stockholders of the Corporation, only such business shall be conducted as shall have been properly brought before such meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of such meeting (or any supplement thereto) given by or at the direction of the Board of Directors of the Corporation, (ii) otherwise properly brought before such meeting by or at the direction of the Board of Directors of the Corporation, or (iii) otherwise properly brought before such meeting by a stockholder of the Corporation in accordance with these Articles. For business to be properly brought before an annual meeting by a stockholder of the Corporation, such stockholder must have given timely notice thereof in writing to the Clerk of the Corporation. To be timely, such stockholder's notice must be delivered either by personal delivery or by registered or certified mail, return receipt requested, to the principal executive offices of the Corporation (addressed to the Clerk) not later than ninety (90) calendar days prior to the anniversary date of the release of the Corporation's proxy statement to its stockholders in connection with the preceding year's -3- 17 annual meeting of its stockholders, except that if no annual meeting of its stockholders was held in the previous year or the date of the annual meeting of its stockholders has been changed by more than thirty (30) calendar days from the anniversary of the annual meeting of its stockholders stated in the previous year's proxy statement, a proposal of a stockholder of the Corporation shall be received by the Corporation a reasonable time before the solicitation is made. Such stockholder's notice shall set forth, as to each matter such stockholder proposes to bring before an annual meeting, (i) a brief description of the business desired to be brought before such annual meeting and the reasons for conducting such business at the annual meeting, (ii) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote with respect to such business and that such stockholder intends to appear in person or by proxy at the annual meeting to move the consideration of such business, (iii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iv) the class and number of shares of stock of the Corporation which are beneficially owned by such stockholder, and (v) any interest of such stockholder in such business. Notwithstanding anything in these Articles or the Corporation's by-laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth herein or in the Corporation's by-laws. The Chairman of an annual meeting may refuse to acknowledge a motion to consider any business that he/she determines was not made in compliance with the foregoing procedures and if he/she should so determine and declare to such meeting, then any such business not properly brought before such meeting shall not be transacted. (l) Only persons who are nominated in accordance with the procedures set forth in these Articles, the Corporation's by-laws and applicable laws, rules and regulations shall be eligible for election as directors of the Corporation. Without limiting the foregoing, nomination of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders of the Corporation (i) by or at the direction of the Board of Directors of the Corporation or any nominating or similar committee thereof, or (ii) by any stockholder of the Corporation entitled to vote for the election of directors of the Corporation at such meeting who complies with the notice procedures set forth in these Articles. Such nominations, other than those made by or at the direction of the Board of Directors of the Corporation or any nominating or similar committee thereof, shall be made pursuant to timely notice in writing to the Clerk of the Corporation. To be timely, a stockholder's notice shall be delivered either by personal delivery or by registered or certified mail, return receipt requested, to the principal executive offices of the Corporation (addressed to the Clerk) not later than ninety (90) calendar days prior to the anniversary date of the release of the Corporation's proxy statement to its stockholders in connection with the preceding year's annual meeting of its stockholders, except that if no annual meeting of its stockholders was held in the previous year or the date of the annual meeting of its stockholders has been changed by more than thirty (30) calendar days from the anniversary of the annual meeting of its stockholders stated in the previous year's proxy statement, a proposal of a stockholder of the Corporation shall be received by the Corporation a reasonable time before the solicitation is made. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election or re-election as a director of the Corporation (A) the name, age, business address and residence address of such nominee, (B) the principal occupation or employment of such nominee, (C) the class and number of shares of the Corporation, if any, which are beneficially owned by such nominee, (D) a description of all -4- 18 arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which such nomination is made by such stockholder, and (E) any other information relating to such nominee that is required to be disclosed in solicitations of proxies for election of directors, or as otherwise required, in each case, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such nominee's written consent to being named in the proxy statement as a nominee and to serving as a director of the Corporation if elected); and (ii) as to such stockholder (A) the name and address, as they appear on the Corporation's books, of such stockholder, (B) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and that such stockholder intends to appear in person or by proxy at such meeting to nominate the person or persons specified in such notice, and (C) the class and number of shares of stock of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors of the Corporation, any person nominated by the Board of Directors of the Corporation for election as a director of the Corporation shall furnish to the Clerk of the Corporation that information required to be set forth in a stockholder's notice of nomination, as provided above in these Articles or in the Corporation's by-laws, which pertains to such nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in these Articles or in the Corporation's by-laws. The Chairman of the meeting may refuse to acknowledge a motion to consider any nominee as a director of the Corporation that he/she determines was not made in compliance with the foregoing procedures and if he/she should so determine and declare to such meeting then the defective nomination shall be disregarded. (m) A special meeting of the stockholders may be called at any time only by (a) the Chairman of the Board, (b) the President, (c) a majority of the Directors acting by vote or by written instrument or instruments signed by them, or (d) by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer, upon written application of stockholders holding at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding voting stock. Such call shall state the time, place and purposes of the meeting. The business transacted at such special meeting shall be limited to the purpose for which it was called except as otherwise determined by the Board of Directors of the Corporation or the chairman of the meeting. -5- 19 ARTICLE VIII** ARTICLE I The name of the Corporation is changed from Boyle Leasing Technologies, Inc. to MicroFinancial Incorporated. ARTICLE III The Common Stock, par value $.01, is split 2-for-1. The number of the authorized shares of Common Stock, par value $.01, is increased from 10,000,000 shares to 25,000,000 shares. The Series A 1987 Convertible Preferred Stock, par value $1.00, and the Series B 1987 Convertible Preferred Stock, par value $1.00, are retired. The class of Preferred Stock, par value $.01, is created and 5,000,000 shares of such stock are authorized. ARTICLE IV The rights and designations for the Series A 1987 Convertible Preferred Stock, par value $1.00, and the Series B 1987 Convertible Preferred Stock, par value $1.00, are removed. The description of the Preferred Stock, par value $.01, and the procedure for the determination of the rights and designations thereof, are added. ARTICLE V The restrictions on transfer of shares are removed. ARTICLE VI The Board of Directors of the Corporation are classified into three classes. The requirements for the removal of a Director of the Corporation is added. The requirements for the amendment to these Restated Articles is added. The requirements for the approval of the consolidation or merger of the Corporation with another corporation or the sale of all or substantially all of the assets of the Corporation is added. 20 Advance notice requirements for meetings of the Corporation's stockholders are added. Advance notice requirements for nomination of the Corporation's Directors are added. A requirement of an increased percentage of the Corporation's stockholders to call a meeting of the stockholders is added. -2- EX-3.2 3 BYLAWS 1 Exhibit 3.2 AMENDED AND RESTATED BY-LAWS OF MICROFINANCIAL INCORPORATED 2 TABLE OF CONTENTS 1. ARTICLES OF ORGANIZATION....................................................1 2. FISCAL YEAR.................................................................1 3. MEETINGS OF STOCKHOLDERS....................................................1 3.1 Annual Meetings.........................................................1 3.2 Special Meetings........................................................6 3.3 Place of Meetings.......................................................6 3.4 Notice of Meetings......................................................6 3.5 Quorum..................................................................7 3.6 Action by Vote..........................................................8 3.7 Voting..................................................................8 3.8 Action by Consent.......................................................8 3.9 Proxies.................................................................8 4. DIRECTORS...................................................................9 4.1 Powers..................................................................9 4.2 Enumeration, Election and Term of Office................................9 4.3 Regular Meetings........................................................9 4.4 Special Meetings.......................................................10 4.5 Notices................................................................10 4.6 Quorum.................................................................11 4.7 Action by Consent......................................................11 4.8 Committees.............................................................12 4.9 Meeting by Telecommunications..........................................12 5. OFFICERS AND AGENTS........................................................13 5.1 Enumeration; Qualification.............................................13 5.2 Powers.................................................................13 5.3 Election...............................................................13 5.4 Tenure.................................................................14 5.5 Chairman of the Board..................................................14 5.6 President and Vice Presidents..........................................14 5.7 Treasurer and Assistant Treasurers.....................................15 5.8 Clerk and Assistant Clerks.............................................15 5.9 Secretary and Assistant Secretary......................................16 6. RESIGNATIONS, REMOVALS AND VACANCIES.......................................16 6.1 Resignations...........................................................16 6.2 Removals...............................................................16 6.3 Vacancies..............................................................17 7. INDEMNIFICATION OF DIRECTORS AND OTHERS....................................18 8. STOCK......................................................................20 8.1 Stock Authorized.......................................................20 8.2 Issue of Authorized Unissued Capital Stock.............................20 8.3 Certificates of Stock..................................................20 8.4 Transfers..............................................................21 8.5 Lost, Mutilated, or Destroyed Certificates.............................22 8.6 Transfer Agent and Registrar...........................................22 8.7 Setting Record Date and Closing Transfer Records.......................22 9. MISCELLANEOUS PROVISIONS...................................................23 9.1 Execution of Papers....................................................23 9.2 Voting of Securities...................................................23 9.3 Corporate Seal.........................................................24 9.4 Corporate Records......................................................24 9.5 Evidence of Authority..................................................24 10. AMENDMENTS................................................................25 -i- 3 RESTATED BY-LAWS OF MICROFINANCIAL INCORPORATED 1. ARTICLES OF ORGANIZATION. The name and purposes of MicroFinancial Incorporated (the "Corporation") shall be as set forth in the Articles of Organization. These By-Laws, the powers of the Corporation and its Directors and stockholders, and all matters concerning the conduct and regulation of the business of the Corporation, shall be subject to such provisions in regard thereto, if any, as are set forth in the Articles of Organization. All references in these By-Laws to the Articles of Organization shall be construed to mean the Articles of Organization of the Corporation as from time to time amended or restated. 2. FISCAL YEAR. Except as from time to time otherwise determined by the Directors, the fiscal year of the Corporation shall in each year end on December 31. 3. MEETINGS OF STOCKHOLDERS. 3.1 ANNUAL MEETINGS. (a) The annual meeting of stockholders shall be held on the second Tuesday in April in each year (or if that be a legal holiday in the place where the meeting is to be held, on the next succeeding full business day) at ten o'clock A.M. unless a different hour is fixed by the Board of Directors or the President and stated in the notice of the meeting. The purposes for 4 which the annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization or these By-Laws, may be specified by the Board of Directors or the President. If no annual meeting has been held on the date fixed above, a special meeting in lieu thereof may be held and such special meeting shall have for the purposes of these By-Laws, or otherwise, all the force and effect of an annual meeting. (b) At an annual meeting of the stockholders of the Corporation, only such business shall be conducted as shall have been properly brought before such meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of such meeting (or any supplement thereto) given by or at the direction of the Board of Directors of the Corporation, (ii) otherwise properly brought before such meeting by or at the direction of the Board of Directors of the Corporation, or (iii) otherwise properly brought before such meeting by a stockholder of the Corporation in accordance with these Bylaws. For business to be properly brought before an annual meeting by a stockholder of the Corporation, such stockholder must have given timely notice thereof in writing to the Clerk of the Corporation. To be timely, such stockholder's notice must be delivered either by personal delivery or by registered or certified mail, return receipt requested, to the principal executive offices of the Corporation (addressed to the Clerk) not later than ninety (90) calendar days prior to the anniversary date of the release of the Corporation's proxy statement to its stockholders in connection with the preceding year's annual meeting of its stockholders, except that if no annual meeting of its stockholders was held in the previous year or the date of the annual meeting of its stockholders has been changed by more than thirty (30) calendar days from the anniversary of the annual meeting of its stockholders stated in the previous year's proxy statement, a proposal of a stockholder of the Corporation shall be received by the Corporation a reasonable time before the solicitation is -2- 5 made. Such stockholder's notice shall set forth, as to each matter such stockholder proposes to bring before an annual meeting, (i) a brief description of the business desired to be brought before such annual meeting and the reasons for conducting such business at the annual meeting, (ii) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote with respect to such business and that such stockholder intends to appear in person or by proxy at the annual meeting to move the consideration of such business, (iii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iv) the class and number of shares of stock of the Corporation which are beneficially owned by such stockholder, and (v) any interest of such stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this SECTION 3. The Chairman of an annual meeting may refuse to acknowledge a motion to consider any business that he/she determines was not made in compliance with the foregoing procedures and if he/she should so determine and declare to such meeting, then any such business not properly brought before such meeting shall not be transacted. (c) Only persons who are nominated in accordance with the procedures set forth in this SECTION 3.1, the Articles of Organization and applicable laws, rules and regulations shall be eligible for election as directors of the Corporation. Without limiting the foregoing, nomination of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders of the Corporation (i) by or at the direction of the Board of Directors of the Corporation or any nominating or similar committee thereof, or (ii) by any stockholder of the Corporation entitled to vote for the election of directors of the Corporation at such meeting who complies with the notice procedures set forth in this SECTION 3.1. Such nominations, other than -3- 6 those made by or at the direction of the Board of Directors of the Corporation or any nominating or similar committee thereof, shall be made pursuant to timely notice in writing to the Clerk of the Corporation. To be timely, a stockholder's notice shall be delivered either by personal delivery or by registered or certified mail, return receipt requested, to the principal executive offices of the Corporation (addressed to the Clerk) not later than ninety (90) calendar days prior to the anniversary date of the release of the Corporation's proxy statement to its stockholders in connection with the preceding year's annual meeting of its stockholders, except that if no annual meeting of its stockholders was held in the previous year or the date of the annual meeting of its stockholders has been changed by more than thirty (30) calendar days from the anniversary of the annual meeting of its stockholders stated in the previous year's proxy statement, a proposal of a stockholder of the Corporation shall be received by the Corporation a reasonable time before the solicitation is made. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election or re-election as a director of the Corporation (A) the name, age, business address and residence address of such nominee, (B) the principal occupation or employment of such nominee, (C) the class and number of shares of the Corporation, if any, which are beneficially owned by such nominee, (D) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which such nomination is made by such stockholder, and (E) any other information relating to such nominee that is required to be disclosed in solicitations of proxies for election of directors, or as otherwise required, in each case, pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such nominee's written consent to being named in the proxy -4- 7 statement as a nominee and to serving as a director of the Corporation if elected); and (ii) as to such stockholder (A) the name and address, as they appear on the Corporation's books, of such stockholder, (B) a representation that such stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and that such stockholder intends to appear in person or by proxy at such meeting to nominate the person or persons specified in such notice, and (C) the class and number of shares of stock of the Corporation which are beneficially owned by such stockholder. At the request of the Board of Directors of the Corporation, any person nominated by the Board of Directors of the Corporation for election as a director of the Corporation shall furnish to the Clerk of the Corporation that information required to be set forth in a stockholder's notice of nomination, as provided above in this SECTION 3.1, which pertains to such nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this SECTION 3.1. The Chairman of the meeting may refuse to acknowledge a motion to consider any nominee as a director of the Corporation that he/she determines was not made in compliance with the foregoing procedures and if he/she should so determine and declare to such meeting then the defective nomination shall be disregarded. (d) The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of stock of the Corporation entitled to vote, voting together as a single class, shall be required to alter, amend or repeal SECTION 3.1(b) or SECTION 3.1(c). 3.2 SPECIAL MEETINGS. A special meeting of the stockholders may be called at any time only by (a) the Chairman of the Board, (b) the President, (c) by a majority of the Directors acting by vote or by written -5- 8 instrument or instruments signed by them, or (d) by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer, upon written application of stockholders holding at least sixty-six and two-thirds percent (66 2/3%) of the issued and outstanding voting stock. Such call shall state the time, place and purposes of the meeting. The business transacted at such special meeting shall be limited to the purpose for which it was called except as otherwise determined by the Board of Directors of the Corporation or the chairman of the meeting. 3.3 PLACE OF MEETINGS. All meetings of the stockholders shall be held at the principal office of the Corporation in Massachusetts, unless a different place within Massachusetts or, if permitted by the Articles of Organization, elsewhere within the United States is designated by the President, or by a majority of the Directors acting by vote or by written instrument or instruments signed by them and stated in the notice of the meeting. Any adjourned session of any meeting of the stockholders shall be held at such place within Massachusetts or, if permitted by the Articles of Organization, elsewhere within the United States as is designated in the vote of adjournment. 3.4 NOTICE OF MEETINGS. A written notice of the place, date and hour of all meetings of stockholders stating the purposes of the meeting shall be given at least seven (7) days before the meeting to each stockholder entitled to vote thereat and to each stockholder who is otherwise entitled by law or by the Articles of Organization to such notice, by leaving such notice with him or at his residence or usual place of business, or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the records of the Corporation. Such notice shall be given by the Clerk, or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer or -6- 9 by a person designated either by the Clerk, by the person or persons calling the meeting or by the Board of Directors. Whenever notice of a meeting is required to be given a stockholder under any provision of law, of the Articles of Organization, or of these By-Laws, a written waiver thereof, executed before or after the meeting by such stockholder or his attorney thereunto authorized, and filed with the records of the meeting, shall be deemed equivalent to such notice. 3.5 QUORUM. At any meeting of the stockholders, a quorum shall consist of a majority of all shares of stock then issued and outstanding and entitled to vote at the meeting except that if two or more classes or series of stock are entitled to vote on any matter as separate classes or series, then in the case of each such class or series a quorum for that matter shall consist of a majority of all shares of stock of that class or series then issued and outstanding and except when a different quorum is required by law, by the Articles of Organization or by these By-Laws. Stock owned directly or indirectly by the Corporation, if any, shall not be deemed outstanding for this purpose. Any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, whether or not a quorum is present, and the meeting may be held as adjourned without further notice. 3.6 ACTION BY VOTE. When a quorum is present at any meeting, a plurality of the votes properly cast for election to any office shall elect to such office and a majority of the vote properly cast upon any question other than an election to an office shall decide the question, except when a larger vote is required by law, by the Articles of Organization or by these By-Laws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. -7- 10 3.7 VOTING. Stockholders entitled to vote shall have one vote for each share of stock entitled to vote held by them of record according to the records of the Corporation and a proportionate vote for a fractional share, unless otherwise provided by the Articles of Organization. The Corporation shall not, directly or indirectly, vote any share of its own stock. 3.8 ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting if all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. 3.9 PROXIES. Stockholders entitled to vote may vote either in person or by proxy in writing dated not more than six months before the meeting named therein, which proxies shall be filed with the clerk or other person responsible to record the proceedings of the meeting before being voted. Unless otherwise specifically limited by their terms, such proxies shall entitle the holders thereof to vote at any adjournment of such meeting but shall not be valid after the final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. -8- 11 4. DIRECTORS. 4.1 POWERS. The business of the Corporation shall be managed by a Board of Directors who shall have and may exercise all the powers of the Corporation except as otherwise reserved to the stockholders by law, by the Articles of Organization or by these By-Laws. 4.2 ENUMERATION, ELECTION AND TERM OF OFFICE. The Board of Directors shall consist of no more than seven (7) or less than three (3) Directors divided into three (3) classes in accordance with the provisions of the Articles of Organization. The Directors shall be chosen at the annual meeting of the stockholders by such stockholders as have the right to vote thereon, and each shall hold office until the end of his or her specified term and until his or her successor is chosen and qualified or until he or she sooner dies, resigns, is removed or becomes disqualified. No Director need be a stockholder. 4.3 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such times and places within or without The Commonwealth of Massachusetts as the Board of Directors may fix from time to time and, when so fixed, no notice thereof need be given, provided that any Director who is absent when such times and places are fixed shall be given notice as provided in this SECTION 4 of the fixing of such times and places and provided further that any resolution relating to the holding of regular meetings shall remain in force only until the next annual meeting of stockholders. The first meeting of the Board of Directors following the annual meeting of the stockholders may be held without notice immediately after and at the same place as the annual meeting of the stockholders or the special meeting held in lieu thereof. If in any year a meeting of the Board of Directors is not held at such time and place, any action to be taken may be taken -9- 12 at any later meeting of the Board of Directors with the same force and effect as if held or transacted at such meeting. 4.4 SPECIAL MEETINGS. Special meetings of the Directors may be called by the President or by the Treasurer or by the Clerk or by any two Directors and shall be held at the place designated in the call thereof. 4.5 NOTICES. Notices of any special meeting of the Directors shall be given by the Clerk or Secretary to each Director, by mailing to him, postage prepaid, and addressed to him at his address as registered on the books of the Corporation, or if not so registered at his last known home or business address, a written notice of such meeting at least forty-eight (48) hours before the meeting or by delivering such notice to him at least twenty-four (24) hours before the meeting or by sending to him at least twenty-four (24) hours before the meeting, by prepaid telegram addressed to him at such address, notice of such meeting. If the Clerk or Secretary refuses or neglects for more than twenty-four (24) hours after receipt of a call to give notice of such special meeting, or if the offices of Clerk and Secretary are vacant or the Clerk and Secretary are absent from The Commonwealth of Massachusetts, or incapacitated, such notice may be given by the officer or one of the Directors calling the meeting. Notice need not be given to any Director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Director who attend the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice of a Directors' meeting need not specify the purposes of the meeting. -10- 13 4.6 QUORUM. At any meeting of the Directors, a quorum for any election or for the consideration of any question shall consist of a majority of the Directors then in office. Whether or not a quorum is present, any meeting may be adjourned from time to time by a majority of the votes properly cast upon the question, and the meeting may be held as adjourned without further notice. When a quorum is present at any meeting, the votes of a majority of the Directors present shall be requisite and sufficient for election to any office and shall decide any question brought before such meeting, except in any case where a different vote is required by law, by the Articles of Organization or by these By-Laws. 4.7 ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Directors may be taken without a meeting if all the Directors consent to the action in writing and the written consents are filed with the records of the meetings of the Directors. Such consent shall be treated for all purposes as a vote of the Directors at a meeting. 4.8 COMMITTEES. The Board of Directors, by vote of a majority of the Directors then in office, may elect from its number an Executive Committee or other committees and may delegate thereto some or all of its powers except those which by law, by the Articles of Organization, or by these By-Laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-Laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of -11- 14 Directors may abolish any such committee at any time. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall upon request report its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. 4.9 MEETING BY TELECOMMUNICATIONS. Members of the board of directors or any committee elected thereby may participate in a meeting of such board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in a meeting can hear each other at the same time and participation by such means shall constitute presence in person at the meeting. 5. OFFICERS AND AGENTS. 5.1 ENUMERATION; QUALIFICATION. The officers of the Corporation shall be a President, a Treasurer, a Clerk, and such other officers, including a Chairman of the Board, if any, as the incorporators at their initial meeting, or the Directors from time to time, may in their discretion elect or appoint. The Corporation may also have such agents, if any, as the incorporators at their initial meeting, or the Directors from time to time, may in their discretion appoint. Any officer may be but none need be a Director or stockholder. The Clerk shall be a resident of Massachusetts unless the Corporation has a resident agent appointed for the purpose of service of process. Any two or more offices may be held by the same person. Any officer may be required by the Directors to give bond for the faithful performance of his duties to the Corporation in such amount and with such sureties as the Directors may determine. The premiums for such bonds may be paid by the Corporation. -12- 15 5.2 POWERS. Subject to law, to the Articles of Organization and to the other provisions of these By-Laws, each officer shall have, in addition to the duties and powers herein set forth, such duties and powers as are commonly incident to his office and such duties and powers as the Directors may from time to time designate. 5.3 ELECTION. The Chairman of the Board may, and the President, the Treasurer and the Clerk shall be elected annually by the Directors at their first meeting following the annual meeting of the stockholders. Other officers, if any, may be elected or appointed by the Board of Directors at said meeting or at any other time. 5.4 TENURE. Except as otherwise provided by law or by the Articles of Organization or by these By-Laws, the Chairman of the Board, the President, the Treasurer and the Clerk shall hold office until the first meeting of the Directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified, and each other officer shall hold office until the first meeting of the Directors following the next annual meeting of the stockholders and until their respective successors are chosen and qualified, unless a different period shall have been specified by the terms of his election or appointment, or in each case until he sooner dies, resigns, is removed or becomes disqualified. Each agent shall retain his authority at the pleasure of the Directors. -13- 16 5.5 CHAIRMAN OF THE BOARD. If elected, the Chairman of the Board of Directors shall preside at all meetings of the Directors and shall be an ex-officio, voting member of all committees, including any executive committee, which may be established by the Board of Directors. 5.6 PRESIDENT AND VICE PRESIDENTS. The President shall be the chief executive officer of the Corporation and shall, subject to the direction of the Board of Directors, have general supervision and control of its business. Unless otherwise provided by the Board of Directors he shall preside, when present, at all meetings of stockholders and, in the absence of the Chairman of the Board of Directors, he shall preside at any meeting of the Board of Directors. In the absence or disability of the President, his powers or duties shall be performed by the Vice President, if only one, or, if more than one, by the one designated for the purpose by the Directors. Any Vice President shall have such other powers and shall perform such other duties as the Board of Directors may from time to time designate. 5.7 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall, subject to the direction of the Board of Directors, have general charge of the financial affairs of the Corporation and shall cause to be kept accurate books of account. He shall have custody of all funds, securities, and valuable documents of the Corporation, except as the Board of Directors may otherwise provide. In the absence or disability of the Treasurer, his powers and duties shall be performed by the Assistant Treasurer, if only one, or, if more than one, by the one designated for the purpose by the Directors. Any Assistant Treasurer shall have such other powers and perform such other duties as the Board of Directors may from time to time designate. -14- 17 5.8 CLERK AND ASSISTANT CLERKS. The Clerk shall keep a record of the meetings of stockholders. In the event there is no Secretary or he is absent, the Clerk or an Assistant Clerk shall keep a record of the meetings of the Board of Directors. Unless the Directors shall appoint a transfer agent and/or registrar or other officer or officers for the purpose, the Clerk shall be charged with the duty of keeping, or causing to be kept, accurate records of all stock outstanding, stock certificates issued and stock transfers. In the absence of the Clerk from any meeting of stockholders, an Assistant Clerk if one be elected, otherwise a Temporary Clerk designated by the person presiding at the meeting, shall perform the duties of the Clerk. An Assistant Clerk shall have such powers and perform such other duties as the Board of Directors may from time to time designate. 5.9 SECRETARY AND ASSISTANT SECRETARY. The Secretary, if one be elected or appointed, shall keep a record of the meetings of the Board of Directors. In the absence of the Secretary, the Clerk and any Assistant Clerk, a Temporary Secretary shall be designated by the person presiding at such meeting to perform the duties of the Secretary. 6. RESIGNATIONS, REMOVALS AND VACANCIES. 6.1 RESIGNATIONS. Any Director or officer may resign at any time by delivering his resignation in writing to the President or the Clerk or to a meeting of the Directors. Such resignation shall take effect at such time as is specified therein, or if no such time is so specified then upon delivery thereof. 6.2 REMOVALS. Unless a higher percentage is required by law or the Articles of Organization, any director of the Corporation may be removed from office at any time, but only for cause (as defined -15- 18 below) and only by the affirmative vote (i) of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class or (ii) at least sixty-six and two-thirds percent (66 2/3%) of the directors then in office, though less than a quorum, but excluding from such vote any director(s) who is (are) then the subject of the removal vote. For purposes of this provision, "cause" shall mean (i) gross negligence, fraud or dishonesty, (ii) conviction of a felony offense, (iii) breach of a fiduciary duty involving personal profit, or (iv) willful violation of any material written Corporation policy. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this provision. The Directors may remove any officer from office with or without assignment of cause by vote of a majority of the Directors then in office. If cause is assigned for removal of any Director or officer, such Director or officer may be removed only after a reasonable notice and opportunity to be heard before the body proposing to remove him. The Directors may terminate or modify the authority of any agent or employee. Except as the Directors may otherwise determine, no Director or officer who resigns or is removed shall have any right to any compensation as such Director or officer for any period following his resignation or removal, or any right to damages on account of such removal whether his compensation be by the month or by the year or otherwise, provided, however, that the foregoing provision shall not prevent such Director or officer from obtaining damages for breach of any contract of employment legally binding upon the Corporation. -16- 19 6.3 VACANCIES. Unless a higher percentage is required by law or the Articles of Organization, any vacancies in the Board of Directors for any reason, and any newly created directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors, acting by vote of eighty percent (80%) of the directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next election of the class for which such directors shall have been chosen and until their respective successors shall be duly elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the then-outstanding shares of the Common Stock of the Corporation, voting together as a single class, shall be required to alter, amend or repeal this provision. If the office of any officer becomes vacant, the Directors may elect or appoint a successor by vote of a majority of the Directors present at the meeting at which such election or appointment is made. Each such successor shall hold office for the unexpired term of his predecessor and until his successor shall be elected or appointed and qualified, or until he sooner dies, resigns, is removed or becomes disqualified. 7. INDEMNIFICATION OF DIRECTORS AND OTHERS. The Corporation shall, to the extent legally permissible, indemnify any person serving or who has served as a Director or officer of the Corporation, or at its request as a Director, trustee, officer, employee or other agent of any organization in which the Corporation owns shares or of which it is a creditor against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees, reasonably incurred by -17- 20 him in connection with the defense or disposition of any action, suit or other proceeding, whether civil or criminal, in which he may be involved or with which he may be threatened, while serving or thereafter, by reason of his being or having been such a Director, officer, trustee, employee or agent, except with respect to any matter as to which he shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation; provided, however, that as to any matter disposed of by a compromise payment by such Director, officer, trustee, employee or agent, pursuant to a consent decree or otherwise, no indemnification either for said payment or for any other expenses shall be provided unless: (a) such compromise shall be approved as in the best interests of the Corporation, after notice that it involves such indemnification: (i) by a disinterested majority of the directors then in office; or (ii) by the holders of a majority of the outstanding stock at the time entitled to vote for Directors, voting as a single class, exclusive of any stock owned by any interested Director or officer; or (b) in the absence of action by disinterested directors or stockholders, there has been obtained at the request of a majority of the Directors then in office an opinion in writing of independent legal counsel to the effect that such Director or officer appears to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation. Expenses including counsel fees, reasonably incurred by any such Director, officer, trustee, employee or agent in connection with the defense or disposition of any such action, suit or other proceeding may be paid from time to time by the Corporation in advance of the final disposition -18- 21 thereof upon receipt of an undertaking by such individual to repay the amounts so paid to the Corporation if it is ultimately determined that indemnification for such expenses is not authorized under this section. The right of indemnification hereby provided shall not be exclusive of or affect any other rights to which any such Director, officer, trustee, employee or agent may be entitled. Nothing contained in this section shall affect any rights to indemnification to which corporate personnel other than such Directors, officers, trustees, employees or agents may be entitled by contract or otherwise under law. As used in this section the terms "Director", "officer", "trustee", "employee" and "agent" include their respective heirs, executors and administrators, and an "interested" Director, officer, trustee, employee or agent is one against whom in such capacity the proceedings in question or other proceedings on the same or similar grounds is then pending. 8. STOCK. 8.1 STOCK AUTHORIZED. The total number of shares and the par value, if any, of each class of stock which the Corporation is authorized to issue, and if more than one class is authorized, a description of each class with the preferences, voting powers, qualifications and special and relative rights and privileges as to each class and any series thereof, shall be as stated in the Articles of Organization. 8.2 ISSUE OF AUTHORIZED UNISSUED CAPITAL STOCK. Any unissued capital stock from time to time authorized under the Articles of Organization may be issued by vote of the Directors. No such stock shall be issued unless the cash, so far as due, or the property, services or expenses for which it was authorized to be issued, -19- 22 has been actually received or incurred by, or conveyed or rendered to, the Corporation or is in its possession as surplus. 8.3 CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate in form selected by the Board of Directors stating the number and the class and the designation of the series, if any, of the shares held by him. Such certificate shall be signed by the President or a Vice President and the Treasurer or an Assistant Treasurer. Such signatures may be facsimiles if the certificate is signed by a transfer agent, or by a registrar, other than a Director, officer or employee of the Corporation. Every certificate for shares of stock subject to any restriction on transfer pursuant to the Articles of Organization, these By-Laws, or any agreement to which the Corporation is a party shall have the restriction noted conspicuously on the certificate and shall also set forth on the face or back either the full text of the restriction or a statement of the existence of such restriction and a statement that the Corporation will furnish a copy to the holder of such certificate upon written request and without charge. Every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall set forth on its face or back either the full text or the preferences, voting powers, qualifications and special and relative rights of the shares of each class and series authorized to be issued or a statement of the existence of such preferences, powers, qualifications and rights, and a statement that the Corporation will furnish a copy thereof to the holder of such certificate upon written request and without charge. 8.4 TRANSFERS. Subject to the restrictions, if any, imposed by the Articles of Organization, these By-Laws or any agreement to which the Corporation is a party, shares of stock shall be transferred -20- 23 on the books of the Corporation only by the surrender to the Corporation or its transfer agent of the certificate representing such shares properly endorsed or accompanied by a written assignment of such shares or by a written power of attorney to sell, assign, or transfer such shares, properly executed, with necessary transfer stamps affixed if necessary, and with such proof that the endorsement, assignment or power of attorney is genuine and effective as the Corporation or its transfer agent may reasonably require. Except as may be otherwise required by law, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-Laws. It shall be the duty of each stockholder to notify the Corporation of his post office address. 8.5 LOST, MUTILATED, OR DESTROYED CERTIFICATES. Except as otherwise provided by law, the Board of Directors may determine the conditions upon which a new certificate of stock may be issued in place of any certificate alleged to have been lost, mutilated or destroyed. It may in its discretion, require the owner of a lost, mutilated or destroyed certificate, or his legal representative, to give a bond, sufficient in its opinion, with or without surety, to indemnify the Corporation against any loss or claim which may arise by reason of the issue of a certificate in place of such lost, mutilated or destroyed stock certificate. -21- 24 8.6 TRANSFER AGENT AND REGISTRAR. The Board of Directors may appoint a transfer agent or a registrar or both for its capital stock or any class or series thereof and require all certificates for such stock to bear the signature or facsimile thereof of any such transfer agent or registrar. 8.7 SETTING RECORD DATE AND CLOSING TRANSFER RECORDS. The Board of Directors may fix in advance a time not more than sixty (60) days before (i) the date of any meeting of the stockholders or (ii) the date for the payment of any dividend or the making of any distribution to stockholders or (iii) the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice and to vote at such meeting, or the right to receive such dividend or distribution, or the right to give such consent or dissent. If a record date is set, only stockholders of record on the date shall have such right notwithstanding any transfer of stock on the records of the Corporation after the record date. Without fixing such record date, the Board of Directors may close the transfer records of the Corporation for all or any part of such sixty (60) day period. If no record date is fixed and the transfer books are not closed, then the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, and the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. -22- 25 9. MISCELLANEOUS PROVISIONS. 9.1 EXECUTION OF PAPERS. All deeds, leases, transfers, contracts, bonds, notes, releases, checks, drafts and other obligations authorized to be executed on behalf of the Corporation shall be signed by the President or the Treasurer except as the Directors may generally or in particular cases otherwise determine. 9.2 VOTING OF SECURITIES. Except as the Directors may generally or in particular cases otherwise specify, the President or the Treasurer may on behalf of the Corporation vote or take any other action with respect to shares of stock or beneficial interest of any other corporation, or of any association, trust or firm, of which any securities are held by this corporation, and may appoint any person or persons to act as proxy or attorney-in-fact for the Corporation, with or without power of substitution, at any meeting thereof. 9.3 CORPORATE SEAL. The seal of the Corporation shall be a circular die with the name of the Corporation, the word "Massachusetts" and the year of its incorporation cut or engraved thereon, or shall be in such other form as the Board of Directors may from time to time determine. 9.4 CORPORATE RECORDS. The original, or attested copies, of the Articles of Organization, By-Laws and records of all meetings of the incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the Corporation or at an office of its transfer agent or of its Clerk or of its Resident Agent. Said copies and records need not all be -23- 26 kept in the same office. They shall be available at all reasonable times to the inspection of any stockholder for any proper purpose but not to secure a list of stockholders for the purpose of selling said list or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the Corporation. 9.5 EVIDENCE OF AUTHORITY. A certificate by the Clerk or Secretary or an Assistant or Temporary Clerk or Secretary as to any matter relative to the Articles of Organization, By-Laws, records of the proceedings of the incorporators, stockholders, Board of Directors, or any committee of the Board of Directors, or stock and transfer records or as to any action taken by any person or persons as an officer or agent of the Corporation, shall as to all persons who rely thereon in good faith be conclusive evidence of the matters so certified. 10. AMENDMENTS. If authorized by the Articles of Organization, the Directors may make, amend or repeal the By-Laws, in whole or in part, except with respect to any provision thereof which by law, the Articles of Organization or the By-Laws does not allow such action by the Directors. No change in the date fixed in these By-Laws for the annual meeting of stockholders may be made within sixty (60) days before the date fixed in these By-Laws, and in case of any change in such date, notice thereof shall be given to each stockholder in person or by letter mailed to his last known post office address at least twenty (20) days before the new date fixed for such meeting. -24- EX-5.1 4 OPINION OF EDWARDS & ANGELL, LLP 1 EXHIBIT 5.1 July 31, 1998 MicroFinancial Incorporated 950 Winter Street, Suite 41000 Waltham, Massachusetts 02154 Ladies and Gentlemen: We have examined the Registration Statement on Form S-1 (the "Registration Statement") filed by MicroFinancial Incorporated (the "Company") with the Securities and Exchange Commission on the date hereof in connection with the registration under the Securities Act of 1933, as amended, of 4,600,000 shares of common stock, $0.01 par value (the "Common Stock"). In connection with this opinion, we have examined the following documents and records: (1) The Restated Articles of Incorporation of the Company, as amended to date; (2) The By-Laws of the Company, as amended to date; (3) Specimen certificate of the Common Stock; and (4) All corporate minutes and proceedings of the Company relating to the issuance of the Common Stock being registered under the Registration Statement. We have also examined such further documents, records and proceedings as we have deemed pertinent in connection with the issuance of the Common Stock. In our examination, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the completeness and authenticity of all documents submitted to us as originals, and the conformity to the originals of all documents submitted to us as certified, photostatic or conformed copies, and the validity of all laws and regulations. We also are familiar with the additional proceedings proposed to be taken by the Company in connection with the authorization, registration, issuance and sale of the Common Stock. We are qualified to practice law in the Commonwealth of Massachusetts and we do not purport to express any opinion herein concerning any law other than the laws of the Commonwealth of Massachusetts and the federal law of the United States. 2 MicroFinancial Incorporated July 31, 1998 Page 2 Based upon such examination, subject to the proposed additional proceedings being duly taken and completed as now contemplated by the Company prior to the issuance of the Common Stock, it is our opinion that the Common Stock, when issued and paid for, will be legally issued, fully paid and non-assessable. We consent to the use of this opinion as an exhibit to the Registration Statement and to the references to our firm in the Prospectus which is part of the Registration Statement. Very truly yours, /s/ Edwards & Angell, LLP Edwards & Angell, LLP EX-10.15 5 STANDARD TERMS AND CONDITIONS OF INDENTURE 1 Exhibit 10.15 - -------------------------------------------------------------------------------- APPENDIX I STANDARD TERMS AND CONDITIONS OF INDENTURE - -------------------------------------------------------------------------------- Dated as of November 1, 1994 ROTHCHILD LEASE FINANCE CONDUIT V 2 TABLE OF CONTENTS PRELIMINARY STATEMENT ARTICLE ONE DEFINITIONS Section 1.01 Definitions ..................................................1 ARTICLE TWO THE NOTES Section 2.01 Form Generally ..............................................24 Section 2.02 Series; Denomination ........................................24 Section 2.03 Execution, Authentication, Delivery and Dating ..............25 Section 2.04 Temporary Notes .............................................26 Section 2.05 Registration, Registration of Transfer and Exchange .........26 Section 2.06 Limitation on Transfer and Exchange .........................27 Section 2.07 Mutilated, Destroyed Lost or Stolen Note ....................28 Section 2.08 Payment of Principal and Interest; Principal and Interest Rights Preserved ...................................29 Section 2.09 Persons Deemed Owner ........................................31 Section 2.10 Cancellation ................................................31 Section 2.11 Tax Treatment ...............................................31 ARTICLE THREE WAREHOUSE FUNDINGS Section 3.01 General .....................................................32 Section 3.02 Warehouse Note ..............................................32 Section 3.03 Procedure for Warehouse Fundings ............................32 Section 3.04 Verification of Warehouse Funding Report ....................34 Section 3.05 Disbursement of Funds .......................................35 Section 3.06 Repayments of Principal .....................................35 Section 3.07 Appointment of Note Administrator ...........................35 i 3 ARTICLE FOUR ISSUANCE OF NOTES; SUBSTITUTIONS OF COLLATERAL Section 4.01 Conditions to Initial Issuance of Notes .....................37 Section 4.02 Issuances of Additional Series of Notes .....................38 Section 4.03 Security for Notes ..........................................40 Section 4.04 Substitution, Purchase and Addition of Lease Contracts ......41 Section 4.05 Releases ....................................................43 Section 4.06 Trust Estate ................................................43 Section 4.07 Notice of Release ...........................................44 ARTICLE FIVE SATISFACTION AND DISCHARGE Section 5.01 Satisfaction and Discharge of Indenture .....................44 Section 5.02 Application of Trust Money ..................................46 ARTICLE SIX DEFAULTS AND REMEDIES Section 6.01 Events of Default ...........................................47 Section 6.02 Acceleration of Maturity; Rescission and Annulment...........48 Section 6.03 Collection of Indebtedness and Suits for Enforcement by Indenture Trustee ..........................................49 Section 6.04 Remedies ....................................................49 Section 6.05 Optional Preservation of Trust Estate .......................50 Section 6.06 Indenture Trustee May File Proofs of Claim ..................51 Section 6.07 Indenture Trustee May Enforce Claims Without Possession of Notes ...................................................51 Section 6.08 Application of Money Collected ..............................52 Section 6.09 Limitation on Suits .........................................53 Section 6.10 Unconditional Right of Noteholders to Receive Principal and Interest ....................................54 Section 6.11 Restoration of Rights and Remedies ..........................54 Section 6.12 Rights and Remedies Cumulative ..............................54 Section 6.13 Delay or Omission; Not Waiver ...............................55 Section 6.14 Control by Noteholders ......................................55 Section 6.15 Waiver of Past Defaults .....................................55 Section 6.16 Undertaking for Costs .......................................56 Section 6.17 Waiver of Stay or Extension Laws ............................56 ii 4 Section 6.18 Sale of Trust Estate ........................................56 Section 6.19 Action on Notes..............................................57 ARTICLE SEVEN THE INDENTURE TRUSTEE Section 7.01 Certain Duties and Responsibilities .........................58 Section 7.02 Notice of Default and Trigger Events ........................60 Section 7.03 Certain Rights of Indenture Trustee .........................60 Section 7.04 Not Responsible for Recitals or Issuance of Notes ...........61 Section 7.05 May Hold Notes ..............................................62 Section 7.06 Money Held in Trust .........................................62 Section 7.07 Compensation and Reimbursement ..............................62 Section 7.08 Corporate Trustee Required; Eligibility .....................63 Section 7.09 Resignation and Removal; Appointment of Successor ...........64 Section 7.10 Acceptance of Appointment by Successor ......................65 Section 7.11 Merger, Conversion, Consolidation or Succession to Business of Indenture Trustee ..............................65 Section 7.12 Co-Indenture Trustees and Separate Indenture Trustees .......65 Section 7.13 Rights with Respect to the Servicer .........................67 Section 7.14 Appointment of Authenticating Agent .........................67 Section 7.15 Indenture Trustee to Hold Lease Contracts ...................69 Section 7.16 Money for Note Payments to be Held in Trust .................69 ARTICLE EIGHT THE NOTE INSURANCE POLICIES Section 8.01 Payments under the Note Insurance Policies ..................71 ARTICLE NINE SUPPLEMENTAL INDENTURES Section 9.01 Supplemental Indentures without Consent of Noteholders ......72 Section 9.02 Supplemental Indentures with Consent of Noteholders .........73 Section 9.03 Execution of Supplemental Indentures ........................74 Section 9.04 Effect of Supplemental Indentures ...........................75 iii 5 Section 9.05 Reference in Notes to Supplemental Indentures ...............75 ARTICLE TEN REDEMPTION OF NOTES Section 10.01 Redemption at the Option of the Issuer, Election to Redeem ........................................76 Section 10.02 Notice to Indenture Trustee; Deposit of Redemption Price ....76 Section 10.03 Notice of Redemption by the Issuer ..........................77 Section 10.04 Notes Payable on Redemption Date ............................77 Section 10.05 Release of Series Lease Contracts ...........................77 ARTICLE ELEVEN REPRESENTATIONS, WARRANTIES AND COVENANTS Section 11.01 Representations and Warranties ..............................79 Section 11.02 Covenants ...................................................81 Section 11.03 Other Matters as to the Issuer ..............................86 ARTICLE TWELVE ACCOUNTS AND ACCOUNTINGS Section 12.01 Collection of Money .........................................87 Section 12.02 Collection Account; Advance Payment Account; ACH Account; Redemption Account ...........................87 Section 12.03 Cash Collateral Account .....................................91 Section 12.04 Reports by Indenture Trustee to MBIA and Noteholders .................................................93 ARTICLE THIRTEEN PROVISIONS OF GENERAL APPLICATION Section 13.01 General Provisions ..........................................94 Section 13.02 Acts of Noteholders .........................................94 Section 13.03 Notices, etc., to Indenture Trustee, MBIA, Issuer and Servicer ..................................................94 Section 13.04 Notices to Noteholders; Waiver ..............................95 iv 6 Section 13.05 Effect of Headings and Table of Contents .........95 Section 13.06 Successors and Assigns ...........................96 Section 13.07 Separability .....................................96 Section 13.08 Benefits of Indenture ............................96 Section 13.09 Legal Holidays ...................................96 Section 13.10 Governing Law ....................................96 Section 13.11 Counterparts .....................................96 Section 13.12 Corporate Obligation .............................97 Section 13.13 Compliance Certificates and Opinions .............97 Section 13.14 MIA Default ......................................97 Exhibit A Form of Investment Letter ......................... A Exhibit B Supplement to Indenture for Grant of Substitute Lease Contracts................................... B Exhibit C Form of Indenture Supplement ...................... C Exhibit D Forms of Note Insurance Policy .................... D-1 and D-2 Exhibit E-1 Form of Term Note ................................. E-1 Exhibit E-2 Form of Warehouse Note ............................ E-2 v 7 These STANDARD TERMS AND CONDITIONS OF INDENTURE (the "Standard Indenture Terms"), dated as of November 1, 1994, are incorporated by reference and are intended to form a part of the SPECIFIC TERMS AND CONDITIONS OF INDENTURE dated as of November 1, 1994 (the "Specific Indenture Terms") to which these Standard Indenture Terms are appended (together, the "Indenture") and which Indenture shall be supplemented from time to time with Supplements as described herein. PRELIMINARY STATEMENT The Issuer has duly authorized the execution and delivery of the Indenture to provide for the issuance of the Issuer's Notes issuable as provided in the Indenture. All covenants and agreements made by the Issuer, the Servicer, the Indenture Trustee and the Back-up Servicer herein are for the benefit and security of the Holders of the Notes and MBIA. The Issuer, the Servicer, the Indenture Trustee and the Back-up Servicer are entering into the Indenture, and the Indenture Trustee is accepting the trusts created hereby, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. All things necessary to make the Indenture a valid agreement of the Issuer, the Servicer, the Indenture Trustee and the Back-up Servicer in accordance with its terms have been done. ARTICLE ONE DEFINITIONS SECTION 1.01 DEFINITIONS. Except as otherwise, expressly provided herein or in the Specific Indenture Terms or the applicable Supplement, or unless the context otherwise requires, the following terms have the respective meanings set forth below for all purposes of the Indenture, and the definitions of such terms are equally applicable both to the singular and plural forms of such terms. Capitalized terms used herein but not otherwise defined shall have the respective meanings assigned to such terms in the Servicing Agreement or the Lease Acquisition Agreement. "Accrual Date": With respect to any Series of Notes, the date upon which interest begins accruing on such Notes, as specified in such Notes and the related Supplement. "Accrual Period": The period beginning on the twentieth day of each month and ending on the nineteenth day of the immediately following month (or, in the case of the Accrual Period that is applicable to an Initial Payment Date, beginning on the Accrual Date for such Notes). "Act": With respect to any Noteholder, the meaning specified in Section 13.02. 8 "ACH": The National Automated Clearinghouse System. "ACH Account": Unless otherwise specified in the Specific Indenture Terms, the account .established by the Issuer for the sole benefit of the Noteholders and MBIA pursuant to Section 12.02(f) hereof, into which account shall be deposited payments related to the Lease Receivables. "ACH Bank": shall mean the bank specified in the applicable Specific Servicing Terms so long as such bank meets the requirements of a Trustee as set forth in Section 7.08 of the Standard Indenture Terms. "Additional Principal Amount": The amount, if any, payable to Noteholders pursuant to Section 12.02(d)(xi) hereof. "Additional Servicer Fee": The amount, if any, of the fee payable in accordance with Section 6.02 of the Standard Servicing Terms to a successor Servicer appointed pursuant to Section 6.02 of the Standard Servicing Terms that is in excess of the Servicer Fee. "Advance Payment": With respect to a Lease Contract and a Due Period, any Scheduled Payment or portion thereof made by, or on behalf of, a Customer and received by the Servicer during such Due Period, which Scheduled Payment or portion thereof does not become due until a subsequent Due Period. "Advance Payment Account": The account or accounts established and maintained pursuant to Section 12.02(e) hereof. "Affiliate": With respect to any specified Person, any other Person controlling or controlled by or under common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Aggregate IPB": The aggregate of the Implicit Principal Balances of all Series Lease Contracts for all Outstanding Series. "Aggregate Initial Series IPB": The sum of all Series Initial IPB for all Series of Notes Outstanding. "Amended Lease Schedule": With respect to any Series Lease Schedule, the list of Lease Contracts amending such Series Lease Schedule pursuant to any substitution, repurchase, modification or Warehouse Fundings in accordance with the terms hereof and the Lease Acquisition Agreement, and accompanied by an Amendment to Indenture for New Lease Contracts and an Amendment to Lease Acquisition Agreement for New Lease Contracts. 2 9 "Amendment to Lease Acquisition Agreement for New Lease Contracts": The Amendment to Lease Acquisition Agreement for New Lease Contracts, a form of which is attached to the Standard Lease Acquisition Terms as Exhibit A. "Amendment to Indenture for New Lease Contracts": The Amendment to Indenture for New Lease Contracts, a form of which is attached hereto as Exhibit B. "Annualized Default Rate": Unless otherwise specified in the Specific Indenture Terms, for any Due Period, the sum of the Implicit Principal Balances as of the Calculation Date occurring in such Due Period of all Lease Contracts that became Defaulted Lease Contracts during such Due Period (including any such Lease Contracts that have been purchased or substituted), minus the sum of Recoveries and Residual Proceeds and, if included in the term Lease Receivables, Servicing Charges, received during such Due Period, divided by the Aggregate IPB on, the Calculation Date immediately preceding such Due Period multiplied by twelve. "Assignment and Assumption Agreement": An assignment and assumption agreement between the Issuer and the Company, in the form attached to the Specific Lease Acquisition Terms as Exhibit B. "Authenticating Agent": Any entity appointed by the Indenture Trustee pursuant to Section 7.14 hereof. "Available Warehouse Amount": The amount, if any, by which the Warehouse Note Limit for a Series of Notes exceeds the aggregate Outstanding Principal Amount of all Warehouse Notes of such Series. "Back-up Servicer": The entity identified as such in the Specific Indenture Terms. "Back-up Servicer Fee": The fee payable on each Payment Date to the Back-up Servicer in consideration for the Back-up Servicer's performance of its duties pursuant to the Indenture and the Servicing Agreement as Back-up Servicer, in an amount equal to the product of one-twelfth of the Back-up Servicer Fee Rate and the Outstanding Principal Amount of all Series of Notes immediately following the preceding Payment Date. "Back-up Servicer Fee Rate": The percentage specified in the Specific Indenture Terms. "Benefit Plan Investor": shall have the meaning set forth in 29 C.F.R. ss. 2510.3-101. "Board of Directors": Either the board of directors of the Issuer or of the Servicer, as the context requires, or any duly authorized committee of such Board. "Board Resolution": A copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer or of the Servicer to have been duly adopted by its Board of Directors and to be in full force and effect on the date of such certification and delivered to the Indenture Trustee. 3 10 "Business Day": Any day other than a Saturday, a Sunday or a day on which banking institutions in New York City or in the city in which the principal place of business of the Issuer or the Servicer or the corporate trust office of the Indenture Trustee under the Indenture is located are authorized or obligated by law or executive order to close. "Calculation Date": The last day of a Due Period, except that (a) with respect to any calculation of the Series Initial IPB or the Term Note Funding Amount for any Series of Term Notes, the Calculation Date shall mean the close of business on the related Cut-Off Date and (b) with respect to any calculations made regarding any Warehouse Funding or calculation of the Series Initial IPB for any Series of Warehouse Notes, the Calculation Date shall mean the Calculation Date that was the basis for the most recent Monthly Services Report; provided, however, that with respect to any Warehouse Fundings that occur prior to delivery of the initial Monthly Servicer's Report, the Calculation Date shall mean the Cut-Off Date for the Initial Delivery Date. "Cash Collateral Account": The trust account or accounts created and maintained pursuant to Section 12.03 hereof. "Cash Collateral Account Factor": The meaning specified in the Specific Indenture Terms. "Cash Collateral Account Deposit": With respect to the issuance of any Series of Notes, the amount to be deposited on the Closing Date as set forth in the related Indenture Supplement and on every third Payment Date, beginning on February 16, 1995, the amount of the Cash Collateral Account Deposit shall be equal to the maximum amount of Scheduled Payments due on the related Due Date. "Cash Collateral Account Required Balance": As of any determination date, an amount equal to the sum of any Cash Collateral Account Deposits plus the product of (a) the Required Collateralization Amount minus the positive difference between (i) the Aggregate IPB, and (ii) the Outstanding Principal Amount of all Series of Notes, after giving effect to any payments of principal expected to occur on the related Payment Date and the Warehouse Funding expected to occur on the related Warehouse Funding Date prior to the next Payment Date; and (b) the Cash Collateral Account Factor; provided, however, if a Trigger Event has occurred, an amount equal to zero. "Change in Control": The occurrence of any one of the events set forth in the Specific Indenture Terms. 4 11 "Code": The Internal Revenue Code of 1986, as amended. "Collateral": The meaning specified in the Granting Clause of the Specific Indenture Terms. "Collateralization Percentage": The percentage specified in the Specific Indenture Terms. "Collection Account": The trust account or accounts created and maintained pursuant to Section 12.02 hereof. "Company": The entity identified as such in the Specific Indenture Terms. "Concentration Limits": The Lease Contract pool concentration limits specified in the Specific Lease Acquisition Terms; provided, however, that with the approval of MBIA, the limitations set forth in the Specific Lease Acquisition Terms may be increased or decreased. "Corporate Trust Office": The principal corporate trust office of the Indenture Trustee at the location identified in the Specific Indenture Terms or at such other address as the Indenture Trustee may designate from time to time by notice to MBIA, the Noteholders and the Issuer, or the principal corporate trust office of any successor Indenture Trustee. "Customer": The lessee under each related Lease Contract, including any guarantor of such lessee and their respective successors and assigns. "Cut-Off Date": With respect to any Series of Term Notes, the meaning specified in the applicable Supplement, and with respect to any Series of Warehouse Notes, each Warehouse Funding Date. "Default": Any occurrence or circumstance which with notice or the lapse of time or both would become an Event of Default. "Defaulted Lease Contract": Unless otherwise specified in the Specific Indenture Terms, a Lease Contract shall become a Defaulted Lease Contract at the earlier of the day (i) which is the last day of the fifth month following a month in which the Servicer made a Servicer Advance which has not been reimbursed from the related Lease Contract, or (ii) the Servicer determines in accordance with its customary practices that it shall not make a Servicer Advance, that a prior Servicer Advance is unrecoverable or that the remaining Scheduled Payments under the related Lease Contract are uncollectible. "Defaulted Lease Purchase and Substitution Limit": The meaning specified in the Specific Indenture Terms. 5 12 "Delinquency Rate": For any Due Period, the sum of the Implicit Principal Balances of all Lease Contracts as of the Calculation Date occurring in such Due Period with respect to which a Customer has not made any Scheduled Payment due in the immediately prior Due Period (including any such Lease Contracts that have been purchased or substituted), divided by the Aggregate IPB on such Calculation Date (including any such Lease Contracts that have been purchased or substituted). "Delinquent Lease Contract": For any Due Period, any Lease Contract (a) with respect to which a Customer has not made any Scheduled Payment due in such Due Period and which remains unpaid as of the Calculation Date at the end of such Due Period and (b) which is not a Defaulted Lease Contract. "Delinquent Lease Purchase and Substitution Limit": the meaning specified in the Specific Indenture Terms. "Delivery Date": The date on which the Notes of a Series are first executed, authenticated and delivered, as specified in the related Supplement. "Determination Date": The fourth Business Day preceding each Payment Date. "Discount Rate": With respect to a Series of Warehouse Notes, the rate equal to the sum of the Trustee Fee Rate, the Back-up Servicer Fee Rate, the applicable MBIA Premium Rate, and (a) with respect to the portion of Warehouse Notes paying interest based upon a treasury rate, applicable Warehouse Note Interest Rate and (b) with respect to the portion of Warehouse Notes paying interest based upon LIBOR, the applicable Maximum Warehouse Note Interest Rate and with respect to any Series of Term Notes, the rate equal to the sum of the applicable Note Interest Rate, the Trustee Fee Rate, the Back-up Servicer Fee Rate and the applicable MBIA Premium Rate. "Dollar(s)": Lawful money of the United States of America. "Due Date": With respect to each Lease Contract, each date on which payment is due thereunder. "Due Period": As to any Determination Date or Payment Date, the period beginning on the first day and ending on the last day of the calendar month preceding the month in which such Determination Date or Payment Date occurs. "Electronic Ledgers": The electronic master records of all lease contracts of the Company or the Servicer similar to and including the Lease Contracts. "Eligible Investments": Any and all of the following: (i) direct obligations of, and obligations fully guaranteed by, the United States of America, the Federal Home Loan Mortgage Corporation, the Federal National Mortgage 6 13 Association, the Federal Home Loan Banks or any agency or instrumentality of the United States of America the obligations of which are backed by the full faith and credit of the United States of America; (ii) (A) demand and time deposits in, certificates of deposit of, banker's acceptances issued by or federal funds sold by any depository institution or trust company (including the Indenture Trustee or its agent acting in their respective commercial capacities) incorporated under the laws of the United States of America or any State thereof and subject to supervision and examination by federal and/or state authorities, so long as at the time of such investment or contractual commitment providing for such investment, such depository institution or trust company has a short term unsecured debt rating in the highest available rating category of each of the Rating Agencies and provided that each such investment has an original maturity of no more than 365 days, and (B) any other demand or time deposit or deposit which is fully insured by the Federal Deposit Insurance Corporation; (iii) repurchase obligations with a term not to exceed 30 days with respect to any security described in clause (i) above and entered into with a depository institution or trust company (acting as a principal) rated "A" or higher by S&P and A2 or higher by Moody's; provided, however, that collateral transferred pursuant to such repurchase obligation must (A) be valued weekly at current market price plus accrued interest, (B) pursuant to such valuation, equal, at all times, 105% of the cash transferred by the Indenture Trustee in exchange for such collateral and (C) be delivered to the Indenture Trustee or, if the Indenture Trustee is supplying the collateral, an agent for the Indenture Trustee, in such a manner as to accomplish perfection of a security interest in the collateral by possession of certificated securities. (iv) securities bearing interest or sold at a discount issued by any corporation incorporated under the laws of the United States of America or any State thereof which has a long term unsecured debt rating in the highest available rating category of each of the Rating Agencies at the time of such investment; (v) commercial paper having an original maturity of less than 365 days and issued by an institution having a short term unsecured debt rating in the highest available rating category of each of the Rating Agencies at the time of such investment; (vi) a guaranteed investment contract approved by each of the Rating Agencies and MBIA and issued by an insurance company or other corporation having a long term unsecured debt rating in the highest available rating category of each of the Rating Agencies at the time of such investment; (vii) money market funds having ratings in the highest available rating category of each of the Rating Agencies at the time of such investment which invest only in other Eligible Investments; any such money market funds which provide for demand withdrawals 7 14 being conclusively deemed to satisfy any maturity requirement for Eligible Investments set forth in the Indenture; and (viii) any investment approved in writing by each of the Rating Agencies and MBIA. The Indenture Trustee may purchase from or sell to itself or an affiliate, as principal or agent, the Eligible Investments listed above. "Enumerated States": At any time of determination, those States in which the Equipment is located such that the aggregate Implicit Principal Balance of all Lease Contracts in those States is at least equal to 70% of the aggregate Implicit Principal Balances of all Lease Contracts at such time. "Equipment": The equipment leased to the Customers pursuant to the Lease Contracts and described by general equipment type under the column heading "eq type" on the Series Lease Schedule. "ERISA": The Employee Retirement Income Security Act of 1974, as amended or any successor statute thereto. "Event of Default": The meaning specified in Section 6.01 hereof. "Existing Indebtedness": The meaning specified in the Specific Lease Acquisition Terms. "Final Due Date": With respect to each Lease Contract, the final Due Date thereunder. "Final Payment Date": With respect to any Note of a Series, the date on which the final principal payment on such Note is made as therein or herein provided, whether at the Stated Maturity, or by acceleration or redemption. "First Period Warehouse Interest": With respect to any Warehouse Funding, the amount, if any, of interest that will accrue on the related Warehouse Funding Amount at the Warehouse Note Interest Rate in effect on the Reset Date for the related Warehouse Funding Date, commencing on such Warehouse Funding Date and ending on the last day of the Accrual Period in which such Warehouse Funding occurs. "Fixed Interest Rate": The meaning specified in the applicable Supplement, but not to exceed the applicable Maximum Warehouse Note Rate. "Floating Interest Rate": The meaning specified in the applicable Supplement, but not to exceed the applicable Maximum Warehouse Note Rate. "Floor Percentage": The meaning specified in the Specific Indenture Terms. 8 15 "Grant": To grant, bargain, sell, warrant alienate, remise, release, convey, assign, transfer, mortgage, pledge, create and grant a security interest in and right of set-off against, deposit, set over and confirm. A Grant of the Lease Contracts, the Lease Receivables or of any other instrument shall include all rights, powers and options (but none of the obligations) of the Granting party thereunder, including, without limitation, the immediate and continuing right to claim, collect, receive and receipt for payments in respect of the Lease Contracts and the Lease Receivables, or any other payment due thereunder, to give and receive notices and other communications, to make waivers or other agreements, to exercise all rights and options, to bring proceedings in the name of the Granting party or otherwise, and generally to do and receive anything which the Granting party is or may be entitled to do or receive thereunder or with respect thereto. "Guaranty Amounts": Any and all amounts paid by the individual guarantor indicated on the applicable Lease Contract. "Holdback Rate": The percentage specified in the Specific Indenture Terms. "Holder" or "Noteholder": The person in whose name a Note is registered in the Note Register. "Implicit Principal Balance": As of any date of determination, the present value of the remaining stream of Scheduled Payments due with respect to each Lease Contract after the applicable Calculation Date (reduced by the applicable Servicer Fee but not reduced by any Additional Servicer Fee) based upon discounting such Scheduled Payments (assuming such Scheduled Payments are received on the last day of the related Due Period) to such Calculation Date at an annual rate equal to the applicable Discount Rate, at the same frequency as the Payment Dates; except that on the Calculation Date, (w) on or immediately following the deposit into the Collection Account of Insurance Proceeds equal to the outstanding Implicit Principal Balance of the related Lease Contract or the Purchase Price, or on or immediately following the delivery of a Substitute Lease Contract, (x) immediately on or after the date that a Lease Contract has become a Defaulted Lease Contract, or (y) immediately preceding the Final Payment Date, the Implicit Principal Balance of each such related Lease Receivable shall be zero. To the extent that the Final Due Date of any Series Lease Contract is later than the Stated Maturity of the last maturing Notes of the related Series, any Scheduled Payments due on such Lease Receivable after the Calculation Date immediately preceding such Stated Maturity shall not be taken into account in calculating the Implicit Principal Balance of such Lease Receivable. 9 16 "Indenture": These Standard Indenture Terms together with the Specific Indenture Terms and as supplemented by Supplements, in the form when originally executed and, if from time to time further supplemented or amended by one or more indentures supplemental hereto or Amendment to Indenture for New Lease Contracts entered into pursuant to the applicable provisions hereof, as the Specific Indenture Terms or Standard Indenture Terms are so supplemented or amended. All references in these Standard Indenture Terms designated "Articles," "Sections," "Subsections" and other subdivisions are to the designated Articles, Sections, Subsections and other subdivisions of these Standard Indenture Terms as originally executed, or if amended or supplemented, as so amended and supplemented, all references in the Specific Indenture Terms to the designated "Articles," "Sections," "Subsections" and other subdivisions are to the designated Articles, Sections, Subsections and other subdivisions of the Specific Indenture Terms, and all references in a Supplement to the designated "Articles," "Sections," "Subsections" and other subdivisions are. to the designated Articles, Sections, Subsections and other subdivisions of such Supplement. The words "herein," "hereof," "hereunder" and other words of similar import when not related to a specific subdivision of these Standard Indenture Terms, refer to the Indenture as a whole and not, to any particular Article, Section, Subsection or other subdivision of these Standard Indenture Terms, the Specific Indenture Terms or any Supplement. "Indenture Trustee": The entity specified in the Specific Indenture Terms, until a successor Person shall have become the Indenture Trustee pursuant to the applicable provisions of the Indenture, and thereafter "Indenture Trustee" shall mean such successor Person. "Independent": When used with respect to any specified Person means such a Person, who (1) is in fact independent of the Issuer, (2) does not have any direct financial interest or any material indirect financial interest in the Issuer or in any Affiliate of the Issuer and (3) is not connected with the Issuer as an officer, employee, promoter, underwriter, trustee, partner, director, or person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be furnished to the Indenture Trustee, such Person shall be appointed by a Issuer Order and approved by the Indenture Trustee in the exercise of reasonable care, and such opinion or certificate shall state that the signer has read this definition and that the signer is Independent within the meaning hereof. "Independent Accountants": The meaning specified in the Specific Indenture Terms. "Initial ACH Deposit": The meaning specified in the Specific Indenture Terms. "Initial Cash Deposit": The meaning specified in the applicable Supplement. "Initial Delivery Date": The date on which the first Series of Notes are executed, authenticated and delivered. "Initial Payment Date": The meaning specified in the applicable Supplement. 10 17 "Insurance Agreement": Shall mean the Insurance Agreement, dated as of the Transaction Documents Date, by and among MBIA, the Issuer, the Company, the Back-up Servicer and the Indenture Trustee. "Insurance Policy": With respect to an item of Equipment and a Lease Contract, any insurance policy maintained by the Customer pursuant to the related Lease Contract that covers physical damage to the Equipment or general liability (including policies procured by the Company or the Servicer on behalf of the Customer), and which may be further specified in the Specific Indenture Terms. "Insurance Proceeds": With respect to an item of Equipment and a Lease Contract, any amount received during the related Due Period pursuant to an Insurance Policy issued with respect to such Equipment and the related Lease Contract, net of any costs of collecting such amounts not otherwise reimbursed. "Insurer": Any insurance company or other insurer providing any Insurance Policy. "Issuer": The entity identified as such in the Specific Indenture Terms. "Issuer Order" and "Issuer Request": A written order or request signed in the name of the Issuer by its Chairman of the Board, President, or a Vice President and delivered to the Indenture Trustee. "Issuer Payment Office": The meaning specified in the Specific Indenture Terms or such other location as the Issuer shall notify to the Warehouse Lender no later than two Business Days prior to a proposed Warehouse Funding Date. "Issuer State of Incorporation": The meaning specified in the Specific Indenture Terms. "Key Employee": The meaning specified in the Specific Indenture Terms. "Lease Acquisition Agreement": The Specific Lease Acquisition Terms together with the Standard Lease Acquisition Terms. "Lease Assets": The meaning specified in the Lease Acquisition Agreement. "Lease Contracts": The lease contracts and loan contracts (and all rights with respect thereto, including all guaranties and other agreements or arrangements of whatever character from time to time supporting or securing payment of any Lease Contract and all rights with respect to any agreements or arrangements with the vendors, dealers or manufacturers of the Equipment to the extent specifically related to any Lease Contract) which are identified on either a Series Lease Schedule delivered to the Indenture Trustee and MBIA on a Delivery Date or on an Amended Lease Schedule delivered to the Indenture Trustee and MBIA on a Warehouse Funding Date or on the date on which Substitute Lease Contracts are delivered to the Indenture Trustee, and any other lease 11 18 contract specified in the Specific Indenture Terms and any amendments, riders and annexes thereto; provided that, from and after the date on which a Lease Contract is purchased or substituted by the Company or the Issuer in accordance with Section 4.04 hereof, such repurchased or replaced Lease Contract shall no longer constitute a Lease Contract for purposes of the Transaction Documents. "Lease Receivables": With respect to any Lease Contract, all of, and the right to receive all of (i) the Scheduled Payments, (ii) any Guaranty Amounts, (iii) any Insurance Proceeds, (iv) any Residual Proceeds, (v) any Recoveries and (vi) if so specified in the Specific Indenture Terms, any Servicing Charges. "LIBOR Rate": Unless otherwise specified in the applicable Supplement, with respect to each Accrual Period, an interest rate per annum equal to the rate for London interbank offered, quotations for one-month Eurodollar deposits determined by the Indenture Trustee for such Accrual Period as follows: (a) On each Reset Date, the Indenture Trustee will determine the LIBOR Rate on the basis of the rate for deposits in U.S. Dollars for a period of one month that appears on the Telerate Page 3750 as of 11:00 am. (London time) on such Reset Date. If such rate does not appear on Telerate Page 3750, the rate for such Reset Date will be determined on the basis of the rates at which deposits in U.S. Dollars are offered by the Reference Banks at approximately 11:00 a.m. (London time) on such date to prime banks in the London interbank market for a period of one month commencing on that Reset Date. The Indenture Trustee will request the principal London office of each of the Reference Banks to provide such a quotation. (b) If, on any Reset Date, at least two Reference Banks provide quotations when requested, the LIBOR Rate for such Reset Date will be the arithmetic mean of the quotations so received. (c) If, on any Reset Date, only one or none of the Reference Banks provides such a quotation, the LIBOR Rate will be the arithmetic mean of the offered rates quoted by major banks in New York City selected by the Indenture Trustee at approximately 11:00 a.m. (New York City time) on such Reset Date for loans to leading European banks, in U.S. Dollars for a period of one month commencing on that Reset Date. (d) If, on any Reset Date, the LIBOR Rate cannot be calculated pursuant to one of the above methods, the LIBOR Rate for such Reset Date shall be the Maximum Warehouse Note Rate. "Lien": The meaning specified in the Lease Acquisition Agreement. "Liquidated Lease Receivable" A Lease Receivable that has been liquidated pursuant to Section 3.01 (b) of the Standard Servicing Terms. 12 19 "Loan Contract": A Lease Contract that evidences a sale of the related Equipment to the Customer and the retention by the lessor of a security interest in such Equipment, including any TRAC Lease. "London Banking Day": Any day on which dealings in deposits in Dollars are transacted in the London interbank market. "Material Affiliate": The meaning specified in the Specific Indenture Terms. "Maximum Default Rate": The meaning specified in the Specific Indenture Terms. "Maximum Delinquency Rate": The meaning specified in the Specific Indenture Terms. "Maximum Warehouse Note Rate": The rate specified in the applicable Supplement. "MBIA": Municipal Bond Investors Assurance Corporation. "MBIA Default": The occurrence and continuance of any of the following events: (a) the failure by MBIA to make a payment under a Note Insurance Policy in accordance with its terms; or (b) the occurrence of an "Insurer Insolvency", as that term is defined in the Insurance Agreement, with respect to MBIA. "MBIA Premium": The sum of all MBIA Premiums specified in the Supplements. "MBIA Premium Rate": The meaning specified in the applicable Supplement. "Minimum Required Collateralization Amount": On any date of determination, an amount equal to the Required Collateralization Amount, as last calculated (or, if not previously calculated, as specified in the Specific Indenture Terms with respect to the Initial Delivery Date), plus or minus the following amounts, as applicable: (i) in the case of a Warehouse Funding occurring on any date of determination, plus the product of the Holdback Rate and the Warehouse Funding IPB; (ii) in the case of an issuance of a Series of Term Notes on any date of determination, plus the product of the Holdback Rate and the Series Initial IPB for such Series of Notes; (iii) in the case of the payment in full of any Series of Notes on any date of determination, minus the product of the Holdback Rate and the related Series Initial IPB. 13 20 "Monthly Servicer's Report" shall mean the report prepared by the Servicer pursuant to Section 4.01 of the Standard Servicing Terms. "Moody's": Moody's Investors Service, Inc. "Net Worth Requirement": The meaning specified in the Specific Indenture Terms. "Nonrecoverable Advance": The meaning specified in the Servicing Agreement. "Note Administrator": Rothschild Inc. or any successor Note. Administrator approved by MBIA. "Noteholder" or "Holder": The Person in whose name a Note is registered in the Note Register. "Note Insurance Policies": The note guaranty insurance policies issued by MBIA insuring each Series of Term Notes or Warehouse Notes, respectively, in accordance with the terms thereof, the forms of which are attached hereto as Exhibit D-I and D-2, respectively. "Note Interest Rate": With respect to any Series of Term Notes, the annual rate at which interest accrues on the Notes of such Series, as specified in such Notes and in the related Supplement, and with respect to any Series of Warehouse Notes, the applicable Warehouse Note Interest Rate. "Note Register" and "Note Registrar": The respective meanings specified in Section 2.05 hereof. "Notes": Collectively, all Outstanding Series of Term Notes and Warehouse Notes or all Outstanding Notes of any one Series, as is consistent with the context in which such term is used. "Officer's Certificate": A certificate signed by the Chairman of the Board, the President, a Vice President, the Treasurer, the Controller, an Assistant Controller or the Secretary of the company on whose behalf the certificate is delivered, and delivered to the Indenture, Trustee, which certificate shall comply with the applicable requirements of Section 13.13 hereof. Unless otherwise specified, any reference in the Indenture to an Officer's Certificate shall be to an Officer's Certificate of the Issuer. "Opinion of Counsel": A written opinion of counsel who may, except as otherwise expressly provided in the Indenture, be counsel for the Issuer and who shall be reasonably satisfactory to the Indenture Trustee and MBIA and which opinion shall comply with the applicable requirements of Section 13.13 hereof. 14 21 "Outstanding": With respect to Notes, as of any date of determination, all Notes theretofore authenticated and delivered under the Indenture except: (i) Notes theretofore cancelled by the Note Registrar or delivered to the Note Registrar for cancellation; (ii) Notes for whose payment money in the necessary amount has been theretofore irrevocably deposited with the Indenture Trustee or any Paying Agent (other than the Issuer) in trust for the Holders of such Notes (provided, however, that if such Notes are to be redeemed, notice of such redemption has been duly given pursuant to the Indenture or any provision therefor, satisfactory to the Indenture Trustee, has been made); and (iii) Notes in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to the Indenture, unless proof satisfactory to the Indenture Trustee is presented that any such Notes are held by a bona fide purchaser; provided, however, that for purposes of disbursing payments from the Note Insurance Policies and in determining whether the Holders of the requisite Outstanding Principal Amount of Notes have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Notes owned by the Issuer or any other obligor upon the Notes or any Affiliate of the Issuer or such other obligor shall be disregarded and deemed not to be outstanding, except that, in determining whether the Indenture Trustee shall be protected in relying upon any such request demand, authorization, direction, notice, consent, or waiver, only Notes which the Indenture Trustee knows to be so owned shall be so disregarded. "Outstanding Principal Amount": With respect to any Outstanding Term Note or Series of Term Notes, the unpaid principal amount of such Note or all Notes of such Series, as applicable, and with respect to any Outstanding Warehouse Note or Series of Warehouse Notes, the sum of all Warehouse Fundings made under such Note or Series, as applicable, less the amount of all principal payments previously made with respect to such Note or Series. "Overdue Payment": With respect to a Due Period and a Delinquent Lease Contract, all payments due in a prior Due Period that the Servicer receives from or on behalf of a Customer during the related Due Period on such Delinquent Lease Contract, including any Servicing Charges unless otherwise specified in the Specific Indenture Terms. "Paying Agent": The Indenture Trustee or any other Person that meets the eligibility standards for the Indenture Trustee specified in Section 7.08 hereof and is authorized by the Issuer pursuant to Section 7.16 hereof to pay the principal of, or interest on, any Notes on behalf of the Issuer. "Payment Date": For each Series, the twentieth day of each calendar month (or if such day is not a Business Day, the next succeeding Business Day) commencing on the Initial Payment Date for such Series. 15 22 "Person": Any individual, corporation, partnership, association, joint-stock company, trust (including any beneficiary thereof), unincorporated organization or government or any agency or political subdivision thereof. "Placement Agent": Rothschild Inc. "Principal Distribution Amount": As to each Series of Notes and (a) as of each Payment Date prior to the Stated Maturity of such Series, an amount equal to the lesser of (i) the applicable Target Principal Distribution Amount for such Series for such Payment Date, and (ii) if the amounts available in the Collection Account and the Cash Collateral Account (including any reinvestment income in the latter account) after payment of all amounts required by clauses (i) through (vi) of Section 12.02(d) hereof are less than the aggregate Target Principal Distribution Amounts for all Series of Notes, an amount equal to the product of (A) the total funds available for payment of principal on the Notes, in accordance with the priorities set forth in Section 12.02(d) hereof, and (B) the applicable Pro Rata Share of the Target Principal Distribution Amount for such Series of Notes; and (b) as of the State d Maturity of such Series, an amount equal to the Outstanding Principal Amount of the Notes of such Series as of such date. "Private Placement Memorandum" or "Final Private Placement Memorandum": The Private Placement Memorandum related to any direct or indirect offering of a Series of Notes and having the date specified in the related Supplement. "Proceeding": Any suit in equity, action at law or other judicial or administrative proceeding. "Pro Rata Share": With respect to any distribution of principal or interest on any Series of Notes on any Payment Date, a percentage determined by dividing the Target Principal Distribution Amount or amount of interest, as applicable, scheduled to be paid on such Series of Notes by the aggregate Target Principal Distribution Amount or amount of interest, as applicable, scheduled to be paid on all Series of Notes on such Payment Date. "Purchase Price": With respect to any Lease Contract repurchased by the Company pursuant to Sections 2.04 or 3.03 of the Lease Acquisition Agreement or by the Issuer pursuant to Sections 3.04 or 4.04(d) hereof, the sum of (i) the Implicit Principal Balance of the related Lease Receivable on the Calculation Date on or immediately preceding the date when the Lease Contract is repurchased, (ii) any Scheduled Payments with respect to the Lease Contract due on or prior to such Calculation Date but not received through such Calculation Date and (iii) with respect to the related 16 23 Equipment, the amount recorded in the books and records of the Issuer as the "unguaranteed residual." "Rating Agencies": Moody's and S & P. "Record Date": The close of business on the last day of the month preceding the applicable Payment Date, whether or not a Business Day, except with respect to an Initial Payment Date, the Record Date shall be the related Delivery Date. "Recoveries": For any Due Period occurring after the date on which any Lease Contract becomes a Defaulted Lease Contract and with respect to such Defaulted Lease Contract, all payments that the Servicer received from or on behalf of a Customer during such Due Period in respect of such Defaulted Lease Contract or from liquidation or re-leasing of the related Equipment, including but not limited to Scheduled Payments, Overdue Payments, Guaranty, Amounts, and Insurance Proceeds, as reduced by (i) any unreimbursed Servicer Advances with respect to such Lease Contract and (ii) any reasonably incurred out-of-pocket expenses incurred by the Servicer in enforcing such Defaulted Lease Contract. "Redemption Date": A date fixed pursuant to Section 10.01 hereof. "Redemption Price": With respect to any Series of Notes being redeemed pursuant to Article Ten hereof, and as of the related Redemption Date, the Outstanding Principal Amount of such Series of Notes, together with interest accrued thereon to but excluding the related Redemption Date at the applicable Note Interest Rate (exclusive of installments of interest and principal maturing on or prior to such date, payment of which shall have been made or duly provided for to the Holder of such Note on the applicable Record Date or as otherwise provided in the Indenture). "Redemption Record Date": With respect to any redemption of Notes, a date fixed pursuant to Section 10.01 hereof. "Reference Banks": Four leading banks selected by the Indenture Trustee that are engaged in transactions in eurodollar deposits in the international Eurocurrency market, each of which shall have an established place of business in London. "Registered Holder": The Person whose name appears on the Note Register on the applicable Record Date or Redemption Record Date. "Reinvestment Income": Any interest or other earnings earned on all or part of the Trust Estate, other than interest or other earnings from investments in the Cash Collateral Account. "Required Collateralization Amount": As of any date of determination, the lesser of (a) the Minimum Required Collateralization Amount, and 17 24 (b) the greatest of (i) the Collateralization Percentage multiplied by the Aggregate IPB (including any Lease Contracts to be purchased or funded and excluding any Lease Contracts to be released pursuant to Section 10.05 on such date of determination), (ii) the aggregate Implicit Principal Balance of the Lease Contracts (including any Lease Contracts to be purchased or funded on such date of determination) relating to the three Customers whose Lease Contracts have the greatest remaining Implicit Principal Balances, and (iii) the Floor Percentage multiplied by the Aggregate Initial Series IPB (including any Lease Contracts to be purchased or funded on such date of determination). "Reset Date": During the Warehouse Funding Period, on the second Business Day before each Warehouse Funding Date and on the second Business Day immediately preceding the commencement of each Accrual Period; provided that if such date is not both a Business Day and also a London Banking Day, the Reset Date shall be the first preceding day that is both a Business Day and a London Banking Day. "Residual Proceeds": With respect to a Lease Contract that is not a Defaulted Lease Contract and the related Equipment, the net proceeds (excluding Insurance Proceeds) of any sale, re-lease (including any lease renewal) or other disposition of such Equipment. "Responsible Officer": When used with respect to the Indenture Trustee, any officer assigned to the Corporate Trust Department (or any successor thereto), including any Vice President, Senior Trust Officer, Trust Officer, Assistant Trust Officer, any Assistant Secretary, any Trust other Officer of the Indenture Trustee customarily performing functions similar to Officer or an) those performed by any of the above designated officers and having direct responsibility for the administration of the Indenture, and also, with respect to a particular matter, any other officer, to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "Sale": The meaning specified in Section 6.18 hereof. "Scheduled Expenses": On any Determination Date, the Servicer Fee, the Back-up Servicer Fee, the MBIA Premium and the Trustee Fee to be due on the next succeeding Payment Date. "Scheduled Payment": With respect to a Payment Date and a Lease Contract, the periodic payment, including, if so specified in the Specific Indenture Terms, any payments pursuant to any "PUT" (Purchase Upon Termination) or balloon clause and "TRAC" (Terminal Rate Adjustment Clause) clause (exclusive of any amounts in respect of taxes) set forth in such Lease Contract due from the Customer in the related Due Period, calculated without regard to any modification granted pursuant to Section 3.01(b)(v) of the Standard Servicing Terms. "Series": A separate Series of Notes issued pursuant to the Indenture, with the specific terms identified in the applicable Supplement. 18 25 "Series Initial IPB": (a) With respect to any Series of Term Notes, the aggregate Implicit Principal Balance of the related Series Lease Contracts as calculated on the close of business on the related Cut-Off Date, and (b) with respect to any Series of Warehouse Notes, the sum of all related Warehouse Funding IPBs. "Series IPB": With respect to any Series of Notes, the sum of the Implicit Principal Balances of all related Series Lease Contracts. "Series Lease Contracts": For each Series of Notes, the Lease Contracts listed on the related Series Lease Schedule. "Series Lease Schedule": For each Series of Notes, the list of Lease Contracts and Lease Receivables attached to the related Supplement for such Series of Notes, together with and as amended by all related Amended Lease Schedules, each of which shall include with respect to each Lease Contract: (a) a number identifying the Lease Contract (b) the Implicit Principal Balance, (c) the Customer, (d) the State of the Customer's billing address, (e) the original and remaining term, (f) the Scheduled Payment, (g) the frequency with which Scheduled Payments are due, (h) whether such Lease Contract is a "true lease," a Loan Contract or a TRAC Lease, (i) the zip code of the Customer's billing address; (j) the amount of any PUT or TRAC payments; (k) the equipment type and (1) any additional items specified in the Specific Indenture Terms. "Servicer": Initially, the party specified in the Specific Indenture Terms and any successor Servicer appointed pursuant to Section 6.02 of the Standard Servicing Terms. "Servicer Advance" The meaning set forth in Section 3.04 of the Standard Servicing Terms. "Servicer Fee": The amount payable to the Servicer as the Servicer Fee on each Payment Date in the amount set forth in the Specific Servicing Terms. The Servicer Fee shall not include the Additional Servicer Fee. "Servicing Agreement": The Specific Servicing Terms together with the Standard Servicing Terms. "Servicing Charges": The sum of (i) all late payment charges paid by Customers on Delinquent Lease Contracts after payment in full of any Scheduled Payments due in a prior Due Period and Scheduled Payments for the related Due Period and (ii) any other incidental charges or fees received from a Customer, including but not limited to, late fees, collection fees and bounced check charges. "S & P": Standard & Poor's Ratings Group, a division of McGraw Hill. "Specific Indenture Terms": The Specific Terms and Conditions of Indenture dated as of the Transaction Documents Date, among the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee. 19 26 "Specific Lease Acquisition Terms": The Specific Terms and Conditions of Lease Acquisition dated as of the Transaction Documents Date, between the Issuer and the Company. "Specific Servicing Terms": The Specific Terms and Conditions of Servicing dated as of the Transaction Documents Date, among the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee. "Standard Indenture Terms": The Standard Terms and Conditions of Indenture dated as of the Transaction Documents Date, appended to the Specific Indenture Terms. "Standard Lease Acquisition Terms": The Standard Terms and Conditions of Lease. Acquisition dated as of the Transaction Documents Date, appended to the Specific Lease Acquisition Terms. "Standard Servicing Terms": The Standard Terms and Conditions of Servicing dated as of the Transaction Documents Date, appended to the Specific Servicing Terms. "State": Any state of the United States of America and, in addition, the District of Columbia and Puerto Rico. "Stated Maturity": With respect to any Note, the meaning specified in the applicable Supplement. "Substitute Lease Contract": The meaning specified in the Lease Acquisition Agreement. "Supplement": With respect to any Series of Notes, the supplement to the Indenture in the form attached as Exhibit C hereto and pursuant to which the terms of such Series are specified as provided in Section 2.02 hereof. "Targeted Balance": For any Payment Date and (a) any Series of Term Notes, the amount indicated under the column "Targeted Balance" on Schedule B to the applicable Supplement for such Payment Date and (b) any Series of Warehouse Notes, the greater of (i) the related Series IPB minus the product of the then current Holdback Rate and the Series Initial IPB for such Warehouse Notes and (ii) the product of one minus the then current Collateralization Percentage and the Series IPB for such Warehouse Notes. "Target Principal Distribution Amount": With respect to each Payment Date and each Series of Term Notes, (a) for any Payment Date prior to the applicable Stated Maturity, an amount equal to the Outstanding Principal Amount of the Notes of such Series as of such Payment Date (before giving effect to distributions on such date), minus the lesser of (i) the amount of the applicable Targeted Balance for such Payment Date and (ii) the applicable Series IPB, and (b) on the applicable Stated Maturity, an amount equal to the Outstanding Principal Amount of Notes of such Series as of such date. 20 27 With respect to each Payment Date and each Series of Warehouse Notes, (a) for any Payment Date during the Warehouse Funding Period and prior to the applicable Stated Maturity, an amount equal to the greater of (i) zero and (ii) the Outstanding Principal Amount of the Notes of such Series as of such Payment Date (before giving effect to distributions on such date), minus the applicable Series IPB, (b) for any Payment Date after the Warehouse Funding Termination Date and prior to the applicable Stated Maturity, an amount equal to the amount by which the Outstanding Principal Amount of the Notes of such Series as of such Payment Date (before giving effect to distributions on such date), exceeds the Targeted Balance for such Payment Date, and (c) on the applicable Stated Maturity, an amount equal to the Outstanding Principal Amount of Notes of such Series as of such date. "Term Note": Any Series of Notes designated as such in the applicable Supplement. "Term Note Funding Amount": As of any date of determination, the amount, if any, by which the sum of (a) the amount of funds then held in the Cash Collateral Account plus (b) the Aggregate IPB (including any Lease Contracts being purchased or funded on such date of determination) and minus (c) the Series IPB of any Series of Notes to be redeemed in full on such date of determination, exceeds the sum of (i) the Required Collateralization Amount and (ii) the aggregate Outstanding Principal Amount of all Series of Notes (after providing for any payment or redemption of principal on such date of determination, and not including the principal amount of any new Series of Notes to be issued on such date of determination); provided, however, that the Term Note Funding Amount shall not exceed the amount specified in the applicable Supplement. "TRAC Lease": A Lease Contract that meets the requirements of Section 7701(h) of the Code. "Transaction Documents": The Indenture, the Servicing Agreement, the Lease Acquisition Agreement, the Notes, the Insurance Agreement and the Note Insurance Policies. "Transaction Documents Date": With respect to each Series of Notes, the meaning specified in the Supplement. "Transition Cost": Any documented expenses reasonably incurred by a successor Servicer or the Indenture Trustee in connection with a transfer of servicing from the Servicer to a successor Servicer as successor Servicer pursuant to Section 6.02 of the Standard Servicing Terms, but not to exceed the amount set forth in the Specific Indenture Terms. "Treasury Rate": The yield on actively-traded U.S. government securities with a maturity of two years as set forth on page "USD" of the Bloomberg Financial Markets Screen (or if not available, any other nationally recognized trading screen reporting on-line intra-day trading in United States government securities) at 11:00 a.m. (New York time) on any date of determination, or in the event no such nationally recognized trading screen is available, the arithmetic mean of the 21 28 yields for the two columns under the heading "Week Ending" published in the Statistical Release under the caption "Treasury Constant Maturities" for two year maturities. "Trigger Event": The occurrence of any one of the following events: (1) for any three consecutive Due Periods, the average of the Annualized Default Rates for such consecutive Due Periods was equal to or greater than the Maximum Default Rate; (2) in any Due Period, the Annualized Default Rate was equal to or greater than three times the Maximum Default Rate; (3) in any two consecutive Due Periods, the sum of the Annualized Default Rates for such Due Periods was equal to or greater than three times the Maximum Default Rate; (4) for any three consecutive Due Periods, the average of the Delinquency Rates for such Due Periods was equal to or greater than the Maximum Delinquency Rate; (5) the Net Worth Requirement is not met; (6) the occurrence of any Change in Control; (7) an Event of Default occurs;(8) the Issuer or the Trust Estate becomes an "investment company" within the meaning of the Investment Company Act of 1940, as amended; (9) a voluntary bankruptcy filing of the Servicer or an involuntary bankruptcy filing of the Servicer which is not discharged within sixty (60) days; or (10) the occurrence of any additional event set forth in the Specific Indenture Terms as a "Trigger Event". "Trust Estate": The meaning specified in the Granting Clause of the Specific Indenture Terms. "Trustee Fee": The fee payable on each Payment Date to the Indenture Trustee in consideration for the Indenture Trustee's performance of its duties pursuant to the Indenture as Indenture Trustee, in an amount equal to the product of one-twelfth of the Trustee Fee Rate and the Outstanding Principal Amount of all Series of Notes immediately following the preceding Payment Date. "Trustee Fee Rate": The percentage specified in the Specific Indenture Terms. "Vice President": With respect to the Issuer or the Indenture Trustee, any vice president whether or not designated by a number or a word or words added before or after the title "vice president." "Warehouse Conversion Event": The meaning specified in the related Supplement. "Warehouse Expected Termination Date": The date specified in the related Supplement. "Warehouse Funded Lease Contract": A Lease Contract acquired by the Issuer through a Warehouse Funding. "Warehouse Funding": An extension of credit by the Warehouse Lender to the Issuer in accordance with Article III hereof and the related Supplement, in the amount equal to the principal amount stated on the related Warehouse Funding Report. 22 29 "Warehouse Funding Amount": As of any Warehouse Funding Date, the amount, if any, by which the sum of (a) the Aggregate IPB and (b) the Warehouse Funding IPB for the current Warehouse Funding Date, exceeds the sum of (i) the Required Collateralization Amount and (ii) the Outstanding Principal Amount of all Series of Notes; provided, however, that the Warehouse Funding Amount shall not exceed the Available Warehouse Amount or be less than zero. "Warehouse Funding Agreement": The Warehouse Funding Agreement comprised of the Standard Terms and Conditions of Warehouse Funding and the Specific Terms and Conditions of Warehouse Funding, between the Issuer and a Warehouse Lender in connection with the provision of Warehouse Fundings by such Warehouse Lender. "Warehouse Funding Date": Any Monday on which the Issuer desires to obtain a Warehouse Funding in accordance with the terms hereof, or if such Monday is not a Business Day, the following Business Day, and provided, however, that (a) except as otherwise set forth in the Specific Indenture Terms, no Warehouse Fundings shall occur on any date between and including a Determination Date and the related Payment Date and (b) no Warehouse Fundings shall occur after the date that the Issuer provides notice to the Indenture Trustee pursuant to Section 10.02 hereof that such Series of Warehouse Notes are to be redeemed by the Issuer. "Warehouse Funding IPB": The sum of the Implicit Principal Balances of the Lease Contracts to be acquired by or on behalf of the Issuer on any Warehouse Funding Date. "Warehouse Funding Period": The period of time commencing on the initial issuance of a Series of Warehouse Notes and ending on the applicable Warehouse Funding Termination Date. "Warehouse Funding Report": The report prepared by the Note Administrator substantially in the form of Schedule C to the related Supplement. "Warehouse Funding Termination Date": With respect to any Series of Warehouse Notes, the earliest of (a) the Warehouse Expected Termination Date, (b) the day on which a Trigger Event occurs, (c) the date on which such Series of Notes is redeemed pursuant to Article Ten hereof and (d) any other date specified in the applicable Supplement. "Warehouse Lender": The party identified in the related Supplement. "Warehouse Note": Any Note issued pursuant to Article III hereof by the Issuer in favor of a Warehouse Lender and designated as such in the related Supplement. "Warehouse Note Interest Rate": As provided in the related Supplement. "Warehouse Note Limit": The maximum principal amount of a Series of Warehouse Notes, which amount shall be specified in the applicable Supplement and the applicable Warehouse Notes. 23 30 ARTICLE TWO THE NOTES SECTION 2.01 FORM GENERALLY. The Term Notes and the certificates of authentication shall be in substantially the form set forth in Exhibit E-1 hereto and the Warehouse Note and the certificate of authentication shall be in substantially the form set forth in Exhibit E-2 hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by the Indenture, and may, have such letters, numbers or other marks of identification and such legends or endorsements placed thereon, as may, consistently herewith, be determined by the officers executing such Notes, as evidenced by their execution of the Notes. The definitive Notes shall be typewritten, printed, lithographed or engraved or produced by any combination of these methods on steel engraved borders or may be produced in any manner acceptable to the Indenture Trustee and the initial purchasers of the Notes, all as determined by the officers executing such Notes, as evidenced by their execution of such Notes. SECTION 2.02 SERIES; DENOMINATION. (a) The Indenture provides for the issuance by the Issuer from time to time of one or more Series of Notes consisting of Term Notes and Warehouse Notes, all subject to and in accordance with the terms of the Indenture and the applicable Supplement and provided that, except in the case of a Warehouse Conversion Event, only one Series of Warehouse Notes may be Outstanding at any one time. Each Note in a Series shall bear upon the face thereof the designation selected for the Series to which it belongs. All Series of Notes shall be identical except for differences among the Series for Note Interest Rates, Stated Maturities and the other items identified below. All Notes of all Series issued under the Indenture shall be in all respects equally and ratably secured by the Collateral Granted by the Issuer on the Initial Delivery Date and from time to time thereafter (although the obligation insurance policies are issued specific to each Series only), and shall be entitled to the benefits hereof without preference, priority or distinction on account of the actual time or times of authentication and delivery, all in accordance with the terms and provisions of the Indenture and the applicable Supplement. The Supplement with regard to a Series of Notes shall establish, without limitation, the following terms and provisions of the Notes of such Series, each of which the Issuer shall determine in authorizing the issuance of any Series: (i) designation of the Series; 24 31 (ii) the applicable Delivery Date, Initial Payment Date, Accrual Date, the Transaction Documents Date, the schedules to be attached to such Supplement containing the Targeted Balances with respect to any Series of Term Notes and the Series Lease Schedule, and if applicable, the Cut-off Date, Warehouse Funding Termination Date and the Warehouse Expected Termination Date; (iii) the maximum aggregate principal amount of Notes of such Series that may be issued, including, without limitation, the Warehouse Note Limit and the maximum Term Note Funding Amount; (iv) the Note Interest Rate for a Series of Term Notes, or with respect to a Series of Warehouse Notes, the terms used in the definition of Note Interest Rate that require further specification in the applicable Supplement, including without limitation, the applicable Fixed Interest Rate, the Floating Interest Rate and the Maximum Warehouse Note Rate; (v) any Initial Cash Deposit; (vi) the identity of the Warehouse Lender, if applicable; (vii) the MBIA Premium, the MBIA Premium Rate and the due dates for the MBIA Premium; (viii) the Stated Maturity for such Series; and (ix) the Note Insurance Policy number. (b) The aggregate principal amount of Notes of each Series which maybe authenticated and delivered under the Indenture is specified in the applicable Supplement, except for Notes authenticated and delivered upon registration of transfer or in exchange for or in lieu of, other Notes pursuant to Sections 2.04, 2.05, 2.07 or 9.05 hereof. The Notes shall be issuable only as registered Notes without coupons in denominations of at least $250,000 and any amount in excess thereof; PROVIDED, HOWEVER, that, the foregoing shall not restrict or prevent the transfer in accordance with Sections 2.05 and 2.06 hereof of any Note with a remaining Outstanding Principal Amount of less than $250,000. SECTION 2.03 EXECUTION, AUTHENTICATION, DELIVERY AND DATING. The Notes shall be executed on behalf of the Issuer by its President or one of its Vice Presidents under its corporate seal imprinted or otherwise reproduced thereon. The signature of these officers on the Notes must be manual. 25 32 Notes bearing the manual signatures of individuals who were at any time the proper officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication or delivery of such Notes or did not hold offices at the date of authentication or delivery of such Notes. Each Note shall bear on its face the applicable Delivery Date and be dated as of the date of its authentication. No Note shall be entitled to any benefit under the Indenture or be valid or obligatory for any purpose, unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Indenture Trustee or by any Authenticating Agent by the manual signature of one of its authorized officers, and such certificate. upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. SECTION 2.04 TEMPORARY NOTES. Pending the preparation of definitive Notes, the Issuer may execute, and upon Issuer Order, the Indenture Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such variations as the officers executing such Notes may determine, as evidenced by their execution of such Notes. If temporary Notes are issued, the Issuer will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Issuer to be maintained as provided in Section 11.02(n) hereof, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Issuer shall execute and the Indenture Trustee shall authenticate and deliver in exchange therefor one or more definitive Notes of any authorized denominations and of a like initial aggregate principal amount and Stated Maturity. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under the Indenture as definitive Notes. SECTION 2.05 REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. (a) The Issuer shall cause to be kept at an office or agency to be maintained by the Issuer in accordance with Section 11.02(n) hereof a register (the "Note Register"), in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Notes and the registration of transfers of Notes. Norwest Bank Minnesota, National Association, 6th Street and Marquette Avenue, Minneapolis, Minnesota 55479-0069, is hereby appointed "Note Registrar" for the purpose of registering Notes and transfers of Notes as herein provided. The Indenture Trustee shall have the right to examine the Note Register at all reasonable times and to rely conclusively upon a Certificate of the Note Registrar as to the names and addresses of the Holders of the Notes and the principal amounts and numbers of such Notes as held. 26 33 (b) Upon surrender for registration of transfer of any Note at the office or agency of the Issuer to be maintained as provided in Section 11.02(n) hereof and subject to the conditions set forth in Section 2.06 hereof, the Issuer shall execute, and the Indenture Trustee or its agent shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations, and of a like aggregate principal amount, Series and Stated Maturity. (c) At the option of the Holder, Notes of a Series may be exchanged for other Notes of such Series of any authorized denominations and of a like aggregate principal amount and Stated Maturity, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, the Issuer shall execute, and the Indenture Trustee or its agent shall authenticate and deliver, the Notes which the Noteholder making the exchange is entitled to receive. (d) All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Issuer, evidencing the same debt and entitled to the same benefits under the Indenture, as the Notes surrendered upon such registration of such transfer or exchange. Every Note presented or surrendered for registration of transfer or exchange shall (if so required by the Issuer or the Note Registrar) be duly endorsed or be accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Note Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made to a Holder for any registration of transfer or exchange of Notes, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 2.04 or 9.05 hereof not involving any registration of transfer. Notwithstanding anything else to the contrary contained in the Indenture, the obligation of the Issuer to pay the principal of and interest on the Notes is not a general obligation of the Issuer, but is limited solely to the Collateral pledged under the Indenture and the applicable Note Insurance Policies. SECTION 2.06 LIMITATION ON TRANSFER AND EXCHANGE. (a) The Notes have not been registered or qualified under the Securities Act of 1933 (the 1933 Act") or the securities laws of any state. No transfer of any Note shall be made unless that transfer is made in a transaction which does not require registration or qualification under the 1933 Act or under applicable state securities laws. In the event that a transfer is to be made without registration or qualification, such Noteholder's prospective transferee shall either (i) deliver to the Indenture Trustee an investment letter substantially in the form set forth on Exhibit A hereto, or other applicable document (the "Investment Letter") or (ii) deliver to the Indenture Trustee an 27 34 opinion of counsel that the transfer is exempt from the Act. Neither the Issuer nor the Indenture Trustee is obligated to register or qualify the Notes under the 1933 Act or any other securities law. Any such Holder desiring to effect such transfer shall, and does hereby agree to, indemnify the Indenture Trustee, MBIA and the Issuer against any liability, cost or expense (including attorneys' fees) that may result if the transfer is not so exempt or is not made in accordance with such federal and state laws. The Indenture Trustee shall promptly, after receipt of such information as is set forth in the next succeeding sentence, furnish to any Holder, or any Prospective Owner designated by a Holder, the information required to be delivered to Holders and Prospective Owners of Notes in connection with resales of the Notes to permit compliance with Rule 144A of the 1933 Act in connection with such resales. Such information shall be provided to the Indenture Trustee by the Servicer. (b) No acquisition or transfer of a Note, or any interest therein may be made to any "Benefit Plan Investor" (as defined in 29 C.F.R. ss. 2510.3-101) or to any person who is directly or indirectly purchasing the Notes or an interest therein on behalf of, as named fiduciary of, as trustee of, or with assets of, such a Benefit Plan Investor unless the Indenture Trustee is provided with evidence that establishes to the satisfaction of the Trustee that (i) either no "prohibited transaction" under ERISA or the Code will occur in connection with such prospective acquiror's or transferee's acquisition. and holding of the Notes or that the acquisition and holding of the Notes by such prospective acquiror or transferee is subject to a statutory or administrative exemption, and (ii) that the prospective acquiror's or transferee's acquisition and holding will not subject the Issuer, the Servicer, the Indenture Trustee, or the Note Administrator to any obligation or liability (including obligations or liabilities under ERISA or Section 4975 of the Code) in addition to those explicitly undertaken in the Transaction Documents. The Indenture Trustee shall have no liability to the Trust Estate or any Noteholder arising from a transfer of any such Note in reliance upon a certification described in this Section 2.06. SECTION 2.07 MUTILATED, DESTROYED, LOST OR STOLEN NOTE. If (i) any mutilated Note is surrendered to the Note Registrar, or the Indenture Trustee receives evidence to its satisfaction of the destruction, loss or theft of any Note, and (ii) there is delivered to the Indenture Trustee and MBIA such security or indemnity as may be required by the Indenture Trustee to save the Issuer, the Indenture Trustee and MBIA or any agent of any of them harmless, then, in the absence of notice to the Issuer or the Note Registrar that such Note has been acquired by a bona fide purchaser, the Issuer shall execute and, upon its request, the Indenture Trustee shall authenticate and deliver, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a new Note of the same tenor, Series, initial principal amount and Stated Maturity, bearing a number not contemporaneously outstanding. If after the delivery of such new Note, a bona fide purchaser of the original Note in lieu of which such new Note was issued presents for payment such original Note, MBIA, the Issuer and the Indenture Trustee shall be entitled to recover such new Note from the person to whom it was delivered or any person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expenses incurred by MBIA, the Issuer 28 35 or the Indenture Trustee or any agent of any of them in connection therewith. If any such mutilated, destroyed, lost or stolen Note shall have become or shall be about to become due and payable, or shall have become subject to redemption in full, instead of issuing a new Note, the Issuer may pay such Note without surrender thereof, except that any mutilated Note shall be surrendered. Upon the issuance of any new Note under this Section, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Indenture Trustee) connected therewith. Every new Note issued pursuant to this Section 2.07, in lieu of any destroyed, lost or stolen Note, shall constitute an original additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the benefits of the Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 2.08 PAYMENT OF PRINCIPAL AND INTEREST; PRINCIPAL AND INTEREST RIGHTS PRESERVED. (a) The Notes shall bear interest on the Outstanding Principal Amount thereof for each applicable Accrual Period at the Note Interest Rate in effect at the beginning of the related Accrual Period (calculated on the basis of a 360-day year consisting of 12 months of 30 days each) for such Series, until the last day preceding the Final Payment Date and (to the extent that the payment of such interest shall be legally enforceable) on any overdue installment of interest from the date such interest became due and payable (giving effect to any applicable grace periods provided herein) until fully paid. Interest shall be due and payable in arrears on each Payment Date, with each payment of interest calculated as described above on the Outstanding Principal Amount of the Notes immediately following the preceding Payment Date or on the applicable Delivery Date, if there has not been any preceding Payment Date, except that with respect to any Warehouse Fundings occurring since the preceding Payment Date, interest on the related Warehouse Funding Amounts from the related Warehouse Funding Date through the end of the Accrual Period in which such Warehouse Funding occurs shall be paid in the amount of the applicable First Period Warehouse Interest at the time of such fundings as provided in Section 3.05 hereof. In making any such interest payment, if the interest calculation with respect to a Note shall result in a portion of such payment being less than $.01, then such payment shall be decreased to the nearest whole cent, and no subsequent adjustment shall be made in respect thereof. (b) The principal of each Note shall be payable in installments ending no later than the applicable Stated Maturity thereof unless such Note becomes due and payable at an earlier date by 29 36 declaration of acceleration, call for redemption or otherwise. All reductions in the principal amount of a Note effected by payments of installments of principal made on any Payment Date shall be binding upon all future Holders of such Note and (if any Note issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof, whether or not such payment is noted on such Note. Each installment of principal payable on the Notes shall be in an amount equal to the Principal Distribution Amount and the Additional Principal Amount, if any available to be paid in accordance with the priorities of Section 12.02(d) hereof. The principal payable on the Notes of each Series, shall be paid on each Payment Date beginning on the applicable Initial Payment Date and ending on the applicable Final Payment Date, and with respect to all of the Notes of one Series, on a pro rata basis based upon the ratio that the Outstanding Principal Amount of a Note bears to the Outstanding Principal Amount of all Notes of such Series; provided, however, that if as a result of such proration a portion of such principal would be less than $.01, then such payment shall be decreased to the nearest whole cent, and such portion shall be applied to the next succeeding principal payment. (c) The principal of and interest on the Notes are payable by check mailed by first-class mail to the Person whose name appears as the Registered Holder of such Note on the Note Register at the address of such Person as it appears on the Note Register or by wire transfer in immediately available funds to the account specified in writing to the Indenture Trustee by such Registered Holder at least five Business Days prior to the Record Date for the Payment Date on which wire transfers will commence, in such coin or currency of the United States of America as at the time of payment is legal tender for the payment of public and private debts. Except as set forth in the final sentence of this Section 2.08(c), all payments on the Notes shall be paid without any requirement of presentment. The Issuer shall notify the Person in whose name a Note is registered at the close of business on the Record Date next preceding the Payment Date on which the Issuer expects that the final installment of principal of such Note will be paid that the Issuer expects that such final installment will be paid on such Payment Date. Such notice shall be mailed no later than the tenth day prior to such Payment Date and shall specify the place where such Note may be surrendered. Funds representing any such checks returned undeliverable shall be held in accordance with Section 7.16. Each Noteholder shall surrender its Note to the Indenture Trustee prior to payment of the final installment of principal of such Note. (d) Notwithstanding any of the foregoing provisions with respect to payments of principal of and interest on the Notes, if the Notes have become or been declared due and payable following an Event of Default and such acceleration of maturity and its consequences have not been rescinded and annulled, then payments of principal of and interest on such Notes shall be made in accordance with Section 6.08 hereof. (e) On or before 2:00 p.m. (New York time) on each applicable Reset Date, the Indenture Trustee shall determine the applicable LIBOR Rate for any Outstanding Series of Warehouse Notes. Upon each determination of the LIBOR Rate, the Indenture Trustee will promptly provide notice of such determination to MBIA, the Note Administrator, the Warehouse Lender and the Servicer. The determination of the LIBOR Rate by the Indenture. Trustee and the Indenture Trustee's 30 37 subsequent calculation of the Note Interest Rate for a Series of Warehouse Notes for the relevant Reset Date shall (in the absence of manifest error) be final and binding on each Noteholder. SECTION 2.09 PERSONS DEEMED OWNER. Prior to due presentment for registration of transfer of any Note, the Issuer, MBIA, the Indenture Trustee and any agent of the Issuer, MBIA or the Indenture Trustee shall treat the Person in whose name any Note is registered as the owner of such Note for the purpose of receiving payments of principal of and interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Issuer, MBIA, the Indenture Trustee nor any agent of the Issuer, MBIA or the Indenture Trustee shall be affected by notice to the contrary. SECTION 2.10 CANCELLATION. All Notes surrendered to the Indenture Trustee for payment, registration of transfer or exchange (including Notes surrendered to any Person other than the Indenture Trustee which shall be delivered to the Indenture Trustee) shall be promptly cancelled by the Indenture Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes cancelled as provided in this Section 2.10, except as expressly permitted by the Indenture. All cancelled Notes held by the Indenture Trustee shall be disposed of by the Indenture Trustee as is customary with its standard practice. SECTION 2.11 TAX TREATMENT. The Issuer has structured the Indenture and the Notes with the intention that the Notes will qualify under applicable tax law as indebtedness of the Issuer, and, except as provided in the Specific Terms, the Issuer, the Company, the Servicer and each Noteholder, by acceptance of its Note, agree to treat the Notes as debt for all purposes. 31 38 [PAGE MISSING] 32 39 executed documents effecting the transfer of ownership of such titled Equipment from the vendor of such titled Equipment to the Issuer, a manufacturer's certificate of origin reflecting the Issuer as owner of the titled Equipment and a stamped application evidencing the filing with the appropriate Departments of Motor Vehicles of a request to title such Equipment in the name of the Issuer and naming the Indenture Trustee as secured party, and (b) with respect to titled Equipment which is titled in the name of the Company or a third party, either (1) a certificate of title issued by the appropriate Departments of Motor Vehicles in the name of the Issuer and naming the Indenture Trustee as secured party, or (2) a stamped application evidencing the filing with the appropriate Departments of Motor Vehicles of a request to title such Equipment in the name of the Issuer and naming the Indenture Trustee as secured party, together with an opinion of counsel to the effect that all requirements of the applicable certificate of title statutes have been complied with; (iii) the delivery by the Issuer to the Indenture Trustee on or before the Business Day immediately prior to the requested Warehouse Funding Date of the Series Lease Schedule with respect to the initial Warehouse Funding for a Series of Warehouse Notes and thereafter an Amended Lease Schedule accompanied by an Amendment to Indenture for New Lease Contracts and Amendment to Lease Acquisition Agreement for New Lease Contracts executed by the Issuer and the Company, as appropriate; (iv) no Default or Event of Default shall exist or shall result from such Warehouse Funding; (v) the Note Insurance Policy shall be in full force and effect and no MBIA Default shall have occurred; (vi) the Lease Contracts proposed to be funded with such Warehouse Funding shall be Eligible Lease Contracts, and after giving effect to such Warehouse Funding, neither the Concentration Limits nor the Warehouse Note Limit shall be exceeded; (vii) as of the second Business Day immediately prior to the requested Warehouse Funding Date, a Note Administrator is in place in accordance with Section 3.07 hereof, (viii) as of the second Business Day immediately prior to the requested Warehouse Funding Date, the Warehouse Note facility fee provided for under the applicable Warehouse Funding Agreement is not past due; (ix) none of the following shall have occurred: by reason of any changes arising after the Initial Delivery Date (A) the effective cost to the Warehouse Lender of funding a proposed Warehouse Funding shall exceed the LIBOR Rate applicable to such Warehouse Funding, (B) the making of any Warehouse Funding has become impracticable as a result of a contingency which has occurred and which materially and adversely affects the London interbank market, or (C) the making of any Warehouse Funding has been made unlawful by 33 40 compliance by the Warehouse Lender in good faith with any law or governmental rule, regulation, guideline or order (whether or not having the force of law); (x) such Warehouse Funding shall occur on a date prior to the Warehouse Funding Termination Date; (xi) such other conditions as may be specified in the applicable Supplement; and (xii) the Trustee and the Note Administrator shall have received notice by facsimile by the Issuer, received no later than four business days prior to a Warehouse Funding Date that a Warehouse Funding shall occur on such Warehouse Funding Date. (b) PREPARATION OF WAREHOUSE FUNDING REPORT. Upon receipt by the Note Administrator of the list of the proposed Lease Contracts to be funded, the Note Administrator shall review such diskette and prepare a Warehouse Funding Report from the information provided in such diskette, the existing information regarding all other Lease Contracts and the existing information used to generate the Monthly Servicer's Report. No later than 10:00 a.m. (New York time) on each Business Day immediately preceding a proposed Warehouse Funding Date, the Note Administrator shall fax the Warehouse Funding Report to the Issuer and the Issuer shall thereupon execute such report and fax it to the Indenture Trustee no later than 11:00 am. (New York time) on such date of receipt. The Note Administrator shall electronically transfer or forward to MBIA by overnight mail for receipt by MBIA on the related Warehouse Funding Date, a diskette containing, in a standardized format, the same information that was delivered by the Issuer pursuant to Section 3.03(a)(i) hereof. SECTION 3.04 VERIFICATION OF WAREHOUSE FUNDING REPORT. (a) Upon the Indenture Trustee's receipt of a Warehouse Funding Report, the Indenture Trustee shall recompute all of the calculations in such report (including without limitation a recalculation of the Implicit Principal Balances of the related Lease Contracts) based on the information contained in the list of Lease Contracts forwarded to it by diskette or electronic transfer, the existing information regarding all other Lease Contracts and the existing information used to generate the Monthly Servicer's Report, and if the Indenture Trustee does not discover and is not notified of any errors in the calculations in such report that have not been corrected by 3:00 p.m. (New York time) on the Business Day immediately preceding the proposed Warehouse Funding Date and all of the conditions precedent set forth in Section 3.03(a) hereof have been satisfied, the Indenture Trustee shall notify the Warehouse Lender of the Warehouse Funding Amount by faxing the Warehouse Funding Report to the Warehouse Lender and MIA by 3:00 p.m. on the Business Day immediately preceding the proposed Warehouse Funding Date. If the Indenture Trustee discovers or is notified of any error in the Warehouse Funding Report that is not corrected by 3:00 p.m. (New York time) on the Business Day immediately preceding the proposed Warehouse Funding Date or if any of the conditions precedent set forth in Section 3.03(a) hereof have not been satisfied, the Indenture Trustee shall notify the Warehouse Lender that the applicable Warehouse Funding is postponed until resolution of any such error, and the Indenture Trustee shall thereupon 34 41 notify MBIA, the Note Administrator and the Issuer of such error. If MBIA discovers any error in the Warehouse Funding Report after a funding based on such report, MBIA shall notify the Indenture Trustee, the Note Administrator and the Issuer. (b) If a Warehouse Funding occurs based upon a Warehouse Funding Report with respect to which an error has been discovered and the Note Administrator or the Issuer is not able to correct such error to the satisfaction of the Warehouse Lender and MBIA by the next succeeding date upon which a Warehouse Funding is permitted to occur (or, in the case of the final Warehouse Funding preceding the applicable Warehouse Funding Termination Date, by the Payment Date immediately following such Warehouse Funding Termination Date), the Issuer shall either (i) repurchase the affected Lease Contracts at a price equal to the Implicit Principal Balance of such Lease Contracts, (ii) replace the affected Lease Contracts with Substitute Lease Contracts, in each case on the earlier of W the second succeeding date upon which a Warehouse Funding is permitted to occur and (y) the following Determination Date or (iii) deposit funds in the Collection Account in the amount, if any, by which the Warehouse Funding Amount as recalculated based on the correct information is less than the affected Warehouse Funding. SECTION 3.05 DISBURSEMENT OF FUNDS. Subject to the terms of the Indenture, the Warehouse Lender will make available to the Issuer each Warehouse Funding Amount set forth on the applicable Warehouse Funding Report, less any First Period Warehouse Interest, at the Issuer Payment Office by 3:00 p.m. (New York time) on the applicable Warehouse Funding Date in immediately available funds. SECTION 3.06 REPAYMENTS OF PRINCIPAL. On each Payment Date, the Issuer shall make payments of principal on the Warehouse Note in whole or in part, in the amount, if any, of the Principal Distribution Amount for the Warehouse Note for such Payment Date and any Additional Principal Amount required to be paid by the Issuer in accordance with clauses (vii) and (xi) of Section 12.02(d) hereof. SECTION 3.07 APPOINTMENT OF NOTE ADMINISTRATOR. (a) The Issuer hereby appoints Rothschild Inc. as Note Administrator with respect to the Warehouse Notes. By the execution of a separate agreement between the Note Administrator and the Issuer, attached hereto as Exhibit F (the "Note Administration Agreement"), Rothschild Inc. shall accept its appointment as Note Administrator and agree to be bound by the provisions of Article Three hereof. If at any time MBIA, or upon an MBIA Default, the Noteholders shall notify the Indenture Trustee and Rothschild Inc. in writing that Rothschild Inc. has failed to perform its duties in accordance with this Article Three or the Note Administration Agreement, or if at any time, Rothschild Inc. shall become the subject of a proceeding under the federal Bankruptcy Code, the Issuer shall appoint a successor Note Administrator which shall be acceptable to MBIA and notify the Indenture Trustee of such appointment. Upon notice of such appointment, the Issuer shall mail written notice thereof by first-class mail, postage prepaid, to all Holders of Warehouse Notes. Upon the Note Administrator's resignation or termination pursuant to this Section 3.07, the Note 35 42 Administrator shall comply with the provisions of the Indenture and the Insurance Agreement until the acceptance of the appointment of a successor Note Administrator. Any successor Note Administrator upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as the Note Administrator. (b) The Issuer agrees to pay the Note Administrator compensation for its services under this Article Three in accordance with the terms of the Note Administration Agreement, which fee shall in no event be an obligation of the Trust Estate. 36 43 ARTICLE FOUR ISSUANCE OF NOTES; SUBSTITUTIONS OF COLLATERAL SECTION 4.01 CONDITIONS TO INITIAL ISSUANCE OF NOTES. Each Series of Notes to be issued on the Initial Delivery Date, may be executed by the Issuer and delivered to the Indenture Trustee for authentication, and thereupon, the same shall be authenticated and delivered by the Indenture Trustee upon Issuer Order and upon receipt by the Indenture Trustee of the following: (a) with respect to the issuance of the initial Series of Term Notes, an Assignment and, Assumption Agreement with the related Series Lease Schedule attached thereto; (b) the original executed counterpart of each Lease Contract and all other items included in the Lease Contract File; (c) a Board Resolution of each of the Issuer, the Servicer and the Company authorizing, as applicable, the execution, delivery and performance of the Transaction Documents and the transactions contemplated hereby and by the other Transaction Documents, certified by the Secretary or an Assistant Secretary of the Issuer, the Servicer or the Company, as applicable; (d) a copy of an officially certified document, dated not more than 30 days prior to the Initial Delivery Date, evidencing the due organization and good standing of each of the Issuer, the Servicer and the Company; (e) copies of the Certificate of Incorporation and By-Laws of each of the Issuer, the Servicer and the Company, certified by the Secretary or an Assistant Secretary of the Issuer, the Servicer and the Company, as applicable; (f) (i) evidence of filing with the Secretary of State of the State (and with the relevant county, if required by the applicable state law) of the Company's chief executive office of UCC-1 financing statements executed by the Company, as debtor, and naming the Issuer as secured party, and the Lease Assets as collateral; and (ii) evidence of filing with the Secretary of State of the State (and with the relevant county, if required by the applicable state law) of the Issuer's chief executive office of UCC-1 financing statements executed by the Issuer, as debtor, and naming the Indenture Trustee for the benefit of the Noteholders and MBIA as secured party, and the Trust Estate as collateral; (g) a certificate listing the Servicing Officers of the Servicer as of the Initial Delivery Date; (h) an executed copy of a Supplement for each Series of Notes to be issued on the Initial Delivery Date and the Servicing Agreement and the Lease Acquisition Agreement; 37 44 (i) a Note Insurance Policy for each Series of Notes being issued on such date; (j) evidence of the deposit by the Issuer of interest on the initial Series of Term Notes at the applicable Note Interest Rate pursuant to Section 12.02(a)(iv) hereof; and (k) such other documents as the Indenture Trustee or MBIA may reasonably require or as may be specified in the Specific Indenture Terms. SECTION 4.02 ISSUANCES OF ADDITIONAL SERIES OF NOTES. (a) Additional Series of Term Notes and Warehouse Notes may be issued by the Issuer in accordance with the terms of the Indenture, provided that any new Series of Term Notes shall have an aggregate initial principal balance not to exceed the Term Note Funding Amount and any new Series of Warehouse Notes shall have an aggregate initial principal balance not to exceed the maximum amount specified in the applicable Supplement. (b) On or before the Delivery Date relating to any new Series of Notes, the parties hereto will execute and deliver a Supplement which will specify the terms applicable to such new Series. The terms set forth in such Supplement may modify or amend the terms of the Indenture solely as applied to such new Series. Each new Series of Notes may be executed by the Issuer and delivered to the Indenture Trustee for authentication, and thereupon, the same shall be authenticated and delivered by the Indenture Trustee upon Issuer Order and upon receipt by the Indenture Trustee of the following: (i) original executed counterpart of each new Lease Contract and all other items included in the Lease Contract File; (ii) a Supplement and if the Issuer is acquiring Lease Contracts from the Company, an Assignment and Assumption Agreement, subjecting any new Lease Contracts to the provisions of the Transaction Documents, and providing with respect to such new Lease Contracts a Series Lease Schedule (unless with respect to a Series of Warehouse Notes, no Warehouse Funding is to occur on the applicable Delivery Date); (iii) on or before the tenth Business Day immediately preceding the Delivery Date for the Notes to be issued, the issuer shall have given the Indenture Trustee, the Servicer, MBIA and each Rating Agency notice of such issuance and the applicable Delivery Date; (iv) the Issuer shall have delivered to the Indenture Trustee and MBIA the related Supplement, executed by each party hereto other than. the Indenture Trustee; (v) the Issuer shall have delivered to the Indenture Trustee and MBIA an Officers' Certificate of the Issuer to the effect that (A) such issuance will not result in the occurrence 38 45 of a Trigger Event or a Default under the Indenture and the, Issuer is not in Default under the Indenture, (B) the issuance of the Notes applied for will not result in a breach of any of the terms, conditions or provisions of, or constitute a Default under, any agreement or instrument to which the Issuer is a party or by which it is bound, or any order of any court or administrative agency entered in any proceeding to which the Issuer is a party or by which it may be bound or to which it may be subject (C) all conditions precedent provided in the Indenture relating to the authentication and delivery of the additional Series of Notes applied for have been complied with, and (D) specifying the Series, whether such Series is to be comprised of Term Notes or Warehouse Notes, the applicable Stated Maturity and the principal amount and Note Interest Rate of the Notes to be authenticated and delivered; (vi) (A) if the Issuer is acquiring the Lease Assets from the Company, evidence of filing with the Secretary of State of the State (and with the relevant county, if required by the applicable state law) of the Company's chief executive office of UCC-1 financing statements executed by the Company, as debtor, and naming the Issuer as secured party, and the Lease Assets as collateral; (B) evidence of filing with the Secretary of State of the State (and with the relevant county, if required by the applicable state law) of the Issuer's chief executive office of UCC-1 financing statements executed by the Issuer, as debtor, and naming the Indenture Trustee for the benefit of the Noteholders and MBIA as secured party, and the Trust Estate as collateral; and (C) with respect to any titled Equipment, evidence acceptable to MBIA that applications have been filed to re-title or originate title in the related Equipment in the name of the Issuer and naming the Indenture Trustee as secured party; (vii) the Issuer shall have delivered to the Indenture Trustee and MBIA an Officers' Certificate to the effect that attached thereto am true and correct copies of letters signed by each Rating Agency confirming that the Notes of such Series have been rated "AAA" by S&P and "Aaa" by Moody's and that the rating on each other Series of Notes is in full force and effect on the applicable Delivery Date; (viii) a financial guaranty insurance policy with respect to the payment of principal and interest of such new Series of Notes in form and substance substantially the same as the Note Insurance Policy issued by MBIA with respect to the Series of Term Notes or Warehouse Notes, as applicable, on the Initial Delivery Date, and evidence that MBIA shall not have been downgraded from an "AAA" or "Aaa" rating; (ix) an opinion of counsel to the effect that the Notes of such Series will be characterized as debt and that the issuance of such Series will not adversely affect the characterization of the Notes of any Outstanding Series as debt; and (x) such other documents, certificates, instruments, opinions, or other items as may be required by the terms of the Supplement creating such Series of Notes or as may be specified in the Specific Indenture Terms. 39 46 Upon satisfaction of the above conditions, the Indenture Trustee shall execute the Supplement and issue and deliver to or upon the order of the Issuer the applicable Notes, and provide notice to all existing Noteholders of the issuance of such Series of Notes. SECTION 4.03 SECURITY FOR NOTES. (a) The Issuer and the Company shall file UCC-I financing statements described in Sections 4.01 (f) and 4.02(b)(vi) hereof in accordance with such Sections. In addition, as soon as practicable but no later than 30 days after the Initial Delivery Date and any subsequent Delivery Date, as the case may be, (i) the Issuer shall file with respect to all Lease Contracts other than Loan Contracts, UCC- I financing statements with the Secretaries of State (and with the relevant county, if required by the applicable state law) of the Enumerated States, executed by the Issuer, as debtor, and naming the Indenture Trustee for the benefit of the Noteholders and MBIA as secured party and the Equipment located in such States as collateral; provided that no filings naming an individual Customer as debtor shall be required; and (ii), with respect to any titled Equipment underlying a Lease Contract, the Issuer and the Company shall provide evidence to the Indenture Trustee acceptable to MBIA that applications have been filed to retitle or originate title in such Equipment, as applicable, in the name of the Issuer and naming the Indenture Trustee as secured party, and immediately upon receipt, the Issuer shall deliver or cause to be delivered to the Indenture Trustee, certificates of title naming the Issuer as title owner and the Indenture Trustee as secured party. From time to time, the Servicer shall take or cause to be taken such actions and execute such documents as are necessary to perfect and protect the Indenture Trustee's and MBIA's respective interests in the Lease Contracts and the Equipment owned by the Issuer and initially located in the Enumerated States against all other Persons, including, without limitation, the filing of financing statements, amendments thereto and continuation statements, the execution of transfer instruments and the making of notations on or taking possession of all records or documents of title. (b) If any change in either the Company's or the Issuer's name, identity, structure or the location of its principal place of business or chief executive office occurs, then the Issuer shall, or the Issuer shall cause the Company, to deliver 30 days prior written notice of such change or relocation to the Servicer, MBIA and the Indenture Trustee and no later than the effective date of such change or relocation, the Servicer shall file such amendments or statements as may be required to preserve and protect the Indenture Trustee's and MBIA's respective interests in the Trust Estate. (c) During the term of the Indenture, the Issuer will maintain its chief executive office and principal place of business in one of the States of the United States. (d) The Servicer agrees to pay all reasonable costs and disbursements in connection with the perfection and the maintenance of perfection, as against all third parties, of the Indenture Trustee's and MBIA's respective right, title and interest in and to the Trust Estate (other than the Equipment not initially located in the Enumerated States). 40 47 (e) The Indenture Trustee may, if requested by the Servicer for purposes of servicing a Lease Contract, temporarily release to the Servicer such Lease Contract. Any Lease Contract temporarily released from the custody of the Indenture Trustee to the Servicer or its agents shall have stamped on it prior to delivery a legend to the effect that the Lease Contract is the property of the Issuer and has been pledged to Norwest Bank Minnesota, National Association, as Indenture Trustee. The Servicer shall promptly return the Lease Contract to the Indenture Trustee when the need therefor no longer exists. SECTION 4.04 SUBSTITUTION, PURCHASE AND ADDITION OF LEASE CONTRACTS. (a) If at any time the Issuer, MBIA or the Indenture Trustee obtains knowledge (within the meaning of 7.01 (e) hereof), discovers or is notified by the Servicer that any of the representations and warranties of the Company in the Lease Acquisition Agreement were incorrect at the time as of which such representations and warranties were made, then the Person discovering such defect, omission, or circumstance shall promptly notify MBIA and the other parties to this Indenture. (b) In the event that (i) any representation or warranty of the Company in the Lease Acquisition Agreement is incorrect and materially and adversely affects the interests of MBIA or the Holders of the Notes, or if any breach of any of the representations and warranties set forth in Sections 3.01(a)(ii), 3.01(a)(v), 3.01(a)(vii) or 3.01(a)(xxi) of the Standard Lease Acquisition Terms, or (ii) the Indenture Trustee shall fail to receive evidence acceptable to MBIA that each application for re-titling certificates of title has been filed within 30 days of the Initial Delivery Date required pursuant to Section 4.03(a) hereof, then in the case of clause (i) above, the Issuer shall require the Company pursuant to the Lease Acquisition Agreement to eliminate or otherwise cure the circumstance or condition which has caused such representation or warranty to be incorrect within 30 days of discovery or notice thereof, and in the case of clause (ii) above, the Issuer shall require the Company pursuant to the Lease Acquisition Agreement to deliver all original certificates of title still in its possession to the Back-up Servicer, who shall file applications for re-titling the related certificates of title at the expense of and based on instructions from the Company. In the case of clause (i) above, if the Company fails or the Company or the Back-up Servicer is unable to cure such circumstance or condition in accordance with the Lease Acquisition Agreement, or in the case of clause (ii) above, if the Indenture Trustee shall fail to receive evidence acceptable to MBIA within 60 days of the Initial Delivery Date required pursuant to Section 4.03(a) hereof, then the Issuer shall require the Company to substitute or purchase pursuant to the Lease Acquisition Agreement for any Lease Contract as to which the certificate of title was not delivered to the Indenture Trustee within the required time period or such representation or warranty is incorrect within the time specified in Section 3.03 of the Lease Acquisition Agreement. The proceeds of a purchase shall be remitted by the Issuer to the Servicer for deposit by the Servicer in the Collection Account pursuant to Section 3.03(a) of the Standard Servicing Terms. (c) If the Issuer fails to enforce the purchase or substitution obligation of the Company under the Lease Acquisition Agreement, the Indenture Trustee is hereby appointed attorney-in-fact to act on behalf of and in the name of the Issuer to require such purchase or substitution. 41 48 (d) With respect to (i) any Lease Contract to be prepaid or terminated early pursuant to Section 3. 10 of the Standard Servicing Terms and (ii) any Defaulted Lease Contract or Delinquent Lease Contract, the Issuer shall be entitled to with respect to (ii) above, and shall with respect to (i) above, upon five Business Days notice to the Indenture Trustee, purchase such Lease Contract or deliver a Substitute Lease Contract meeting the same requirements as those specified in Section 3.04 of the Standard Lease Acquisition Terms for substitutions and purchases by the Company upon breaches of a representation or warranty by the Company thereunder; provided, however, that (w) the cumulative Implicit Principal Balance of prepaid or early terminated Lease Contracts on any Series Lease Schedule which are substituted by the Issuer (measured as of the date of substitution) shall not exceed 10% of the applicable Series Initial IPB, (x) the cumulative Implicit Principal Balance of Defaulted Lease Contracts on any Series Lease Schedule which are purchased or substituted by the Issuer (measured as of the date of substitution) shall not exceed the Defaulted Lease Purchase and Substitution Limit times the applicable Series Initial IPB and (y) the cumulative Implicit Principal Balance of Delinquent Lease Contracts on any Sublease Schedule which are purchased or substituted by the Issuer (measured as of the date of substitution) shall not exceed the applicable Delinquent Lease Purchase and Substitution Limit times the applicable Series Initial IPB. (e) The Issuer shall comply with the requirements relating to Substitute Lease Contracts and Warehouse Funded Lease Contracts as set forth in the Lease Acquisition Agreement within the time periods set forth therein. In addition, in the case of any new Lease Contracts acquired by the Issuer pursuant to a Warehouse Funding, the Issuer shall provide to the Indenture Trustee and MBIA, as applicable, the items listed in Section 3.03(a) hereof which are required to be delivered to the Indenture Trustee and/or MBIA pursuant to such Section. In the case of any Substitute Lease Contracts acquired by the Issuer, the Issuer shall provide to the Indenture Trustee on the applicable date of delivery the items listed in (i) and (ii) below, and to MBIA the item listed in (i) below. In the case of any new Lease Contracts acquired by the Issuer pursuant to either a Warehouse Funding or a substitution of a Lease Contract, the Issuer shall provide to the Indenture Trustee and MBIA at the end of each calendar quarter the items listed in (iii) below with respect to any Substitute Lease Contracts substituted or Lease Contracts acquired through a Warehouse Funding during such period: (i) an Amendment to Lease Acquisition Agreement for New Lease Contracts and an Amendment to Indenture for New Lease Contracts substantially in the forms of Exhibit A to the Standard Lease Acquisition Terms and Exhibit B to the Standard Indenture Terms, respectively, each amendment having attached thereto an Amended Lease Schedule and subjecting such Substitute Lease Contract to the provisions thereof and hereof and providing with respect to the Substitute Lease Contract the information required to supplement the related Series Lease Schedule, and with respect to titled Equipment, an application to retitle or originate title in such Equipment, as applicable, in the name of the Issuer and naming the Indenture Trustee as secured party; (ii) the original executed counterpart of the Lease Contract relating to such Substitute Lease Contract and all other items included in the Lease Contract File; and 42 49 (iii) evidence that financing statements have been filed with respect to such Substitute Lease Contract or Warehouse Funded Lease Contract in accordance with Sections 4.01(f), 4.02(b)(vi) and 4.03 hereof. SECTION 4.05 RELEASES. (a) The Issuer shall be entitled to obtain a release from the lien of the Indenture for any Lease Contract and, except in the case of a re-lease under (iii) below, the related Equipment at any time (i) after a payment by the Company or the Issuer of the Purchase Price of the Lease Receivable, (ii) after a Substitute Lease Contract is substituted for such Lease Contract, or (iii) upon the termination of a Lease Contract following the sale, lease or other disposition of the related Equipment in accordance with Section 3.01(b)(vii) of the Standard Servicing Terms, if the Issuer delivers to the Indenture Trustee and MBIA an Officer's Certificate (A) identifying the Lease Receivable and the related Lease Contract and Equipment to be released, (B) requesting the release thereof, (C) setting forth the amount deposited in the Collection Account with respect thereto, in the event a Lease Contract and the related Equipment are being released from the lien of this Indenture pursuant to (i) or (iii) above, and (D) certifying that the amount deposited in the Collection Account (x) equals the Purchase Price of the Lease Contract, in the event a Lease Contract and the related Equipment are being released from the lien of the Indenture pursuant to (i) above or (y) equals the entire amount of Insurance Proceeds, Recoveries or Residual Proceeds. received with respect to such Lease Contract and related Equipment in the event of a release from the lien of the Indenture pursuant to (iii) above. (b) Upon satisfaction of the conditions specified in subsection (a), the Indenture Trustee shall release from the lien of the Indenture and deliver to or upon the order of the Issuer (or to or upon the order of the Company if it has satisfied its obligations under Section 4.04 hereof and Section 3.04 of the Lease Acquisition Agreement with respect to a Lease Contract) the Lease Contract, the Lease Receivable and the Equipment described in the Issuer's request for release. SECTION 4.06 TRUST ESTATE. The Indenture Trustee may, and when required by the provisions of Articles Four, Five, Six and Twelve hereof shall, execute instruments to release property from the lien of this Indenture, or convey the Indenture Trustee's interest in the same, in a manner and under circumstances which are not inconsistent with the provisions of the Indenture. No party relying upon an instrument executed by the Indenture Trustee as provided in this Article Four shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any monies. 43 50 SECTION 4.07 NOTICE OF RELEASE. The Indenture Trustee shall be entitled to receive at least 10 days' notice of any action to be taken pursuant to Section 4.05(a) hereof, accompanied by copies of any instruments involved. 44 51 ARTICLE FIVE SATISFACTION AND DISCHARGE SECTION 5.01 SATISFACTION AND DISCHARGE OF INDENTURE. (a) Following payment in full of (i) all of the Notes, (ii) the fees and charges of the Indenture Trustee, (iii) all other obligations of the Issuer under this Indenture and (iv) all amounts owing to MBIA under the Insurance Agreement, and the release by the Indenture Trustee of the Trust Estate in accordance with Section 5.01(b) hereof, the Indenture shall be discharged. Notice of the matters specified in this Section 5.01(a) shall be provided to Moody's in the manner provided in Section 13.03(e). (b) Upon payment in full of the amounts referred to in clauses (i) through (iv) of Section 5.01 (a) hereof, the Issuer may submit to the Indenture Trustee an Officer's Certificate requesting the release to the Issuer or its designee of a stated amount of the funds on deposit in the Cash Collateral Account and some or all of the other Trust Estate (collectively, the "Withdrawn Collateral"), accompanied by an Opinion of Counsel reasonably acceptable to MBIA to the effect that, after the release of the Withdrawn Collateral, there will remain an amount in the Cash Collateral Account or otherwise subject to the Indenture at least equal to the payments of interest due on the Outstanding Notes and the Principal Distribution Amounts that am subject to recapture as preferential transfers pursuant to Section 547 of the Bankruptcy Code or, alternatively, to the effect that no such payments are subject to recapture. In rendering such Opinion Of Counsel, such counsel may rely as to factual matters, including, without limitation, the date on which funds were received and the source of funds, upon an Officer's Certificate. Promptly after receipt of such Officer's Certificate, Opinion of Counsel and authorization to release from MBIA, the Indenture Trustee shall release the Withdrawn Collateral from the lien of the Indenture, and deliver the Withdrawn Collateral to the Issuer or its designee. The Issuer shall be entitled to deliver more than one such Officer's Certificate and Opinion of Counsel until the entire Trust Estate is released and delivered to the Issuer or its designee. Notwithstanding the foregoing, MBIA may waive the requirement that the Issuer deliver such Officer's Certificate and/or Opinion of Counsel and authorize the Indenture Trustee by written direction to release all or a portion of the Cash Collateral Account or other items of the Trust Estate from the lien of the Indenture upon payment in full of the amounts referred to. in clauses (i) through (iv) of Section 5.01(a) hereof. Notwithstanding termination of this Indenture, the Indenture Trustee shall remain obligated to make claims under the Note Insurance Policy with respect to any Preference Claim. (c) In connection with the discharge of the Indenture and the release of the Trust Estate, the Indenture Trustee shall release from the lien of the Indenture and deliver to or upon the order of the Issuer all property remaining in the Trust Estate and shall execute and file, at the expense of the Issuer, UCC financing statements evidencing such discharge and release. 45 52 SECTION 5.02 APPLICATION OF TRUST MONEY. Subject to the last paragraph of Section 7.16 hereof, all monies deposited with the Indenture Trustee pursuant to Section 5.01 hereof shall be held in trust, invested in Eligible Investments listed in Section (1) of the definition thereof, and applied by the Indenture Trustee, in accordance with the provisions of the Notes and the Indenture, to the payment, either directly or through any Paying Agent as the Indenture Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Indenture Trustee; but such money need not be segregated from other funds except to the extent required in the, Indenture or to the extent required by law. 46 53 ARTICLE SIX DEFAULTS AND REMEDIES SECTION 6.01 EVENTS OF DEFAULT. "Event of Default" wherever used herein means any one of the following events: (1) default in the payment of any interest upon any Note when the same becomes due and payable; or (2) default in the payment of any principal of any Note when the same becomes due and payable; or (3) default in the performance of any covenant of the Issuer, or material breach of any representation or warranty of the Issuer, in the Indenture, the Lease Acquisition Agreement, the Insurance Agreement or the Servicing Agreement (other than a covenant or warranty default in the performance of which or breach of which is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 30 days after the Issuer has actual knowledge thereof, (4) the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of the Issuer under the Federal Bankruptcy Code or any other applicable Federal or state bankruptcy, insolvency, reorganization, liquidation or other similar law now or hereafter in effect or any arrangement with creditors or appointing a receiver, liquidator, assignee, trustee, or sequestrator (or other similar official) for the Issuer or for any substantial part of its property, or ordering the winding up or liquidation of the Issuer's affairs, and the continuance OF any such decree or order unstayed and in effect for a period of 60 consecutive days; or (5) the institution by the Issuer of proceedings to be adjudicated a bankrupt or insolvent, or the consent by the Issuer to the institution of bankruptcy or insolvency proceedings against the Issuer, or the filing by the Issuer of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable Federal or state bankruptcy insolvency, reorganization, liquidation or other similar law now or hereafter in effect, or the consent by the Issuer to the filing of any such petition or to the appointment of or taking possession by a receiver, liquidator, assignee, custodian, trustee or sequestrator (or other similar official) of the Issuer or of any substantial part of the Issuer's property, or the making by the Issuer of any assignment for the benefit of creditors, or the admission by it in writing of its inability, or the failure by it generally, to pay its debts as they become due, or the taking of corporate action by the Issuer in furtherance of any such action. 47 54 SECTION 6.02 ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default with respect to any of the Notes at the time Outstanding occurs and is continuing, then, and in every such case, the Indenture Trustee shall, at the direction of MBIA, or if there is an MBIA Default, the Indenture Trustee shall, at the direction of the Holders of not less than 66-2/3% in Outstanding Principal Amount of all Notes, declare the principal of all the Notes to be immediately due and payable, by notice given in writing to the Issuer (and to the Indenture Trustee if given by Noteholders); provided that, MBIA shall not declare the Outstanding Principal Amount of all of the Notes immediately due and payable unless it shall have endorsed the Note Insurance Policies to provide coverage for any shortfall in the payment of accelerated principal and any interest due on the Outstanding Notes on the date established for redemption thereof pursuant to such acceleration, and upon any such declaration, such principal shall become immediately due and payable without any presentment, demand, protest or other notice of any kind (except such notices as shall be expressly required by the provisions of the Indenture), all of which are hereby expressly waived. At any time after such a declaration of acceleration has been made, but before any Sale of the Trust Estate has been made or a judgment or decree for payment of the money due has been obtained by the Indenture Trustee as hereinafter in this Article provided, MBIA, or if an MBIA Default has occurred, the Holders of not less than a majority of the Outstanding Principal Amount of all Notes, by written notice to the Issuer and the Indenture Trustee, may rescind and annul such declaration and its consequences (except that in the case of a payment default on the Notes, the consent of all the Noteholders shall be required to rescind and annul such a declaration and its consequences) if: (1) the Issuer has paid or deposited with the Indenture Trustee a sum sufficient to pay (A) all overdue installments of interest on all Notes; (B) the principal of any Notes which has become due otherwise than by such declaration of acceleration and interest thereon at the rate borne by such Notes from the time such principal first became due until the date when paid; and (C) all sums paid or advanced, together with interest thereon, by the Indenture Trustee, MBIA or any Noteholder hereunder or by MBIA under the Insurance Agreement or any Note Insurance Policy, and the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, MBIA and the Noteholders, their agents and counsel incurred in connection with the enforcement of the Indenture to the date of such payment or deposit; and (2) all Events of Default, other than the nonpayment of the principal on any of the Notes which has become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.15 hereof. 48 55 No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 6.03 COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY INDENTURE TRUSTEE. The Issuer covenants that if an Event of Default shall occur and be continuing and any of the Notes have been declared due and payable and such declaration has not been rescinded and annulled, the Issuer will, upon demand of the Indenture Trustee and at the direction of MBIA, pay to the Indenture Trustee, for the benefit of the Holders of the Notes and MBIA, the whole amount then due and payable on the Notes for principal and interest, with interest upon the overdue principal at the rate borne by the Notes and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee and MBIA, their respective agents and counsel. If the Issuer fails to pay such amount forthwith upon such demand, the Indenture Trustee, in its own name and as Indenture Trustee of an express trust shall, at the direction of MBIA, and if an MBIA Default has occurred the Indenture Trustee may, and shall, at the direction of not less than a majority of the Outstanding Principal Amount of all Notes, institute Proceedings for the collection of the sums so due and unpaid, and prosecute such Proceeding to judgment or final decree, and enforce the same against the Issuer and collect the monies adjudged or decreed to be payable in the manner provided by law out of the property of the Issuer, wherever situated. If an Event of Default occurs and is continuing, the Indenture Trustee shall, at the direction of MBIA, and if an MBIA Default has occurred the Indenture Trustee may, and shall, at the direction of not less than a majority of the Outstanding Principal Amount of all Notes, proceed to protect and enforce its rights and the rights of MBIA by such appropriate Proceedings as the Indenture Trustee, at the direction of MBIA, or if an MBIA Default has occurred, at its discretion shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in the Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 6.04 REMEDIES. If an Event of Default shall have occurred and be continuing, the Indenture Trustee shall, at the direction of MBIA, and if an MBIA Default has occurred, the Indenture Trustee may, and shall, at the direction of not less than a majority of the Outstanding Principal Amount of all Notes, do one or more of the following: (a) institute Proceedings for the collection of all amounts then due and payable on the Notes or under the Indenture, whether by declaration or otherwise, enforce any judgment obtained, and collect from the Issuer the monies adjudged due; 49 56 (b) take possession of and sell the Trust Estate securing the Notes or any portion thereof or rights or interest therein, at one or more Sales called and conducted in any manner permitted by law; (c) institute any Proceedings from time to time for the complete or partial foreclosure of the lien created by the Indenture with respect to the Trust Estate securing the Notes; (d) during the continuance of a default under a Lease Contract, exercise any of the rights of the lessor under such Lease Contract; and (e) exercise any remedies of a secured party under the Uniform Commercial Code or any applicable law and take any other appropriate action to protect and enforce the rights and remedies of the Indenture Trustee, MBIA or the Holders of the Notes hereunder; provided, however, that without the consent of MBIA, or if an MBIA Default has occurred, all the Holders of Outstanding Notes, the Indenture Trustee may not sell or otherwise liquidate any portion of the Trust Estate unless the proceeds of such Sale or liquidation distributable to the Noteholders are sufficient to discharge in full the amounts then due and unpaid upon the Notes for principal and interest together with any amounts owed to MBIA under the Insurance Agreement. SECTION 6.05 OPTIONAL PRESERVATION OF TRUST ESTATE. If (i) an Event of Default shall have occurred and be continuing with respect to the Notes and (ii) no Notes have been declared due and payable, or such declaration and its consequences have been annulled and rescinded, the Indenture Trustee shall, at the direction of MBIA. or if an MBIA Default has occurred, the Indenture Trustee may in its sole discretion if it determines it to be in the best interests of the Holders of the Notes and shall, upon request from the Holders of a majority in Outstanding Principal Amount of all Notes, elect, by giving written notice of such election to the Issuer, to take possession of and retain the Trust Estate securing the Notes intact, collect or cause the collection of the proceeds thereof and make and apply all payments and deposits and maintain all accounts in respect of such Notes in accordance with the provisions of Article Twelve of the Indenture. If the Indenture Trustee is unable to or is stayed from giving such notice to the Issuer for any reason whatsoever, such election shall be effective as of the time of such determination or request, as the case may be, notwithstanding any failure to give such notice, and the Indenture Trustee shall give such notice upon the removal or cure of such inability or stay (but shall have no obligation to effect such removal or cure). Any such election may be rescinded with respect to any portion of the Trust Estate securing the Notes remaining at the time of such rescission by written notice to the Indenture Trustee and the Issuer from MBIA or, if an MBIA Default has occurred, from the Holders of a majority in Outstanding Principal Amount of all Notes. 50 57 SECTION 6.06 INDENTURE TRUSTEE MAY FILE PROOFS OF CLAIM. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial Proceeding relating to the Issuer or any other obligor upon any of the Notes or the property of the Issuer or of such other obligor or their creditors, the Indenture Trustee (irrespective of whether the principal of any of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Indenture Trustee shall have made any demand on the Issuer for the payment of overdue principal or interest) shall be entitled and empowered, to intervene in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes issued hereunder and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Indenture Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, its agents and counsel and any other amounts due the Indenture Trustee under Section 7.07 hereof) and of MBIA and the Noteholders allowed in such judicial Proceeding, and (ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any receiver, assignee, trustee, liquidator, or sequestrator (or other similar official) in any such judicial Proceeding is hereby authorized by MBIA and each Noteholder to make such payments to the Indenture Trustee, and in the event that the Indenture Trustee shall consent to the making of such payments directly to MBIA or the Noteholders, to pay to the Indenture Trustee any amount due to it for the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, its agents and counsel, and any other amounts due the Indenture Trustee under Section 7.07 hereof. Nothing contained in the Indenture shall be deemed to authorize the Indenture Trustee to authorize or consent to or accept or adopt on behalf of MBIA or any Noteholder any plan of reorganization, arrangement, adjustment or composition affecting MBIA or any of the Notes or the rights of any Holder thereof, or to authorize the Indenture Trustee to vote in respect of the claim of MBIA or any Noteholder in any such Proceeding. SECTION 6.07 INDENTURE TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF NOTES. (a) In all Proceedings brought by the Indenture Trustee (and also any Proceedings involving the interpretation of any provision of this Indenture to which the Indenture Trustee shall be a party), the Indenture Trustee shall be held to represent all of the Noteholders, and it shall not be necessary to make any Noteholder a party to any such Proceedings. (b) All rights of actions and claims under the Indenture or any of the Notes may be prosecuted and enforced by the Indenture Trustee without the possession of any of the Notes or the 51 58 production thereof in any Proceeding relating thereto, and any such Proceedings instituted by the Indenture Trustee shall be brought in its own name as Indenture Trustee of an express trust, and any recovery whether by judgment, settlement or otherwise shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Indenture Trustee, its agents and counsel, be for MBIA and the ratable benefit of the Holders of the Notes. SECTION 6.08 APPLICATION OF MONEY COLLECTED. If the Notes have been declared due and payable following an Event of Default and such declaration has not been rescinded or annulled, any money collected by the Indenture Trustee with respect to the Notes pursuant to this Article Six or otherwise and any other money that may be held thereafter by the Indenture Trustee as security for the Notes shall be applied in the following order, at the date or dates fixed by the Indenture Trustee and, in case of the distribution of such money on account of, principal or interest, upon presentation of the Notes and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid; provided that proceeds of a claim under an Note Insurance Policy will be used only to pay fees, interest and principal on the applicable Series in the manner set forth in clauses Fourth and Fifth below: FIRST: To the payment of all amounts due the Servicer pursuant to Section 3.09 of the Servicing Agreement and Section 12.02(d)(i) hereof and to pay the Servicer the amount necessary to reimburse the Servicer for any other unrecovered Servicer Advances; SECOND: To the payment to the Indenture Trustee of the Trustee Fee then due, to the payment to the Back-up Servicer of the Back-up Servicer Fee then due; THIRD: To the payment to MBIA of the MBIA Premium then due; FOURTH: To the payment of the amounts then due and unpaid upon the Notes of each Series for interest, with interest (to the extent such interest has been collected by the Indenture Trustee or a sum sufficient therefor has been so collected and payment thereof is legally enforceable at the respective rate or rates prescribed therefor in the Notes) on overdue principal, in the proportion in which the Outstanding Principal Amount of each Series represents of the Outstanding Principal Amount of all Series, without preference or priority of any kind, according to the amounts due and payable on the Notes for interest; FIFTH: To the payments of the remaining Outstanding Principal Amount of the Notes, in the proportion in which the Outstanding Principal Amount of each Series represents of the Outstanding Principal Amount of all Series, without preference or priority of any kind; SIXTH: To the payment to MBIA of any amounts previously paid by MBIA under any of the Note Insurance Policies and not theretofore repaid, together with interest thereon and any other amounts due under the Insurance Agreement; 52 59 SEVENTH: In the event an MBIA Default has occurred, to reimburse the Noteholders for any costs or expenses incurred in connection with any enforcement action with respect to the Indenture or the Notes; EIGHTH: In the event an MBIA Default has occurred, to the payment of any fees and expenses to a Warehouse Lender not paid pursuant to clause Fourth above, and to the payment of any surplus to or at the written direction of the Issuer or any other person legally entitled thereto; NINTH: To the payment to the Servicer of any other amounts due the Servicer as expressly provided herein and in the Servicing Agreement; TENTH: To the payment to the Indenture Trustee and the Back-up Servicer, any other amounts due to the Indenture Trustee or the Back-up Servicer as expressly provided herein and in the Servicing Agreement; ELEVENTH: To pay to MBIA any other amounts owing under the Insurance Agreement; TWELFTH: To reimburse MBIA and the Noteholders for any costs or expenses incurred in connection with any enforcement action with respect to the Indenture or the Notes; THIRTEENTH: To the payment of any fees and expenses to a Warehouse Lender not paid pursuant to clause Fourth above, and to the payment of any surplus to or at the written direction of the Issuer or any other person legally entitled thereto. SECTION 6.09 LIMITATION ON SUITS. No Holder of any Note shall have any right to institute any Proceeding, judicial or otherwise, with respect to the Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder for so long as an MBIA Default has not occurred, and if an MBIA Default has occurred, unless (1) such Holder has previously given written notice to the Indenture Trustee of a continuing Event of Default; (2) the Holders of not less than 66-2/3% in Outstanding Principal Amount of all Notes shall have made written request to the Indenture Trustee to institute Proceedings in respect of such Event of Default in its own name as Indenture Trustee hereunder; (3) such Holder or Holders have offered to the Indenture Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; 53 60 (4) the Indenture Trustee for 60 days after its receipt of such notice, request and offer of security or indemnity has failed to institute any such Proceedings; and (5) no direction inconsistent with such written request has been given to the Indenture Trustee during such 60-day period by the Holders of 66-2/3% or more in Outstanding Principal Amount of all Notes; it being understood and intended that no one or more Holders of Notes shall have any right in any manner whatever by virtue of, or by availing of, any provision of the Indenture to affect, disturb or prejudice the rights of any other Holders of Notes, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under the Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders of Notes. SECTION 6.10 UNCONDITIONAL RIGHT OF NOTEHOLDERS TO RECEIVE PRINCIPAL AND INTEREST. Notwithstanding any other provision in the Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal, interest, and premium, if any, on such Note as such principal, interest, and premium, if any, becomes due and payable and to institute any Proceeding for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. SECTION 6.11 RESTORATION OF RIGHTS AND REMEDIES. If the Indenture Trustee, MBIA or any Noteholder has instituted any Proceeding to enforce any right or remedy under the Indenture and such Proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Indenture Trustee, MBIA or to such Noteholder, then, and in every case, the Issuer, the Indenture Trustee, MBIA and the Noteholders shall, subject to any determination in such Proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Indenture Trustee, MBIA and the Noteholders shall continue as though no such Proceeding had been instituted. SECTION 6.12 RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes in the last paragraph of Section 2.07 hereof, no right or remedy herein conferred upon or reserved to the Indenture Trustee, MBIA or to the Noteholders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 54 61 SECTION 6.13 DELAY OR OMISSION; NOT WAIVER. No delay or omission of the Indenture Trustee, MBIA or of any Holder of any Note to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or any acquiescence therein. Every right and remedy given by this Article Six or by law to the Indenture Trustee, MBIA or to the Noteholders may be exercised from time to time, and as often as may be deemed expedient, by the Indenture Trustee, MBIA or by the Noteholders, as the case may be, subject in each case, however, to the right of MBIA to control any such right and remedy except as provided in Section 13.14 hereof. SECTION 6.14 CONTROL BY NOTEHOLDERS. MBIA or, if an MBIA Default has occurred, the Holders of a majority in Outstanding Principal Amount of all Notes, shall have the right to direct the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee or exercising any trust or power conferred on the Indenture Trustee; provided that: (1) such direction shall not be in conflict with any rule of law or with the Indenture including, without limitation, any provision hereof which expressly provides for approval by a greater percentage of Outstanding Principal Amount of all Notes; (2) any direction to the Indenture Trustee by the Noteholders to undertake a private sale of the Trust Estate shall be by the Holders of all Outstanding Notes, unless the condition set forth in Section 6.18(b)(ii) hereof is met; (3) the Indenture Trustee may take any other action deemed proper by the Indenture Trustee which is not inconsistent with such direction; provided, however, that, subject to Section 7.01 hereof, the Indenture Trustee need not take any action which a Responsible Officer or Officers of the Indenture Trustee in good faith determines might involve it in personal liability or be unjustly prejudicial to the Noteholders not consenting; and (4) the Indenture Trustee has been furnished reasonable indemnity against costs, expenses and liabilities which it might incur in connection therewith as provided in Section 7.01(f) hereof. SECTION 6.15 WAIVER OF PAST DEFAULTS. MBIA, or if an MBIA Default has occurred, the Holders of 66-2/3% in Outstanding Principal Amount of all Notes, may on behalf of the Holders of all the Notes waive any past Default hereunder and its consequences, except a Default: (1) in the payment of the principal of, or premium, if any, or interest on any Note, or a Default described in Sections 6.01(4) and (5) hereof, or 55 62 (2) in respect of a covenant or provision hereof which under Article Nine hereof cannot be modified or amended without the consent of the Holder of each Outstanding Note affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of the Indenture; but no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. SECTION 6.16 UNDERTAKING FOR COSTS. All parties to the Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under the Indenture, or in any suit against the Indenture Trustee for any action taken, suffered or omitted by it as Indenture Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 6.16 shall not apply to any suit instituted by the Indenture Trustee or MBIA, or to any suit instituted by any Noteholder or group of Noteholders, holding in the aggregate more than 50% in Outstanding Principal Amount of all Notes, or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of or interest on any Note on or after the Stated Maturity expressed in such Note. SECTION 6.17 WAIVER OF STAY OR EXTENSION LAWS. The Issuer covenants (to the extent that it may lawfully do so) that it will not, at any time, insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of the Indenture; and the Issuer (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Indenture Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 6.18 SALE OF TRUST ESTATE. (a) The power to effect any sale (a "Sale") of any portion of the Trust Estate pursuant to Section 6.04 hereof shall not be exhausted by any one or more Sales as to any portion of the Trust Estate remaining unsold, but shall continue unimpaired until the entire Trust Estate securing the Notes shall have been sold or all amounts payable on the Notes and under the Indenture with respect thereto shall have been paid. The Indenture Trustee may from time to time postpone any Sale by public announcement made at the time and place of such Sale. 56 63 (b) To the extent permitted by applicable law, the Indenture Trustee shall not, in any private Sale, sell to a third party the Trust Estate, or any portion thereof unless: (i) MBIA, or if an MBIA Default has occurred the Holders of all Outstanding Notes, consent to or direct the Indenture Trustee to make such Sale; or (ii) if an MBIA Default has occurred, the proceeds of such Sale would not be less than the sum of all amounts due to the Indenture Trustee hereunder and the Outstanding Principal Amount of all notes and interest due or to become due thereon on the Payment Date next succeeding such Sale together with any amounts owing to MBIA under the Insurance Agreement. (c) The Indenture Trustee, MBIA or the Noteholders may bid for and acquire any portion of the Trust Estate in connection with a public Sale thereof, and in lieu of paying cash therefor, any Noteholder may make settlement for the purchase price by crediting against amounts owing on the Notes of such Holder or other amounts owing to such Holder secured by the Indenture, that portion of the net proceeds of such Sale to which such Holder would be entitled, after deducting the reasonable costs, charges and expenses incurred by the Indenture Trustee, MBIA or the Noteholders in connection with such Sale. The Notes need not be produced in order to complete any such Sale, or in order for the net proceeds of such Sale to be credited against the Notes. The Indenture Trustee, MBIA or the Noteholders may hold, lease, operate, manage or otherwise deal with any property so acquired in any manner permitted by law. (d) The Indenture Trustee shall execute and deliver an appropriate instrument of conveyance transferring its interest in any portion of the Trust Estate in connection with a Sale thereof. In addition, the Indenture Trustee is hereby irrevocably appointed the agent and attorney-in-fact of the Issuer to transfer and convey its interest in any portion of the Trust Estate in connection with a Sale thereof, and to take all action necessary to effect such Sale. No purchaser or transferee at such a sale shall be bound to ascertain the Indenture Trustee's authority, inquire into the satisfaction of any conditions precedent or see to the application of any monies. (e) The method, manner, time, place and terms of any Sale of all or any portion of the Trust Estate shall be commercially reasonable. SECTION 6.19 ACTION ON NOTES. The Indenture Trustee's right to seek and recover judgment on the Notes or under the Indenture shall not be affected by the seeking, obtaining or application of any other relief under or with respect to the Indenture. Neither the lien of the Indenture nor any rights or remedies of the Indenture Trustee or the Noteholders shall be impaired by the recovery of any judgment by the Indenture Trustee against the Issuer or by the levy of any execution under such judgment upon any portion of the Trust Estate or upon any of the assets of the Issuer. 57 64 ARTICLE SEVEN THE INDENTURE TRUSTEE SECTION 7.01 CERTAIN DUTIES AND RESPONSIBILITIES. (a) Except during the continuance of an Event of Default known to the Indenture Trustee as provided in subsection (e) below: (i) the Indenture Trustee undertakes to perform such duties and only such duties as are specifically set forth in the Indenture, and no implied covenants or obligations shall be read into the Indenture against the Indenture Trustee; and (ii) in the absence of bad faith or negligence on its part, the Indenture Trustee may conclusively rely as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Indenture Trustee and conforming to the requirements of the Indenture; but in the case of any such certificates or opinions, which by any provision hereof are specifically required to be furnished to the Indenture Trustee, the Indenture Trustee shall be under a duty to examine the same and to determine whether or not they conform to the requirements of the Indenture. (b) In case an Event of Default known to the Indenture Trustee as provided in subsection (e) below has occurred and is continuing, the Indenture Trustee shall exercise such of the rights and powers vested in it by the Indenture, and shall use the same degree of care and skill in its exercise, as a reasonable person would exercise or use under the circumstances in the conduct of his or her own affairs. (c) No provision of the Indenture shall be construed to relieve the Indenture Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct or bad faith, except that: (i) this subsection (c) shall not be construed to limit the effect of subsection (a) of this Section; (ii) the Indenture Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Indenture Trustee, unless it shall be proved that the Indenture Trustee was negligent in ascertaining the pertinent facts; (iii) the Indenture Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of MBIA or the Holders of a majority (or other such percentage as may be required by the terms hereof) in Outstanding Principal Amount of all Notes in accordance with Section 6.14 hereof relating to the time, method and place of conducting any Proceeding for any remedy available to the Indenture Trustee, or exercising any trust 58 65 or power conferred upon the Indenture Trustee, under the Indenture, the Lease Acquisition Agreement or the Servicing Agreement; and (iv) no provision of the Indenture shall require the Indenture Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it, provided that nothing contained in the Indenture shall excuse the Indenture Trustee for failure to perform its duties as Indenture Trustee under the Indenture. (d) Whether or not therein expressly so provided, every provision of the Indenture relating to the conduct or affecting the liability of or affording protection to the Indenture Trustee shall be subject to the provisions of this Section 7.01. (e) For all purposes under the Indenture, the Indenture Trustee shall not be deemed to have notice of any Event of Default described in Section 6.01(4) or 6.01(5) hereof or any Default described in Section 6.01(3) hereof or of any Trigger Event unless a Responsible Officer assigned to and working in the Indenture Trustee's corporate trust department has actual knowledge thereof or unless written notice of any event which is in fact such an Event of Default, Default or Trigger Event is received by the Indenture Trustee at the Corporate Trust Office, and such notice references any of the Notes generally, the Issuer, the Trust Estate or the Indenture. (f) The Indenture Trustee shall be under no obligation to institute any suit, or to take any remedial proceeding under the Indenture, or to enter any appearance or in any way defend in any suit in which it may be made defendant, or to take any steps in the execution of the trusts hereby created or in the enforcement of any rights and powers hereunder until it shall be indemnified to its satisfaction against any and all costs and expenses, outlays and counsel fees and other reasonable disbursements and against all liability, except liability that is adjudicated, in connection with any action so taken. (g) Notwithstanding any extinguishment of All right, title and interest of the Issuer in and to the Trust Estate following an Event of Default and a consequent declaration of acceleration of the maturity of any of the Notes, whether such extinguishment occurs through a Sale of the Trust Estate to another person, the acquisition of the Trust Estate by the Indenture Trustee with respect to the Trust Estate (or the proceeds thereof) and the Noteholders and the rights of the Noteholders shall continue to be governed by the terms of the Indenture. (h) Notwithstanding anything to the contrary contained herein, the provisions of subsections (e) through (g), inclusive, of this Section 7.01 shall be subject to the provisions of subsections (a) through (c), inclusive, of this Section 7.01. (j) The Indenture Trustee shall provide the reports and accountings as required pursuant to Section 12.04 hereof. 59 66 SECTION 7.02 NOTICE OF DEFAULT AND TRIGGER EVENTS. Promptly after the occurrence of any Default or Trigger Event known to the Indenture Trustee (within the meaning of Section 7.01 (e) hereof) which is continuing, within one Business Day of obtaining such knowledge, the Indenture Trustee shall transmit by telephonic or telegraphic communication confirmed by mail to MBIA and the Issuer and by mail to all Holders of Notes, as their names and addresses appear on the Note Register, notice of such Default or Trigger Event hereunder known to the Indenture Trustee, unless in the case of notice of Default to Noteholders, such Default shall have been promptly cured or waived. SECTION 7.03 CERTAIN RIGHTS OF INDENTURE TRUSTEE. Except as otherwise provided in Section 7.01, (a) the Indenture Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note or other obligation, paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) any request or direction of the Issuer mentioned herein shall be sufficiently evidenced by a Issuer Request or Issuer Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of the Indenture the Indenture Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Indenture Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officer's Certificate; (d) the Indenture Trustee may consult with counsel and the written advice of such counsel selected by the Indenture Trustee with due care or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Indenture Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Indenture at the request or direction of any of the Noteholders pursuant to the Indenture, unless such Noteholders shall have offered to the Indenture Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (f) the Indenture Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, note or other paper or document, but the Indenture Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Indenture Trustee shall determine to make such further inquiry or investigation, it shall 60 67 be entitled to examine the books, records and premises of the Issuer, upon reasonable notice and at reasonable times personally or by agent or attorney; and (g) the Indenture Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys. SECTION 7.04 NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF NOTES. (a) The recitals contained in the Indenture and in the Notes, except the certificates of authentication on the Notes, shall be taken as the statements of the Issuer, and the Indenture Trustee assumes no responsibility for their correctness. The Indenture Trustee makes no representations as to the validity or condition of the Trust Estate or any part thereof, or as to the title of the Issuer thereto or as to the security afforded thereby or hereby, or as to the validity or genuineness of any securities at any time pledged and deposited with the Indenture Trustee hereunder or as to the validity or sufficiency of the Indenture or any of the Notes. The Indenture Trustee shall not be accountable for the use or application by the Issuer of any of the Notes or the proceeds thereof or of any money paid to the Issuer or upon Issuer Order under any provisions hereof (b) Except as otherwise expressly provided herein and without limiting the generality of the foregoing, the Indenture Trustee shall have no responsibility or liability for or with respect to the existence or validity of any Equipment or Lease Contract, the perfection of any security interest (whether as of the date hereof or at any future time), the maintenance of or the taking of any action to maintain such perfection, the validity of the assignment of any portion of the Trust Estate to the Indenture Trustee or of any intervening assignment, the review of any Lease Contract (it being understood that the Indenture Trustee has not reviewed and does not intend to review the substance or form of any such Lease Contract), the performance or enforcement of any Lease Contract, the validity and sufficiency of the Note Insurance Policies, the compliance by the Issuer or the Servicer with any covenant or the breach by the Issuer or the Servicer of any warranty or representation made hereunder or in any related document or the accuracy of any such warranty or representation, any investment of monies in the Collection Account or any loss resulting therefrom, the acts or omissions of the Issuer, the Servicer, MBIA or any Customer, any action of the Servicer taken in the name of the Indenture Trustee, or the validity of the Servicing Agreement or the Lease Acquisition Agreement. (c) The Indenture Trustee shall not have any obligation or liability under any Lease Contract by reason of or arising out of the Indenture or the granting of a security interest in such Lease Contract hereunder or the receipt by the Indenture Trustee of any payment relating to any Lease Contract pursuant hereto, nor shall the Indenture Trustee be required or obligated in any manner to perform or fulfill any of the obligations of the Issuer under or pursuant to any Lease Contract, or to make any payment, or to make any inquiry as to the nature or the sufficiency of any payment received by it, or the sufficiency of any performance by any party, under any Lease Contract. 61 68 SECTION 7.05 MAY HOLD NOTES. The Indenture Trustee, the Servicer, any Paying Agent, the Note Registrar, any Authenticating Agent or any other agent of the Issuer, in its individual or any other capacity, may become the owner or pledgee of Notes, and if operative, may otherwise deal with the Issuer with the same rights it would have if it were not Indenture Trustee, Servicer, Paying Agent, Note Registrar, Authenticating Agent or such other agent. SECTION 7.06 MONEY HELD IN TRUST. Money and investments held in trust by the Indenture Trustee or any Paying Agent hereunder shall be held in one or more trust accounts hereunder but need not be segregated from other funds except to the extent required in the Indenture or required by law. The Indenture Trustee or any Paying Agent shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Issuer or otherwise specifically provided in the Indenture. SECTION 7.07 COMPENSATION AND REIMBURSEMENT. The Issuer agrees: (i) to pay the Indenture Trustee monthly its fee for all services rendered by it hereunder as Indenture Trustee, in the amount of the Trustee Fee (which compensation shall not otherwise be limited by any provision of law in regard to the compensation of a trustee of an express trust), and to pay to the Back-up Servicer its fee for all services rendered hereunder and under the Servicing Agreement as Back-up Servicer, in the amount of the Back-up Servicer Fee; (ii) except as otherwise expressly provided herein or in the Specific Indenture Terms, to reimburse the Indenture Trustee or the Back-up Servicer upon its request for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by the Indenture Trustee or the Back-up Servicer in accordance with any provision of the Indenture or Servicing Agreement (including the reasonable compensation and the expenses and disbursements of the Indenture Trustee's and Back-up Servicer's agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (iii) to indemnify and hold harmless the Trust and the Indenture Trustee from and against any loss, liability, expense, damage or injury (other than those attributable to a Noteholder in its capacity as an investor in any of the Notes) sustained or suffered pursuant to the Indenture by reason of any acts, omissions or alleged acts or omissions arising out of activities of the Trust or the Indenture Trustee (including without limitation any violation of any applicable laws by the Issuer as a result of the transactions contemplated by the Indenture), including, but not limited to, any judgment, award, settlement, reasonable attorneys' fees and other expenses incurred in connection with the defense of any actual or threatened action, proceeding 62 69 or claim; provided that the Issuer shall not indemnify the Indenture Trustee if such loss, liability, expense, damage or injury is due to the Indenture Trustee's gross negligence or willful misconduct, willful misfeasance or bad faith in the performance of duties. Any indemnification pursuant to this Section shall only be payable from the assets of the Issuer and shall not be payable from the assets of the Trust. The provisions of this indemnity shall run directly to and be enforceable by an injured person subject to the limitations hereof and this indemnification agreement shall survive the termination of the Indenture. Upon the occurrence of an Event of Default resulting in an acceleration of maturity of the Notes that has not been rescinded and annulled, the Indenture Trustee shall have, as security for the performance of the Issuer under this Section 7.07, a lien ranking senior to the lien of the Notes with respect to which any claim of the Indenture Trustee under this Section 7.07 arose upon all property and funds held or collected as part of the Trust Estate by the Indenture Trustee in its capacity as such except the Indenture Trustee shall have no liens on the amounts paid under any of the Note Insurance Policies. The Indenture Trustee shall not institute any Proceeding seeking the enforcement of such lien against any Trust Estate unless directed to do so by MBIA and (i) such Proceeding is in connection with a proceeding in accordance with Article Six hereof for enforcement of the lien of the Indenture for the benefit of the Holders of the Notes secured by such Trust Estate after the occurrence of an Event of Default (other than an Event of Default due solely to a breach of this Section 7.07) and a resulting declaration of acceleration of maturity of such Notes that has not been rescinded and annulled, or (ii) such Proceeding does not result in or cause a Sale or other disposition of such Trust Estate. All monies so collected by the Indenture Trustee shall be applied in accordance with Section 6.08 hereof. SECTION 7.08 CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be a trustee hereunder which shall be a corporation or association organized and doing business under the laws of the United States of America or of any state, authorized under such laws to exercise corporate trust powers, having a combined capital and surplus of at least $100,000,000, subject to supervision or examination by Federal or state authority and having an office within the United States of America, and which shall have a commercial paper or other short-term rating of the highest short term rating categories by the Rating Agencies, or a long term rating of Baa3 or higher or otherwise acceptable to the Rating Agencies. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Indenture Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. 63 70 SECTION 7.09 RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. (a) No resignation or removal of the Indenture Trustee and no appointment of a successor Indenture Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Indenture Trustee under Section 7.10 hereof. (b) The Indenture Trustee may resign at any time by giving 30 days' written notice thereof to the Issuer, MBIA and to each Noteholder. If an instrument of acceptance by a successor Indenture Trustee shall not have been delivered to the Indenture Trustee within 30 days after the giving of such notice of resignation, the resigning Indenture Trustee may petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor Indenture Trustee. (c) The Indenture Trustee may be removed by MBIA, or if an MBIA Default has occurred, by the Holders of 66-2/3% in Outstanding Principal Amount of all Notes, at any time if one of the following events have occurred: (i) the Indenture Trustee shall cease to be eligible under Section 7.08 hereof and shall fail to resign after written request therefor by the Issuer, MBIA or by any Noteholder, or (ii) the Indenture Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Indenture Trustee or of its property shall be appointed or any public officer shall take charge or control of the Indenture Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, or (iii) the Indenture Trustee has failed to perform its duties in the Indenture or has breached any representation of warranty made in the Indenture. (d) If the Indenture Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of the Indenture Trustee for any cause with respect to any of the Notes, the Issuer by a Board Resolution, shall promptly appoint a successor Indenture Trustee reasonably satisfactory to MBIA. If no successor Indenture Trustee shall have been so appointed by the Issuer within 30 days of notice of removal or resignation and shall have accepted appointment in the manner hereinafter provided, then MBIA may appoint a successor Indenture Trustee. If MBIA shall fail to appoint a successor Indenture Trustee within 90 days, then 66-2/3% in Outstanding Principal Amount of all Notes may petition any court of competent jurisdiction for the appointment of a successor Indenture Trustee with respect to the Notes. (e) The Issuer shall give notice in the manner provided in Section 13.04 hereof of each resignation and each removal of the Indenture Trustee and each appointment of a successor Indenture Trustee with respect to the Notes and notice shall be provided in the manner provided in Section 64 71 separate Indenture Trustee that has so resigned or been removed may be appointed in the manner provided in this Section; (iv) no co-Indenture Trustee or separate Indenture Trustee hereunder shall be personally liable by reason of any act or omission of the Indenture Trustee or any other such Indenture Trustee hereunder nor shall the Indenture Trustee be liable by reason of any act or omission of any co-Indenture Trustee or separate Indenture Trustee selected by the Indenture Trustee with due care or appointed in accordance with directions to the Indenture Trustee pursuant to Section 6.14; and (v) any Act of Noteholders delivered to the Indenture Trustee shall be deemed to have been delivered to each such co-Indenture Trustee and separate Indenture Trustee. SECTION 7.13 RIGHTS WITH RESPECT TO THE SERVICER. The Indenture Trustee's rights and obligations with respect to the Servicer and the Back-up Servicer shall be governed by the Servicing Agreement. SECTION 7.14 APPOINTMENT OF AUTHENTICATING AGENT. The Indenture Trustee may appoint an Authenticating Agent or Agents with respect to the Notes which shall be authorized to act on behalf of the Indenture Trustee to authenticate Notes issued upon original issue or upon exchange, registration of transfer or pursuant to Section 2.05 hereof, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Indenture Trustee hereunder. Wherever reference is made in the Indenture to the authentication and delivery of Notes by the Indenture Trustee or the Indenture Trustee's certificate of authentication or the delivery of Notes to the Indenture Trustee for authentication, such reference shall be deemed to include authentication and delivery on behalf of the Indenture Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Indenture Trustee by an Authenticating Agent and delivery of the Notes to the Authenticating Agent on behalf of the Indenture Trustee. Each Authenticating Agent shall be acceptable to the Issuer, MBIA and the Noteholders and shall at all times be a corporation having a combined capital and surplus of not less than the equivalent of $50,000,000 and subject to supervision or examination by Federal or state authority or the equivalent foreign authority, in the case of an Authenticating Agent who is not organized and doing business under the laws of the United States of America, any state thereof or the District of Columbia. It such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. 67 72 Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of such Authenticating Agent, shall continue to be an Authenticating Agent without the execution or filing of any paper or any further act on the part of the Indenture Trustee or such Authenticating Agent; provided, such corporation shall be otherwise eligible under this Section. An Authenticating Agent may resign at any time by giving written notice thereof to the Indenture Trustee, MBIA and to the Issuer. The Indenture Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent, MBIA and to the Issuer. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Indenture Trustee may appoint a successor Authenticating Agent which shall be acceptable to the Issuer and MBIA and shall mail written notice of such appointment by first-class mail, postage prepaid, to all Holders of Notes, if any, with respect to which such Authenticating Agent will serve, as their names and addresses appear in the Note Register. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Indenture Trustee may pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section; provided, however, the Indenture Trustee shall not be entitled to be reimbursed for such payments. If an appointment is made pursuant to this Section, the Notes may have endorsed thereon, in addition to the Indenture Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This is one of the Notes described in the within-mentioned Indenture. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION As Indenture Trustee By:______________________________ As Authenticating Agent By:______________________________ Authorized Officer 68 73 SECTION 7.15 INDENTURE TRUSTEE TO HOLD LEASE CONTRACTS. The Indenture Trustee hereby acknowledges receipt (subject to any exceptions as may be noted by the Indenture Trustee to the Servicer and MBIA within 10 days of the related Delivery Date) of and shall hold each Lease Contract together with any documents relating thereto that may from time to time be delivered to the Indenture Trustee, until such time as such Lease Contract is released from the lien of the Indenture pursuant to the terms of the Indenture. The Indenture Trustee shall be under no duty or obligation to inspect, review or examine the Lease Contracts and other documents to determine that the same are genuine, enforceable or appropriate for the represented purpose or that they have actually been recorded or that they are other than what they purport to be on their face. SECTION 7.16 MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. The Indenture Trustee shall execute and deliver, and if there is any Paying Agent other than the Indenture Trustee, the Issuer will cause each Paying Agent other than the Indenture Trustee to execute and deliver to the Indenture Trustee and MBIA an instrument in which such Paying Agent shall agree with the Indenture Trustee that, subject to the provisions of this Section, such Paying Agent will: (i) hold all sums held by it for the payment of principal or interest on Notes in trust for the benefit of the Noteholders entitled thereto and MBIA until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (ii) give the Indenture Trustee, MBIA and the Noteholders notice of any Default by the Issuer (or any other obligor upon the Notes) in the making of any payment of principal or interest; and (iii) at any time during the continuance of any such Default, upon the written request of the Indenture Trustee, forthwith pay to the Indenture Trustee all sums so held in trust by such Paying Agent. The Issuer may at any time, for the purpose of obtaining the satisfaction and discharge of the Indenture or for any other purpose, pay, or by Issuer Order direct any Paying Agent to pay, to the Indenture Trustee all sums held in trust by such Paying Agent, such sums to be held by the Indenture Trustee upon the same trusts as those upon which such sums were held by such Paying Agent; and, upon such payment by any Paying Agent to the Indenture Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Indenture Trustee or any Paying Agent in trust for the payment of the principal or interest on any Note and remaining unclaimed for three years after such principal or interest has become due and payable shall be paid to the Issuer on Issuer Request or to MBIA (upon its written request) if such payment had been made by MBIA; and the Holder of such Note shall thereafter, as an unsecured general creditor, and subject to any applicable statute of 69 74 limitations, look only to the Issuer for payment thereof, and all liability of the Indenture Trustee, such Paying Agent or MBIA with respect to such trust money or the related Note, shall thereupon cease; PROVIDED, HOWEVER, that the Indenture Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Issuer cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the city in which the Corporate Trust Office is located, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Issuer, and provided, further, that any amounts held that are proceeds of a claim made under an Note Insurance Policy shall be returned to MBIA, and the Noteholders shall look only to MBIA for such payments. The Indenture Trustee may also adopt and employ, at the expense of the Issuer, any other reasonable means of notification of such repayment (including, but not limited to, mailing notice of such repayment to Noteholders whose right to or interest in monies due and payable but not claimed is determinable from the records of any Paying Agent, at the last address as shown on the Note Register for each such Noteholder). 70 75 ARTICLE EIGHT THE NOTE INSURANCE POLICIES SECTION 8.01 PAYMENTS UNDER THE NOTE INSURANCE POLICIES. If on the close of business on the second Business Day prior to any Payment Date, the funds on deposit in the Collection Account are not sufficient to make the payment of any fees due to a Warehouse Lender under a Series of Warehouse Notes or interest due on the Outstanding Notes of the applicable Series on such Payment Date, in each case in accordance with Section 12.02(d)(vi) hereof, the Indenture Trustee shall, no later than 10:00 a.m. New York time, on the Business Day immediately preceding such Payment Date make a claim under the applicable Note Insurance Policy in an amount equal to such insufficiency. In addition, if on the close of business on the second Business Day immediately prior to any Stated Maturity the funds on deposit in the Collection Account are not sufficient to pay the entire Outstanding Principal Amount of all Notes of the applicable Series (after giving effect to the application of funds available to pay the Pro Rata Share of the Principal Distribution Amount of each Outstanding Series in accordance with Section 12.02(d)(vii) hereof), the Indenture Trustee shall, no later than 10:00 a.m. New York time, on the Business Day immediately preceding such Payment Date, make a claim under the applicable Note Insurance Policy in an amount equal to such insufficiency. Proceeds of claims on the Note Insurance Policies shall be deposited in the Collection Account or the Redemption Account, as applicable, and used solely to pay amounts due in respect of interest on the applicable Notes on each Payment Date and principal of the applicable Notes at the Stated Maturity. In addition, on any day that the Indenture Trustee has actual knowledge or receives notice that any amount previously paid to a Noteholder has been subsequently recovered from such Noteholder pursuant to a final order of a court of competent jurisdiction that such payment constitutes an avoidable preference within the meaning of any applicable bankruptcy law to such Noteholder (a "Preference Claim"), the Indenture Trustee shall make a claim within one Business Day upon the relevant Note Insurance Policy for the full amount of such Preference Claim in accordance with the terms of such Note Insurance Policy. Any proceeds of any such Preference Claim received by the Indenture Trustee shall be paid to the related Noteholders. 71 76 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 9.01 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS. The Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee, with the consent of MBIA but without the consent of the Holders of any Notes, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Indenture Trustee, for any of the following purposes, provided that any such amendment, as evidenced by an Opinion of Counsel if requested by the Indenture Trustee, will not have a material adverse affect on Noteholders: (1) to correct or amplify the description of any property at any time subject to the lien of the Indenture, or better to assure, convey and confirm unto the Indenture Trustee any property subject or required to be subjected to the lien of the Indenture, or to subject to the lien of the Indenture additional property; or (2) to evidence the succession of another Person to the Issuer, and the assumption by such successor of the covenants of the Issuer herein and in the Notes contained, in accordance with Section 11.02(p) hereof; or (3) to add to the covenants of the Issuer, for the benefit of MBIA or the Holders of all Notes, or to surrender any right or power herein conferred upon the Issuer; or (4) to convey, transfer, assign, mortgage or pledge any property to or with the Indenture Trustee; or (5) to cure any ambiguity, to correct or supplement any provision herein which may be defective or inconsistent with any other provisions with respect to matters or questions arising under the Indenture, which shall not be inconsistent with the provisions of the Indenture, provided that such action shall not adversely affect the interests of the Holders of the Notes; or (6) to evidence the succession of the Indenture Trustee pursuant to Article Seven hereof; or (7) to add to any Events of Default; (8) to substitute one or more Lease Contracts in accordance with Section 4.04 hereof and to add Lease Contracts pursuant to Warehouse Fundings; (9) to amend the definition of "Concentration Limits"; and 72 77 (10) modify any of the provisions of this Section 9.02, except to increase the percentage of Holders required for any modification or waiver or to provide that certain other provisions of the Indenture cannot be modified or waived without the consent of each Holder of each Outstanding Note affected thereby; or (11) permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture with respect to any part of the Trust Estate or terminate the lien of the Indenture on any property at any time subject hereto or deprive the Holder of any Note of the security afforded by the lien of the Indenture; or (12) modify any of Sections 6.01(1) or (2), 6.02, 6.03, 6.18, or 12.02(d) hereof. (b) With the consent of MBIA and the Holders of not less than 66-2/3% in Outstanding Principal Amount of a Series of Warehouse Notes, by Act of said Holders delivered to the Issuer and the Indenture Trustee, the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of Article Three hereof, provided that any such amendment does not modify the Indenture in a manner described in clauses (1) through (8) of paragraph (a) of this Section 9.02. (c) The Indenture Trustee is hereby authorized to join in the execution of any supplemental indenture pursuant to clause (a) or (b) above and to make any further appropriate agreements and stipulations that may be therein contained, but the Indenture Trustee shall not be obligated to enter into any such supplemental indenture that affects the Indenture Trustee's own rights, duties, liabilities or immunities under the Indenture. It shall not be necessary for any Act of Noteholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. Promptly after the execution by the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee of any supplemental indenture pursuant to this Section, the Issuer shall mail to the Holders of the Notes and the Rating Agencies a copy of such supplemental indenture. SECTION 9.03 EXECUTION OF SUPPLEMENTAL INDENTURES. In executing any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by the Indenture, the Indenture Trustee shall be entitled to receive upon request, and (subject to Section 7.01 hereof) shall be fully protected in relying in good faith upon, an Opinion of Counsel reasonably acceptable to the Indenture Trustee stating that the execution of such supplemental indenture is authorized or permitted by the Indenture. The Indenture Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Indenture Trustee's own duties or immunities under the Indenture or otherwise. 74 78 SECTION 9.04 EFFECT OF SUPPLEMENTAL INDENTURES. Upon the execution of any supplemental indenture under this Article, the Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of the Indenture for all purposes; and every Holder of Notes theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 9.05 REFERENCE IN NOTES TO SUPPLEMENTAL INDENTURES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and if required by the Indenture Trustee shall, bear a notation in form approved by the Indenture Trustee as to any matter provided for in such supplemental indenture. If the Issuer shall so determine, new Notes so modified as to conform, in the opinion of the Indenture Trustee and the Issuer, to any such supplemental indenture may be prepared and executed by the Issuer and authenticated and delivered by the Indenture Trustee in exchange for Outstanding Notes. 75 79 ARTICLE TEN REDEMPTION OF NOTES SECTION 10.01 REDEMPTION AT THE OPTION OF THE ISSUER; ELECTION TO REDEEM. The Issuer shall have the option to redeem (a) at any time except as may be otherwise specified in the related Supplement, all of the Outstanding Notes of a Series of Warehouse Notes and (b) all of the Outstanding Notes of any Series of Term Notes at any time after the Outstanding Principal Amount of the Notes in such Series is less than 10% (or such other percentage as may be specified in the Specific Indenture Terms) of the original Outstanding Principal Amount of such Series of Term Notes as of the related Delivery Date, in each case at the applicable Redemption Price plus any fees due hereunder and all amounts due to MBIA under the Insurance Agreement. With respect to any redemption permitted by clause (b) above, MBIA shall have the same option to redeem any such Series of Notes in the absence of the exercise thereof by the Issuer. With respect to any Series of Warehouse Notes, MBIA shall have the option to redeem all of the Outstanding Notes of such Series at any time after the Outstanding Principal Amount of the Notes in such Series is less than 10% (or such other percentage as may be specified in the Specific Indenture Terms) of the Series Initial IPB at the time of redemption. The Issuer shall set the Redemption Date and the Redemption Record Date for a Series of Notes and give notice thereof to the Indenture Trustee pursuant to Section 10.02 hereof. Installments of interest and principal that are due regarding a Series of Notes on or prior to the related Redemption Date shall continue to be payable to the Holders of such Notes called for redemption as of the relevant Record Dates according to their terms and the provisions of Section 2.08 hereof. The election of the Issuer or MBIA to redeem any Notes pursuant to this Section shall be evidenced by a Board Resolution or written notice from MBIA, respectively, directing the Indenture Trustee to make the payment of the Redemption Price on all of the Notes to be redeemed from monies deposited with the Indenture Trustee pursuant to Section 10.04 hereof. SECTION 10.02 NOTICE TO INDENTURE TRUSTEE; DEPOSIT OF REDEMPTION PRICE. In the case of any redemption pursuant to Section 10.01 hereof, the Issuer or MBIA, as applicable, shall, at least 15 days prior to the related Redemption Date, notify the Indenture Trustee of such Redemption Date and shall deposit into the Redemption Account on such notification date an amount equal to the Redemption Price of all Notes to be redeemed on such Redemption Date plus any fees due hereunder and all amounts due to MBIA under the Insurance Agreement; provided, however, that in the case of a redemption of a Series of Warehouse Notes to be funded through the issuance of a Series of Term Notes, the Issuer need not deposit the applicable Redemption Price into the Redemption Account prior to the provision of the notice of redemption, but rather, on the related Delivery Date, the Issuer shall deposit into the Redemption Account such portion of the proceeds of the issuance of such new Series of Term Notes as is necessary to redeem the applicable Series of Warehouse Notes on the related Redemption Date at the applicable Redemption Price. 76 80 SECTION 10.03 NOTICE OF REDEMPTION BY THE ISSUER. Upon receipt of such notice and such deposit set forth in Section 10.02 above, the Indenture Trustee shall provide notice of redemption pursuant to Section 10.01 hereof by first-class mail, postage prepaid, mailed no later than the Business Day following the date on which such deposit was made to each Holder of Notes whose Notes are to be redeemed, at his address in the Note Register. All notices of redemption shall state: (1) the applicable Redemption Date; (2) the applicable Redemption Price; and (3) that on such Redemption Date, the Redemption Price will become due and payable upon each such Note in the related Series, and that interest thereon shall cease to accrue on such date. Notice of redemption of a Series of Notes shall be given by the Indenture Trustee in the name and at the expense of the Issuer or MBIA, as applicable. Failure to give notice of redemption, or any defect therein, to any Holder of any Note selected for redemption shall not impair or affect the validity of the redemption of any other Note. SECTION 10.04 NOTES PAYABLE ON REDEMPTION DATE. Notice of redemption having been given as provided in Section 10.03 hereof, the Series of Notes to be redeemed shall, on the applicable Redemption Date, become due and payable at the Redemption Price and on such Redemption Date (unless the Issuer or MBIA, as applicable, shall default in the payment of the Redemption Price) such Notes shall cease to bear interest. The Holders of such Notes shall be paid the Redemption Price by the Paying Agent on behalf of the Issuer; provided, however, that installments of principal and interest that are due regarding such Series of Notes on or prior to such Redemption Date shall be payable to the Holders of such Notes registered as such on the relevant Record Dates according to their terms and the provisions of Section 2.08 hereof. If the Holders of any Note called for redemption shall not be so paid, the principal and premium on such Series of Notes, if any, shall, until paid, bear interest from the applicable Redemption Date at the related Note Interest Rate. SECTION 10.05 RELEASE OF SERIES LEASE CONTRACTS. In connection with any redemption permitted under this Article Ten, the Issuer shall be permitted to obtain a release of the related Series Lease Contracts to the extent that (a) after giving effect to such release, the sum of (i) the amount of funds then held in the Cash Collateral Account 77 81 and (ii) the Aggregate IPB is equal to or exceeds the Required Collateralization Amount plus the Outstanding Principal Amount of all Series of Notes (after giving effect to such redemption and the issuance of any new Series of Notes) and (b) the applicable Redemption Price shall have been deposited into the Redemption Account as required by Section 10.02. 78 82 ARTICLE ELEVEN REPRESENTATIONS, WARRANTIES AND COVENANTS SECTION 11.01 REPRESENTATIONS AND WARRANTIES. Except as otherwise provided in the Specific Indenture Terms, the issuer hereby makes the following representations and warranties for the benefit of the Indenture Trustee, MBIA and the Noteholders on which the Indenture Trustee relies in accepting the Trust Estate in rust and in authenticating the Notes. Such representations and warranties are made as of the Initial Delivery Date and each additional Delivery Date, and shall survive the transfer, grant and assignment of the Trust Estate to the Indenture Trustee. (a) ORGANIZATION AND GOOD STANDING. The Issuer is a corporation duly organized, validly existing and in good standing under the law of the Issuer State of incorporation and each other State where the nature of its business requires it to qualify, except to the extent that the failure to so qualify would not in the aggregate materially adversely affect the ability of the Issuer to perform its obligations under the Transaction Documents; (b) AUTHORIZATION. The Issuer has the power, authority and legal right to execute, deliver and perform under the terms of the Transaction Documents and the execution, delivery and performance of the Transaction Documents have been duly authorized by the Issuer by all necessary corporate action; (c) BINDING OBLIGATION. Each of (i) the Indenture, assuming due authorization, execution and delivery by the Indenture Trustee, the Back-up Servicer and the Servicer, (ii) the Insurance Agreement, assuming due authorization, execution and delivery by MBIA, the Indenture Trustee and the Servicer, (iii) the Servicing Agreement, assuming due authorization, execution and delivery by the Issuer, the Servicer, the Indenture Trustee and the Servicer and (iv) the Lease Acquisition Agreement, assuming due authorization, execution and delivery by the Company, constitutes a legal, valid and binding obligation of the Issuer, enforceable again the Issuer in accordance with its terms except that (A) such enforcement may be subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws (whether statutory, regulatory or decisional) now or hereafter in effect relating to creditors' rights generally and (B) the remedy of specific performance and injunctive and other forms of equitable relief may be subject to certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought, whether a proceeding at law or in equity; (d) NO VIOLATION. The consummation of the, transactions contemplated by the fulfillment of the terms of the Transaction Documents will not conflict with, result in any breach of any of the terms and provisions of or constitute (with or without notice, lapse of time or both) a default under the organizational documents or bylaws of the Issuer, or any material indenture, agreement, mortgage, deed of trust or other instrument to which the Issuer is a party or by which it is bound, or in the creation or imposition of any Lion upon any of its properties pursuant to the terms of such indenture, agreement, mortgage, deed of trust or other such instrument, other than any Lien created or imposed pursuant to the terms of the Transaction Documents, or violate any law or, to the best 79 83 of the Issuer's knowledge, any material order, rule or regulation applicable to the Issuer of any court or of any federal or state regulatory body, administrative agency or other governmental instrumentality having jurisdiction over the Issuer or any of its properties. (e) NO PROCEEDINGS. There are no Proceedings or investigations to which the Issuer, or any of the Issuer's Affiliates, is a party pending, or, to the knowledge of Issuer, threatened, before any court, regulatory body, administrative agency or other tribunal or governmental instrumentality (A) asserting the invalidity of the Transaction Documents, (B) seeking to prevent the issuance of any of the Notes or the consummation of any of the transactions contemplated by the Transaction Documents or (C) seeking any determination or ruling that would materially and adversely affect the performance by the Issuer of its obligations under, or the validity or enforceability of, the Transaction Documents. (f) APPROVALS. All approvals, authorizations, consents, orders or other action's of any Person, or of any court, governmental agency or body or official, required in connection with the execution and delivery of the Transaction Documents and with the valid and proper authorization, issuance and sale of the Notes pursuant to the Indenture (except approvals of State securities officials under the Blue Sky Laws), have been or will be taken or obtained on or prior to the applicable Delivery Date. (g) PLACE OF BUSINESS. The Issuer's principal place of business and chief executive office is located at the address specified in the Specific Indenture Terms. (h) TRANSFER AND ASSIGNMENT. Upon the delivery to the Indenture Trustee of the Lease Contracts and the filing of the financing statements described in Sections 4.01(f) and 4.02(b)(vi) hereof, the Indenture Trustee for the benefit of the Noteholders shall have a first priority perfected security interest in the Lease Receivables, the Lease Contracts, the Equipment (to the extent owned by the Issuer) initially located in the Enumerated States, and in the proceeds thereof, except for Liens permitted under Section 11.02(a) and limited to the extent set forth in Section 9-306 of the UCC as in effect in the applicable jurisdiction and provided, that, the security interest of the Indenture Trustee for the benefit of the Noteholders with respect to the Equipment will not be a perfected security interest with respect to any Equipment located initially in any States other than the Enumerated States and with respect to Equipment underlying Loan Contracts. All filings (including, without limitation, UCC filings) as are necessary in any jurisdiction to perfect the ownership or other interest of the Indenture Trustee in the Trust Estate (other than that Equipment in such other States or Equipment underlying Loan Contracts), including the transfer of the Lease Contracts and the payments to become due thereunder, have been made. (i) PARENT OF THE ISSUE. The Company is the registered owner of all of the issued and outstanding common stock of the Issuer, all of which common stock has been validly issued, is fully paid and nonassessable and is owned of record, free and clear of all mortgages, assignments, pledges, security interests, warrants, options and rights to purchase. (j) LEASE ACQUISITION AGREEMENT. As of the Initial Delivery Date the Issuer has entered into the Lease Acquisition Agreement with the Company relating to its acquisition of the Lease 80 84 Contracts, the Lease Receivables and the Equipment, and the representations and warranties made by the Company relating to the Lease Contracts, Lease Receivables and the Equipment have been validly assigned to and are for the benefit of the Issuer, the Indenture Trustee, MBIA and the Noteholders and such representations and warranties are true and correct in all material respects. (k) BULK TRANSFER LAWS. The transfer, assignment and conveyance of the Lease Contracts, the Equipment and the Lease Receivables by the Company to the Issuer pursuant to the Lease Acquisition Agreement or by the Issuer pursuant to the Indenture is not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. (1) THE LEASE CONTRACTS. The Issuer hereby restates and makes each of the representations and warranties with respect to the Lease Contracts, the Lease Receivables and the Equipment that. are made by the Company in Section 3.01 of the Lease Acquisition Agreement. SECTION 11.02 COVENANTS. The Issuer hereby makes the following covenants for the benefit of the Indenture Trustee, MBIA and the Noteholders, on which the Indenture Trustee relies in accepting the Trust Estate in trust and in authenticating the Notes. Such covenants are made as of the Initial Delivery Date, but shall survive the transfer, grant and assignment of the Trust Estate to the Indenture Trustee. (a) NO LIENS. Except for the conveyances and grant of security interests hereunder, the Issuer will not sell, pledge, assign or transfer to any other Person, or grant, create, incur, assume or suffer to exist any Lien on any Trust Estate now existing or hereafter created, or any interest therein prior to the termination of the Indenture pursuant to Section 5.01 hereof, the Issuer will notify the Indenture Trustee of the existence of any Lien on any Trust Estate immediately upon discovery thereof, and the Issuer shall defend the right, title and interest of the Indenture Trustee in, to and under the Trust Estate now existing or hereafter created, against all claims of third parties claiming through or under the Issuer; PROVIDED, HOWEVER, that nothing in this Section 11.02(a) shall prevent or be deemed to prohibit the Issuer from suffering to exist upon any of the Trust Estate any Liens for municipal or other local taxes and other governmental charges if such taxes or governmental charges shall not at the time be due and payable or if the Issuer shall currently be contesting the validity thereof in good faith by appropriate proceedings and shall have set aside on its books adequate reserves with respect thereto. (b) DELIVERY OF COLLECTIONS. The Issuer agrees to hold in trust and promptly pay to the Servicer all amounts received by the Issuer in respect of the Trust Estate (other than amounts distributed to or for the benefit of the Issuer pursuant to Article Twelve hereof). (c) OBLIGATIONS WITH RESPECT TO LEASE CONTRACTS. The Issuer will duly fulfill all obligations on its part to be fulfilled under or in connection with each Lease Contract and will do nothing to impair the rights of the Indenture Trustee (for the benefit of the Noteholders and MBIA) in the Lease Receivables, the Lease Contracts and any other Trust Estate. As long as there is no event of default under the applicable Lease Contract, the Issuer will not disturb the Customer's quiet and peaceful possession of the related Equipment and the Customer's unrestricted use thereof for its intended purpose. 81 85 (d) COMPLIANCE WITH LAW. The Issuer will comply, in all material respects, with all acts, rules, regulations, orders, decrees and directions of any governmental authority applicable to the Lease Contracts or any part thereof; provided, however, that the Issuer may contest any act, regulation, order, decree or direction in any reasonable manner which shall not materially and adversely affect the rights of the Indenture Trustee (for the benefit of the Noteholders and MBIA) in the Lease Receivables, the Lease Contracts and the related Equipment. The Issuer will comply, in all material respects, with all requirements of law applicable to the Issuer. (e) PRESERVATION OF SECURITY INTEREST. The Issuer shall execute and file such continuation statements and any other documents which may be required by law to fully preserve and protect the interest of the Indenture Trustee (for the benefit of the Noteholders and MBIA) in the Trust Estate; PROVIDED, that the Issuer shall not be required to file financing statements or any related agreements or documentation with respect to any Equipment not initially located in the Enumerated States or with respect to any Equipment underlying Loan Contracts. (f) MAINTENANCE OF OFFICE, ETC. The Issuer will not, without providing 30 days notice to the Indenture Trustee and MBIA and without filing such amendments to any previously filed financing statements as the Indenture Trustee or MBIA may require or as may be required in order to maintain the Indenture Trustee's perfected security interest in the Trust Estate (other than Equipment underlying Loan Contracts), (a) change the location of its principal executive office, or (b) change its name, identity or corporate structure in any manner which would make any financing statement or continuation statement filed by the Issuer in accordance with the Servicing Agreement or the Indenture seriously misleading within the meaning of Article 9-402(7) of any applicable enactment of the UCC. (g) FURTHER ASSURANCES. Except as set forth in Section 11.02(e), the Issuer will make, execute or endorse, acknowledge, and file or deliver to the Indenture Trustee from time to time such schedules, confirmatory assignments conveyances, transfer endorsements, powers of attorney, certificates, reports and other assurances or instruments and take such further steps relating to the Trust Estate, as the Indenture Trustee may request and reasonably require. (h) NOTICE OF LIENS. The Issuer shall notify the Indenture Trustee and MBIA promptly after becoming aware of any Lien on any Trust Estate, except for any liens for municipal of other local taxes if such taxes shall not at the time be due or payable without penalty or if the Issuer shall currently be contesting the validity thereof in good faith by appropriate proceedings and shall have set aside on its books adequate reserves with respect thereto. (i) ACTIVITIES OF THE ISSUER. The Issuer (a) shall engage in only (1) the acquisition, ownership, leasing, selling and pledging of the property acquired by the Issuer pursuant to the Lease Acquisition Agreement, and causing the issuance of, receiving and selling the Notes issued pursuant to the Indenture and (2) the exercise of any powers permitted to corporations under the corporate law of the applicable Issuer State of Incorporation which are incidental to the foregoing or necessary to accomplish the foregoing and the Issuer shall incur no debt other than trade payables and expense accruals in connection with its operations in the normal course of business; (b) will (1) maintain its 82 86 books and records separate From the books and records of any other entity, (2) maintain separate bank accounts and no funds of the Issuer shall be commingled with funds of any other entity, (3) keep in full effect its existence, rights and franchises as a corporation under the laws of the applicable Issuer State of Incorporation, and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to protect the validity and enforceability of the Indenture; and (c) will not (1) dissolve or liquidate in whole or in part, (2) own any subsidiary or lend or advance any moneys to, or make an investment in, any Person, (3) make any capital expenditures, (4)(A) commence any case, proceeding or other action under any existing or future bankruptcy, insolvency or similar law seeking to have an order for relief entered with respect to it, or seeking reorganization, arrangement adjustment wind-up, liquidation, dissolution, composition or other relief with respect to it or its debts, (B) seek appointment of a receiver, trustee, custodian or other similar official for it or any part of its assets, (C) make a general assignment for the benefit of creditors, or (D) take any action in furtherance of, or consenting or acquiescing in, any of the foregoing, (5) guarantee (directly or indirectly), endorse or otherwise become contingently liable (directly or indirectly) for the obligations of, or own or purchase any stock, obligations or securities of or any other interest in, or make any. capital contribution to, any other Person, (6) merge or consolidate with any other Person, (7) engage in any other action that bears on whether the separate legal identity of the Issuer will be respected, including without limitation (A) holding itself out as being liable for the debts of any other party or (B) acting other than in its corporate name and through its duly authorized officers or agents, or (8) create, incur, assume, or in any manner become liable in respect of any indebtedness other than trade payables and expense accruals incurred in the ordinary course of business and which are incidental to its business purpose; provided, however, that the Issuer may take any action prohibited by this clause (8) if (y) the Issuer shall cause, prior to the taking of such action, an Opinion of Counsel experienced in federal bankruptcy matters, in substance satisfactory to the Indenture Trustee, the Noteholders, MBIA and the Rating Agencies, to be delivered to the Indenture Trustee, the Noteholders, MBIA and the Rating Agencies and (z) the Rating Agencies shall indicate in writing that the taking of such action will not affect the then current rating of any Series of Notes. The Issuer shall not amend any article in its Certificate of Incorporation that deals with any matter discussed above without the prior written consent of MBIA. On or before each April 15, so long as any of the Notes are Outstanding, the Issuer shall furnish to each Noteholder, the Indenture Trustee and MBIA, an Officer's Certificate confirming that the Issuer has complied with its obligations under this Section 11.02(i). (j) DIRECTORS. The Issuer agrees that at all times, at least two of the directors and one of the executive officers of the Issuer (or two persons, one of whom is serving as both a director and an executive officer) will not be a director, officer or employee of any direct or ultimate parent, or Affiliate of the parent or of the Issuer; provided, however, that such independent directors and officers may serve in similar capacities for other "special purpose corporations" formed by the Company and its Affiliates. The Issuer's Certificate of Incorporation shall at all times provide that such independent directors shall have a fiduciary duty to the Holders of the Notes. 83 87 (k) CONSOLIDATED RETURN. The Issuer and the Company are members of an affiliated group within the meaning of section 1504 of the Code which will file, a consolidated return for federal income tax purposes at all times until the termination of the Indenture. (1) PRESERVATION OF THE EQUIPMENT. The Issuer warrants that it is the lawful owner and possessor of the Equipment (except with respect to Equipment in which it has a valid security interest) and that it will warrant and defend such Equipment against all Persons, claims and demands whatsoever. The Issuer shall not assign, sell, pledge, or exchange, or in any way encumber or otherwise dispose of the Equipment, except as permitted under the Indenture. (m) TAXABLE INCOME FROM THE LEASE CONTRACTS. The Issuer shall treat the Notes issued by it as debt and shall treat the Lease Contracts as owned by it for Federal, state and local income tax purposes, and the affiliated group of which the Issuer is a member within the meaning of section 1504 of the Code shall treat the Notes issued by the Issuer as debt of the Issuer and shall treat the Lease Contracts as owned by the Issuer for federal, state and local income tax purposes, and the Issuer and such affiliated group shall report and include in the computation of the Issuer's gross income for such tax purposes the rental and other income from the Lease Contracts, and shall deduct the interest paid or accrued with respect to the Notes in accordance with its applicable method of accounting for such purposes. (n) MAINTENANCE OF OFFICE OR AGENCY. The Issuer will maintain an office or agency within the United States of America where Notes may be presented or surrendered for payment, where Notes may be surrendered for registration of transfer or exchange and where notices and demand to or upon the Issuer in respect of the Notes and the Indenture may be served. The Issuer hereby initially appoints the Indenture Trustee as the Paying Agent and its Corporate Trust Office as the office for each of said purposes. The Issuer will give 30 days prior written notice to the Indenture Trustee, MBIA and the Noteholders of any change in the identity of the Paying Agent or the location, of any such office or agency. If at any time the Issuer shall fail to maintain any such office or agency or shall fail to furnish the Indenture Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Indenture Trustee, and the Issuer hereby appoints the Indenture Trustee its agent to receive all such presentations, surrenders, notices and demands. (o) ENFORCEMENT OF SERVICING AGREEMENT AND LEASE ACQUISITION AGREEMENT. The Issuer will take all actions necessary, and diligently pursue all remedies available to it, to the extent commercially reasonable, to enforce the obligations of the Servicer under the Servicing Agreement and the Company under the Lease Acquisition Agreement and to secure its rights thereunder. (p) ISSUER MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. The Issuer shall not consolidate or merge with or into any other Person or convey or transfer its properties and assets substantially as an entirety to any Person, unless: (i) the Person (if other than the Issuer) formed by or surviving such consolidation or merger or which acquires by conveyance or transfer the properties and 84 88 assets of the Issuer substantially as an entirety shall be a Person organized and existing as a limited purpose corporation under the laws of the United States of America or any State thereof and shall have expressly assumed, by an indenture supplemental hereto, executed and delivered to the Indenture Trustee and MBIA, in form and substance reasonably satisfactory to the Indenture Trustee and MBIA, the obligation to make due and punctual payments of the principal of and interest on all of the Notes and to perform every covenant of the Indenture on the part of the Issuer to be performed or observed; and (ii) the Issuer shall have caused the Indenture Trustee to have received a letter from the Rating Agencies to the effect that the rating issued with respect to the Notes is confirmed, notwithstanding the consummation of such merger, consolidation, transfer or conveyance together with the consent of MBIA to such merger, consolidation transfer or conveyance; and (iii) immediately after giving effect to such transaction, no Event of Default or Default shall have occurred and be continuing; and (iv) the Issuer shall have delivered to the Indenture Trustee and MBIA an Officer's Certificate and an Opinion of Counsel each stating that such consolidation, merger, conveyance or transfer and such Supplement comply with this Article Eleven and that all conditions precedent herein provided for relating to such transaction have been complied with; (v) such consolidation, merger, conveyance or transfer shall be on such terms as shall fully preserve the lien and security of the Indenture, the perfection and priority thereof and the rights and powers of the Indenture Trustee, MBIA and the Holders of the Notes under the Indenture; and (vi) the surviving corporation shall be a "special purpose corporation"; i.e., shall have an organizational charter substantially similar to the Certificate of Incorporation of the Issuer including specific limitations on the business purposes, and provisions for independent directors; and (vii) MBIA shall have given its prior written consent, which consent shall not be unreasonably Withheld or delayed. (q) SUCCESSOR SUBSTITUTED. Upon any consolidation or merger, or any conveyance or transfer of the properties and assets of the Issuer substantially as an entirety in accordance with Section 11.02(p) hereof, the Person formed by or surviving such consolidation or merger (if other than the Issuer) or the Person to which such conveyance or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under the Indenture with the same effect as if such Person had been named as the Issuer herein. In the event of any such conveyance or transfer, the Person named as the "Issuer" in the first paragraph of the Specific Indenture Terms or any successor which shall theretofore have become such in the manner prescribed in this Article shall be released from its liabilities as obligor and maker on all the Notes 85 89 and from its obligations under the Indenture and may be dissolved, wound-up and liquidated at any time thereafter. (r) USE OF PROCEEDS. The proceeds from the sale of the Notes will be used by the Issuer (i) to pay the Existing Indebtedness, (ii) to pay the expenses associated with this transaction, and (iii) for general corporate purposes, including the cost of funding additional Lease Contracts. None of the transactions contemplated in the Indenture, the Lease Acquisition Agreement or the Servicing Agreement (including the use of the proceeds from the sale of the Notes) will result in a violation of Section 7 of the Securities and Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. The Issuer does not own or intend to carry or purchase any "margin security" within the meaning of said Regulation G, including margin securities originally issued by it or any "margin stock" within the meaning of said Regulation U. (s) NOTICE OF TRIGGER EVENTS. Upon the Issuer's obtaining knowledge of the occurrence of any Trigger Event, the Issuer shall within one Business Day of obtaining such knowledge notify MBIA and the Noteholders of such occurrence. SECTION 11.03 OTHER MATTERS AS TO THE ISSUER. (a) LIMITATION ON LIABILITY OF DIRECTORS, OFFICERS OR EMPLOYEES OF THE ISSUER. The directors, officers, or employees of the Issuer shall not be under any liability to the Trust, MBIA, the Indenture Trustee, the Noteholders, the Company, the Servicer, the Back-up Servicer or any other Person hereunder or pursuant to any document delivered hereunder, it being expressly understood that all such liability is expressly waived and released as a condition of, and as consideration for, the execution of the Indenture and the issuance of the Notes. (b) PARTIES WILL NOT INSTITUTE PROCEEDINGS. So long as the Indenture is in effect, none of the parties hereto or any Affiliate thereof will file any involuntary petition or otherwise institute any bankruptcy, reorganization, arrangement, insolvency or liquidation proceeding or other proceeding under any federal or state bankruptcy or similar law against the Issuer. 86 90 ARTICLE TWELVE ACCOUNTS AND ACCOUNTINGS SECTION 12.01 COLLECTION OF MONEY. Except as otherwise expressly provided herein, the Indenture Trustee may demand payment or delivery of, and shall receive and collect, directly and without intervention or assistance of any fiscal agent or other intermediary, all money and other property payable to or receivable by the Indenture Trustee pursuant to the Indenture. The Indenture Trustee shall, upon request from the Servicer, provide the Servicer with sufficient information regarding the amount of collections with respect to the Lease Contracts received by the Indenture Trustee in the ACH Account (if such account is held by the Indenture Trustee) and the other accounts held in the name of the Indenture Trustee to permit the Servicer to perform its duties under the Servicing Agreement. The Indenture Trustee shall hold all such money and property so received by it as part of the Trust Estate and shall apply it as provided in the Indenture. If any lease Contract becomes a Defaulted Lease Contract, the Indenture Trustee, upon Issuer or Servicer request may, and upon the request of MBIA or the Holders of a majority in Outstanding Principal Amount of all Notes shall, take such action as may be appropriate to enforce such payment or performance, including the institution and prosecution of appropriate Proceedings. Any such action shall be without prejudice to any right to claim a Default or Event of Default under the Indenture and to proceed thereafter as provided in Article Six hereof. SECTION 12.02 COLLECTION ACCOUNT; ADVANCE PAYMENT ACCOUNT; ACH ACCOUNT; REDEMPTION ACCOUNT. (a) Prior to the Initial Delivery Date, the Indenture Trustee shall open and maintain a trust account at its Corporate Trust Office (the "Collection Account") in the name of the Indenture Trustee for the benefit of the Noteholders and MBIA, for the receipt of (i) if applicable, payments remitted to the Indenture Trustee by the Servicer and, if applicable, the ACH Bank pursuant to Section 3.03(a) and (b) and Section 3.04 of the Standard Servicing Terms, (ii) amounts transferred from the Advance Payment Account in accordance with Section 3.03(c) of the Standard Servicing Terms and from the Cash Collateral Account in accordance with Section 12.03(d)(i) and (iii) hereof, (iii) proceeds of claims made under any of the Note Insurance Policies, in accordance with Article Eight hereof, upon receipt, (iv) with respect to the first Payment Date for any Series of Term Notes, an initial deposit by the Issuer equal to the number of days' interest on such Series of Term Notes as may be specified in the applicable Supplement and (v) any Reinvestment Income. Funds in the Collection Account shall not be commingled with any other monies. All payments to be made from time to time by the Issuer to the Noteholders out of funds in the Collection Account pursuant to the Indenture shall be made by the Indenture Trustee or the Paying Agent of the Issuer. All monies deposited from time to time in the Collection Account pursuant to the Indenture shall be held by the Indenture Trustee as part of the Trust Estate as herein provided. (b) Upon Issuer Order, the Indenture Trustee shall invest the funds in the Collection Account in Eligible Investments; provided, however, that all monies on deposit in the Collection 87 91 Account pursuant to Section 12.02(a)(iii) hereof shall remain uninvested. The Issuer Order shall specify the Eligible Investments in which the Indenture Trustee shall invest, shall state that the same are Eligible Investments and shall further specify the percentage of funds to be invested in each Eligible Investment. No such Eligible Investment shall mature later than the second Business Day preceding the next following Payment Date and shall not be sold or disposed of prior to its maturity; provided that, Eligible Investments of the type described in clause (i) of the definition of Eligible Investments may mature on such Payment Date. In the absence of a Issuer Order, the Indenture Trustee shall invest funds in the Collection Account in Eligible Investments described in clause (vii) of the definition thereof. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the Noteholders and MBIA. The Indenture Trustee shall provide to the Servicer and MBIA monthly written confirmation of such investments, describing the Eligible Investments in which such amounts have been invested. Any funds not so invested must be insured by the Federal Deposit Insurance Corporation. (c) Any income or other gain from investments in Eligible Investments as outlined in (b) above shall be credited to the Collection Account and any loss resulting from such investments shall be charged to such account; provided, however, that the Issuer shall make or cause to be made no later than the applicable Payment Date a deposit to the Collection Account to the extent of any losses therein caused as a result of the Issuer's investment instructions provided for herein. The Indenture Trustee shall riot be liable for any loss incurred on any funds invested in Eligible Investments pursuant to the provisions of this Section 12.02 (other than in its capacity as obligor under any Eligible Investment). (d) On each Payment Date if either no Default or Event of Default shall have occurred and be continuing or a Default or Event of Default shall have occurred and be continuing but the entire Outstanding Principal Amount of all Notes shall not have been declared due and payable pursuant to Section 6.02 hereof, then on such Payment Date, after making all transfers and deposits to the Collection Account pursuant to Section 12.02(a) hereof, the Indenture Trustee shall withdraw from the Collection Account (other than amounts representing payments of Lease Receivables due after the Calculation Date immediately preceding such Payment Date) including the Reinvestment Income therein, and shall make the following disbursements in the following order in accordance with the provisions of and instructions on the Monthly Servicer's Report; provided, however, that W the proceeds of claims. under any of the Note Insurance Policies shall be used solely to pay the amounts due under paragraphs (vi) and (vii) of this Section 12.02(d) in accordance with the terms of the applicable Note Insurance Policy; (y) the Indenture Trustee shall withdraw from the Collection Account and make interest payments based on the Outstanding Principal Amount of each Series of Notes even if it shall not have received the Monthly Servicer's Report; and (z) if there are insufficient funds to make the payments specified in clause (vi) or (vii) below, then the amount available to be paid pursuant to such clause will be allocated to each Series of Notes based on the applicable Pro Rata Share, provided, however, that proceeds of a claim under an Note Insurance Policy to pay any Outstanding Principal Amount upon the Stated Maturity of a Series of Notes shall be used solely to pay such Outstanding Principal Amount after giving effect to the application of funds available to pay the Pro Rata Share of the Principal Distribution Amount of each Outstanding Series: 88 92 (i) to pay to the Servicer: (A) the Servicer Fee then due for all Notes; (B) the Reinvestment Income (except to the extent previously remitted to the Servicer); (C) the amounts necessary to reimburse the Servicer and any successor Servicer and subservicer as provided in Section 3.09(a) of the Standard Servicing Terms for reasonable costs and expenses incurred by the Servicer (including reasonable attorney's fees and out-of-pocket expenses) in connection with the realization, attempted realization or enforcement of rights and remedies upon Defaulted Lease Contracts, from amounts received as Recoveries from any Defaulted Lease Contracts; (D) any amounts received from customers to pay the taxes described in Section 3.07 of the Standard Servicing Terms, to the extent deposited in the Collection Account; (E) all amounts received in respect of Lease Receivables as to which the Servicer has made an unrecovered Servicer Advance, to the extent of such Servicer Advance; and (F) the amount necessary to reimburse the Servicer for any Nonrecoverable Advance; (ii) to pay to the Indenture Trustee the Trustee Fee then due for all Notes, (iii) to pay to the Back-up Servicer the Back-up Servicer Fee then due for all Notes; (iv) to pay to MBIA the MBIA Premium then due for all Notes; (v) [reserved) (vi) to pay the interest due on that Payment Date on all Series of Outstanding Notes and any overdue interest, to be applied as provided in Section 2.08 hereof; (vii) to pay the Principal Distribution Amount on all Series of Outstanding Notes, to be applied to the payment of Note principal as provided in Section 2.08 hereof; (viii) if so specified in the Specific Indenture Terms, to pay any premiums due under any Insurance Policies maintained by the Issuer or the Servicer with respect to the Lease Assets and with respect to which the Indenture Trustee shall have received notice of nonpayment, and then, unless a Trigger Event has occurred, to deposit into the Cash Collateral Account an amount necessary to bring the balance therein to an amount equal to the Cash Collateral Account Required Balance; (ix) to pay to MBIA, any amounts previously paid by MBIA under any, Note Insurance Policy and not heretofore repaid, together with interest thereon in accordance with the Insurance Agreement; (x) to pay to a successor Servicer after a successor Servicer has been appointed pursuant to Section 6.02 of the Standard Servicing Terms, the Additional 89 93 Servicer Fee, if any, and to pay any successor Servicer, MBIA or the Indenture Trustee, any Transition Costs incurred by any successor Servicer, MBIA (solely pursuant to Section 6.02(d) of the Standard Servicing Terms) or the Indenture Trustee and not previously reimbursed; (xi) on and after the Payment Date following a Trigger Event, apply any remaining funds to the payment of Note principal on all Series of Outstanding Notes, in the proportion in which the Outstanding Principal Amount of each Series represents of the Outstanding Principal Amount of all Series; (xii) to pay to the Servicer, any other amounts due the Servicer as expressly provided herein and in the Servicing Agreement; (xiii) to pay to MBIA, any other amounts due under the Insurance, Agreement; (xiv) to pay to the Indenture Trustee and the Back-up Servicer, any other amounts due to the Indenture Trustee or the Back-up Servicer as expressly provided herein and in the Servicing Agreement; and (xv) to pay any additional fees and expenses payable to a Warehouse Lender pursuant to a Supplement or the Warehouse Funding Agreement for a Series of Warehouse Notes; and to remit any excess funds to or at the direction of the Issuer in accordance with the instructions on the Monthly Servicer's Report. (e) Prior to the Initial Delivery Date, the Issuer shall cause the Indenture Trustee to open and maintain a trust account at the Corporate Trust Office (the "Advance Payment Account") in the name of the Indenture Trustee for the benefit of Noteholders and MBIA, for the receipt and withdrawal of Advance Payments in accordance with Section 3.03(c) of the Standard Servicing Terms. The Indenture Trustee shall transfer moneys from the Advance Payment Account to the Collection Account on the applicable Determination Date in accordance with Section 3.03(c) of the Standard Servicing Terms. Moneys in the Advance Payment Account shall be invested in Eligible Investments in the name of the Indenture Trustee that mature no later dm the relevant Determination Date. (f) If payments on the Lease Contracts are made by means of electronic transfers from a Customer bank account, the Servicer shall either remit such payments to the Collection Account in accordance with Section 3.03(a) of the Standard. Servicing Terms, or prior to the Delivery Date the Issuer shall cause the Indenture Trustee to open and maintain a trust account in the corporate trust department of the ACH Bank (the "ACH Account") in the name of the Indenture Trustee for the benefit of Noteholders and MBIA for the receipt of such collections in accordance with the Servicing Agreement. The Issuer shall make an initial deposit into the ACH Account (the "Initial ACH Deposit") in the amount specified in the Specific Indenture Terms. The Indenture Trustee shall transfer moneys from the ACH Account to the Collection Account on the applicable Determination Date in order to comply with Section 3.03(b) of the Standard Servicing Terms. 90 94 Moneys in the ACH Account shall be invested in Eligible Investments that mature no later than the relevant Determination Date. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the Noteholders and MBIA. (g) Prior to the Initial Delivery Date, the Issuer shall cause the Indenture Trustee to open and maintain a trust account at the Corporate Trust Office (the "Redemption Account") in the name of the Indenture Trustee for the benefit of Noteholders and MBIA, for the receipt of the Redemption Price of any Notes to be redeemed in accordance with Article Ten hereof. On any Redemption Date, the Indenture Trustee shall withdraw the applicable Redemption Price from, the Redemption Account and the Paying Agent shall remit the Redemption Price to the applicable Noteholders in accordance with Section 10.04 hereof. Moneys in the Redemption Account shall be invested in Eligible Investments that mature no later than two Business Days prior to the relevant Redemption Date. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the Noteholders and MBIA. Any monies deposited in the Redemption Account for purposes of redeeming Notes pursuant to Article Ten hereof shall, subject to Section 7.16 hereof, remain in the Redemption Account until used to redeem such Notes. SECTION 12.03 CASH COLLATERAL ACCOUNT. (a) Prior to the initial Delivery Date, the Issuer shall cause the Indenture Trustee to open and maintain a trust account at the Corporate Trust Office (the "Cash Collateral Account") in the name of the Indenture Trustee for the benefit of the Noteholders and MBIA, for the receipt of (i) any Cash Collateral Account Deposits required to be made with respect to a Series of Notes, (ii) deposits pursuant to Section 12.02(d)(viii), and (iii) any other deposits required under an Indenture Supplement or the Specific Indenture Terms. Monies received in the Cash Collateral Account will be invested at the written direction of the Issuer in Eligible Investments during the term of the Indenture, and any income or other gain realized from such investment, shall be held by the Indenture Trustee in the Cash Collateral Account as part of the Trust Estate as security for the Notes subject to disbursement and withdrawal as herein provided. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the Noteholders and MBIA. Monies shall be subject to withdrawal in accordance with Section 12.03(d) hereof. (b) Upon Issuer Order all or a portion of the Cash Collateral Account shall be invested and reinvested at the Issuer's written direction in one or more Eligible Investments. In the absence of a Issuer Order, the Indenture Trustee shall invest funds in the Cash Collateral Account in Eligible Investments described in clause (vii) of the definition thereof. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the Noteholders an MBIA. All income or other gain from such investments shall be credited to such Cash Collateral Account and any loss resulting from such investments shall be charged to such Cash Collateral Account; provided, however, that the Issuer shall make or cause to be made on any Determination Date a deposit to the Cash Collateral Account to the extent of any losses therein caused as a result of the Issuer's investment instructions. No Eligible Investment shall mature later than the Business Day preceding the next following Determination Date and shall not be sold or disposed of prior to its maturity. Eligible Investments shall be made in the name of the Indenture Trustee for the benefit of the 91 95 Noteholders and MBIA. The Indenture Trustee shall provide to the Servicer and MBIA monthly written confirmation of such investments, describing the Eligible Investments in which such amounts have been invested. Any funds not so invested must be insured by the Federal Deposit Insurance Corporation. (c) If any amounts invested as provided in Section 12.03(b) hereof shall be needed for disbursement from the Cash Collateral Account as set forth in Section 12.03(d) hereof, the Indenture Trustee shall cause such investments of such Cash Collateral Account to be sold or otherwise converted to cash to the credit of such Cash Collateral Account. The Indenture Trustee shall not be liable for any investment loss resulting from investment of money in the Cash Collateral Account in any Eligible Investment in accordance with the terms hereof (other than in its capacity as obligor under any Eligible Investment). (d) Disbursements from the Cash Collateral Account shall be made, to the extent funds therefor are available, only as follows: (i) in the event that the amount in the Collection Account at 10:00 a.m. Minneapolis time on the Determination Date immediately preceding any Payment Date (other than amounts representing payments of Lease Receivables due after the Calculation Date immediately preceding such Payment Date) is less than the sum of the amounts required to be paid from the Collection Account on such Payment Date pursuant to clauses (i) through (vi) of Section 12.02(d) hereof plus the Principal Distribution Amount determined in accordance with clauses (a)(i) and (b) of the definition thereof, the Indenture Trustee shall withdraw funds from the Cash Collateral Account on or prior to 4:00 p.m. New York time on such Determination Date to the extent necessary to make such payments on such Payment Date and deposit such funds into the Collection Account; (ii) subject to subparagraph (iii) of this Section 12.03(d), in the event that on any Payment Date the balance in the Cash Collateral Account equals an amount greater than the Cash Collateral Account Required Balance (after giving effect to the distributions listed in Section 12.02(d)(i) through (xiv) hereof on such Payment Date), the Indenture Trustee shall withdraw funds in the Cash Collateral Account in such amount so that the remaining amount in the Cash Collateral Account after such withdrawal will equal the Cash Collateral Account Required Balance, and disburse such amounts to or at the direction of the Issuer pursuant to instructions on the Monthly Servicer's Report; (iii) in the event that on any Payment Date a Trigger Event has occurred, the Indenture, Trustee shall withdraw all funds from the Cash Collateral Account and deposit such funds into the Collection Account for disbursement in accordance with the provisions of Section 12.02(d) hereof; and (iv) subject to subparagraph (iii) of this Section 12.03(d), in the event that on any Warehouse Funding Date the balance in the Cash Collateral Account, after 92 96 giving effect to any Warehouse Funding occurring on such Warehouse Funding Date, equals an amount greater than the Cash Collateral Account Required Balance, the Indenture Trustee shall withdraw funds in the Cash Collateral Account in such amount so that the remaining amount in the Cash Collateral Account after such withdrawal will equal the Cash Collateral Account Required Balance, and disburse such amounts to or at the direction of the Issuer. SECTION 12.04 REPORTS BY INDENTURE TRUSTEE TO, MBIA AND NOTEHOLDERS. (a) On each Payment Date the Indenture Trustee shall account to each Holder of Notes on which payments of principal and interest are then being made the amount which represents principal and the amount which represents interest, and shall contemporaneously advise the Issuer and MBIA of all such payments. The Indenture Trustee may satisfy its Notes under this Section 12.04 by delivering the Monthly Servicer's Report to each such Holder of the Notes, MBIA and the Issuer. On or before the 15th day prior to any final Payment Date the Indenture Trustee shall provide notice to MBIA and the Holders of the applicable Series of Notes of the Final Payment Date for such Notes. Such notice shall include (1) a statement that interest shall cease to accrue as of the last day preceding the date on which the Final Payment Date occurs, and (2) shall specify the place or places at which presentation and surrender may be made. (b) The Indenture Trustee shall, on a monthly basis beginning on the first Calculation Date, confirm the credit rating or, if more than one credit rating has been assigned, each such credit rating, of each institution in which funds are invested pursuant to clause (vi) of the definition of Eligible Investments and shall promptly notify the Noteholders and MBIA if any such credit rating has been lowered. (c) At least annually, or as otherwise required by law, the Indenture Trustee shall distribute to Noteholders any information returns or other tax information or statements as are required by applicable tax law to be distributed to the Noteholders. The Servicer shall prepare or cause to be prepared all such information for distribution by the Indenture Trustee to the Noteholders. 93 97 ARTICLE THIRTEEN PROVISIONS OF GENERAL APPLICATION SECTION 13.01 GENERAL PROVISIONS. All of the provisions of this Article shall apply to the Standard Indenture Terms and each Specific Indenture Terms. SECTION 13.02 ACTS OF NOTEHOLDERS. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by the Indenture to be given or taken by Noteholders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Noteholders in person or by an agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Indenture Trustee, and, where it is hereby expressly required, to the Issuer. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Noteholders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of the Indenture and (subject to Section 7.01 hereof) conclusive in favor of the Indenture Trustee and the Issuer, if made in the manner provided in this Section 13.02. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved in any manner which the Indenture Trustee deems sufficient. (c) The ownership of Notes shall be proved by the Note Register. (d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Note shall bind the Holder of every Note issued upon the registration of transfer thereof or in exchange therefor in lieu thereof, in respect of anything done, omitted or suffered to be done by the Indenture Trustee or the Issuer in reliance thereon, whether or not notation of such action is made upon such Note. SECTION 13.03 NOTICES, ETC., TO INDENTURE TRUSTEE, MBIA, ISSUER AND SERVICER. Any request, demand, authorization, direction, notice, consent, waiver or Act of Noteholders or other document provided or permitted by the Indenture to be made upon, given or furnished to, or filed with any party hereto shall be sufficient for every purpose hereunder if in writing and telecopied or mailed, first-class postage prepaid and addressed to the appropriate address below: (a) to the Indenture Trustee at the address specified in the Specific Indenture Terms, or at any other address previously furnished in writing to the Issuer, MBIA, the Noteholders and the Servicer; or 94 98 (b) to MBIA at Municipal Bond Investors Assurance Corporation, 113 King Street, Armonk, New York 10504, Attention: Structured Finance Surveillance Department, or at any other address previously furnished in writing by MBIA to the Indenture Trustee, the Noteholders, the Servicer and the Issuer; or (c) to the Issuer at the address specified in the Specific Indenture Terms, or at any other address previously furnished in writing to the Indenture Trustee, MBIA, the Noteholders and the Servicer by the Issuer; or (d) to the Servicer at the address specified in the Specific Indenture Terms, or at any other address previously furnished in writing to the Indenture Trustee, MBIA, the Noteholders and the Issuer. (e) to each of (i) Standard & Poors, Attention: Asset Backed Surveillance Group, 26 Broadway, New York, NY 10004, and (ii) Moody's Investor Service, 99 Church Street, New York, NY 10007. SECTION 13.04 NOTICES TO NOTEHOLDERS; WAIVER. Where the Indenture provides for notice to Noteholders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Noteholder affected by such event, at his address as it appears on the Note Register not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case in which notice to Noteholders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Noteholder shall affect the sufficiency of such notice with respect to other Noteholders, and any notice which is mailed in the manner herein provided shall conclusively be presumed to have been duly given. Where the Indenture provides for notice in any manner, such notice may be waived in writing by any Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Noteholders shall be filed with the Indenture Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of regular mail service as a result of a strike, work stoppage or similar activity, it shall be impractical to mail notice of any event to Noteholders when such notice is required to be given pursuant to any provision of the Indenture, then any manner of giving such notice as shall be satisfactory to the Indenture Trustee shall be deemed to be a sufficient giving of such notice. SECTION 13.05 EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. 95 99 SECTION 13.06 SUCCESSORS AND ASSIGNS. All covenants and agreements in the Indenture by the Issuer shall bind its successors and assigns, whether so expressed or not. There shall be no assignment hereof, except in accordance with the provisions of Section 7.10 hereof. SECTION 13.07 SEPARABILITY. In case any provision in the Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 13.08 BENEFITS OF INDENTURE. Nothing in the Indenture or in the Notes, express or implied, shall give to any Person, other than the parties hereto, the Noteholders, and any Paying Agent which may be appointed pursuant to the provisions hereof, and any of their successors hereunder, any benefit or any legal or equitable right, remedy or claim under the Indenture or under the Notes, except that MBIA is an express third part), beneficiary to the Indenture. SECTION 13.09 LEGAL HOLIDAYS. In any case in which the date of any Payment Date or the Stated Maturity of any Note shall not be a Business Day, then (notwithstanding any other provision of a Note or the Indenture) payment of principal, interest, or premium, if any, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the nominal date of any such Stated Maturity or Payment Date and, assuming such payment is actually made on such subsequent Business Day, no additional interest shall accrue on the amount so paid for the period from and after any such nominal date. SECTION 13.10 GOVERNING LAW. The Indenture and each Note shall be construed in accordance with and governed by the internal laws of the State of New York applicable to agreements made and to be performed therein, without regard to the conflict of laws provisions of any State. SECTION 13.11 COUNTERPARTS. The Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 96 100 SECTION 13.12 CORPORATE OBLIGATION. No recourse may be taken, directly or indirectly, against any incorporation, subscriber to the capital stock, stockholder, employee, officer or director of the Issuer or of any predecessor or successor of the Issuer with respect to the Issuees obligations on the Notes or under the Indenture or any certificate or other writing delivered in connection herewith. SECTION 13.13 COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application, order or request by the Issuer or the Servicer to the Indenture Trustee to take any action under any provision of the Indenture for which a specific request is required under the Indenture, the Issuer or the Servicer, as applicable, shall furnish to the Indenture Trustee an Officer's Certificate of the Issuer or the Servicer, as applicable, stating that all conditions precedent, if any, provided for in the Indenture relating to the proposed action have been complied with, except that in the case of any such application or request as to which the furnishing of a different certificate is specifically required by any provision of the Indenture relating to such particular application or request, no additional certificate need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in the Indenture shall include: (a) a statement that each individual signing such certificate or opinion has read or has caused to be read such covenant or condition and the definitions herein relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, such individual has made such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 13.14 MBIA DEFAULT. If an MBIA Default occurs, MBIA's right to consent hereunder and under any other Transaction Document and to direct the Indenture Trustee shall be void and, in such event, in all provisions of this Agreement wherein MBIA's consent or direction is required or permitted, the consent or direction of the Holders of not less than a majority in Outstanding Principal Amount of all Notes shall be required or permitted. In addition, if an MBIA Default occurs, at the direction of the Holders of not less than a majority in Outstanding Principal Amount of all Notes, the amount of the fee that would have otherwise been paid as the MBIA Premium shall be applied in the order 97 101 of priority set forth in Section 12.02(d) to either (a) procure an alternative third party credit enhancement for all Series of. Outstanding Notes, (b) make payments of premiums to the Noteholders of each Series in the proportion in which the Outstanding Principal Amount of each Series represents of the Outstanding Principal Amount of all Series or (c) any combination of the foregoing. Notice of an MBIA Default shall be provided to Moody's in the manner specified in Section 13.03(e). 98 102 EXHIBIT A FORM OF INVESTMENT LETTER BLT FINANCE CORP. III 7.33% LEASE-BACKED NOTES, SERIES 1994-A BLT Finance Corp. III (the "Company") 950A Winter Street Waltham, Massachusetts 02154 Norwest Bank Minnesota, National Association, as Trustee Norwest Center 6th Street & Marquette Avenue Minneapolis, Minnesota 55479-0069 The undersigned hereby certifies on behalf of the purchaser named below (the "Purchaser") as follows: 1. I __________________, am the chief financial officer, a person fulfilling an equivalent function or other executive officer of the Purchaser. [2. I am familiar with the provisions of Rule 144A ("Rule 144A") under the Securities Act of 1933 (the "1933 Act"). a. The Purchaser is a "qualified institutional buyer," as defined in Rule 144A. b. The Purchaser is aware that the Company may rely on the exemption from the registration requirements of the 1933 Act provided by Rule 144A. c. The Purchaser acknowledges that the Purchaser has (i) received such information regarding the 1994-A Notes as the Purchaser may require pursuant to Rule 144A or (ii) the Purchaser has determined not to request such information.] [2. I am familiar with the provisions of Regulation D under the Securities Act of 1933 (the "1933 Act"). a. The Purchaser is an "accredited investor" within the meaning of Rule 501 of Regulation D under the 1933 Act. b. In the normal course of the Purchaser's business the Purchaser invests in or purchases securities similar to the 1994-A Notes, has such knowledge and experience in financial and business matters that the Purchaser is capable of evaluating the merits and risks of its investment in the 1994-A Notes. c. The Purchaser is capable of bearing the economic risks of an investment in the 1994-A Notes.] 103 3. The Purchaser is acquiring the 1994-A Notes for its own account and the account of its affiliated entities for the purpose of investment or resale under Rule 144A or any other exemption from registration available under the 1933 Act and not with a view to the distribution thereof. 4. The Purchaser understands that it is the expressed intent of the Company that the 1994-A Notes are being issued only in transactions not involving any public offering within the meaning of the 1933 Act and that the 1994-A Notes will bear a legend substantially as set forth in the form of 1994-A included in the Indenture. 5. The Purchaser has no present intention of selling, negotiating or otherwise disposing of the 1994-A Notes; provided, however it is understood that the disposition of the Purchaser's property shall at all times be and remain within its control and without prejudice, however, to its right at all times to sell or otherwise dispose of all or any part of the 1994-A Notes in accordance with the Indenture under a registration statement under the 1933 Act, or under the exemption from such registration available under the 1933 Act. 6. The Purchaser [is not a benefit plan investor as defined in 29 C.F.R. ss. 2510.3-101 nor a Person who is directly or indirectly using assets of or acting as fiduciary or trustee of any such benefit plan investor] / [is using funds to purchase the 1994-A Notes that are held in a general account and all of the assets in such general account are from the receipt of premiums for the purchase of annuity contracts that provide for a benefit that is guaranteed throughout the term of the contract] / [specify other applicable statutory or regulatory exemption]. 7. The Purchaser acknowledges that transfer of a 1994-A Note can only be effected in accordance with the Indenture. The representations and warranties contained herein shall be binding upon the heirs, executors, administrators and other successors of the undersigned. If there is more than one signatory hereto, the obligations, representations, warranties and agreements of the undersigned are made jointly and severally. Executed at ____________________, ______________________, this ___ day of _______________, 199_. _________________________________ _________________________________ Purchaser's Name and Title (Print) Signature of Purchaser _________________________________ Address of Purchaser _________________________________ Purchaser's Taxpayer Identification or Social Security Number 104 EXHIBIT B FORM OF SUPPLEMENT TO INDENTURE FOR GRANT OF SUBSTITUTE LEASE CONTRACTS Pursuant to Section 4.03(e) of the Standard Terms and Conditions of Indenture dated as of November 1, 1994 (the "Standard Indenture Terms", which together with the Specific Terms and Conditions of Indenture dated as of November 1, 1994 (the "Specific Indenture Terms") constitute the Indenture), among [BLT Finance Corp. III] (the "Issuer"), [Boyle Leasing Technologies, Inc. (the "Servicer") and Norwest Bank Minnesota, National Association, as Indenture Trustee and Back-up Servicer, attached hereto is a supplement to Schedule A of the Specific Indenture Terms, which includes information regarding certain Lease Contracts, Lease Receivables and Equipment that is hereby Granted by the Issuer to the Trustee in accordance with the Indenture. For purposes of this Supplement, all defined terms used herein and not otherwise defined herein shall have the meanings assigned to them in the Indenture. Dated: ___________________ By:________________________________ Name: Title: [BLT FINANCE CORP. III] By:________________________________ Name: Title: 105 SCHEDULE A SUPPLEMENT FOR SUBSTITUTE LEASE CONTRACTS 106 EXHIBIT C [FORM OF INDENTURE SUPPLEMENT FOR EACH SERIES OF NOTES] SUPPLEMENT TO INDENTURE, [TERM] [WAREHOUSE] NOTES, SERIES 199_-_ This INDENTURE SUPPLEMENT, dated as of ____________, is entered into by and among BLT Finance Corp. III, a Massachusetts corporation (the "Issuer"), Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Servicer"), Norwest Bank Minnesota, National Association, a national banking association, (the "Back-up Servicer") and Norwest Bank Minnesota, National Association, a national banking association, as trustee (the "Indenture Trustee"). This Indenture Supplement incorporates by reference all of the provisions of the Standard Terms and Conditions of Indenture and the Specific Indenture Terms, which together are intended to form the Indenture (the "Indenture") entered into in connection with the financing described below. The Issuer has duly authorized the execution and delivery of this Indenture Supplement to provide for the issuance of the Issuer's % Lease-Backed [Term/Warehouse] Notes, Series (the "Series -- Notes") in a (maximum] aggregate principal amount of issuable as provided in the Indenture. The Series Lease Schedule listing the Lease Assets granted to the Indenture Trustee in connection with the issuance of the Series -- Notes is attached hereto as Schedule A and the Targeted Balance Schedule with respect to the Series -- Notes is attached hereto as Schedule B. Pursuant to Section 2.02 of the Standard Terms and Conditions of Indenture, this Indenture Supplement sets forth the following additional terms applicable to the Series --- Notes, which series is hereby designated as [Term/ Warehouse Notes]: "Accrual Date": shall initially mean --. "Cut-off Date": shall initially mean --. "Delivery Date": shall mean --. ["Fixed Interest Rate": shall mean --.] ["Floating Interest Rate": shall mean --.] "Initial Cash Deposit": shall be $---. "Initial Payment Date": shall be --. 107 ["LIBOR Rate": ] ["LIBOR Rate Reserve Percentage": ] ["Maximum Warehouse Note Rate": ] "MBIA Premium": shall mean --. "MBIA Premium Rate": shall mean . ["Note Interest Rate": shall mean --.] "Obligation Insurance Policy": shall have the MBIA Policy Number ---. ["Private Placement Memorandum" or "Final Private Placement Memorandum": shall refer to the Private Placement Memorandum dated --.] "Stated Maturity": shall mean --. "Transaction Documents Date": shall mean --. ["Warehouse Funding Termination Date": shall mean --.] ["Warehouse Expected Termination Date": shall mean --.] ["Warehouse Lender": shall mean --.] ["Warehouse Note Limit": shall mean " $---.] 108 IN WITNESS WHEREOF, the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee have caused this Indenture Supplement to be duly executed by their respective officers thereunto duly authorized as of the date and year first above written. BLT FINANCE CORP. III By:_________________________________ Name: Title: BOYLE LEASING TECHNOLOGIES, INC. as Servicer By:_________________________________ Name: Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Back-Up Servicer By:_________________________________ Name: Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee By:_________________________________ Name: Title: 109 SCHEDULE A LEASE SCHEDULE 110 SCHEDULE B TARGETED BALANCE SCHEDULE SERIES --- 111 SCHEDULE C [Form of Warehouse Funding Report, if applicable] 112 Exhibit D-1 [MBIA LOGO] FORM OF TERM NOTE NOTE GUARANTY INSURANCE POLICY OBLIGATIONS: $18,885,370.15 POLICY NUMBER: 604260 BLT Finance Corp. III 7.33% Lease-Backed Note, Series 1994-A Municipal Bond Investors Assurance Corporation (the "Insurer"), in consideration of the payment of the premium and subject to the terms of this Note Guaranty Insurance Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any Owner that an amount equal to each full and complete Insured Payment will be received by Norwest Bank Minnesota, National Association, as indenture trustee for the Owners (the "Indenture Trustee"), on behalf of the Owners, for distribution by the Indenture Trustee to each Owner of each Owner's proportionate share of the Insured Payment. The Insurer's obligations hereunder with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee, whether or not such funds are properly applied by the Indenture Trustee. Insured Payments shall be made only at the time set forth in this Policy, and no accelerated Insured Payments shall be made regardless of any acceleration of the Obligations, unless such acceleration is at the sole option of the Insurer. Notwithstanding the foregoing paragraph, this Policy does not cover shortfalls, if any, attributable to the liability of the Trust Estate or the Indenture Trustee for withholding taxes, if any (including interest and penalties in respect of any such liability). The Insurer will pay any Insured Payment that is a Preference Amount on the Business Day following receipt on a Business Day by the Fiscal Agent (as described below) of (i) a certified copy of the order requiring the return of such Preference Amount, (ii) an opinion of counsel satisfactory to the Insurer that such order is final and not subject to appeal, (iii) an assignment in such form as is reasonably required by the Insurer, irrevocably assigning to the Insurer all rights and claims of the Owner relating to or arising under the Obligations against the debtor which made such preference payment or otherwise with respect to such preference payment and (iv) appropriate instruments to effect the appointment of the Insurer as agent for such Owner in any legal proceeding related to such preference payment, such instruments being in a form satisfactory to the Insurer, provided that if such documents are received after 12:00 noon, New York City time, on such Business Day, they will be deemed to be received on the following Business Day. Such payments shall be disbursed to the receiver or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Owner and not to any Owner directly unless such Owner has returned principal or interest paid on the Obligations to such receiver or trustee in bankruptcy, in which case such payment shall be disbursed to such Owner. The Insurer will pay any other amount payable hereunder no later than 12:00 noon, New York City time, on the later of the Payment Date on which the related Deficiency Amount is due or the Business Day following receipt in New York, New York on a Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by the Insurer (the "Fiscal Agent") of a Notice (as described below); provided that if such Notice is received after 12:00 noon, New York City time, on such Business Day, it will be deemed to be received on the following Business Day. If any such Notice received by the Fiscal Agent is not in proper form or is otherwise insufficient for the purpose of making claim hereunder, it shall be deemed not to have been received by the Fiscal Agent for purposes of this paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee and the Indenture Trustee may submit an amended Notice. 113 [MBIA LOGO] Insured Payments due hereunder, unless otherwise stated herein will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners by wire transfer of immediately available funds in the amount of the Insured Payment less, in respect of Insured Payments related to Preference Amounts, any amount held by the Indenture Trustee for the payment of such Insured Payment and legally available therefor. The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or any failure of the Insurer to deposit, or cause to be deposited, sufficient funds to make payments due under this Policy. Subject to the terms of the Agreement, the Insurer shall be subrogated to the rights of each Owner to receive payments under the Obligations to the extent of any payment by the Insurer hereunder. As used herein, the following terms shall have the following meanings: "Agreement" means the Indenture dated as of November 1, 1994, among BLT Finance Corp. III, as Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, without regard to any amendment or supplement thereto. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York City or in the city in which the corporate trust office of the Indenture Trustee under the Agreement is located are authorized or obligated by law or executive order to close. "Deficiency Amount" means (a) for any Payment Date, any shortfall in amounts available in the Collection Account to pay the interest due on the Obligations after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after payment of all amounts payable pursuant to Section 12.02(d)(i) through (iv) of the Agreement, plus (b) on the Stated Maturity, any shortfall in amounts available in the Collection Account to pay the Principal Distribution Amount after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after the payment of all amounts payable pursuant to Section 12.02(d)(i) through (vi) of the Agreement. "Insured Payment" means (i) as of any Payment Date, any Deficiency Amount and (ii) any Preference Amount. "Notice" means the telephonic or telegraphic notice, promptly confirmed in writing by telecopy substantially in the form of Exhibit A attached hereto, the original of which is subsequently delivered by registered or certified mail, from the Indenture Trustee specifying the Insured Payment which shall be due and owing on the applicable Payment Date. "Owner" means each Noteholder (as defined in the Agreement) who, on the applicable Payment Date, is entitled under the terms of the applicable Notes to payment under the Policy. "Preference Amount" means any amount previously distributed to an Owner on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a final nonappealable order of a court having competent jurisdiction. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set 114 [MBIA LOGO] forth in the Agreement as of the date of execution of this Policy, without giving effect to any subsequent amendment to or modification of the Agreement unless such amendment or modification has been approved in writing by the Insurer. Any notice hereunder or service of process on the Fiscal Agent of the Insurer may be made at the address listed below for the Fiscal Agent of the Insurer or such other address as the insurer shall specify in writing to the Indenture Trustee. The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such other address as the Fiscal Agent shall specify to the Indenture Trustee in writing. This Policy is being issued under and pursuant to, and shall be construed under, the laws of the State of New York, without giving effect to the conflict of laws principles thereof. The insurance provided by this Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. This Policy is not cancelable for any reason. The premium on this Policy is not refundable for any reason including payment, or provision being made for payment, prior to maturity of the Obligations. IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and attested this 16th day of November, 1994. MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION By /s/ [Illegible] ------------------------ Assistant Secretary 115 [MBIA LOGO] EXHIBIT A TO NOTE GUARANTY INSURANCE POLICY NUMBER: 604260 NOTICE UNDER NOTE GUARANTY INSURANCE POLICY NUMBER: 604260 State Street Bank and Trust Company, N.A., as Fiscal Agent for Municipal Bond Investors Assurance Corporation 61 Broadway, 15th Floor New York, NY 10006 Attention: Municipal Registrar and Paying Agency Municipal Bond Investors Assurance Corporation 113 King Street Armonk, NY 10504 The undersigned, a duly authorized officer of Norwest Bank Minnesota, National Association, as indenture trustee (the "Indenture Trustee"), hereby certifies to State Street Bank, and Trust Company, N.A. (the "Fiscal Agent") and Municipal Bond Investors Assurance Corporation (the "Insurer"), with reference to Note Guaranty Insurance Policy Number: 604260 (the "Policy") issued by the Insurer in respect of the Rothschild Asset-Backed Finance Conduit V, 7.33% Lease-Backed Note, Series 1994-A (the "Obligations"), that: (i) the Indenture Trustee is the indenture trustee under the Indenture dated as of November 1. 1994, among BLT Finance Corp. III, as Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee; (ii) the amount due under clause (a) of the definition of Deficiency Amount for the Payment Date occurring on (the "Applicable Payment Date") is $ ; (iii) the amount due under clause (b) of the definition of Deficiency Amount for the Applicable Payment Date is $ ; (iv) the sum of the amounts listed in paragraphs (ii) and (iii) above is $ (the "Deficiency Amount"); (v) the amount of previously distributed payments on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with a final nonappealable order of a court having competent jurisdiction is $____ (the "Preference Amount"); (vi) the total Insured Payment due is $ , which amount equals the sum of the Deficiency 116 [MBIA LOGO] Amount and the Preference Amount; (vii) the Indenture Trustee is making a claim under and pursuant to the terms of the Policy for the dollar amount of the Insured Payment set forth in (iv) above to be applied to the payment on the Obligations for the Applicable Payment Date in accordance with the Agreement and for the dollar amount of the Insured Payment set forth in (v) above to be applied to the payment of any Preference Amount; and (viii) the Indenture Trustee directs that payment of the Insured Payment be made to the following account by bank wire transfer of federal or other immediately available funds in accordance with the terms of the Policy: [INDENTURE TRUSTEE'S ACCOUNT]. Any capitalized term used in this Notice and not otherwise defined herein shall have the meaning assigned thereto in the Policy. Any person who knowingly and with intent to defraud any insurance company or other person files a statement of claim containing any materially false information, or conceals for the purpose of misleading, information concerning any fact material thereto, commits a fraudulent insurance act, which is a crime. IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered this Notice under the Policy as of the day of , . as Indenture Trustee By ________________________________________ Title _____________________________________ 117 Exhibit-D-2 DRAFT KUTAK ROCK 11/09/94 FORM OF TERM NOTE NOTE GUARANTY INSURANCE POLICY OBLIGATIONS: $[ ] POLICY NUMBER: BLT Finance Corp. III [ ]% Lease-Backed Note, Series 1994-A Municipal Bond Investors Assurance Corporation (the "Insurer"), in consideration of the payment of the premium and subject to the terms of this Note Guaranty Insurance Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any Owner that an amount equal to each full and complete Insured Payment will be received by Norwest Bank Minnesota, National Association, as indenture trustee for the Owners (the "Indenture Trustee"), on behalf of the Owners, for distribution by the Indenture Trustee to each Owner of each Owner's proportionate share of the Insured Payment. The Insurer's obligations hereunder with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee, whether or not such funds are properly applied by the Indenture Trustee. Insured Payments shall be made only at the time set forth in this Policy, and no accelerated Insured Payments shall be made regardless of any acceleration of the Obligations, unless such acceleration is at the sole option of the Insurer. Notwithstanding the foregoing paragraph, this Policy does not cover shortfalls, if any, attributable to the liability of the Trust Estate or the Indenture Trustee for withholding taxes, if any (including interest and penalties in respect of any such liability). The Insurer will pay any Insured Payment that is a Preference Amount on the Business Day following receipt on a Business Day by the Fiscal Agent (as described below) of (i) a certified copy of the order requiring the return of such Preference Amount, (ii) an opinion of counsel satisfactory to the Insurer that such order is final and not subject to appeal, (iii) an assignment in such form as is reasonably required by the Insurer irrevocably assigning to the Insurer all rights and claims of the Owner relating to or arising under the Obligations against the debtor which made such preference payment or otherwise with respect to such preference payment and (iv) appropriate instruments to effect the appointment of the Insurer as agent for such Owner in any legal proceeding related to such preference payment, such instruments being in a form satisfactory to the Insurer, provided that if such documents are received after 12:00 noon, New York City time, on such Business Day, they will be deemed to be received on the following Business Day. Such payments shall be disbursed to the receiver or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Owner and not to any Owner directly unless such Owner has returned principal or interest paid on the Obligations to such receiver or trustee in bankruptcy, in which case such payment shall be disbursed to such Owner. 118 The Insurer will pay any other amount payable hereunder no later than 12:00 noon, New York City time, on the later of the Payment Date on which the related Deficiency Amount is due or the Business Day following receipt in New York, New York on a Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by the Insurer (the Fiscal Agent) of a Notice (as described below); provided that if such Notice is received after 12:00 noon, New York City time, on such Business Day, it will be deemed to be received on the following Business Day. If any such Notice received by the Fiscal Agent is not in proper form or is otherwise insufficient for the purpose of making claim hereunder, it shall be deemed not to have been received by the Fiscal Agent for purposes of this paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee and the Indenture Trustee may submit an amended Notice. Insured Payments due hereunder, unless otherwise stated herein, will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners by wire transfer of immediately available funds in the amount of the Insured Payment less, in respect of Insured Payments related to Preference Amounts, any amount held by the Indenture Trustee for the payment of such Insured Payment and legally available therefor. The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or any failure of the Insurer to deposit, or cause to be deposited, sufficient funds to make payments due under this Policy. Subject to the terms of the Agreement, the Insurer shall be subrogated to the rights of each Owner to receive payments under the Obligations to the extent of any payment by the Insurer hereunder. As used herein, the following terms shall have the following meanings: "Agreement" means the Indenture dated as of November 1, 1994, among BLT Finance Corp. III, as Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, without regard to any amendment or supplement thereto. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York City or in the city in which the corporate trust office of the Indenture Trustee under, the Agreement is located are authorized or obligated by law or executive order to close. "Deficiency Amount" means (a) for any Payment Date, any shortfall in amounts available in the Collection Account to pay the interest due on the Obligations after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after payment of all amounts payable pursuant to Section 12.02(d)(i) through (iv) of the Agreement, plus (b) on the Stated Maturity, any shortfall in amounts available in the Collection 2 119 Account to pay the Principal Distribution Amount after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after the payment of all amounts payable pursuant to Section 12.02(d)(i) through (vi) of the Agreement. "Insured Payment" means (i) as of any Payment Date, any Deficiency Amount and (ii) any Preference Amount. "Notice" means the telephonic or telegraphic notice, promptly confirmed in writing by telecopy substantially in the form of Exhibit A attached hereto, the original of which is subsequently delivered by registered or certified mail, from the Indenture Trustee specifying the Insured Payment which shall be due and owing on the applicable Payment Date. "Owner" means each Noteholder (as defined in the Agreement) who, on the applicable Payment Date, is entitled under the terms of the applicable Notes to payment under the Policy. "Preference Amount" means any amount previously distributed to an Owner on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a final nonappealable order of a court having competent jurisdiction. Capitalized terms used herein and not otherwise defined herein shall have the respective meanings set forth in the Agreement as of the date of execution of this Policy, without giving effect to any subsequent amendment to or modification of the Agreement unless such amendment or modification has been approved in writing by the Insurer. Any notice hereunder or service of process on the Fiscal Agent of the Insurer may be made at the address listed below for the Fiscal Agent of the Insurer or such other address as the Insurer shall specify in writing to the Indenture Trustee. The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such other address as the Fiscal Agent shall specify to the Indenture Trustee in writing. This Policy is being issued under and pursuant to, and shall be construed under, the laws of the State of New York, without giving effect to the conflict of laws principles thereof. The insurance provided by this Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. This Policy is not cancelable for any reason the premium on this Policy is not refundable for any reason including payment, or provision being made for payment, prior to maturity of the Obligations. 3 120 IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and this day of November, 1994. MUNICIPAL BOND INVESTORS ASSURANCE CORPORATION By _________________________________ Attest: BY __________________________ Secretary 4 121 EXHIBIT A TO NOTE GUARANTY INSURANCE POLICY NUMBER: [ ] NOTICE UNDER NOTE GUARANTY INSURANCE POLICY NUMBER: [ ] State Street Bank and Trust Company, N.A., as Fiscal Agent for Municipal Bond Investors Assurance Corporation 61 Broadway, 15th Floor New York, NY 10006 Attention: Municipal Registrar and Paying Agency Municipal Bond Investors Assurance Corporation 113 King Street Armonk, NY 10504 The undersigned, a duly authorized officer of , as indenture trustee (the "Indenture Trustee"), hereby certifies to State Street Bank and Trust Company, N.A. (the "Fiscal Agent") and Municipal Bond Investors Assurance Corporation (the "Insurer"), with reference to Note Guaranty Insurance Policy Number: (the "Policy") issued by the Insurer in respect of the Rothschild Asset-Backed Finance Conduit V, [ ]% Lease-Backed Note, Series 1994 (the "Obligations"), that: (i) the Indenture Trustee is the indenture trustee under the Indenture dated as of November 1, 1994, among BLT Finance Corp. III, as Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee; (ii) the amount due under clause (a) of the definition of Deficiency Amount for the Payment Date occurring on (the "Applicable Payment Date") is $ ; (iii) the amount due under clause (b) of the definition of Deficiency Amount for the Applicable Payment Date is $ ; (iv) the sum of the amounts listed in paragraphs (ii) and (iii) above is $ (the "Deficiency Amount"); 122 (v) the amount of previously distributed payments on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the Bankruptcy Code in accordance with a final nonappealable order of a court having competent jurisdiction is $ (the "Preference Amount"); (vi) the total Insured Payment due is $ which amount equals the sum of the Deficiency Amount and the Preference Amount; (vii) the Indenture Trustee is making a claim under and pursuant to the terms of the Policy for the dollar amount of the Insured Payment set forth in (iv) above to be applied to the payment on the Obligations for the Applicable Payment Date in accordance with the Agreement and for the dollar amount of the Insured Payment set forth in (y) above to be applied to the payment of any Preference Amount; and (viii) the Trustee directs that payment of the Insured Payment be made to the following account by bank wire transfer of federal or other immediately available funds in accordance with the terms of the Policy: [INDENTURE TRUSTEE'S ACCOUNT]. Any capitalized term used in this Notice and not otherwise defined herein shall have the, meaning assigned thereto in the Policy. Any person who knowingly and with intent to defraud any insurance company or other person files a statement of claim containing any materially false information, or conceals for the purpose of misleading, information concerning any fact material thereto commits a fraudulent insurance act, which is a crime. IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered this Notice under the Policy as of the day of , . as Indenture Trustee By __________________________________ Title _______________________________ A-2 123 EXHIBIT E-1 FORM OF TERM NOTE THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE INDENTURE UNDER WHICH THIS NOTE IS ISSUED (A COPY OF WHICH IS AVAILABLE FROM THE, INDENTURE TRUSTEE UPON REQUEST). DUE TO THE PROVISIONS FOR THE PAYMENT OF PRINCIPAL CONTAINED HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING THIS NOTE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY INQUIRY OF THE INDENTURE TRUSTEE. No. ______________________ $_______________ BLT FINANCE CORP. III 7.33% LEASE-BACKED NOTE, SERIES 1994-A DELIVERY DATE: November 16,1994 STATED MATURITY: December 16,1998 BLT Finance Corp. 111, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts (the "Issuer", which term includes any successor entity under the Indenture referred to below), for value received, hereby promises to pay to , or its registered assigns, the principal gum of Dollars ($ ) in monthly installments beginning on December 16, 1994, and to pay interest monthly in arrears on the unpaid portion of said principal sum (and, to the extent that the payment of such interest shall be legally enforceable, on any overdue installment of interest on this Note) on the sixteenth day of each calendar month or, if such sixteenth day is not a Business Day, the Business Day immediately following (each, a "Payment Date"), for the period from and including the Delivery Date set forth above through , 1994, and thereafter, monthly from and including the most recent Payment Date through the day immediately preceding the applicable Payment Date, until the last day preceding the Final Payment Date, at the rate of 7.33% per annum (calculated on the basis of a 360-day year consisting of 12 months of 30 days each). Each monthly installment of principal payable on this Note shall be an amount equal to the Pro Rata share of the Principal Distribution Amount plus any Additional Principal Amount, as such term is defined in the Indenture described herein. Any remaining unpaid portion of the principal amount of this Note shall 124 be due and payable no later than the Stated Maturity referred to above. The interest and principal so payable on any Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Note is registered on the Record Date for such Payment Date, which shall be the close of business on the last day of the month prior to such Payment Date (whether or not a Business Day). The principal and interest on this Note are payable by check mailed by first-class mail to the Person whose name appears as the Registered Holder of this Note on the Note Register at the address of such Person as it appears on the Note Register, or by wire transfer in immediately available funds to the account specified in writing to the Indenture Trustee by the Person whose name appears as the Registered Holder of this Note on the Note Register received at least five Business Days prior to the Record Date for the Payment Date on which wire transfers Will commence, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Funds represented by checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated as such by the Issuer for such purpose pursuant to the Indenture. This Note is one of a duly authorized issue of Notes of the Issuer designated as its 7.33% Lease-Backed Notes, Series 1994-A Due December 16,1998 (herein called the "Notes") issued and to be issued under the Specific Terms and Conditions of Indenture dated November 1, 1994, and the Standard Terms and Conditions of Indenture dated November 1, 1994, appended thereto and incorporated therein (herein called the "Indenture"), among the Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Indenture Trustee (the "Indenture Trustee", which term includes any successor Indenture Trustee under the Indenture), to which the Indenture, and all indentures supplemental thereto, reference is hereby made for a statement of the respective rights thereunder of the Issuer, the Indenture Trustee and the Holders of the Notes, and the terms upon which the Notes are, and am to be, authenticated and delivered. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Notes are secured by certain Lease Receivables and by certain other Collateral described in the Indenture and the Note Guaranty Insurance Policy issued by MBIA. The Trust Estate secures the Notes equally and ratably without prejudice, priority or distinction between, Any Note and any other Note by reason of time of issue or otherwise, and also secures the payment of certain other amounts and certain other obligations as described in the Indenture. Unless earlier declared due and payable by reason of an Event of Default, Notes are payable only at the time and in the manner provided in the Indenture and are not redeemable or prepayable at the option of the Issuer before such time, except that the Notes shall be redeemable at the option of the Issuer, and in the absence of the exercise thereof, by MBIA in whole but not in part, at any time after the Outstanding Principal Amount of Notes declines to 10% or less of the original principal amount of the Notes at a redemption price equal to the Outstanding Principal Amount thereof plus accrued interest thereon to the date of redemption. If an Event of Default as defined in the Indenture shall occur and be continuing, the principal of all the Notes may become or be 2 125 declared due and payable in the manner said with the effect, provided in the indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the Note Register of the Issuer upon surrender of this Note for registration of transfer at the office or agency of the Issuer in the United States of America maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Indenture Trustee and duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same Stated Maturity of authorized denominations and for the same initial aggregate principal amount will be issued to the designated transferees. Prior to due presentment for registration of transfer of this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue, and neither the Issuer, the Indenture Trustee, nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Issuer, the Indenture Trustee, the Back-up Servicer, the Servicer and MBIA with the consent of the Holders of 66-2/3% in aggregate principal amount of Notes at the time Outstanding. The Indenture also contains provisions permitting MBIA or the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding with the prior written consent of MBIA, on behalf of the Holders of all Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Notes are issuable only in registered form without coupons in such authorized denominations as provided in the Indenture and subject to certain limitations therein set forth. This Note and the Indenture shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to conflicts of laws principles. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note, but solely from the Collateral pledged to the Indenture Trustee under the Indenture and the Policy at the times, place and rate, and in the coin or currency, herein prescribed. Notwithstanding anything else to the contrary contained in this Note or the Indenture, the obligation of the Issuer to pay the principal of and interest on this Note is not a general obligation of the Issuer, nor its officers or directors, but is limited solely to the Collateral pledged under the Indenture. 3 126 STATEMENT OF INSURANCE Municipal Bond Investors Assurance Corporation ("MBIA") has issued a Note Guaranty Insurance Policy (the "Policy") containing the following provisions, such Policy being on file at the offices of the Indenture Trustee at 6th Street and Marquette Avenue, Minneapolis, Minnesota 55479-0069. MBIA, in consideration of the payment of the premium and subject to the terms of the Policy, thereby unconditionally and irrevocably guarantees to any Owner that an amount equal to each full and complete Insured Payment will be received by the Indenture Trustee, as Indenture Trustee for the Owners, on behalf of the Owners, for distribution by the Indenture Trustee to each Owner of each Owner's proportionate share of the Insured Payment. MBIA's obligations under the Policy with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee whether or not such funds are properly applied by the Indenture Trustee. Insured Payments shall be made only at the time set forth in the Policy, and no accelerated Insured Payments shall be made regardless of any acceleration of the Obligations, unless such acceleration is at the sole option of MBIA. "Obligations" shall mean: $ BLT Finance Corp. III 7.33% Lease-Backed Term Note, Series 1994-A Notwithstanding the foregoing paragraph, the Policy does not cover shortfalls, if any, attributable to the liability of the Trust Estate or the Indenture Trustee for withholding taxes, if any (including interest and penalties in respect of any such liability). MBIA will pay any Insured Payment that is a Preference Amount on the Business Day following receipt on a Business Day by the Fiscal Agent (as described below) Of (i) a certified copy of the order requiring the return of such Preference Amount, (ii) an opinion of counsel satisfactory to MBIA that such order is final and not subject to appeal, (iii) an assignment in such form as is reasonably required by MBIA, irrevocably assigning to MBIA all rights and claims of the Owner relating to or arising under the Obligations against the debtor which made such preference payment or otherwise with respect to such preference payment and (iv) appropriate instruments to effect the appointment of MBIA as agent for such Owner in any legal proceeding related to such preference payment, such instruments being in a form satisfactory TO MBIA, provided that if such documents are received after 12:00 noon, New York City time, on such Business Day, they will be deemed to be received on the following Business Day. Such payments shall, be disbursed to the receiver or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Owner and not to the Owner directly unless such Owner has returned principal or interest paid on the Obligations to such receiver or trustee in bankruptcy, in which case such payment shall be 4 127 disbursed to such Owner. MBIA will pay any other amount payable under the Policy no later than 12:00 noon, New York City time, on the later of the Payment Date on which the related Deficiency Amount is due or the Business Day following receipt in New York, New York on a Business Day by State Street Bank and Trust Company, N.A. as Fiscal Agent for MBIA or any successor fiscal agent appointed by MBIA (the "Fiscal Agent") of a Notice (as described below); provided that if such Notice is received after 12:00 noon, New York City time, on such Business Day, it will be deemed to be received on the following Business Day. If any such Notice received by the MW Agent is NOT in proper form or is otherwise insufficient for the purpose of making claim under the Policy, it shall be deemed not to have been received by the Fiscal Agent for purposes of this paragraph, and MBIA or the Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee, and the Indenture Trustee may submit an amended Notice. Insured Payments due under the Policy, unless otherwise stated therein will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owner by wire transfer of immediately available funds in the amount of the Insured Payment less, in respect of Insured Payments related to Preference Amounts, any amount held by the Indenture Trustee for the payment of such Insured Payment and legally available therefor. The Fiscal Agent is the agent of MBIA only and the Fiscal Agent shall in no event be liable to Owners for any acts of the Fiscal Agent or any failure of MBIA to deposit, or cause to be deposited, sufficient funds to make payments due under the Policy, Subject to the terms of the Agreement, MBIA shall be subrogated to the rights of each Owner to receive payments under the Obligations to the extent of any payment by MBIA under the Policy. As used herein, the following terms shall have the following meanings: "Agreement" means the Indenture dated as of November 1, 1994, among BLT Finance Corp. III as Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, without regard to any amendment or supplement thereto. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York City or in the city in which the corporate trust office of the Indenture Trustee under the Agreement is located are authorized or obligated by law or executive order to close. "Deficiency Amount" means (a) for any Payment Date, any shortfall in amounts available in the Collection Account to pay the interest due on the Obligations after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after payment of all amounts payable pursuant to Section 12.02(d)(i) through (iv) of the Agreement, 5 128 plus (b), on the Stated Maturity any shortfall in amounts available in the Collection Account to pay the Principal Distribution Amount after giving effect to the transfers from the Cash Collection Account pursuant to Section 12.03(d)(i) of the Agreement and after the payment of all amounts payable pursuant to Section 12.02(d)(i) through (vi) of the Agreement. "Insured Payment" means (i) as of any Payment Date, any Deficiency Amount and (ii) any Preference Amount, "Notice" means the telephonic or telegraphic notice, promptly confirmed in writing by telecopy substantially in the form of Exhibit A attached to the Policy, the original of which is subsequently delivered by registered or certified mail, from the Indenture Trustee specifying the Insured Payment which shall be due and owing on the applicable Payment Date. "Owner" means each Noteholder (as defined in the Agreement) who, on the applicable Payment Date, is entitled under the terms of the applicable Notes to payment under the Policy. "Preference Amount" means any amount previously distributed to an Owner on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a final nonappealable order of a court having competent jurisdiction. Capitalized. terms used in the Policy and not otherwise defined therein shall have the respective meanings set forth in the Agreement as of the date of execution of the Policy, without giving effect to any subsequent amendment to or modification of the Agreement unless such amendment or modification has been approved in writing by MBIA. Any notice under the Policy or service of process on the Fiscal Agent of MBIA may be made at the address listed below for the Fiscal Agent of MBIA or such other address as MBIA shall specify in writing to the Indenture Trustee. The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York, New York 10006 Attention: Municipal Registrar and Paying Agency or such other address as the Fiscal Agent and MBIA shall specify to the Indenture Trustee in writing. The Policy is being issued under and pursuant to, and shall be construed under the laws of the State of New York, without giving effect to the conflict of laws principles thereof The insurance provided by the Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. The Policy is not cancelable for any reason. The premium on the Policy is not refundable for any reason including payment, or provision being made for payment, prior to final payment of the Obligations. 6 129 Unless the certificate of authentication hereon has been executed by the Indenture Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid obligatory for any purpose. IN WITNESS WHEREOF, BLT Finance Corp. III has caused this instrument to be signed, manually, by its President or a Vice President. By: ___________________________________ [Vice] President 7 130 [FORM OF INDENTURE TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This is one of the Notes described in the within-mentioned Indenture. Dated: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: __________________________________ Authorized Signatory 8 131 Exhibit E-2 FORM OF WAREHOUSE NOTE THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE INDENTURE UNDER WHICH THIS NOTE IS ISSUED (A COPY OF WHICH IS AVAILABLE FROM THE INDENTURE TRUSTEE UPON REQUEST). DUE TO THE PROVISIONS FOR THE PAYMENT AND REBORROWING OF PRINCIPAL CONTAINED HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE MAY BE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING THIS NOTE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY INQUIRY OF THE INDENTURE TRUSTEE. No. __________________ $ ______________ BLT FINANCE CORP. III LEASE-BACKED WAREHOUSE NOTE, SERIES 1994-B DELIVERY DATE: November 16, 1994 STATED MATURITY: May 16, 2001 BLT Finance Corp. III, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts (the "Issuer", which term includes any successor entity under the Indenture referred to below), for value received, hereby promises to pay to , or its registered assigns (the "Warehouse Lender"), on the Stated Maturity set forth above, the principal sum of Dollars ($ ), or, if less, the sum of all Warehouse Fundings made under this Note, less the amount of all principal payments previously made by the Issuer to the Warehouse Lender (the "Outstanding Principal Amount"), and to pay interest monthly in arrears on the unpaid portion of said Outstanding Principal Amount (and, to the extent that the payment of such interest shall be legally enforceable, on any overdue installment of interest on this Note) on the sixteenth day of each calendar month or, if such sixteenth day is not a Business Day, the Business Day immediately following (each, a "Payment Date"), monthly from and including the most recent Payment Date through the day immediately preceding the applicable Payment Date, until the last day preceding the Final Payment Date, at the 2 132 then applicable Floating Interest Rate or Fixed Interest Rate, determined as set forth in the Indenture described herein. Principal and interest shall be paid in monthly installments beginning on , 1994, and each installment of principal shall be in an amount equal to the Pro Rata Share of the Principal Distribution Amount plus any Additional Principal Amount, as such terms are defined in the Indenture described herein. The interest and principal so payable on any Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Note is registered on the Record Date for such Payment Date, which shall be the close of business on the last day of the month prior to such Payment Date (whether or not a Business Day). (Interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days each.) The Warehouse Fundings made by the Warehouse Lender to the Issuer shall be evidenced by this Note and the Warehouse Lender shall endorse on the grid annexed hereto, the date and amount of each Warehouse Funding made by it to the Issuer and the amount of each payment of principal made by the Issuer with respect thereto. The Warehouse Lender is irrevocably authorized by the Issuer to endorse this Note and the Warehouse Lender's records shall be effective only if such records are in agreement with the related Warehouse Funding Reports delivered pursuant to the Indenture; PROVIDED, HOWEVER that the failure of the Warehouse Lender to make, or an error in making, a notation thereon with respect to any Warehouse Funding shall not limit or otherwise affect the obligations of the Issuer hereunder or under the Indenture. The principal and interest on this Note are payable by check mailed by first-class mail to the Person whose name appears as the Registered Holder of this Note on the Note Register at the address of such Person as it appears on the Note Register, or by wire transfer in immediately available funds to the account specified in writing to the Indenture Trustee by the Person whose name appears as the Registered Holder of this Note on the Note Register received at least five Business Days prior to the Record Date for the Payment Date on which wire transfers will commence, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Funds represented by checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated as such by the Issuer for such purpose pursuant to the Indenture. This Note is one of a duly authorized issue of Notes of the Issuer designated as its Lease-Backed Warehouse Notes, Series 1994-B, Due May 16, 2001 (herein called the "Notes") issued and to be issued under the Specific Terms and Conditions of Indenture dated as of November 1, 1994, and the Standard Terms and Conditions of Indenture dated as of November 1, 1994, and the Supplement to Indenture, Warehouse Notes, Series 1994-B, appended thereto and incorporated therein (herein collectively called the "Indenture"), among the Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Indenture Trustee (the "Indenture Trustee", which term includes any successor Indenture Trustee under the Indenture), to which the Indenture, and all indentures supplemental thereto, reference is hereby made for a statement of the respective rights thereunder of the Issuer, the Indenture Trustee and the Holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. All 3 133 terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Notes are secured by certain Lease Receivables and by certain other Collateral described in the Indenture and the Note Guaranty Insurance Policy issued by MBIA. The Trust Estate secures the Notes equally and ratably with all other Series of notes issued by the Issuer pursuant to the Indenture without prejudice, priority or distinction between any Note and any other Note by reason of time of issue or otherwise, and also secures the payment of certain other amounts and certain other obligations as described in the Indenture. Unless earlier declared due and payable by reason of an Event of Default, Notes are payable only at the time and in the manner provided in the Indenture, except that the Notes may be redeemed in full at the option of the Issuer at any time and in the absence of the exercise thereof, by MBIA in whole but not in part at any time after the Outstanding Principal Amount of the Notes declines to 10% or less of the Series Initial IPB, at a redemption price equal to the Outstanding Principal Amount thereof plus accrued interest thereon to the date of redemption. If an Event of Default as defined in the Indenture shall occur and be continuing, the principal of all the Notes may become or be declared due and payable in the manner and with the effect provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the Note Register of the Issuer upon surrender of this Note for registration of transfer at the office or agency of the Issuer in the United States of America maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Indenture Trustee and duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same Stated Maturity of authorized denominations and for the same initial aggregate principal amount will be issued to the designated transferees. Prior to due presentment for registration of transfer of this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue, and neither the Issuer, the Indenture Trustee, nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Issuer, the Indenture Trustee, the Back-up Servicer, the Servicer and MBIA with the consent of the Holders of 66-2/3% in aggregate principal amount of Notes and all other notes issued under the Indenture at the time Outstanding. The Indenture also contains provisions permitting MBIA or the Holders of specified percentages in aggregate principal amount of the Notes and all other notes issued under the Indenture at the time Outstanding with the prior written consent of MBIA, on behalf of the Holders of all Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and 4 134 binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Notes are issuable only in registered form without coupons in such authorized denominations as provided in the Indenture and subject to certain limitations therein set forth. This Note and the Indenture shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to conflicts of laws principles. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal. of and interest on this Note, but solely from the Collateral pledged to the Indenture Trustee under the Indenture and the Obligation Insurance Policy at the times, place and rate, and in the coin or currency, herein prescribed. Notwithstanding anything else to the contrary contained in this Note or the Indenture, the obligation of the Issuer to pay the principal of and interest on this Note is not a general obligation of the Issuer, nor its officers or directors, but is limited solely to the Collateral pledged under the Indenture. STATEMENT OF INSURANCE Municipal Bond Investors Assurance Corporation ("MBIA") has issued a Note Guaranty Insurance Policy (the "Policy") containing the following provisions, such Policy being on file at the offices of the Indenture Trustee at 6th Street and Marquette Avenue, Minneapolis, Minnesota 55479-0069. MBIA, in consideration of the payment of the premium and subject to the terms of the Policy, thereby unconditionally and irrevocably guarantees to any Owner that an amount equal to each full and complete Insured Payment will be received by the Indenture Trustee, as Indenture Trustee for the Owners, on behalf of the Owners, for distribution by the Indenture Trustee of such Insured Payment to each Owner of each Owner's proportionate share of the Insured Payment. MBIA's obligations under the Policy with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee whether or not such funds are properly applied by the Indenture Trustee. Insured Payments shall be made only at the time set forth in the Policy, and no accelerated Insured Payments shall be made regardless of any acceleration of the Obligations, unless such acceleration is at the sole option of MBIA. "Obligations" shall mean: Not to Exceed $25,000,000.00 BLT Finance Corp. III Warehouse Note, Series 1994-B 5 135 Notwithstanding the foregoing paragraph, the Policy does not cover shortfalls, if any, attributable to the liability of the Trust Estate or the Indenture Trustee for withholding taxes, if any (including interest and penalties in respect of any such liability). MBIA will pay any Insured Payment that is a Preference Amount following receipt on a Business Day by the Fiscal Agent (as described below) of (i) a certified copy of the order requiring the return of such Preference Amount, (ii) an opinion of counsel satisfactory to MBIA that such order is final and not subject to appeal, (iii) an assignment in such form as is reasonably required by MBIA, irrevocably assigning to MBIA all rights and claims of the Owner relating to or arising under the Obligations against the debtor which made such preference payment or otherwise with respect to such preference payment and (iv) appropriate instruments to effect the appointment of MBIA as agent for such Owner in any legal proceeding related to such preference payment, such instruments being in a form satisfactory to MBIA, provided that if such documents are received after 12:00 noon, New York City time, on such Business Day, they will be deemed to be received on the following Business Day. Such payments shall be disbursed to the receiver or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Owner and not to any Owner directly unless such Owner has returned principal or interest paid on the Obligations to such receiver or trustee in bankruptcy, in which case such payment shall be disbursed to such Owner. MBIA will pay any other amount payable under the Policy no later than 12:00 noon, New York City time, on the later of the Payment Date on which the related Deficiency Amount is due or the Business Day following receipt in New York, New York on a Business Day by State Street Bank and Trust Company, N.A. as Fiscal Agent for MBIA or any successor fiscal agent appointed by MBIA (the "Fiscal Agent") of a Notice (as described below), provided that if such Notice is received after 12:00 noon, New York City time, on such Business Day, it will be deemed to be received on the following Business Day. If any such Notice received by the Fiscal Agent is not in proper form or is otherwise insufficient for the purpose of making claim under the Policy, it shall be deemed not to have been received by the Fiscal Agent for purposes of this paragraph, and MBIA or the Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee, and the Indenture Trustee may submit an amended Notice. Insured Payments due under the Policy unless otherwise stated therein will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owner by wire transfer of immediately available funds in the amount of the Insured Payment less, in respect Insured Payments, related to Preference Amounts, any amount held by the Indenture Trustee for the payment of such Insured Payment and legally available therefor. The Fiscal Agent is the agent of MBIA only and the Fiscal Agent shall in no event be liable to Owner for any acts of the Fiscal Agent or any failure of MBIA to deposit, or cause to be deposited, sufficient funds to make payments due under the Policy. Subject to the terms of the Agreement, MBIA shall be subrogated to the rights of each Owner to receive payments under the Obligations to the extent of any payment by MBIA under the Policy. 6 136 As used herein, the following terms shall have the following meanings.: "Agreement" means the Indenture dated as of November 1, 1994, among BLT Finance Corp. III as Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, without regard to any amendment or supplement thereto. "Business Day" means any day other than a Saturday, a Sunday or day on which banking institutions in New York City or in the city in which the corporate trust office of the Indenture Trustee under the Agreement is located are authorized or obligated by law or executive order to close. "Deficiency Amount" means (a) for any Payment Date, any shortfall in amounts available in the Collection Account to pay the interest due on the Obligations after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after payment of all amounts payable pursuant to Section 12.02(d)(i) through (iv) of the Agreement, plus (b), on the Stated Maturity, any shortfall in amounts available in the Collection Account to pay the Principal Distribution Amount after giving affect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) of the Agreement and after the payment of all amounts payable pursuant to Section 12.02(d)(i) through (vi) of the Agreement. "Insured Payment" means (i) as of any Payment Date, any Deficiency Amount and (ii) any Preference Amount. "Notice" means the telephonic or telegraphic notice, promptly confirmed in writing by telecopy substantially in the form of Exhibit A attached to the Policy, the original of which is subsequently delivered by registered or certified mail, from the Indenture Trustee specifying the Insured Payment which shall be due and owing on the applicable Payment Date. "Owner" means each Holder (as defined in the Agreement) who, on the applicable Payment Date, is entitled under the terms of the applicable Notes to payment under the Policy. "Preference Amount" means any amount previously distributed to an Owner on the Notes that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a final nonappealable order of a court having competent jurisdiction. Capitalized terms used in the Policy and not otherwise defined therein shall have the respective meanings set forth in the Agreement as of the date of execution of the Policy, without giving effect to any subsequent amendment to or modification of the Agreement unless such amendment or modification has been approved in writing by MBIA. 7 137 Any notice under the Policy or service of proms on the Fiscal Agent of MBIA may be made at the address listed below for the Fiscal Agent of MBIA or such other address as MBIA shall specify in writing to the Indenture Trustee. The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York, New York 10006 Attention: Municipal Registrar and Paying Agency or such other address as the Fiscal Agent and MBIA shall specify to the Indenture Trustee in writing. The Policy is being issued under and pursuant to, and shall be construed under the laws of the State of New York, without giving effect to the conflicts of laws principles thereof. The insurance provided by the Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. The Policy is not cancelable for any reason. The premium on the Policy is not refundable for any reason including payment, or provision being made for payment, prior to final payment of the Obligations. Unless the certificate of authentication hereon has been executed by the Indenture Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, BLT Finance Corp. III has caused this instrument to be signed, manually, by its President or a Vice President. By: __________________________________ [Vice] President 7 138 CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-mentioned Indenture. Dated: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: _________________________________ Authorized Signatory 8 139 GRID TO WAREHOUSE NOTE Disbursement Amount Date of of Principal Warehouse Warehouse Payment & Funding Funding Date Paid - ------- ------- --------- 9 EX-10.16 6 SPECIFIC TERMS AND CONDITIONS OF INDENTURE 1 Exhibit 10.16 - -------------------------------------------------------------------------------- ROTHSCHILD ASSET-BACKED FINANCE CONDUIT V ---------------------------- SPECIFIC TERMS & CONDITIONS OF INDENTURE among BLT FINANCE CORP. III ("Issuer") and BOYLE LEASING TECHNOLOGIES, INC. ("Servicer") and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION ("Back-up Servicer") and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION ("Indenture Trustee") ---------------------------- DATED AS OF NOVEMBER 1, 1994 AND AMENDED AND RESTATED AS OF MAY 1, 1996 - -------------------------------------------------------------------------------- 2 SPECIFIC TERMS AND CONDITIONS OF INDENTURE, dated as of November 1, 1994 and amended and restated as of May 1, 1996, by and among BLT Finance Corp. III, a Massachusetts corporation (the "Issuer"), Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Servicer"), NORWEST Bank Minnesota, National Association, a national banking association, (the "Back-up Servicer") and NORWEST Bank Minnesota, National Association, a national banking association, as trustee (the "Indenture Trustee"). PRELIMINARY STATEMENT This amended and restated Specific Terms and Conditions of Indenture (the "Specific Indenture Terms") is intended to incorporate by reference all of the provisions of the Standard Terms and Conditions of Indenture attached hereto as Appendix 1 (the "Standard Indenture Terms") and all Supplements as described in the Standard Indenture Terms, and together the Specific Indenture Terms, the Standard Indenture Terms and all Supplements are intended to form the Indenture entered into in connection with the financing described below. The Issuer has duly authorized the execution and delivery of the Indenture to provide for the issuance by the Issuer of its 7.33% Lease-Backed Notes, Series 1994-A, due December 16, 1998 (the "Series 1994-A Term Notes") in an aggregate principal amount of $18,885,370.15, the Warehouse Note, Series 1994-B, (the "Series 1994-B Warehouse Note") in an aggregate principal amount of up to $25,000,000 (which Series 1994-B Warehouse Note is now being redeemed), the 6.69% Lease-Backed Notes, Series 1996-A, due May 16, 2000 (the "1996-A Term Notes") in an aggregate principal amount of $23,406,563.11 and the Warehouse Notes, Series 1996-B, (the "1996-B Warehouse Notes") in an aggregate principal amount of up to $20,000,000, each issuable as provided in the Indenture. All covenants and agreements made by the Issuer, the Indenture Trustee, the Back-up Servicer and the Servicer herein are for the benefit and security of the Holders of the Notes and MBIA. The Issuer and the Servicer are entering into the Indenture, and the Indenture Trustee is accepting the trusts created hereby, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged. All things necessary to make the Indenture a valid agreement of the Issuer, the Indenture Trustee, the Back-up Servicer and the Servicer in accordance with its terms have been done. GRANTING CLAUSE The Issuer does hereby transfer, assign, set over, and otherwise convey to the Indenture Trustee for the ratable benefit of the Noteholders and MBIA, without recourse, all of the Issuer's rights, title and interest in and to the following and any and all benefits accruing to the Issuer from: (a) the Lease Receivables and Lease Contracts and all payments received on or with respect to the Lease Contracts and Lease Receivables and due after the Cut-Off Date; (b) the Equipment and any security interest of the Issuer in any of the Equipment that is not owned by the Issuer; (c) any rights of the Issuer under each Insurance Policy related to the Lease Contracts and Insurance Proceeds; (d) the Lease Acquisition Agreement; (e) the Servicing Agreement; (f) all amounts from time to time on deposit in the Collection Account, the Advance Payment Account, the Cash Collateral Account, the Redemption Account and the ACT Account (including any Eligible Investments and other property in such accounts); (g) the Lease Contract Files; and (h) proceeds of the foregoing 1 3 (including, but not by way of limitation, all cash proceeds, accounts, accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit accounts, insurance proceeds, condemnation awards, rights to payment of any and every kind, and other forms of obligations and receivables which at any time constitute all or part or are included in the proceeds of any of the foregoing), in each case whether now owned or hereafter acquired (all of the foregoing being hereinafter referred to as the "Collateral" or "Trust Estate"). The foregoing transfer, assignment, set over and conveyance does not constitute and is not intended to result in a creation or an assumption by the Indenture Trustee, any Noteholder or MBIA of any obligation of the Issuer, the Company, the Servicer or any other Person in connection with the Trust Estate or under any agreement or instrument relating thereto. The Indenture Trustee acknowledges its acceptance on behalf of the Noteholders and MBIA of all right, title and interest previously held by the Issuer in and to the Trust Estate, and declares that it shall maintain such right, title and interest in accordance with the provisions hereof and agrees to perform the duties herein required to the best of its ability to the end that the interests of the Noteholders and MBIA may be adequately and effectively protected. ARTICLE ONE SPECIFIC DEFINITIONS AND PROVISIONS SECTION 1.01 CERTAIN DEFINED TERMS. The Standard Indenture Terms provide that the meaning of certain defined terms used in the Indenture shall be defined in these Specific Indenture Terms. All other terms used in the Indenture have the applicable meanings assigned to them in the Standard Indenture Terms. With respect to the Notes, the following definitions shall apply: "ACH Account": None. "Back-up Servicer": shall initially mean NORWEST Bank Minnesota, National Association. "Back-up Servicer Fee Rate": shall mean five one hundredths of one percent (0.05%) per annum. "Cash Collateral Account Factor": shall mean 1.0067. "Change in Control": shall mean both of the Key Employees shall become deceased, shall become unable to work for a period of six (6) consecutive months or more, or cease to be employed by the Reported Companies. "Collateralization Percentage": shall mean 26%. "Company": shall mean Leasecomm Corporation. "Corporate Trust Office": shall mean the trust office listed in Section 1.02 below. 2 4 "Defaulted Lease Purchase and Substitution Limit": shall mean 6.5%. "Delinquent Lease Purchase and Substitution Limit": shall mean 20%. "Enumerated States": None. "Floor Percentage": shall mean 5%. "Holdback Rate": shall mean 24%. "Indenture Trustee": shall initially mean Norwest Bank Minnesota, National Association. "Independent Accountants": shall mean a firm of independent certified public accountants of recognized national standing. "'Initial ACT Deposit": shall be $0.00. "Issuer": shall mean BLT Finance Corp. III. "Issuer Payment Office": shall mean 950 Winter Street, Waltham, Massachusetts, 02154. "Issuer State of Incorporation": shall mean the Commonwealth of Massachusetts. "Key Employee": shall mean Peter von Bleyleben and Richard Latour. "Lease Receivables": The term "Lease Receivables" shall include Servicing Charges. "Maximum Default Rate": shall mean 7%. "Maximum Delinquency Rate": shall mean 14.5%. "Minimum Required Collateralization Amount": shall mean with respect to the Initial Delivery Date, $5,963,801.10. "Net Worth Requirement": shall mean that the Reported Companies' total stockholders' equity as reflected in the most recent Reported Companies' Financial Statements is equal to at least $5,900,000; provided however that such net worth shall be calculated in accordance with generally accepted accounting principles as in effect on May 1, 1996. "Overdue Payment": shall include Servicing Charges. "Reported Companies": shall have the meaning set forth in the Specific Servicing Terms. "Scheduled Payment": shall exclude payments made pursuant to a TRAC payment and payments made pursuant to a PUT payment clause. "Servicer": shall initially mean Boyle Leasing Technologies, Inc. 3 5 "Transaction Documents Date: except as provided in any Supplement, shall mean November 1, 1994. "Transition Cost": The Transition Cost payable to the Back-up Servicer shall not exceed $50,000. "Trustee Fee Rate": shall mean (i) with respect to the Series 1994-A Notes and the 1994-B Warehouse Note, one tenth of one percent (0.10%) per annum, and with respect to any other Series, as defined in the related Supplement. SECTION 1.02 NATURE OF TRANSFER In the event that the transfer of the Trust Estate is deemed to be a secured financing, the Issuer shall be deemed hereunder to have Granted to the Indenture Trustee and the Issuer does hereby Grant to the Indenture Trustee, for the ratable benefit of the Noteholders and MBIA, a security interest in all of the Issuer's right, title and interest in, to and under the Lease Contracts, the Lease Receivables, the Equipment and the other assets in the Trust Estate, whether now owned or hereafter acquired. For purposes of such Grant, the Indenture shall constitute a security agreement under applicable law. SECTION 1.03 ADDRESSES FOR NOTICES All demands, notices and communications referred to in Section 13.03 (a), (c) or (d) of the Standard Indenture Terms shall be addressed as follows: (a) if to the Issuer, at 950 Winter Street, Waltham, Massachusetts 02154 Attention: President; (b) if to the Servicer, at 950 Winter Street, Waltham, Massachusetts 02154 Attention: President; (c) if to the Back-up Servicer, at Corporate Trust Department, 6th Street & Marquette Avenue, Minneapolis, Minnesota 55479-0069. (d) if to the Indenture Trustee, at Corporate Trust Department, 6th Street & Marquette Avenue, Minneapolis, Minnesota 55479-0069. Any of the above Persons may change the address for notices hereunder by giving notice of such change to other Persons. 4 6 SECTION 1.04 COMPENSATION AND REIMBURSEMENT OF INDENTURE TRUSTEE Reimbursement by the Issuer to the Indenture Trustee and the Back-up Servicer pursuant to Section 7.07(ii) of the Standard Indenture Terms is limited to all reasonable out-of-pocket expenses, disbursements and advances with respect to transportation and food incurred or made by the Indenture Trustee or the Back-up Servicer in accordance with any provision of the Indenture or Servicing Agreement (including the reasonable compensation and the expenses and disbursements of the Indenture Trustee's agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; provided, however, in the event the Indenture Trustee or the Back-up Servicer makes a site visit to the Servicer's offices (other than the Back-up Servicer's annual site visit set forth in Section 7.04(e) of the Standard Servicing Terms) necessitated, in the Back-up Servicer's reasonable judgment, as a result of its activities pursuant to Section 7.04 of the Standard Servicing Terms, the Issuer shall reimburse the Indenture Trustee or the Back-up Servicer for all reasonable out-of-pocket expenses, disbursements and advances incurred or made by the Indenture Trustee or the Back-up Servicer, except any such expense, disbursement or advance as may be attributable to its negligence or bad faith. ARTICLE TWO INDENTURE COMPRISED OF SPECIFIC AND STANDARD TERMS The Specific Indenture Terms incorporate by reference all of the provisions of the Standard Indenture Terms attached hereto as Appendix 1, which together with any Supplement form the Indenture. Notwithstanding the foregoing, if any provision of these Standard Indenture Terms conflicts with the provisions of these Specific Indenture Terms, the provisions of the Specific Indenture Terms shall control and if any provision of a Supplement conflicts with the provisions of either the Standard Indenture Terms or the Specific Indenture Terms, the provisions of the Supplement shall control. ARTICLE THREE MODIFICATION OF CERTAIN PROVISIONS OF INDENTURE (a) The following definitions contained in the Standard Indenture Terms shall be amended as follows: "Accrual Period": The period beginning on the sixteenth day of each month and ending on the fifteenth day of the immediately following month (or, in the case of the Accrual Period that is applicable to an Initial Payment Date, beginning on the Accrual Date for such Notes). "Cut-Off Date": With respect to any Series of Term Notes, the meaning specified in the applicable Supplement, and with respect to any Series of Warehouse Notes, (i) with respect to a Warehouse Funding occurring on or before the Determination Date that occurs during the same calendar month as such Warehouse Funding, the last day of the calendar month ending prior to the related Due Period, and (ii) with respect to any Lease Contract funded in a Warehouse Funding occurring after the Determination Date that occurs during the same 5 7 calendar month as such Warehouse Funding, the last day of the calendar month prior to the month such Warehouse Funding occurs. "Insurance Agreement": Shall mean each Insurance Agreement by and among MBIA, the Issuer, the Company, the Back-up Servicer and the Indenture Trustee, executed in connection with the Issuance of a Series of Notes. "Payment Date": For each Series, the sixteenth day of each calendar month (or if such day is not a Business Day, the next succeeding Business Day) commencing on the Initial Payment Date for such Series. "Pro Rata Share": With respect to any distribution of principal or interest on any Series of Notes on any Payment Date, a percentage determined by dividing the Target Principal Distribution Amount or amount of interest, as applicable, scheduled to be paid on such Series of Notes by the aggregate Target Principal Distribution Amount or amount of interest, as applicable, scheduled to be paid on all Series of Notes on such Payment Date; provided, however, with respect to payments of Additional Principal Amounts on any Payment Date, "Pro Rata Share" for any Series of Notes shall mean a percentage determined by dividing (a) the decline in the related Series IPB since the Calculation Date preceding the Trigger Event by (b) the decline in the Aggregate IPB since the Calculation Date preceding the Trigger Event. "Specific Indenture Terms": The Specific Terms and Conditions of Indenture, dated as of November 1, 1994 and amended and restated as of May 1, 1996, among the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee, as amended from time to time. "Warehouse Funding Date": Shall mean, unless otherwise provided in an applicable Supplement, any Business Day on which the Issuer desires to obtain a Warehouse Funding in accordance with the terms hereof, provided, however, that (a) there shall be no more than two Warehouse Funding Dates per week and (b) no Warehouse Fundings shall occur after Warehouse Funding Termination Date or the date that the Issuer or MBIA, as applicable, provides notice to the Indenture Trustee pursuant to Section 10.02 hereof that such Series of Warehouse Notes are to be redeemed by the Issuer or MBIA, as applicable. (b) The first sentence of Section 2.03 of the Standard Indenture Terms shall be amended and restated as follows: "The Notes shall be executed on behalf of the Issuer by its President, its Vice President and Treasurer or its Vice President and Clerk. No corporate seal shall be required." (c) The provisions of Section 3.03(a)(ii) of the Standard Indenture Terms shall be amended and restated as follows: "(ii) the delivery by the Issuer to the Indenture Trustee on or before the second Business Day immediately prior to the requested Warehouse Funding Date of the original executed counterpart of the Lease Contracts relating to such Warehouse Funding and the other items comprising the related Lease Contract Files." 6 8 (d) The provisions of Section 4.04(e)(iii) of the Standard Indenture Terms shall not be applicable. (e) Section 5.01(b) shall be amended to include the following sentence at the end thereof: "Any costs or fees incurred in connection with the delivery of the Opinion of Counsel referred to in this Section 5.01(b) shall be borne by MBIA." (f) Existing Section 6.15 shall be renumbered as Section 6.15(a) and the following new subsection shall be added thereafter: "(b) Any Event of Default by the Issuer pursuant to Section 6.01(3) hereof that is cured and for which no notice of default is delivered shall be deemed waived without the necessity of written waiver or consent." (g) Section 12.02(d)(xi) shall be amended and restated as follows: (xi) on and after the Payment Date following a Trigger Event, apply any remaining funds to the payment of Note principal on each Series of Outstanding Notes, in proportion to the Pro Rata Share for such Series. ARTICLE FOUR COUNTERPARTS This Indenture may be executed in one or more counterparts all of which together shall constitute one original document. ARTICLE FIVE OTHER TRANSACTIONS Nothing contained in this Indenture or the other Transaction Documents shall preclude the Servicer or the Company from entering into other credit arrangements or securitization transactions with respect to collateral similar to the Collateral. ARTICLE SIX ACKNOWLEDGMENT In connection with the amendment and restatement of these Specific Indenture Terms, the parties hereby authorize modifications to the form of the Monthly Servicer Report as necessary to reflect such amendments. 7 9 IN WITNESS WHEREOF, the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee have caused the Indenture to be duly executed by their respective officers thereunto duly authorized as of the date and year first above written. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Indenture Trustee By: /s/ Bonnie Seideman ----------------------------------- Name: Bonnie Seideman Title: Assistant Vice President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Back-up Servicer By: /s/ Bonnie Seideman ----------------------------------- Name: Bonnie Seideman Title: Assistant Vice President BLT FINANCE CORP. III., Issuer By: /s/ Richard F. Laktim ----------------------------------- Name: Richard F. Laktim Title: Vice President BOYLE LEASING TECHNOLOGIES, INC. Servicer By: /s/ Richard F. Laktim ----------------------------------- Name: Richard F. Laktim Title: Executive Vice President 10 Consented and Agreed to as of the date first above written: MBIA INSURANCE CORPORATION By: /s/ illegible ---------------------------------- Title: Assistant Secretary FIRST UNION NATIONAL BANK By: ---------------------------------- Title: NATIONAL BANK OF ALASKA By: ---------------------------------- Title: 11 Consented and Agreed to as of the date first above written: MBIA INSURANCE CORPORATION By: ---------------------------------- Title: FIRST UNION NATIONAL BANK By: /s/ illegible ---------------------------------- Title: Vice President NATIONAL BANK OF ALASKA By: /s/ illegible ---------------------------------- Title: EX-10.17 7 SUPPLEMENT TO INDENTURE 1 Exhibit 10.17 SUPPLEMENT TO INDENTURE, TERM NOTES, SERIES 1996-A This INDENTURE SUPPLEMENT, dated as of May 1, 1996, is entered into by and among BLT Finance Corp. III, a Massachusetts corporation (the "Issuer"), Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Servicer"), Norwest Bank Minnesota, National Association, a national banking association, (the "Back-up Servicer") and Norwest Bank Minnesota, National Association, a national banking association, as trustee (the "Indenture Trustee"). Capitalized terms used herein and not otherwise defined are, unless the context otherwise requires, used as defined in the Standard Indenture Terms or the Specific Indenture Terms. This Indenture Supplement incorporates by reference all of the provisions of the Standard Terms and Conditions of Indenture, dated as of November 1, 1994 (the "Standard Indenture Terms") and the Specific Terms and Conditions of Indenture, dated as of November 1, 1994 and amended and restated as of May 1, 1996, among the Issuer, the Servicer, the Indenture Trustee and the Backup Servicer (the "Specific Indenture Terms"), which together are intended to form the Indenture (the "Indenture") entered into in connection with the financing described below. The Issuer has duly authorized the execution and delivery of this Indenture Supplement to provide for the issuance of the Issuer's 6.69% Lease-Backed Term Notes, Series 1996-A (the "1996-A Term Notes") in an aggregate principal amount of $23,406,563.11, issuable as provided in the Indenture. The Series Lease Contracts previously granted to the Indenture Trustee in connection with the Warehouse Fundings under the Series 1994-B Warehouse Note are now being designated as the Series Lease Contracts for the Series 1996-A Term Note. The Series Lease Schedule for the Series 1996-A Term Notes is attached hereto as Schedule A and the Targeted Balance Schedule with respect to the 1996-A Term Notes is attached hereto as Schedule B. Pursuant to Section 2.02 of the Standard Indenture Terms, this Indenture Supplement sets forth the following additional terms applicable to the 1996-A Term Notes, which series is hereby designated as Term Notes: SECTION 1. DEFINITIONS. "Accrual Date": shall initially mean May 9, 1996. Cut-off Date": shall mean (i) with respect to the definitions of "Initial Series IPB" and "Term Note Funding Amount", April 30, 1996, and (ii) for all other purposes, the related Warehouse Funding Date upon which each Lease Asset was contributed to the Issuer. "Delivery Date": shall mean May 9, 1996. "Initial Cash Deposit": $30,448.04. "Initial Payment Date": shall be June 17, 1996. "MBIA Premium": shall have the meaning specified in the related Insurance Agreement. 2 "MBIA Premium Rate": shall have the meaning specified in the related Insurance Agreement. "Note Interest Rate": shall mean 6.69%. "Note Insurance Policy": shall mean MBIA Policy Number 21071. "Private Placement Memorandum" or "Final Private Placement Memorandum": shall refer to the Private Placement Memorandum dated May 8, 1996. "Stated Maturity": shall mean May 16, 2000. "Term Note Funding Amount": shall not exceed $23,406,563.11. "Transaction Documents Date": shall mean May 1, 1996 with respect to the 1996-A Term Note Supplement, the Note Insurance Policy with respect to the 1996-A Term Notes and the related Insurance Agreement; for all other purposes "Transaction Documents Date" shall mean November 1, 1994. "Trustee Fee Rate": shall mean with respect to the 1996-A Term Notes, one twentieth of one percent (.05%) per annum. ARTICLE TWO COUNTERPARTS This Indenture Supplement may be executed in one or more counterparts all of which together shall constitute one original document. 3 IN WITNESS WHEREOF, the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee have caused this Indenture Supplement to be duly executed by their respective officers thereunto duly authorized as of the date and year first above written. BLT FINANCE CORP. III, as Issuer By: /s/ Peter Bleyleben ---------------------------------- Name: Title: President BOYLE LEASING TECHNOLOGIES, INC., as Servicer By: /s/ Peter Bleyleben ---------------------------------- Name: Title: President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Back-up Servicer By: /s/ Bonnie Seideman ---------------------------------- Name: Bonnie Seideman Title: Assistant Vice President NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Indenture Trustee By: /s/ Bonnie Seideman ---------------------------------- Name: Bonnie Seideman Title: Assistant Vice President 4 SCHEDULE A SERIES 1996-A LEASE SCHEDULE Delivered to Boyle Leasing Technologies, Inc.; the Indenture Trustee; the Placement Agent; and Giancarlo & Gnazzo. 5 SCHEDULE B TARGETED BALANCE SCHEDULE Date Balance ---- ------- 09-May-96 23,406,563.11 16-Jun-96 22,526,588.37 16-Jul-96 21,717,677.35 16-Aug-96 21,192,665.25 16-Sep-96 20,667,214.27 16-Oct-96 20,140,526.87 16-Nov-96 19,611,762.98 16-Dec-96 19,080,524.03 16-Jan-97 18,548,620.20 16-Feb-97 18,012,910.43 16-Mar-97 17,474,169.67 16-Apr-97 16,933,346.87 16-May-97 16,390,831.95 16-Jun-97 15,843,924.10 16-Jul-97 15,318,614.57 16-Aug-97 14,905,119.24 16-Sep-97 14,487,663.18 16-Oct-97 14,068,212.98 16-Nov-97 13,646,983.99 16-Dec-97 13,214,283.07 16-Jan-98 12,769,823.99 16-Feb-98 12,099,093.32 16-Mar-98 11,241,982.42 16-Apr-98 10,439,195.57 16-May-98 9,687,806.15 16-Jun-98 8,996,086.99 16-Jul-98 8,362,744.62 16-Aug-98 7,742,572.90 16-Sep-98 7,125,562.73 16-Oct-98 6,510,472.12 16-Nov-98 5,899,035.67 16-Dec-98 5,320,189.04 16-Jan-99 4,775,794.12 16-Feb-99 4,172,323.35 16-Mar-99 3,492,283.14 16-Apr-99 2,846,470.78 16-May-99 2,244,378.97 16-Jun-99 1,670,262.83 16-Jul-99 1,111,233.39 16-Aug-99 582,690.29 16-Sep-99 105,249.05 16-Oct-99 0.00 EX-10.18 8 SUPPLEMENT TO INDENTURE 1 Exhibit 10.18 SUPPLEMENT TO INDENTURE, TERM NOTES, SERIES 1997-A This INDENTURE SUPPLEMENT, dated as of August 1, 1997, is entered into by and among BLT Finance Corp. III, a Massachusetts corporation (the "Issuer"), Boyle Leasing Technologies, Inc., a Massachusetts corporation, (the "Servicer"), Norwest Bank Minnesota, National Association, a national banking association, (the "Back-up Servicer") and Norwest Bank Minnesota, National Association, a national banking association, as trustee (the "Indenture Trustee"). Capitalized terms used herein and not otherwise defined are, unless the context otherwise requires, used as defined in the Standard Indenture Terms or the Specific Indenture Terms. This Indenture Supplement incorporates by reference all of the provisions of the Standard Terms and Conditions of Indenture, dated as of November 1, 1994 (the "Standard Indenture Terms") and the Specific Terms and Conditions of Indenture, dated as of November 1, 1994 and amended and restated as of May 1, 1996, among the Issuer, the Servicer, the Indenture Trustee and the Back-up Servicer (the "Specific Indenture Terms"), which together are intended to form the Indenture (the "Indenture") entered into in connection with the financing described below. The Issuer has duly authorized the execution and delivery of this Indenture Supplement to provide for the issuance of the Issuer's 6.42% Lease-Backed Term Notes, Series 1997-A (the "1997-A Term Notes") in an aggregate principal amount of $44,762,573, issuable as provided in the Indenture. A portion of the Series Lease Contracts previously granted to the Indenture Trustee in connection with the Warehouse Fundings under the Issuer's Lease-Backed Warehouse Note Series 1996-B issued pursuant to the Indenture, are now being designated as the Series Lease Contracts for the Series 1997-A Term Note and additional Lease Contracts are being acquired from Boyle Leasing Technologies, Inc. pursuant to the Standard Terms and Conditions of Lease Acquisition dated as of November 1, 1994, the Specific Terms and Conditions of Lease Acquisition, dated as of November 1, 1994 and an Assignment and Assumption Agreement dated as of August 1, 1997. The Series Lease Schedule for the Series 1997-A Term Notes is attached hereto as Schedule A and the Targeted Balance Schedule with respect to the 1997-A Term Notes is attached hereto as Schedule B. Pursuant to Section 2.02 of the Standard Indenture Terms, this Indenture Supplement sets forth the following Additional terms applicable to the 1997-A Term Notes, which series is hereby designated as Term Notes: SECTION 1. DEFINITIONS. "Accrual Date": shall initially mean August 14, 1997. "Cut-off Date": shall mean with respect to the definitions of "Initial Series IPB" and "Term Note Funding Amount," July 31, 1997. "Delivery Date": shall mean August 14, 1997. "Initial Cash Deposit": $274,602.62. 2 "Initial Payment Date": shall be September 16, 1997. "Insurance Agreement": shall mean the Insurance Agreement dated as of May 1, 1996 by and among MBIA Insurance Corporation (the "Insurer"), Leasecomm Corporation (the "Company"), the Servicer, the Issuer, Rothschild Inc. (the "Note Administrator") and the Indenture Trustee in its capacity as Indenture Trustee and Back-up Servicer as supplemented and amended pursuant to Supplement and Amendment to Insurance Agreement dated as of August 1, 1997 by and among the Insurer, the Company, the Servicer, the Issuer, the Note Administrator and the Indenture Trustee in its capacity as Indenture Trustee and Back-up Servicer. "MBIA Premium": shall have the meaning specified in the Insurance Agreement. "MBIA Premium Rate": shall have the meaning specified in the Insurance Agreement. "Note Interest Rate": shall mean 6.42%. "Note Insurance Policy": shall mean MBIA Policy Number 24545. "Private Placement Memorandum" or "Final Private Placement Memorandum": shall refer to the Private Placement Memorandum dated August 12, 1997. "Stated Maturity": shall mean January 16, 2003. "Term Note Funding Amount": shall not exceed $44,762,573. "Transaction Documents Date": shall mean August 1, 1997 with respect to the 1997-A Term Note Supplement, the Note Insurance Policy with respect to the 1997-A Term Notes and the Supplement and Amendment to Insurance Agreement; for all other purposes "Transaction Documents Date" shall mean November 1, 1994. "Trustee Fee Rate": shall mean with respect to the 1997-A Term Notes, one twentieth of one percent (.05%) per annum. ARTICLE TWO COUNTERPARTS This Indenture Supplement may be executed in one or more counterparts all of which together shall constitute one original document. 3 IN WITNESS WHEREOF, the Issuer, the Servicer,the Back-up Servicer and the Indenture Trustee have caused this Indenture Supplement to be duly executed by their respective officers thereunto duly authorized as of the date and year first above written. BLT FINANCE CORP. III as Issuer By: /s/ J.G. Hines ---------------------------------------- Name: J.G. Hines Title: Vice President BOYLE LEASING TECHNOLOGIES, INC. as Servicer By: /s/ Richard F. Latour ----------------------------------------- Name: Richard F. Latour Title: Executive Vice President, Chief Operating Officer, and Chief Financial Officer NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Back-up Servicer By: ---------------------------------------- Name: Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Indenture Trustee By: ---------------------------------------- Name: Title: 4 IN WITNESS WHEREOF, the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee have caused this Indenture Supplement to be duly executed by their respective officers thereunto duly authorized as of the date and year first above written. BLT FINANCE CORP. III as Issuer By: ---------------------------------------- Name: Title: BOYLE LEASING TECHNOLOGIES, INC. as Servicer By: ---------------------------------------- Name: Title: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, as Back-up Servicer By: /s/ Eileen R. Stelzner ------------------------------------------ Name: Eileen R. Stelzner Title: Corporate Trust Officer NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION as Indenture Trustee By: /s/ Eileen R. Stelzner ------------------------------------------ Name: Eileen R. Stelzner Title: Corporate Trust Officer 5 SCHEDULE A SERIES 1997-A LEASE SCHEDULE Delivered to Boyle Leasing Technologies, Inc.; the Indenture Trustee; the Placement Agent; and Giancarlo & Gnazzo. 6 SCHEDULE B TARGETED BALANCE SCHEDULE
Period Date Balance ------ ---- ------- 1 16-Sep-97 44,762,573.36 2 16-Oct-97 43,488,915.63 3 16-Nov-97 42,207,317.88 4 16-Dec-97 40,918,181.19 5 16-Jan-98 39,619,531.10 6 16-Feb-98 38,308,518.36 7 16-Mar-98 36,984,734.71 8 16-Apr-98 35,644,932.68 9 16-May-98 34,292,481.41 10 16-Jun-98 32,930,081.39 11 16-Jul-98 31,552,943.38 12 16-Aug-98 30,161,456.77 13 16-Sep-98 28,814,038.57 14 16-Oct-98 27,524,034.45 15 16-Nov-98 26,291,149.64 16 16-Dec-98 25,112,604.99 17 16-Jan-99 23,944,899.97 18 16-Feb-99 22,771,220.34 19 16-Mar-99 21,686,720.29 20 16-Apr-99 20,701,356.97 21 16-May-99 19,714,761.70 22 16-Jun-99 18,718,707.73 23 16-Jul-99 17,722,599.01 24 16-Aug-99 16,734,748.97 25 16-Sep-99 15,746,166.65 26 16-Oct-99 14,744,370.16 27 16-Nov-99 13,318,153.31 28 16-Dec-99 12,025,807.13 29 16-Jan-2000 10,691,344.47 30 16-Feb-2000 9,413,943.78 31 16-Mar-2000 7,873,434.99 32 16-Apr-2000 6,385,812.30 33 16-May-2000 5,045,581.47 34 16-Jun-2000 3,833,846.54 35 16-Jul-2000 2,743,860.72 36 16-Aug-2000 1,736,003.35 37 16-Sep-2000 856,445.14 38 16-Oct-2000 91,526.09 39 16-Nov-2000 0.00
EX-10.19 9 SPECIMEN 1997-A NOTE 1 Exhibit 10.19 TERM NOTE THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE INDENTURE UNDER WHICH THIS NOTE ISSUED (A COPY OF WHICH IS AVAILABLE FROM THE INDENTURE TRUSTEE UPON REQUEST). DUE TO THE PROVISIONS FOR THE PAYMENT OF PRINCIPAL CONTAINED HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING THIS NOTE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY INQUIRY OF THE INDENTURE TRUSTEE. No. 1 $44,762,573 CUSIP NO. 055510 AD 3 BLT FINANCE CORP. III 6.42% LEASE-BACKED NOTE, SERIES 1997-A DELIVERY DATE: August 14,1997 STATED MATURITY: January 16, 2003 BLT Finance Corp. III, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts (the "Issuer", which term includes any successor entity under the Indenture referred to below), for value received, hereby promises to pay to Principal Mutual Life Insurance Company, or its register assigns, the principal sum of FORTY FOUR MILLION SEVEN HUNDRED SIXTY TWO THOUSAND FIVE HUNDRED SEVENTY THREE DOLLARS ($44,762,573) in monthly installments beginning on September 16, 1997, and to pay interest monthly in arrears on the unpaid portion of said principal sum (and, to the extent that the payment of such interest shall be legally enforceable on any overdue installment of interest on this Note) on the sixteenth day of each calendar month or, if such sixteenth day is not a Business Day, the Business Day immediately following (each, a "Payment Date"), for the period from and including the Delivery Date set forth above through September 16, 1997, and thereafter, monthly from and including the most recent Payment Date through the day immediately preceding the applicable Payment Date, until the last day preceding the Final Payment Date, at the rate of 6.42% per annum (calculated on the basis of a 360-day year consisting of 12 months of 30 days each). Each monthly installment of principal payable on this Note shall be an amount equal to the Principal Distribution Amount plus any Additional Principal Amount, as such term is defined in the Indenture described herein. Any remaining unpaid portion of the principal amount of this Note shall be due and payable no later than the Stated Maturity referred to above. The interest and principal so payable on any Payment Date will, as provided in the 2 Indenture, be paid to the Person in whose name this Note is registered on the Record Date for such Payment Date, which shall be the close of business on the last day of the month prior to such Payment Date (whether or not a Business Day) or the Delivery Date with respect to the initial Payment Date. The principal and interest on this Note are payable by check mailed by first-class mail to the Person whose name appears as the Registered Holder of this Note on the Note Register at the address of such Person as it appears on the Note Register, or by wire transfer in immediately available funds to the account specified in writing to the Indenture Trustee by the Person whose name appears as the Registered Holder of this Note on the Note Register received at least five Business Days prior to the Record Date for the Payment Date on which wire transfers will commence, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Funds represented by checks returned undelivered will be held for payment to the person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated as such by the Issuer for such purpose pursuant to the Indenture. This Note is one of a duly authorized issue of Notes of the Issuer designated as its 6.42% Lease-Backed Notes, Series 1997-A Due January 16, 2003 (herein called the "Notes") issued and to be issued under the Specific Terms and Conditions of Indenture dated as of November 1, 1994 and amended and restated as of May 1, 1996, and the Standard Terms and Conditions of Indenture dated November 1, 1994, appended thereto and incorporated therein (herein called the "Indenture"), among the Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Indenture Trustee (the "Indenture Trustee", which term includes any successor Indenture Trustee under the Indenture) and Back-up Servicer, to which the Indenture, and all indentures supplemental thereto, reference is hereby made for a statement of the respective rights thereunder of the Issuer, the Indenture Trustee and the Holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Notes are secured by certain Lease Receivables and by certain other Collateral described in the Indenture and the Note Insurance Policy issued by MBIA. The Trust Estate secures the Notes equally and ratably without prejudice, priority or distinction between any Note and any other Note by reason of time of issue or otherwise, and also secures the payment of certain other amounts and certain other obligations as described in the Indenture. Unless earlier declared due and payable by reason of an Event of Default, Notes are payable only at the time and in the manner provided in the Indenture and are not redeemable or prepayable at the option of the Issuer before such time, except that the Notes of any series shall be redeemable at the option of the Issuer, and in the absence of the exercise thereof, by MBIA in whole but not in part, at any time after the Outstanding Principal Amount of such Series of Notes declines to less than 10% of the original principal amount of such Series of Notes at a redemption price equal to the Outstanding Principal Amount thereof plus accrued interest thereon to the date of redemption. If an Event of Default as defined in the Indenture shall occur and be -2- 3 continuing, the principal of all the Notes may become or be declared due and payable in the manner and with the effect provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the Note Register of the Issuer upon surrender of this Note for registration of transfer at the office or agency of the Issuer in the United States of America maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Indenture Trustee and duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same Stated Maturity of authorized denominations and for the same initial aggregate principal amount will be issued to the designated transferees. Prior to due presentment for registration of transfer of this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue, and neither the Issuer, the Indenture Trustee, nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Issuer, the Indenture Trustee, the Back-up Servicer, the Servicer and MBIA with the consent of the Holders of 66 2/3% in aggregate principal amount of Notes at the time Outstanding. The Indenture also contains provisions permitting MBIA or the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding with the prior written consent of MBIA, on behalf of the Holders of all Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Notes are issuable only in registered form without coupons in such authorized denominations as provided in the Indenture and subject to certain limitations therein set forth. This Note and the Indenture shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to conflicts of laws principles. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note, but solely from the Collateral pledged to the Indenture Trustee under the Indenture and the Policy at the times, place and rate, and in the coin or currency, herein prescribed. Notwithstanding anything else to the contrary contained in this Note or the Indenture, the obligation of the Issuer to pay the principal of and interest on this Note is -3- 4 not a general obligation of the Issuer, nor its officers or directors, but is limited solely to the Collateral pledged under the Indenture. STATEMENT OF INSURANCE ---------------------- OBLIGATIONS: $44,762,573 POLICY NUMBER: 24545 BLT Finance Corp., III 6.42% Lease-Backed Term Notes, Series 1997-A MBIA Insurance Corporation (the "Insurer"), in consideration of the payment of the premium and subject to the terms of the Note Guaranty Insurance Policy (the "Policy"), thereby unconditionally and irrevocably guarantees to any Owner that an amount equal to each full and complete Insured Payment will be received by Norwest Bank Minnesota, National Association, or its successor, as indenture trustee for the Owners (the "Indenture Trustee"), on behalf of the Owners, from the Insurer for distribution by the Indenture Trustee to each Owner of each owner's proportionate share, as determined in accordance with the Agreement (as defined below), of the Insured Payment. The Insurer's obligations under the Policy with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee, whether or not such funds are properly applied by the Indenture Trustee. Insured Payments shall be made only at the time set forth in the Policy, and no accelerated Insured Payments shall be made regardless of any acceleration of the Obligations, unless such acceleration is at the sole option of the Insurer. Notwithstanding the foregoing paragraph, the Policy does not cover shortfalls, if any, attributable to the liability of the Trust Estate or the Indenture Trustee for withholding taxes, if any (including interest and penalties in respect of any such liability). Furthermore, the Policy covers with respect to the principal amount of the Obligations only such amount as is outstanding at the 1997-A Stated Maturity. The Insurer will pay any Insured Payment that is a Preference Amount on the Business Day following receipt on a Business Day by the Fiscal Agent (as described below) of (i) a certified copy of the order requiring the return of such Preference Amount, (ii) an opinion of counsel satisfactory to the Insurer that such order is final and not subject to appeal, (iii) an assignment in such form as is reasonably required by the Insurer, irrevocably assigning to the Insurer all rights and claims of the Owner relating to or arising under the Obligations against the debtor which made such preference payment or otherwise with respect to such preference payment and (iv) appropriate instruments to effect the appointment of the Insurer as agent for such Owner in any legal proceeding related to such preference payment, such instruments being in a form satisfactory to the Insurer, provided that if such documents are received after 12:00 noon, New York City time on such Business Day, they will be deemed to be received on the following Business Day. Such payments shall be disbursed to the receiver or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Owner and not to any Owner directly -4- 5 unless such Owner has returned principal or interest paid on the Obligations to such receiver or trustee in bankruptcy, in which case such payment shall be disbursed to such Owner. The Insurer will pay any other amount payable under the Policy no later than 12:00 noon, New York City time on the later of the Payment Date on which the related Deficiency Amount is due or the Business Day following receipt in New York, New York on a Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by the Insurer (the "Fiscal Agent") of a Notice (as described below); provided that if such Notice is received after 12:00 noon New York City time on such Business Day, it will be deemed to be received on the following Business Day. If any such Notice received by the Fiscal Agent is not in proper form or is otherwise insufficient for the purpose of making claim under the Policy it shall be deemed not to have been received by the Fiscal Agent for purposes of this paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee and the Indenture Trustee may submit an amended Notice. Insured Payments due under the Policy unless otherwise stated therein will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners by wire transfer of immediately available funds in the amount of the Insured Payment less, in respect of Insured Payments related to Preference Amounts, any amount held by the Indenture Trustee for payment of such Insured Payment and legally available therefor. The Fiscal Agent is the agent of the Insurer only and the Fiscal shall in no event be liable to Owners for any acts of the Fiscal Agent or any failure to deposit or cause to be deposited sufficient funds to make payments due under the Policy. Subject to the terms of the Agreement, the Insurer shall be subrogated to the rights of each Owner to receive payments under the Obligations to the extent of any payment by the Insurer under the Policy. As used in the Policy, the following terms shall have the following meanings: "Agreement" means the Standard Terms of Indenture, dated as of November 1, 1994 and the Specific Terms and Conditions of Indenture, dated as of November 1, 1994, and as amended and restated as of May 1, 1996, among BLT Finance Corp. III, as Issuer, Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, and Boyle Leasing Technologies, Inc., as Servicer, without regard to any amendment or supplement thereto (other than the Supplements to the Indenture for the 1994-A Term Notes, dated as of November 1, 1994, the Supplements to the Indenture for the 1996-A Term Notes and the 1996-B Warehouse Notes, each dated as of May 1, 1996 and the Supplement to the Indenture for the 1997-A Term Notes, dated as of August 1, 1997), unless such amendment or supplement is approved by the Insurer. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York City or in the city in which the principal place of business of -5- 6 the Issuer or the Servicer or the Corporate Trust Office of the Indenture Trustee under the Agreement is located are authorized or obligated by law or executive order to close. "Deficiency Amount" means (a) for any Payment Date, any shortfall in amounts available in the Collection Account to pay the interest due on the Obligations under Section 12.02(d)(vi) of the Agreement after giving effect to the transfers from the Cash Collateral Account pursuant to Sections 12.03(d)(i) and (iii) of the Agreement and after payment of all amounts payable pursuant to Sections 12.02(d)(i) through (iv) of the Agreement, plus (b) on the Stated Maturity, any shortfall in amounts available in the Collection Account to pay the Principal Distribution Amount for the Obligations pursuant to Section 12.02(d)(vii) of the Agreement after giving effect to the transfers from the Cash Collateral Account pursuant to Sections 12.03(d)(i) and (iii) of the Agreement and after the payment of all amounts payable pursuant to Sections 12.02(d)(i))(i) through (vi) of the Agreement. "Insured Payment" means (i) as of any Payment Date, any Deficiency Amount and (ii) any Preference Amount. "Notice" means the telephonic or telegraphic notice, promptly confirmed in writing by telecopy substantially in the form of Exhibit A attached to the Policy, the original of which is subsequently delivered by registered or certified mail, from the Indenture Trustee specifying the related Insured Payment which shall be due and owing on the applicable Payment Date. "Owner" means each Noteholder who, on the applicable Payment Date, is entitled under the terms of the applicable Obligations to payment thereunder. "Preference Amount" means any amount previously distributed to an Owner on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a final nonappealable order of a court having competent jurisdiction. Capitalized terms used in the Policy and not otherwise defined in the Policy shall have the respective meanings set forth in the Agreement as of the date of execution of the Policy, without giving effect to any subsequent amendment or modification to the Agreement unless such amendment or modification has been approved in writing by the Insurer. Any notice under the Policy or service of process on the Fiscal Agent may be made at the address listed below for the Fiscal Agent or such other address as the Insurer shall specify in writing to the Indenture Trustee. The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such other address as the Fiscal Agent shall specify to the Indenture Trustee in writing. The Policy is being issued under and pursuant to, and shall be construed under, the laws of the State of New York, without giving effect to the conflict of laws principles thereof. -6- 7 The insurance provided by the Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. The Policy is not cancelable for any reason. The premiums on the Policy are not refundable for any reason including payment, or provision being made for payment, prior to maturity of the 1997-A Term Notes. Unless the certificate of authentication hereon has been executed Indenture Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, BLT Finance Corp III has caused this instrument to be signed, manually, by its President or a Vice President. By: /s/ illegible --------------------------- Vice President CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-mentioned Indenture. Dated: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: /s/ illegible ---------------------------- Authorized Signatory -7- EX-10.20 10 SPECIMEN 1996-A NOTE 1 Exhibit 10.20 TERM NOTE THIS NOTE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS AND CONDITIONS SET FORTH IN THE INDENTURE UNDER WHICH THIS NOTE ISSUED (A COPY OF WHICH IS AVAILABLE FROM THE INDENTURE TRUSTEE UPON REQUEST). DUE TO THE PROVISIONS FOR THE PAYMENT OF PRINCIPAL CONTAINED HEREIN, THE OUTSTANDING PRINCIPAL AMOUNT OF THIS NOTE LESS THAN THE AMOUNT SHOWN ON THE FACE HEREOF. ANYONE PURCHASING THIS NOTE MAY ASCERTAIN THE OUTSTANDING PRINCIPAL AMOUNT HEREOF BY INQUIRY OF THE INDENTURE TRUSTEE. No. 1 $23,406,563.11 CUSIP NO.055510 AB 7 BLT FINANCE CORP. III 6.42% LEASE-BACKED NOTE, SERIES 1997-A DELIVERY DATE: May 9, 1996 STATED MATURITY: May 16, 2000 BLT Finance Corp. III, a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts (the "Issuer", which term includes any successor entity under the Indenture referred to below), for value received, hereby promises to pay to Principal Mutual Life Insurance Company, or its register assigns, the principal sum of TWENTY THREE MILLION FOUR HUNDRED SIX THOUSAND DOLLARS AND FIVE HUNDRED SIXTY THREE DOLLARS AND ELEVEN CENTS ($23,406,563.11) in monthly installments beginning on June 17, 1996, and to pay interest monthly in arrears on the unpaid portion of said principal sum (and, to the extent that the payment of such interest shall be legally enforceable on any overdue installment of interest on this Note) on the sixteenth day of each calendar month or, if such sixteenth day is not a Business Day, the Business Day immediately following (each, a "Payment Date"), for the period from and including the Delivery Date set forth above through June 16, 1997, and thereafter, monthly from and including the most recent Payment Date through the day immediately preceding the applicable Payment Date, until the last day preceding the Final Payment Date, at the rate of 6.69% per annum (calculated on the basis of a 360-day year consisting of 12 months of 30 days each). Each monthly installment of principal payable on this Note shall be an amount equal to the Principal Distribution Amount plus any Additional Principal Amount, as such term is defined in the Indenture described herein. Any remaining unpaid portion of the principal amount of this Note shall be due and payable no later than the Stated Maturity referred to above. The interest and principal so payable on any Payment 2 Date will, as provided in the Indenture, be paid to the Person in whose name this Note is registered on the Record Date for such Payment Date, which shall be the close of business on the last day of the month prior to such Payment Date (whether or not a Business Day). Interest shall be calculated on the basis of a 360-day year consisting of 12 months of 30 days each. The principal and interest on this Note are payable by wire transfer in immediately available funds to the account specified in writing to the Indenture Trustee by the Person whose name appears as the Registered Holder of this Note on the Note Register as specified by the holder of the Note, or to any other account specified in writing and received at least five Business Days prior to the Record Date for the Payment Date on which wire transfers will commence, or in the absence of such notification, by check mailed by first-class mail to the Person whose name appears as the Registered Holder of this Note on the Note Register at the address of such Person as it appears on the Note Register, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Funds represented by checks returned undelivered will be held for payment to the Person entitled thereto, subject to the terms of the Indenture, at the office or agency in the United States of America designated as such by the Issuer for such purpose pursuant to the Indenture. This Note is one of a duly authorized issue of Notes of the Issuer designated as its 6.69% Lease-Backed Notes, Series 1996-A Due May 16, 2000 (herein called the "Notes") issued and to be issued under the Specific Terms and Conditions of Indenture dated as of November 1, 1994 and amended and restated as of May 1, 1996, and the Standard Terms and Conditions of Indenture dated November 1, 1994, appended thereto and incorporated therein (herein called the "Indenture"), among the Issuer, Boyle Leasing Technologies, Inc., as Servicer, and Norwest Bank Minnesota, National Association, as Indenture Trustee (the "Indenture Trustee", which term includes any successor Indenture Trustee under the Indenture), to which Indenture, and all indentures supplemental thereto, reference is hereby made for a statement of the respective rights thereunder of the Issuer, the Indenture Trustee and the Holders of the Notes, and the terms upon which the Notes are, and are to be, authenticated and delivered. All terms used in this Note which are defined in the Indenture shall have the meanings assigned to them in the Indenture. The Notes are secured by certain Lease Receivables and by certain other Collateral described in the Indenture and the Note Insurance Policy issued by MBIA. The Trust Estate secures the Notes equally and ratably without prejudice, priority or distinction between any Note and any other Note by reason of time of issue or otherwise, and also secures the payment of certain other amounts and certain other obligations as described in the Indenture. Unless earlier declared due and payable by reason of an Event of Default, Notes are payable only at the time and in the manner provided in the Indenture and are not redeemable or prepayable at the option of the Issuer before such time, except that the Notes of any series shall be redeemable at the option of the Issuer, and in the absence of the exercise thereof, by MBIA in whole but not in part, at any time after the Outstanding Principal Amount of such Series of Notes declines to less than 10% of the original principal amount of such Series of Notes at a redemption price equal to the Outstanding Principal Amount thereof plus accrued interest thereon to the date of redemption. If an Event of Default as defined in the Indenture shall occur and be -2- 3 continuing, the principal of all the Notes may become or be declared due and payable in the manner and with the effect provided in the Indenture. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Note may be registered on the Note Register of the Issuer upon surrender of this Note for registration of transfer at the office or agency of the Issuer in the United States of America maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Indenture Trustee and duly executed by the holder hereof or his attorney duly authorized in writing, and thereupon one or more new Notes of the same Stated Maturity of authorized denominations and for the same initial aggregate principal amount will be issued to the designated transferees. Prior to due presentment for registration of transfer of this Note, the Issuer, the Indenture Trustee and any agent of the Issuer or the Indenture Trustee may treat the Person in whose name this Note is registered as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes whether or not this Note be overdue, and neither the Issuer, the Indenture Trustee, nor any such agent shall be affected by notice to the contrary. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Notes under the Indenture at any time by the Issuer, the Indenture Trustee, the Back-up Servicer, the Servicer and MBIA with the consent of the Holders of 66 2/3% in aggregate principal amount of Notes at the time Outstanding. The Indenture also contains provisions permitting MBIA or the Holders of specified percentages in aggregate principal amount of the Notes at the time Outstanding with the prior written consent of MBIA, on behalf of the Holders of all Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Notes are issuable only in registered form without coupons in such authorized denominations as provided in the Indenture and subject to certain limitations therein set forth. This Note and the Indenture shall be governed by and construed in accordance with the internal laws of the State of New York, without regard to conflicts of laws principles. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Issuer, which is absolute and unconditional, to pay the principal of and interest on this Note, but solely from the Collateral pledged to the Indenture Trustee under the Indenture and the Policy at the times, place and rate, and in the coin or currency, herein prescribed. Notwithstanding anything else to the contrary contained in this Note or the Indenture, the obligation of the Issuer to pay the principal of and interest on this Note is -3- 4 not a general obligation of the Issuer, nor its officers or directors, but is limited solely to the Collateral pledged under the Indenture. STATEMENT OF INSURANCE OBLIGATIONS: $23,406,563.11 POLICY NUMBER: 21071 BLT Finance Corp., III Lease-Backed Term Notes, Series 1996-A MBIA Insurance Corporation (the "Insurer"), in consideration of the payment of the premium and subject to the terms of the Note Guaranty Insurance Policy (the "Policy"), thereby unconditionally and irrevocably guarantees to any Owner that an amount equal to each full and complete Insured Payment will be received by Norwest Bank Minnesota, National Association, or its successor, as indenture trustee for the Owners (the "Indenture Trustee"), on behalf of the Owners, from the Insurer for distribution by the Indenture Trustee to each Owner of each owner's proportionate share, as determined in accordance with the Agreement (as defined below), of the Insured Payment. The Insurer's obligations under the Policy with respect to a particular Insured Payment shall be discharged to the extent funds equal to the applicable Insured Payment are received by the Indenture Trustee, whether or not such funds are properly applied by the Indenture Trustee. Insured Payments shall be made only at the time set forth in the Policy, and no accelerated Insured Payments shall be made regardless of any acceleration of the Obligations, unless such acceleration is at the sole option of the Insurer. Notwithstanding the foregoing paragraph, the Policy does not cover shortfalls, if any, attributable to the liability of the Trust Estate or the Indenture Trustee for withholding taxes, if any (including interest and penalties in respect of any such liability). Furthermore, the Policy covers with respect to the principal amount of the Obligations only such amount as is outstanding on the Stated Maturity. The Insurer will pay any Insured Payment that is a Preference Amount on the Business Day following receipt on a Business Day by the Fiscal Agent (as described below) of (i) a certified copy of the order requiring the return of such Preference Amount, (ii) an opinion of counsel satisfactory to the Insurer that such order is final and not subject to appeal, (iii) an assignment in such form as is reasonably required by the Insurer, irrevocably assigning to the Insurer all rights and claims of the Owner relating to or arising under the Obligations against the debtor which made such preference payment or otherwise with respect to such preference payment and (iv) appropriate instruments to effect the appointment of the Insurer as agent for such Owner in any legal proceeding related to such preference payment, such instruments being in a form satisfactory to the Insurer, provided that if such documents are received after 12:00 noon, New York City time on such Business Day, they will be deemed to be received on the following Business Day. Such payments shall be disbursed to the receiver or trustee in bankruptcy named in the final order of the court exercising jurisdiction on behalf of the Owner and not to any Owner directly unless such Owner has returned principal or interest paid on the Obligations to -4- 5 such receiver or trustee in bankruptcy, in which case such payment shall be disbursed to such Owner. The Insurer will pay any other amount payable under the Policy no later than 12:00 noon, New York City time on the later of the Payment Date on which the related Deficiency Amount is due or the Business Day following receipt in New York, New York on a Business Day by State Street Bank and Trust Company, N.A., as Fiscal Agent for the Insurer or any successor fiscal agent appointed by the Insurer (the "Fiscal Agent") of a Notice (as described below); provided that if such Notice is received after 12:00 noon New York City time on such Business Day, it will be deemed to be received on the following Business Day. If any such Notice received by the Fiscal Agent is not in proper form or is otherwise insufficient for the purpose of making claim under the Policy it shall be deemed not to have been received by the Fiscal Agent for purposes of this paragraph, and the Insurer or the Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee and the Indenture Trustee may submit an amended Notice. Insured Payments due under the Policy unless otherwise stated therein will be disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners by wire transfer of immediately available funds in the amount of the Insured Payment less, in respect of Insured Payments related to Preference Amounts, any amount held by the Indenture Trustee for the payment of such Insured Payment and legally available therefor; provided that the preceding provision shall not impair the Insurer's obligation to pay any Deficiency Amount hereunder. The Fiscal Agent is the agent of the Insurer only and the Fiscal shall in no event be liable to Owners for any acts of the Fiscal Agent or any failure to deposit or cause to be deposited sufficient funds to make payments due under the Policy. Subject to the terms of the Agreement, the Insurer shall be subrogated to the rights of each Owner to receive payments under the Obligations to the extent of any payment by the Insurer under the Policy. As used in the Policy, the following terms shall have the following meanings: "Agreement" means the Standard Terms of Indenture, dated as of November 1, 1994 and the Specific Terms and Conditions of Indenture, dated as of November 1, 1994, and as amended and restated as of May 1, 1996, among BLT Finance Corp. III, as Issuer, Norwest Bank Minnesota, National Association, as Back-up Servicer and Indenture Trustee, and Boyle Leasing Technologies, Inc., as Servicer, without regard to any amendment or supplement thereto (other than the Supplements to the Indenture for the 1994-A Term Notes and the 1994-B Warehouse Note, dated as of November 1, 1994 and the 1996-A Term Notes and the 1996-B Warehouse Notes dated May 1, 1996) unless such amendment or supplement is approved by the Insurer. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York City or in the city in which the corporate trust office of the Indenture Trustee under the Agreement is located are authorized or obligated by law or executive order to close. -5- 6 "Deficiency Amount" means (a) for any Payment Date, any shortfall in amounts available in the Collection Account to pay the interest due on the Obligations under Section 12.02(d)(vi) of the Agreement after giving effect to the transfers from the Cash Collateral Account pursuant to Sections 12.03(d)(i) and (iii) of the Agreement which are required to be applied to the payment of such interest and after payment of all amounts payable pursuant Section 12.02(d)(i) through (vi) the Agreement for which funds are available in the Collection Account, plus (b) on the Stated Maturity, any shortfall in amounts available in the Collection Account to pay the Principal Distribution Amount after giving effect to the transfers from the Cash Collateral Account pursuant to Section 12.03(d)(i) and (iii) of the Agreement which are required to be applied to the payment of the Principal Distribution Amount and after the payment of all amounts pursuant to Section 12.02(d)(i) through (vi) of the Agreement for which funds are available in the Collection Account. "Insured Payment" means (i) as of any Payment Date, any Deficiency Amount and (ii) any Preference Amount. "Notice" means the telephonic or telegraphic notice, promptly confirmed in writing by telecopy substantially in the form of Exhibit A attached to the Policy, the original of which is subsequently delivered by registered or certified mail, from the Indenture Trustee specifying the related Insured Payment which shall be due and owing on the applicable Payment Date. "Owner" means each Noteholder (as defined in the Agreement) who, on the applicable Payment Date, is entitled under the terms of the applicable Notes to payment under the Policy. "Preference Amount" means any amount previously distributed to an Owner on the Obligations that is recoverable and sought to be recovered as a voidable preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a final nonappealable order of a court having competent jurisdiction. Capitalized terms used in the Policy and not otherwise defined in the Policy shall have the respective meanings set forth in the Agreement as of the date of execution of the Policy, without giving effect to any subsequent amendment or modification to the Agreement unless such amendment or modification has been approved in writing by the Insurer. Any notice under the Policy or service of process on the Fiscal Agent of the Insurer may be made at the address listed below for the Fiscal Agent or such other address as the Insurer shall specify in writing to the Indenture Trustee. The notice address of the Fiscal Agent is 61 Broadway, 15th Floor, New York, New York 10006 Attention: Municipal Registrar and Paying Agency, or such other address as the Fiscal Agent shall specify to the Indenture Trustee in writing. The Policy is being issued under and pursuant to, and shall be construed under, the laws of the State of New York, without giving effect to the conflict of laws principles thereof. -6- 7 The insurance provided by the Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law. The Policy is not cancelable for any reason. The premium on the Policy is not refundable for any reason including payment, or provision being made for payment, prior to final payment of the Obligations. Unless the certificate of authentication hereon has been executed by the Indenture Trustee by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. IN WITNESS WHEREOF, BLT Finance Corp III has caused this instrument to be signed, manually, by its President or a Vice President. By: /s/ Peter Bleyleben ---------------------------- President -7- 8 CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-mentioned Indenture. Dated: NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION By: /s/ illegible ------------------------------ Authorized Signatory EX-10.21 11 STANDARD TERMS AND CONDITIONS OF SERVICING 1 Exhibit 10.21 ------------------------------------------------ APPENDIX 1 STANDARD TERMS AND CONDITIONS OF SERVICING ------------------------------------------------ Dated as of November 1, 1994 ROTHSCHILD ASSET-BACKED FINANCE CONDUIT V 2 TABLE OF CONTENTS
ARTICLE 1 - DEFINITIONS Section 1.01 Defined Terms..................................................................... 1 ARTICLE 2 - SERVICER REPRESENTATIONS AND WARRANTIES Section 2.01 Representations and Warranties.................................................... 3 ARTICLE 3 - ADMINISTRATION AND SERVICING OF LEASE CONTRACTS Section 3.01 Responsibilities of Servicer...................................................... 5 Section 3.02 Servicer Standard of Care......................................................... 8 Section 3.03 Servicer Remittances.............................................................. 8 Section 3.04 Servicer Advances................................................................. 9 Section 3.05 Financing Statements; Title Filings............................................... 10 Section 3.06 Maintenance of Insurance Policy; Insurance Proceeds............................... 10 Section 3.07 Personal Property and Sales Taxes................................................. 10 Section 3.08 No Offset......................................................................... 10 Section 3.09 Servicing Compensation............................................................ 10 Section 3.10 Substitution or Purchase of Lease Contracts....................................... 11 ARTICLE 4 - ACCOUNTINGS, STATEMENTS AND REPORTS Section 4.01 Monthly Servicer's Reports........................................................ 12 Section 4.02 Financial Statements; Certification as to Compliance; Notice of Default........... 12 Section 4.03 Annual Independent Accountants' Reports; Annual Federal Tax Lien Search........... 14 Section 4.04 Access to Certain Documentation and Information................................... 15 Section 4.05 Other Necessary Data.............................................................. 16 Section 4.06 Indenture Trustee to Cooperate.................................................... 16 ARTICLE 5 - THE SERVICER AND THE ISSUER Section 5.01 Servicer Indemnification.......................................................... 17 Section 5.02 Corporate Existence; Reorganizations.............................................. 17 Section 5.03 Limitation on Liability of the Servicer and Others................................ 18
i 3 Section 5.04 The Servicer Not to Resign........................................................ 18 Section 5.05 Issuer Indemnification............................................................ 18 ARTICLE 6 - SERVICING TERMINATION Section 6.01 Servicer Events of Default........................................................ 19 Section 6.02 Back-up Servicer to Act; Taking of Bids; Appointment of Successor Servicer........ 22 Section 6.03 Notification to Noteholders....................................................... 23 Section 6.04 Waiver of Past Defaults........................................................... 23 Section 6.05 Effects of Termination of Servicer................................................ 24 Section 6.06 No Effect on Other Parties........................................................ 24 ARTICLE 7 - THE BACK-UP SERVICER Section 7.01 Representations of Back-up Servicer............................................... 25 Section 7.02 Merger or Consolidation of, or Assumption of the Obligations of, Back-up Servicer................................................................ 26 Section 7.03 Back-up Servicer Resignation...................................................... 26 Section 7.04 Oversight of Servicing............................................................ 26 Section 7.05 Back-up Servicer Compensation..................................................... 27 Section 7.06 Duties and Responsibilities....................................................... 27 ARTICLE 8 MISCELLANEOUS PROVISIONS Section 8.01 Termination of the Servicing Agreement............................................ 29 Section 8.02 Amendments........................................................................ 29 Section 8.03 Governing Law..................................................................... 30 Section 8.04 Notices........................................................................... 30 Section 8.05 Severability of Provisions........................................................ 30 Section 8.06 Binding Effect.................................................................... 30 Section 8.07 Article Headings and Captions..................................................... 30 Section 8.08 Legal Holidays.................................................................... 30 Section 8.09 Assignment for Security for the Notes............................................. 30 Section 8.10 No Servicing Assignment........................................................... 31 Section 8.11 MBIA Default...................................................................... 31 Section 8.12 Third Party Beneficiary........................................................... 31
ii 4 These STANDARD TERMS AND CONDITIONS OF SERVICING (the "Standard Servicing Terms"), dated as of November 1, 1994, are incorporated by reference and are intended to form a part of the SPECIFIC TERMS OF SERVICING dated as of November 1, 1994 (the "Specific Servicing Terms"), to which these Standard Servicing Terms are appended (together, the "Servicing Agreement"). ARTICLE 1 DEFINITIONS 1.01 DEFINED TERMS. Except as otherwise specified or as the context may otherwise require, the following terms have the respective meanings set forth below for all purposes of the Servicing Agreement, and the definitions of such terms are equally applicable both to the singular and plural forms of such terms and to the masculine, feminine and neuter genders of such terms. Capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in the Indenture or, if not defined therein, in the Lease Acquisition Agreement. "ACH Bank": shall mean the bank, if any, specified in the Specific Servicing Term so long as such bank meets the requirements of the Indenture Trustee as set forth in Section 7.08 of the Standard Indenture Terms. "Back-up Servicer": shall mean the entity identified as such in the Specific Servicing Terms, until a successor Person shall have become the Back-up Servicer pursuant to the applicable provisions of this Servicing Agreement, and thereafter "Back-up Servicer" shall mean such successor Person. "Company": shall mean the entity identified as such in the Specific Servicing Terms. "Initial Net Worth Standard": shall have the meaning set forth in the Specific Servicing Terms. "Issuer": shall mean the entity identified as such in the Specific Servicing Terms. "Lease Acquisition Agreement": shall mean the agreement between the Company and the Issuer evidenced by the Specific Terms and Conditions of Lease Acquisition along with the Standard Terms and Conditions of Lease Acquisition. "Liquidated Lease Receivable": shall mean a Lease Receivable that has been liquidated pursuant to Section 3.01(b) hereof. "Monthly Servicer's Report": shall mean the report prepared by the Servicer pursuant to Section 4.01 hereof. 1 5 "Nonrecoverable Advance": shall mean a Servicer Advance that the Servicer determines in good faith, and in accordance with its customary servicing practices, is unlikely to be eventually repaid from Scheduled Payments made by or on behalf of the related Customer in accordance with Section 3.04 hereof. "Officer's Certificate": shall mean a certificate signed by the Chairman of the Board, the Vice-Chairman of the Board, the President, a Vice President, the Treasurer or the Secretary of the Servicer. "Reported Compan(ies)": shall have the meaning set forth in the Specific Servicing Terms or any successor Servicer, if applicable. "Reported Company Financial Statements": shall include the Reported Company's audited consolidating balance sheet and income statement, consolidated statement of sources and uses/applications of cash, consolidated statement of change in financial position, auditors opinion letter regarding audited financial statements, and all notes to the audited financial statements. "Servicer": shall mean the entity identified as such in the Specific Servicing Terms until a successor Person shall have become the Servicer pursuant to the applicable provisions of the Servicing Agreement, and thereafter "Servicer" shall mean such successor Person. "Servicer Advance": shall have the meaning set forth in Section 3.04 hereof. "Servicer Default": shall mean any occurrence or circumstance which with notice or the lapse of time or both would be a Servicer Event of Default under this Servicing Agreement. "Servicer Event of Default": shall mean each of the occurrences or circumstances enumerated in Section 6.01 hereof. "Servicer State of Incorporation": means the state of incorporation of the Servicer, as specified in the Specific Servicing Terms. "Servicer Termination Notice": means the notice described in Section 6.01 hereof. "Servicing Agreement": shall mean the Specific Terms and Conditions of Servicing together with the Standard Terms and Conditions of Servicing. "Servicing Officer": shall mean those officers of the Servicer involved in, or responsible for, the administration and servicing of the Lease Contracts, as identified on the list of Servicing Officers furnished by the Servicer to the Indenture Trustee, the Back-up Servicer, MBIA and the Noteholders from time to time. 2 6 ARTICLE 2 SERVICER REPRESENTATIONS AND WARRANTIES 2.01 REPRESENTATIONS AND WARRANTIES. The Servicer makes the following representations and warranties as of each Delivery Date, which shall survive such Delivery Date: (a) ORGANIZATION AND GOOD STANDING. The Servicer has been duly incorporated and is validly existing and in good standing as a corporation under the laws of the Servicer State of Incorporation, with requisite corporate power and authority to own its properties, perform its obligations under the Servicing Agreement and to transact the business in which it is now engaged or in which it proposes to engage. (b) AUTHORIZATION AND BINDING OBLIGATION. Each of the Servicing Agreement and the Insurance Agreement has been duly authorized, executed and delivered by the Servicer and constitutes the valid and legally binding obligation of the Servicer enforceable against the Servicer in accordance with its terms, subject as to enforcement to any bankruptcy, insolvency, reorganization and other similar laws of general applicability relating to or affecting creditors' rights generally and to general principles of equity regardless of whether enforcement is sought in a court of equity or law. (c) NO VIOLATION. The entering into of the Servicing Agreement and the Insurance Agreement and the performance by the Servicer of its obligations under the Servicing Agreement and the Insurance Agreement and the consummation of the transactions herein and therein contemplated will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property or assets of such Servicer pursuant to the terms of any material indenture, mortgage, deed of trust or other agreement or instrument to which it is a party or by which it is bound or to which any of its property or assets is subject, nor will such action result in any violation of the provisions of its Certificate of Incorporation or By-laws, or any statute or any order, rule or regulation of any court or any regulatory authority or other governmental agency or body having jurisdiction over it or any of its properties; and no consent, approval, authorization, order, registration or qualification of or with any court, or any such regulatory authority or other governmental agency or body is required for the Servicer to enter into the Servicing Agreement and the Insurance Agreement. (d) NO PROCEEDINGS. There are no proceedings or investigations pending, or to the knowledge of the Servicer, threatened against or affecting the Servicer or any subsidiary in or before any court, governmental authority or agency or arbitration board or tribunal, including but not limited to any such proceeding or investigation with respect to any environmental or other liability resulting from the ownership or use of any of the Equipment, which, individually or in the aggregate, involve the possibility of materially and adversely affecting the properties, business, prospects, profits or condition (financial or otherwise) of the Servicer and its subsidiaries, or the 3 7 ability of the Servicer to perform its obligations under the Servicing Agreement or the Insurance Agreement. The Servicer is not in default with respect to any order of any court, governmental authority or agency or arbitration board or tribunal. (e) APPROVALS. The Servicer (i) is not in violation of any laws, ordinances, governmental rules or regulations to which it is subject, (ii) has not failed to obtain any licenses, permits, franchises or other governmental authorizations necessary to the ownership of its property or to the conduct of its business, and (iii) is not in violation in any material respect of any term of any agreement, charter instrument bylaw or instrument to which it is a party or by which it may be bound, which violation or failure to obtain materially adversely affect the business or condition (financial or otherwise) of the Servicer and its subsidiaries. (f) INVESTMENT COMPANY. The Servicer is not an investment company which is required to register under the Investment Company Act of 1940, as amended. (g) NET WORTH. As of the initial Delivery Date, the Initial Net Worth Standard is met. (h) STANDARD OF CARE. The Servicer is currently servicing the Lease Contracts and Equipment in a manner consistent with industry standards for lease contracts and equipment similar to the Lease Contracts and Equipment, and in any event in a prudent and commercially reasonable manner, and has conducted its servicing operations in a manner consistent with industry standards for servicing of financial portfolios. 4 8 ARTICLE 3 ADMINISTRATION AND SERVICING OF LEASE CONTRACTS 3.01 RESPONSIBILITIES OF SERVICER. (a) The Servicer, for the benefit of MBIA and the Noteholders, shall be responsible for, and shall, in accordance with its customary servicing procedures, pursue the managing, servicing, administering, enforcing and making of collections on the Lease Contracts, the Equipment and any Insurance Policies, the enforcement of the Indenture Trustee's security interest in the Lease Contracts, Lease Receivables and Equipment granted pursuant to the Indenture, and the sale or the releasing of the Equipment upon the expiration or other termination of the related Lease Contract (or repossession thereof without termination), each in accordance with the standards and procedures set forth in this Servicing Agreement and any related provisions of the Indenture and Lease Acquisition Agreement. The Servicer's responsibilities shall include collecting and posting of all payments, responding to inquiries of Customers, investigating delinquencies, accounting for collections and furnishing monthly and annual statements to the Back-up Servicer, the Indenture Trustee, MBIA, the Rating Agencies and the Noteholders with respect to payments, making Servicer Advances, providing appropriate federal income tax information to the Indenture Trustee for use in providing information to the Noteholders or MBIA, collecting and remitting sales and property taxes to taxing authorities, and using its best efforts to maintain the perfected security interest of the Indenture Trustee in the Trust Estate. The Servicer (at its expense), acting alone or through a subservicer, shall have full power and authority, acting at its sole discretion, to do any and all things in connection with such managing, servicing, administration, enforcement, collection and such sale of the Equipment that it may deem necessary or desirable, including the prudent delegation of such responsibilities. Without limiting the generality of the foregoing, the Servicer, in its own name or in the name of a subservicer, shall, and is hereby authorized and empowered by the Indenture Trustee, subject to Section 3.02 hereof to execute and deliver (on behalf of itself, the Noteholders, the Indenture Trustee or any of them) any and all instruments of satisfaction or cancellation, or of partial or full release or discharge, and all other comparable instruments, with respect to the Lease Contracts and any files or documentation pertaining to the Lease Assets. The Servicer, acting alone or through a subservicer, also may, in its sole discretion, waive any late payment charge or penalty, or any other fees that may be collected in the ordinary course of servicing any Lease Contract. Notwithstanding the foregoing, neither the Servicer, nor any subservicer, shall, except pursuant to a judicial order from a court of competent jurisdiction, or as otherwise expressly provided in this Servicing Agreement, release or waive the right to collect the Scheduled Payments or any unpaid balance on any Lease Contract. The Indenture Trustee shall, at the expense of the Servicer, furnish the Servicer, or at the request of the Servicer, any subservicer, with any powers of attorney and other documents necessary or appropriate to enable the Servicer or subservicer to carry out its servicing and administrative duties hereunder, and the Indenture Trustee shall not be responsible for the Servicer's or subservicer's application thereof. Notwithstanding the appointment by the Servicer of a subservicer hereunder, the Servicer shall remain primarily liable for the full performance of its obligations hereunder. 5 9 (b) The Servicer (or a subservicer) shall conduct any Lease Contract management, servicing, administration, collection or enforcement actions in the following manner: (i) The Servicer, as agent for and on behalf of the Issuer, with respect to any Defaulted Lease Contract shall follow such practices and procedures as are normal and consistent with the Servicer's standards and procedures relating to its own lease contracts, lease receivables and equipment that are similar to the Lease Contracts, Lease Receivables and the Equipment, including without limitation, the taking of appropriate actions to foreclose or otherwise liquidate any such Defaulted Lease Contract, together with the related Equipment, to collect any Guaranty Amounts, and to enforce the Issuer's rights under the Lease Acquisition Agreement. All Recoveries, Insurance Proceeds or Residual Proceeds in respect of any such Lease Receivable and the related Equipment received by the Servicer shall be remitted to the Indenture Trustee for deposit in the Collection Account pursuant to Section 3.03(a) hereof; (ii) The Servicer may sue to enforce or collect upon Lease Contracts as agent for the Trust. If the Servicer elects to commence a legal proceeding to enforce a Lease Contract, the act of commencement shall be deemed to be an automatic assignment of the Lease Contract to the Servicer for purposes of collection only. If, however, in any enforcement suit or legal proceeding it is held that the Servicer may not enforce a Lease Contract on the ground that it is not a real party in interest or a bolder entitled to enforce the Lease Contract, then the Indenture Trustee on behalf of the Noteholders and MBIA shall, at the Servicer's request and expense, take such steps as the Servicer deems necessary and instructs the Indenture Trustee in writing to take to enforce the Lease Contract, including bringing suit in its name or the name of the Issuer, as beneficial owner of the Lease Contract, or the names of the Noteholders or MBIA, as third party beneficiaries thereunder, and the Indenture Trustee shall be indemnified by the Servicer for any such action taken. Any Lease Contract temporarily released from the custody of the Indenture Trustee to the Servicer or its agents shall have stamped on it prior to its delivery a legend to the effect that the Lease Contract is the property of the Issuer and has been pledged to Norwest Bank Minnesota, National Association as Indenture Trustee; (iii) The Servicer shall exercise any rights of recourse against third parties that exist with respect to any Lease Contract in accordance with the Servicer's usual practice. In exercising recourse rights, the Servicer is authorized on the Indenture Trustee's behalf to reassign the Lease Contract to the person against whom recourse exists to the extent necessary, and at the price set forth in the document creating the recourse. The Servicer will not reduce or diminish such recourse rights, except to the extent that it exercises such right; (iv) The Servicer may not allow substitutions of Substitute Lease Contracts that do not comply with Section 3.10 hereof, Sections 2.04, 3.03 and 3.04 6 10 of the Standard Lease Acquisition Terms and Section 4.04 of the Standard Indenture Terms; (v) The Servicer may waive, modify or vary any terms of any Lease Contract or consent to the postponement of strict compliance with any such term if in the Servicer's reasonable and prudent determination such waiver, modification or postponement is not materially adverse to the Noteholders or MBIA; PROVIDED, HOWEVER, that (A) the Servicer shall not forgive any payment of rent, and (B) the Servicer shall not permit any modification with respect to any Lease Contract that would decrease the Scheduled Payment, defer the payment of any principal or interest or any Scheduled Payment, reduce the Implicit Principal Balance (except in connection with actual payments attributable to such Implicit Principal Balance), or prevent the complete amortization of the Implicit Principal Balance from occurring by the Calculation Date preceding the Stated Maturity of the related Notes. The Servicer shall provide the Back-up Servicer, MBIA and the Indenture Trustee with an Amended Lease Schedule to the related Series Lease Schedule reflecting any modification of any Scheduled Payment; (vi) The Servicer shall not consent to the termination of any Lease Contract in connection with loss of or damage to the related Equipment unless the Customer has paid an amount not less than the Purchase Price for such Lease Contract, or if less, the maximum amount legally collectible under the related Lease Contract; (vii) Upon termination of a Lease Contract after payment of the last Scheduled Payment due thereunder or in the event that the Servicer or any subservicer in the enforcement of any Lease Contract otherwise (A) acquires title to any item of Equipment with respect to which title was held by the Customer or (B) reclaims possession of Equipment from the Customer, the Servicer shall use its best efforts to sell or re-lease such item of Equipment promptly and consistent with the standard of care set forth in Section 3.02 hereof. Any Insurance Proceeds, Recoveries or Residual Proceeds related thereto shall be deposited in accordance with Section 3.03(a) hereof, and (viii) Notwithstanding any provision to the contrary contained in this Agreement, the Servicer or any subservicer shall exercise any right under a Lease Contract to accelerate the unpaid Scheduled Payments, due or to become due thereunder in such a manner as to maximize the net proceeds available to the Trust Estate; PROVIDED, HOWEVER, that the Servicer will not accelerate any Scheduled Payment unless permitted to do so by the terms of the Lease Contract or under applicable law. 7 11 3.02 SERVICER STANDARD OF CARE. In managing, administering, servicing, enforcing and making collections on the Lease Contracts and Equipment pursuant to this Servicing Agreement, the Servicer will exercise that degree of skill and care consistent with industry standards for servicing of financial portfolios, and that which the Servicer customarily exercises with respect to similar lease contracts and equipment owned or originated by it, and in any event, in a prudent and commercially reasonable manner. The Servicer shall punctually perform all of its obligations and agreements under the Servicing Agreement and shall comply with all applicable federal and state laws and regulations, shall maintain all state and federal licenses and franchises necessary for it to perform its servicing responsibilities hereunder, and shall not materially impair the rights of MBIA or the Noteholders in any Lease Contracts or payments thereunder. 3.03 SERVICER REMITTANCES. (a) Except as provided in the Specific Servicing Terms, the Servicer, as agent of the Issuer, shall remit to the Indenture Trustee for deposit in the Collection Account by 12:00 noon Minneapolis time on each Tuesday and Thursday that is a Business Day, or if such day is not a Business Day, on the next Business Day thereafter, the amounts described below that have been collected through 4:00 p.m. Minneapolis time on the preceding Business Day (or 4:00 p.m. Minneapolis time on the second preceding Business Day with respect to amounts collected by the Servicer in a lockbox) so long as such amounts exceed $1,000: (i) all payments made under the Lease Contracts relating to the Lease Receivables, including prepayments but excluding taxes, received directly by the Servicer; (ii) all Residual Proceeds and Recoveries; (iii) the Purchase Price of any Lease Contract purchased by the Company or the Issuer, to the extent received by the Servicer; (iv) all Guaranty Amounts; (v) all Servicing Charges, unless otherwise provided in the Specific Servicing Terms; and (vi) all Insurance Proceeds. The Servicer shall hold in trust for the benefit of the Holders of the Notes and MBIA any payment it receives relating to items (i) through (vi) above until such time as the Servicer transfers any), such payment to the Indenture Trustee for deposit in the Collection Account. 8 12 (b) If ACH debits are utilized with respect to a Lease Contract, either the Servicer shall remit such payments to the Collection Account in accordance with Section 3.03(a) hereof, or the Servicer will notify the National Automated Clearing House System to debit the Customer for all payments relating to Lease Receivables under such Lease Contract and to credit an account (the "ACH Account") maintained at the ACH Bank in the name of and in the sole control of the Indenture Trustee for the benefit of the Noteholders and MBIA, and the Servicer shall not revoke or modify such notifications. In the event (i) a Customer provides the Servicer or the applicable ACH Bank with written notice of its termination of such Customer's authorization agreement for ACH debits, (ii) there are Lease Contracts that do not provide for ACH debits, or (iii) the Servicer otherwise receives directly moneys with respect to Lease Receivables that would otherwise involve ACH debits, the Servicer shall deposit all payments from all such Customers into the Collection Account in accordance with subsection (a) above. Payments received in the ACH Account representing any payment listed in Section 3.03(a)(i) through (vi) above, will be transferred by the Indenture Trustee to the Collection Account on the related Determination Date. (c) Except as otherwise provided in the Specific Servicing Terms, on each Tuesday and Thursday that is a Business Day or if such day is not a Business Day, on the next Business Day thereafter, the Servicer shall deposit in the Advance Payment Account, no later than 12:00 noon Minneapolis time, the aggregate amounts of Advance Payments collected through 4:00 p.m. Minneapolis time on the preceding Business Day (or 4:00 p.m. Minneapolis time on the second preceding Business Day with respect to amounts collected by the Servicer in a lockbox) and not previously deposited. On the Determination Date preceding any Payment Date, the Indenture Trustee shall withdraw from the Advance Payment Account and deposit in the Collection Account the sum of (i) Reinvestment Income on the Advance Payment Account and (ii) Advance Payments related to the Due Period immediately preceding such Determination Date, both as indicated on the Monthly Servicer's Report for such Payment Date. 3.04 SERVICER ADVANCES. Not later than 10:00 a.m., Minneapolis time, on the Determination Date prior to each Payment Date, the Servicer shall make an advance (a "Servicer Advance") for each Lease Contract which is a Delinquent Lease Contract on such date by remitting to the Indenture Trustee for deposit in the Collection Account an amount equal to the Scheduled Payments, or portion thereof, which were due in the prior Due Period but not received and deposited in the Collection Account on or prior to such Determination Date; PROVIDED, HOWEVER, that the Servicer shall not be obligated to make any Servicer Advance pursuant to this Section 3.04 that the Servicer determines in good faith, and in accordance with its customary servicing practices, is unlikely to be eventually repaid from Scheduled Payments made by or on behalf of the related Customer; FURTHER PROVIDED, that the Servicer may not make a Servicer Advance with respect to a Lease Contract once it has become a Defaulted Lease Contract. On each Determination Date, the Servicer shall deliver to the Back-up Servicer, the Indenture Trustee, MBIA and the Placement Agent the Monthly Servicer's Report, which shall include a listing of the aggregate amount of Scheduled Payments not received for the immediately prior Due Period, the amount of Servicer Advances, and the amounts which it has determined in its sole discretion, and in accordance with its customary servicing practices, are unlikely to be recoverable from the related Customers. 9 13 3.05. FINANCING STATEMENTS; TITLE FILINGS. The Servicer will make all Uniform Commercial Code filings and Department of Motor Vehicles recordings as maybe required pursuant to the terms of the Indenture. The Servicer shall, in accordance with its customary servicing procedures and at its own expense, be responsible for taking such steps as are necessary to maintain perfection of such security interests. The Indenture Trustee hereby authorizes the Servicer to re-perfect or to cause the re-perfection of such security interest on its behalf as Indenture Trustee, as necessary. 3.06 MAINTENANCE OF INSURANCE POLICY; INSURANCE PROCEEDS. The Servicer shall have the obligation to verify, monitor and enforce the acquisition and maintenance of a Customer's Insurance Policies. Any Insurance Proceeds shall be remitted to the Indenture Trustee for deposit in the Collection Account pursuant to Section 3.03(a). 3.07 PERSONAL PROPERTY AND SALES TAXES. The Servicer shall, on behalf of the Issuer, pay or cause to be paid all personal property, sales and use taxes on or with respect to the Equipment, or the acquisition or leasing thereof, as and when such taxes become due, to the extent a Customer has paid amounts to the Servicer or into the ACH Account for such taxes. The Servicer shall also cause to be filed in a timely manner any and all returns and reports required in connection with the payment of such taxes. 3.08 NO OFFSET. Prior to the termination of the Servicing Agreement, the obligations of the Servicer under the Servicing Agreement shall not be subject to any defense, counterclaim or right of offset that the Servicer has or may have against the Issuer, whether in respect of the Servicing Agreement, any Lease Contract, Lease Receivable, Equipment or otherwise. 3.09 SERVICING COMPENSATION. (a) As compensation for the performance of its obligations under the Servicing Agreement the Servicer shall be entitled to receive the Servicer Fee and the Additional Servicer Fee, if applicable. The Servicer Fee with respect to any Lease Contract shall be paid monthly, commencing on the related Initial Payment Date and terminating on the first to occur of (i) the receipt of the last Scheduled Payment and related Residual Proceeds with respect to the last remaining Lease Contract, (ii) the receipt of Recoveries and Insurance Proceeds with respect to the last remaining Lease Contract, or (iii) the date on which the Issuer or MBIA purchases the last remaining Lease Contract. The Servicer Fee shall be paid by the Issuer to the Servicer at the times and in the priority as set forth in the Indenture. The Servicer shall pay all expenses incurred by it in connection with its servicing activities hereunder, including, without limitation, payment of the fees and disbursements of the Independent Accountants and payment of expenses incurred in connection with distributions and reports to the Indenture Trustee, the Back-up Servicer, MBIA, the Rating Agencies and Noteholders and shall not be entitled to reimbursement for such expenses; provided, however, that the Servicer will be entitled to prompt reimbursement from the Issuer for reasonable costs and expenses incurred by the Servicer (including reasonable attorney's fees and out-of-pocket expenses) in connection with the realization, attempted realization or enforcement of rights and remedies upon 10 14 Defaulted Lease Contracts, from amounts received as Recoveries from any Defaulted Lease Contracts. (b) In connection with any transfer of the servicing obligations to a successor Servicer in accordance with Section 6.02 hereof, the Back-up Servicer shall be entitled to reimbursement of Transition Costs as provided therein and in the Indenture. 3.10 SUBSTITUTION OR PURCHASE OF LEASE CONTRACTS. (a) The Servicer shall not allow termination of a Lease Contract prior to the scheduled expiration date or prepayment of any Lease Contract (except from an Advance Payment or as may be specifically required under such Lease Contract in connection with a casualty to the related Equipment), unless the Issuer has (i) pledged to the Indenture Trustee, a Substitute Lease Contract and the related Equipment and Lease Receivables under such Substitute Lease Contract, and delivered to the Indenture Trustee the original executed counterpart of the Substitute Lease Contract or (ii) purchased such prepaid Lease Contract and the related Equipment from the Indenture Trustee by remittance of the Purchase Price to the Servicer for deposit in the Collection Account in accordance with Section 3.03(a) hereof, PROVIDED, FURTHER, that purchases and substitutions of Lease Contracts pursuant to this subparagraph (a) shall comply with the requirements of Section 4.04 of the Standard Indenture Terms and the criteria set forth in Section 3.04 of the Lease Acquisition Agreement. (b) The Servicer shall permit the Issuer to (i) purchase any Defaulted Lease Contract or Delinquent Lease Contract by remittance by the Issuer to the Servicer, for deposit in the Collection Account in accordance with Section 3.03(a) hereof, of the Purchase Price for such Lease Contract or (ii) substitute for any Defaulted Lease Contract or Delinquent Lease Contract, a Substitute Lease Contract and the related Equipment and Lease Receivables under such Substitute Lease Contract, upon the delivery to the Indenture Trustee of the original executed counterpart of the Substitute Lease Contract and the related Lease Contract File; provided that, purchases and substitutions of Lease Contracts pursuant to this subparagraph (b) shall comply with the requirements of Section 4.04 of the Standard Indenture Terms and the criteria set forth in Section 3.04 of the Lease Acquisition Agreement. (c) Notwithstanding any other provision contained in the Servicing Agreement, the Servicer shall not, with respect to a Defaulted Lease Contract (i) negotiate or enter into a new lease with the Customer relating to the Equipment or the Customer's obligations under such Defaulted Lease Contract or (ii) allow the Customer thereunder to resume its rights under such Defaulted Lease Contract, unless the Issuer has repurchased or made a substitution for such Defaulted Lease Contract in the manner set forth in subsection (b) hereof. (d) In the event that the Company is required to repurchase or substitute a Lease Contract pursuant to Sections 2.04 or 3.03 of the Lease Acquisition Agreement, the Servicer shall permit such repurchase or substitution only in accordance with the terms of Sections 3.03 and 3.04 thereof. 11 15 ARTICLE 4 ACCOUNTINGS, STATEMENTS AND REPORTS 4.01 MONTHLY SERVICER'S REPORTS. Prior to the end of the first week of each month, the Servicer will provide to the Placement Agent and the Note Administrator a Computer Tape containing the information from which the Servicer will prepare the Monthly Servicer's Report. No later than 10:00 a.m., Minneapolis time, on each Determination Date, the Servicer shall deliver the Monthly Servicer's Report to the Issuer, the Back-up Servicer, the Indenture Trustee, and the Placement Agent, and the Indenture Trustee will deliver the Monthly Servicer's Report to each Noteholder, MBIA, and the Rating Agencies in the form attached as Exhibit A to the Specific Servicing Terms with respect to the activity in the immediately preceding Due Period. In the course of preparing the Monthly Servicer's Report, the Servicer shall seek direction from the Issuer as to remittance of any funds to be paid pursuant to Section 12.02(d)(xv) of the Standard Indenture Terms. Lease Contracts which have been substituted for or purchased by the Company or the Issuer shall be identified by Customer lease number on the Monthly Servicer's Report. On each Payment Date, the Servicer shall deliver to the Back-up Servicer and MBIA a Computer Tape in a format acceptable to the Back-up Servicer containing the information from which the Servicer prepared the Monthly Servicer's Report, as well as any additional information reasonably requested by the Back-up Servicer prior to such Payment Date. 4.02 FINANCIAL STATEMENTS; CERTIFICATION AS TO COMPLIANCE; NOTICE OF DEFAULT. (a) The Servicer (and the Company if the initial Servicer is no longer the Servicer) will deliver to the Indenture Trustee, the Placement Agent, MBIA, the Back-up Servicer, the Rating Agencies and to each Noteholder of Outstanding Notes (and, upon the request of any Noteholder, to any prospective transferee of any Note): (i) within 120 days after the end of each fiscal year of the Reported Companies, four copies of the Reported Companies' Financial Statements, all in reasonable detail and accompanied by an opinion of the Independent Accountants or a firm of independent certified public accountants of recognized national standing stating that such financial statements present fairly the financial condition of the Reported Companies (or, in the case of a successor Servicer, such successor Servicer's financial condition) and have been prepared in accordance with generally accepted accounting principles consistently applied (except for changes in application in which such accountants concur), and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as were considered necessary in the circumstances; (ii) with each set of Reported Companies' Financial Statements delivered pursuant to subsection (a)(i) above, the Servicer will deliver an Officer's Certificate stating that such officer has reviewed the relevant terms of the Indenture, the Lease Acquisition Agreement, the Insurance Agreement and the Servicing Agreement and has made, or caused 12 16 to be made, under such officer's supervision, a review of the transactions and conditions of the Reported Companies during the period covered by the Reported Companies Financial Statements then being furnished, that the review has not disclosed the existence of any Servicer Default or Servicer Event of Default or, if a Servicer Default or a Servicer Event of Default exists, describing its nature and what action the Servicer has taken and is taking with respect thereto, and that on the basis of such review the officer signing such certificate is of the opinion that during such period the Servicer has serviced the Lease Contracts in compliance with the procedures hereof except as disclosed in such certificate. (iii) immediately upon becoming aware of the existence of any condition or event which constitutes a Servicer Default or a Servicer Event of Default, a written notice describing its nature and period of existence and what action the Servicer is taking or proposes to take with respect thereto; (iv) promptly upon the Servicer's becoming aware of: (A) any proposed or pending investigation of it or the Issuer by any governmental authority or agency, or (B) any pending or proposed court or administrative proceeding which involves or may involve the possibility of materially and adversely affecting the properties, business, prospects, profits or condition (financial or otherwise) of the Servicer or the Issuer, a written notice specifying the nature of such investigation or proceeding and what action the Servicer is taking or proposes to take with respect thereto and evaluating its merits; (v) with reasonable promptness any other data and information with respect to the Servicer or the Lease Assets which may be reasonably requested from time to time, including without limitation any information required to be made available at any time to any prospective transferee of any Notes in order to satisfy the requirements of Rule 144A under the Securities Act of 1933, as amended; (vi) such other information as may be specified in the Specific Servicing Terms; and (vii) unless otherwise provided in the Specific Servicing Terms, quarterly, unaudited versions of the Reported Company's consolidating balance sheet and income statement and consolidated statement of sources and uses of cash. (b) On or before each April 15, so long as any of the Notes are outstanding, the Servicer shall furnish to MBIA and the Indenture Trustee an Officer's Certificate either stating that such action has been taken with respect to the recording, filing, and rerecording and refiling of any 13 17 financing statements and continuation statements as necessary to maintain the interest of the Indenture Trustee created by the Indenture with respect to the Trust Estate and reciting the details of such action or stating that no such action is necessary to maintain such interest. Such Officer's Certificate shall also describe the recording, filing, rerecording and refiling of any financing statements and continuation statements that will be required to maintain the interest of the Indenture Trustee in the Trust Estate until the date such next Officer's Certificate is due. 4.03 ANNUAL INDEPENDENT ACCOUNTANTS' REPORTS; ANNUAL FEDERAL TAX LIEN SEARCH. (a) Commencing with the fiscal year set forth in the Specific Servicing Terms, and each fiscal year thereafter, the Servicer at its expense shall cause the Independent Accountant (who may also render and deliver other services to the Servicer and its Affiliates) to prepare a statement to the Back-up Servicer, the Indenture Trustee, the Noteholders, MBIA, the Rating Agencies and the Placement Agent, dated as of the close of such fiscal year, to the effect that the Independent Accountant has examined the servicing procedures, manuals, guides and records of the Servicer, and the accounts and records of the Servicer relating to the Lease Contracts and any files or documentation pertaining to the Lease Assets (which procedures, manuals, guides and records shall be described in one or more schedules to such statement), that such Independent Accountant has compared the information contained in the Monthly Servicer's Reports delivered in the relevant period with information contained in the accounts and records for such period, and that, on the basis of such examination and comparison, nothing has come to the Independent Accountant's attention to indicate that the Servicer has not, during the relevant period, serviced the Lease Contracts in compliance with such servicing procedures, manual and guides and in the same manner required by the Servicer's standards and with the same degree of skill and care consistent with that which the Servicer customarily exercises with respect to similar Lease Contracts owned by it and otherwise in compliance with the Servicing Agreement, that such accounts and records have not been maintained in accordance with Section 4.04 hereof, that the information contained in the Monthly Servicer's Reports does not reconcile with the information contained in the accounts and records or that such certificates, accounts and records have not been properly prepared and maintained in all material respects or in accordance with the requirements of the Servicing Agreement, except in each case for (a) such exceptions as the Independent Accountant shall believe to be immaterial and (b) such other exceptions as shall be set forth in such statement. The Servicer shall deliver to the Back-up Servicer, the Indenture Trustee, the Noteholders and MBIA a copy of any such statement within 120 days of the close of the relevant fiscal year. (b) Promptly after the end of the Servicer's fiscal year, the Servicer, at its expense, shall cause a search of any and all federal tax liens against the affiliated group of which the Company and the Issuer are members within the meaning of Section 1504 of the Code (the "Affiliated Group") as of the end of such fiscal year to be conducted and shall deliver to the Back-up Servicer, the Indenture Trustee, the Noteholders and MBIA on or before January 31 of each year, commencing January 31, 1995, an officer's certificate signed by a Servicing Officer (i) stating that there are no outstanding federal tax liens filed against any member of the Affiliated Group or (ii) listing the outstanding federal tax liens filed against any member of such Affiliated Group. In the event any 14 18 such certificate shall disclose any such federal tax liens, the Servicer shall promptly thereafter, satisfy any such federal tax liens. 4.04 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION. (a) The Servicer shall provide to the Back-up Servicer, MBIA, the Indenture Trustee, or any Noteholder and their duly authorized representatives, attorneys or accountants access to any and all documentation regarding the Trust Estate (including the Series Lease Schedule) that the Servicer may possess, such access being afforded without charge but only upon reasonable request and during normal business hours so as not to interfere unreasonably with the Servicer's normal operations or customer or employee relations, at offices of the Servicer designated by the Servicer. (b) At all times during the term hereof, the Servicer shall keep available at its principal executive office for inspection by Noteholders, the Indenture Trustee, the Back-up Servicer and MBIA a list of all Lease Contracts then held as a part of the Trust Estate, together with a reconciliation of such list to that set forth in the Series Lease Schedules and each of the Monthly Servicer's Reports, indicating the cumulative addition and removal of Lease Contracts from the Trust Estate. (c) The Servicer will maintain accounts and records as to each respective Lease Contract serviced by the Servicer that are accurate and sufficiently detailed as to permit (i) the reader thereof to know as of the most recent Calculation Date the status of such Lease Contract, including any payments, Insurance Proceeds, Residual Proceeds and Recoveries received or owing (and the nature of each) thereon and (ii) the reconciliation between payments, Insurance Proceeds, Residual Proceeds or Recoveries on (or with respect to) each Lease Contract and the amounts from time to time deposited in the Collection Account in respect of such Lease Contract. (d) The Servicer will maintain all of its computerized accounts and records so that, from and after each Acquisition Date and the grant of the security interest in the related Lease Contract, Lease Receivables and Equipment to the Indenture Trustee, the Servicer's accounts and records (including any back-up computer archives) that refer to any such Lease Contract, Lease Receivable or Equipment indicate clearly that the Lease Contracts, Lease Receivables and Equipment are owned by the Issuer and pledged to the Indenture Trustee for the benefit of the Noteholders. Indication of the Indenture Trustee's interest in a Lease Contract will be deleted from or modified on the Servicer's accounts and records when, and only when, the Lease Contract has been paid in full, replaced with a Substitute Lease Contract or purchased by the Company or the Issuer or assigned to the Servicer pursuant to the Servicing Agreement. (e) Nothing in this Section 4.04 shall affect the obligation of the Servicer to observe any applicable law prohibiting disclosure of information regarding the Customers, and the failure to provide information otherwise required by this Section 4.04 as a result of such observance by the Servicer, shall not constitute a breach of this Section 4.04. 15 19 (f) All information obtained by the Indenture Trustee, the Back-up Servicer, MBIA or any Noteholder regarding the Customers and the Lease Contracts, whether upon exercise of its rights under this Section 4.04 or otherwise, shall be maintained by the Indenture Trustee, the Back-up Servicer, MBIA or the Noteholder, as applicable, in confidence and shall not be disclosed to any other Person, unless such disclosure shall not violate any applicable law or regulation or any proprietary rights of the Company, the Issuer or the Servicer or unless ordered by a court of applicable jurisdiction; provided that MBIA may make disclosures with respect to any of the above matters to the Rating Agencies, reinsurers or any entity having regulatory authority over MBIA. 4.05 OTHER NECESSARY DATA. The Servicer shall, on request of the Back-up Servicer, Indenture Trustee or MBIA, (i) on reasonable notice, furnish the Indenture Trustee or MBIA such data necessary for the administration of the Trust Estate as can be reasonably generated by the Servicer's existing data processing systems, and (ii) on and after a Servicer Event of Default, within 5 Business Days, provide the Indenture Trustee and the Back-up Servicer with access to the Servicer's existing data processing systems and any files or records with respect to the Lease Assets that it may have. 4.06 INDENTURE TRUSTEE TO COOPERATE. Upon payment (including through application of any prepayment) in full of any Lease Contract, the Servicer will notify the Indenture Trustee on the next succeeding Determination Date by written certification (which certification shall include a statement to the effect that all amounts received in connection with such payments in full which are required to be deposited in the Collection Account pursuant to Section 3.03 hereof have been so deposited) of a Servicing Officer and shall request delivery of the Lease Contract to the Servicer. Upon receipt of such delivery request, the Indenture Trustee shall within 10 days of such request by the Servicer release such Lease Contract to the Servicer. Upon release of such Lease Contract, the Servicer is authorized to execute an instrument in satisfaction of such Lease Contract and to do such other acts and execute such other documents as it deems necessary to discharge the Customer thereunder and, if applicable, release any security interest in the Equipment related thereto. The Servicer shall determine when a Lease Contract has been paid in full. Upon the written request of a Servicing Officer and subject to the Indenture Trustee's rights to indemnity contained herein and in the Indenture, the Indenture Trustee shall perform such other acts as reasonably requested in writing by the Servicer and otherwise cooperate with the Servicer in enforcement of the Noteholders' rights and remedies with respect to Lease Contracts. 16 20 ARTICLE 5 THE SERVICER AND THE ISSUER 5.01 SERVICER INDEMNIFICATION. (a) The Servicer shall indemnify and hold harmless the Indenture Trustee, the Issuer, the Back-up Servicer, MBIA, and the Trust Estate, for the benefit of the Noteholders, from and against any loss, liability, claim, expense, damage or injury suffered or sustained to the extent that such loss, liability, claim, expense, damage or injury arose out of or was imposed by reason of the failure by the Servicer to perform its duties under the Servicing Agreement or are attributable to errors or omissions of the Servicer related to such duties; PROVIDED, HOWEVER, that the Servicer shall not indemnify any party to the extent that acts of fraud, gross negligence or breach of fiduciary duty, by such party contributed to such loss, liability, claim, expense, damage or injury. (b) Fees and expenses of counsel shall be at the expense of the indemnified party unless the employment of counsel by such indemnified party has been authorized by the Servicer. The Servicer shall not be liable for any settlement of any action or claim effected without its consent. If the Servicer has made any indemnity payments to MBIA, the Indenture Trustee, the Back-up Servicer or the Noteholders pursuant to this Section and such party thereafter collects any of such amounts from others, such party will promptly repay such amounts collected to the Servicer, without interest. The provisions of this Section 5.01 shall survive any expiration or termination of the Servicing Agreement. 5.02 CORPORATE EXISTENCE; REORGANIZATIONS. (a) The Servicer shall keep in full effect its existence and good standing as a corporation in the Servicer State of Incorporation and will obtain and preserve its qualification to do business as a foreign corporation in each jurisdiction in which such qualification is or shall be necessary to enable the Servicer to perform its duties under the Servicing Agreement, except where the failure to so qualify would not have a material adverse effect on the Trust Estate or the ability of the Servicer to perform its duties hereunder; provided, however, that the Servicer may reincorporate in another state, if to do so would be in the best interests of the Servicer and would not have a material adverse effect upon the Noteholders or MIA. (b) The Servicer shall not (i) (other than pursuant to one or more additional lease pool financings) convey, transfer or lease substantially all of its assets as an entirety to any Person, or (ii) merge or consolidate with another Person, unless such Person or the merged or consolidated entity acquires substantially all the assets of the Servicer as an entirety, has adequate servicing skills and personnel, and executes and delivers to the Issuer, MBIA and the Indenture Trustee an agreement, in form and substance reasonably satisfactory to the Issuer, MBIA and the Indenture Trustee, which contains an assumption by such Person or entity of the due and punctual performance and observance of each covenant and condition to be performed or observed by the Servicer under the Servicing Agreement. The Servicer shall provide prompt written notice of such event to the Rating Agencies. 17 21 5.03 LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS. Except as provided in Section 5.01 hereof, neither the Servicer nor any of the officers, directors, employees or agents of the Servicer shall be under any liability for any action taken or for refraining from the taking of any action in its capacity as Servicer pursuant to the Servicing Agreement; provided, however, that this provision shall not protect the Servicer or any such person against any liability which would otherwise be imposed by reason of willful misconduct, bad faith or gross negligence (which includes negligence with respect to the duties of the Servicer explicitly set forth in the Servicing Agreement) in the performance of its duties hereunder. The Servicer and any officer, director, employee or agent of the Servicer may rely in good faith on any document of any kind PRIMA FACIE properly executed and submitted by any Person with respect to any matters arising hereunder. No implied covenants or obligations shall be read into the Servicing Agreement against the Servicer. In the event the Servicer performs any activities beyond the requirements of the Servicing Agreement, the Servicer shall have the option but will not be required to perform such activities in the future. 5.04 THE SERVICER NOT TO RESIGN. (a) The Servicer shall not resign from the duties and obligations hereby imposed on it except upon a determination by its Board of Directors that by reason of change in applicable legal requirements, with which the Servicer cannot reasonably comply, the continued performance by the Servicer of its duties under the Servicing Agreement would cause it to be in violation of such legal requirements, said determination to be evidenced by a resolution from its Board of Directors to such effect, accompanied by an Opinion of Counsel to such effect and reasonably satisfactory to the Indenture Trustee and MBIA. (b) No such resignation shall become effective until a successor Servicer shall have assumed the responsibilities and obligations of the Servicer hereunder. (c) Except as provided in Sections 5.02 and 6.01, the duties and obligations of the Servicer under the Servicing Agreement shall continue until the Servicing Agreement shall have been terminated as provided in Section 8.01 hereof, and shall survive the exercise by the Issuer or the Indenture Trustee of any right or remedy under the Servicing Agreement, or the enforcement by the Issuer, MBIA, the Indenture Trustee or any Noteholder of any provision of the Notes or the Servicing Agreement. 5.05 ISSUER INDEMNIFICATION. The Issuer shall indemnify and hold harmless the Servicer (but solely from the amounts to be distributed as set forth in Section 12.02(d)(xii) of the Standard Indenture Terms) from and against any loss, liability, expense, damage or injury suffered or sustained by the Servicer, including but not limited to any judgment, award, settlement, reasonable attorneys' fees and other costs and expenses incurred in connection with the defense of any actual or threatened action, proceeding or claim, which arises out of the Servicer's activities hereunder; provided, however, that the Issuer shall not indemnify the Servicer if the Servicer's activities constituted fraud, willful misconduct gross negligence (which includes negligence with respect to 18 22 the duties of the Servicer which are explicitly set forth in the Servicing Agreement) or breach of fiduciary duty by the Servicer. ARTICLE 6 SERVICING TERMINATION 6.01 SERVICER EVENTS OF DEFAULT. (a) Any of the following acts or occurrences shall constitute a Servicer Event of Default: (i) Any failure by the Servicer to deliver to the Indenture Trustee for payment to Noteholders any proceeds or payments received from a Customer or in respect of the Trust Estate and required to be so delivered under the terms of the Indenture and this Servicing Agreement that continues unremedied until 10:00 a.m., Minneapolis time, on the second following Business Day; provided, however, that the Indenture Trustee, upon receiving actual knowledge of such failure, shall give the Servicer prompt written, telecopied or telephonic notice of such failure. Notwithstanding the foregoing, any failure by the Indenture Trustee to deliver such notice to the Servicer shall not prevent the occurrence of a Servicer Event of Default; or (ii) Any failure by the Servicer to deliver a Monthly Servicer's Report pursuant to Section 4.01 hereof that continues unremedied until 10:00 a.m., Minneapolis time, the following Business Day; provided, however, that if the Servicer has not delivered the Monthly Servicer's Report by 12:00 noon, Minneapolis time, on the Determination Date, the Indenture Trustee shall give the Servicer notice of such failure. Notwithstanding the foregoing, any failure by the Indenture Trustee to deliver such notice to the Servicer shall not prevent the occurrence of a Servicer Event of Default; or (iii) Any failure by the Servicer to make a Servicer Advance pursuant to Section 3.04 hereof or to deposit any Purchase Price received by it that continues unremedied until 10:00 am., Minneapolis time, the following Business Day; provided, however, that if the Servicer has not made the Servicer Advance or deposited any Purchase Price received by it by 12:00 noon, Minneapolis time, on the Determination Date and the Indenture Trustee has received written notification from the Servicer by way of the Monthly Servicer's Report or otherwise that such Servicer Advance or Purchase Price is to be paid, the Indenture Trustee shall give the Servicer prompt written, telecopied or telephonic notice of such failure. Notwithstanding the foregoing, any failure by the Indenture Trustee to deliver such notice to the Servicer shall not prevent the occurrence of a Servicer Event of Default; or (iv) Any failure on the part of the Servicer duly to observe or perform in any material respect any other covenants or agreements of the Servicer set forth in 19 23 the Servicing Agreement or the Indenture, as the case may be, or if any representation or warranty of the Servicer set forth in Section 2.01 of the Servicing Agreement shall prove to be incorrect, which failure or breach (A) materially and adversely affects or could affect the interest or rights of MBIA, the Indenture Trustee, or the Noteholders and (B) continues unremedied for a period of 30 days after the date on which the Servicer becomes aware of such failure or breach or written notice of such failure or breach, requiring the situation giving rise to such breach or non-conformity to be remedied, shall have been given to a Servicing Officer of the Servicer by the Indenture Trustee, MBIA, the Issuer, or the Back-up Servicer, or to a Servicing Officer of the Servicer, MBIA and the Indenture Trustee by Holders of Notes representing not less than 25% of the Outstanding Principal Amount of all Series; or (v) Any assignment by the Servicer to a delegate of its duties or rights under the Servicing Agreement, except as specifically permitted hereunder, or any attempt to make such an assignment; (vi) The entry of a decree or order for relief by a court having jurisdiction in respect of the Servicer or a petition against the Servicer in an involuntary case under any federal bankruptcy laws, as now or hereafter in effect, or any other present or future federal or state bankruptcy insolvency or similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Servicer or for any substantial part of its property, or ordering the winding up or liquidation of the affairs of the Servicer and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (vii) The commencement by the Servicer of a voluntary case under any federal bankruptcy laws, as now or hereafter in effect, or any other present or future federal or state bankruptcy, insolvency, reorganization or similar law, or the consent by the Servicer to the appointment of or taking possession by a conservator, receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official in any insolvency, readjustment of debt, marshalling of assets and liabilities, bankruptcy or similar proceedings of or relating to the Servicer or relating to a substantial part of its property, or the making by the Servicer of an assignment for the benefit of creditors, or the failure by the Servicer generally to pay its debts as such debts become due or if the Servicer shall admit in writing its inability to pay its debts as they become due, or the taking of corporate action by the Servicer in furtherance of any of the foregoing; or (viii) The occurrence of a Trigger Event if the initial Servicer is the Servicer. (b) So long as a Servicer Event of Default shall not have been remedied within the period set forth in (i), (ii), (iii), (iv) or (vi) above, as applicable, or if a Servicer Event of 20 24 Default described in (v), (vii) or (viii) above occurs, the Indenture Trustee, at the direction of MBIA shall, or if there has been an MBIA Default, the Indenture Trustee, the Issuer, or the Back-up Servicer may, by notice (the "Seller Termination Notice") then given in writing to the Servicer and the Back-up Servicer, terminate all, but not less than all, of the rights and obligations of the Servicer under this Servicing Agreement. Notwithstanding the foregoing, a delay in or failure of performance under Section 6.01(a)(iv) hereof for a period of 30 or more days, shall not constitute a Servicer Event of Default if such delay or failure could not have been prevented by the exercise of reasonable diligence by the Servicer and such delay or failure was caused by acts of declared or undeclared war, public disorder, rebellion or sabotage, epidemics, landslides, lightning, fire, hurricanes, earthquakes, floods or similar causes. The preceding sentence shall not relieve the Servicer from using its best efforts to perform its obligations in a timely manner in accordance with the terms of the Servicing Agreement, and the Servicer shall provide the Indenture Trustee, the Back-up Servicer, MBIA, the Issuer and the Noteholders with prompt notice of such failure or delay by it, together with a description of its efforts to so perform its obligations. (c) Upon the occurrence of a Trigger Event, the Indenture Trustee shall, at the direction of MBIA, or if there has been an MBIA Default, the Indenture Trustee, the Issuer, or the Back-up Servicer may, by Servicer Termination Notice then given in writing to the Servicer and the Back-up Servicer, terminate all but not less than all of the rights and obligations of the Servicer under this Servicing Agreement. (d) On or after the receipt by the Servicer of a Servicer Termination Notice, all authority and power of the Servicer under this Servicing Agreement, whether with respect to the Notes or the Lease Contracts or otherwise, shall pass to and be vested in the successor Servicer appointed pursuant to Section 6.02 hereof, and, without limitation, such successor Servicer is hereby authorized and empowered to execute and deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and all documents and other instruments, and to do or accomplish all other acts or things necessary or appropriate to effect the purposes of such notice of termination, whether to complete the transfer of the Lease Contracts and related documents, or otherwise. The Servicer agrees to cooperate with the Indenture Trustee, the Back-up Servicer and the successor Servicer in effecting the termination of the responsibilities and rights of the Servicer hereunder, including, without limitation, the transfer to the successor Servicer for administration by it of all cash amounts that shall at the time be held by the Servicer for deposit, or have been deposited by the Servicer, in the Collection Account or the Advance Payment Account or thereafter received with respect to any of the Lease Contracts. To assist the successor Servicer in enforcing all rights under the Lease Contracts and the Insurance Polices to the extent they relate to the Lease Contracts, the outgoing Servicer, at its own expense, shall transfer its records (electronic and otherwise) relating to such Lease Contracts to the successor Servicer in such form as the successor Servicer may reasonably request and shall transfer the related Lease Contracts and Lease Contract Files (to the extent not held by the Indenture Trustee) and all other records, correspondence and documents relating to the Lease Contracts that it may possess to the successor Servicer in the manner and at such times as the successor Servicer shall reasonably 21 25 request. In addition to any other amounts that are then payable to the Servicer under the Servicing Agreement, the Servicer shall be entitled to receive reimbursements for any unreimbursed Servicer Advance made during the period prior to the delivery of a Servicer Termination Notice pursuant to this Section 6.01 which terminates the obligations and right of the Servicer under the Servicing Agreement. 6.02 BACK-UP SERVICER TO ACT; TAKING OF BIDS; APPOINTMENT OF SUCCESSOR SERVICER. (a)(i) Except as provided in Section 6.02(d) hereof, or as otherwise specified in the Specific Servicing Terms, on and after the time the Servicer receives a Servicer Termination Notice pursuant to Section 6.01 hereof, the Back-up Servicer shall, unless prevented by law, automatically and without further action be the successor Servicer. If the Back-up Servicer cannot serve as successor Servicer, another firm acceptable to MBIA shall be appointed. (ii) The successor Servicer shall be the successor in all respects to the Servicer in its capacity as Servicer under the Servicing Agreement and the transactions set forth or provided for herein and shall be subject to all the responsibilities, duties and liabilities relating thereto placed on the Servicer by the terms and provisions hereof, PROVIDED, HOWEVER, that the successor Servicer (x) shall not be required to make any Servicer Advance if such Servicer Advance would be prohibited by applicable law and (y) shall not be liable for any acts or omissions of the outgoing Servicer or for any breach by the outgoing Servicer of any of its representations and warranties contained herein or in any related document or agreement. With the prior written consent of MBIA (which consent shall not be unreasonably withheld), the successor Servicer may subcontract with another firm to act as subservicer so long as the successor Servicer remains fully responsible and accountable for performance of all obligations of the Servicer on and after the time the Servicer receives the Servicer Termination Notice. The successor Servicer shall be entitled to the Servicer Fee and any Additional Servicer Fee, subject to the taking of bids as described in subsection (b) below. (b) Solely for purposes of establishing the fee to be paid to the Back-up Servicer or such other entity specified in the Specific Servicing Terms, upon receipt of a Servicer Termination Notice, the Back-up Servicer shall solicit written bids, with a copy to MBIA (such bids to include a proposed servicer fee and servicing transfer costs) from not less than three entities experienced in the servicing of Lease Contracts similar to the Lease Contracts and that are not affiliates of the Indenture Trustee, the Back-up Servicer, the Servicer or the Issuer and are reasonably acceptable to MBIA. The Issuer may also solicit additional bids from other such entities. Any such written solicitation shall prominently indicate that bids should specify any applicable subservicing fees required to be paid from the Servicer Fee and that any fees and transfer costs in excess of the Servicer Fee shall be paid only pursuant to Section 12.02(d)(x) of the Standard Indenture Terms as the Additional Servicer Fee. The successor Servicer shall act as Servicer hereunder and shall, 22 26 subject to the availability of sufficient funds in the Collection Account pursuant to Section 12.02(d)(i) (up to the Servicer Fee) and Section 12.02(d)(x) (up to any Additional Servicer Fee) of the Standard Indenture Terms, receive as compensation therefor a fee equal to the fee proposed in the bid so solicited which provides for the lowest combination of servicer fee and transition costs, as reasonably determined by MBIA. (c) The Servicer, the Back-up Servicer, the Issuer, the Indenture Trustee and such successor Servicer shall take such action, consistent with the Servicing Agreement, as shall be necessary to effectuate any such succession. The Back-up Servicer (or the Indenture Trustee or the Noteholders if such Noteholders have previously reimbursed the Back-up Servicer and the Indenture Trustee therefor) shall be reimbursed for Transition Costs, if any, incurred in connection with the assumption of responsibilities of the successor Servicer, upon receipt of documentation of such costs and expenses and in accordance with Section 12.02(d)(x) of the Standard Indenture Terms. (d) Upon written notification to the Indenture Trustee that on any Determination Date following the solicitation of bids provided for in Section 6.02(b) hereof, the sum of the aggregate Implicit Principal Balance for all Lease Contracts plus the amount on deposit in the Cash Collateral Account less the Outstanding Principal Amount of all Series is less than the lesser of (1) $50,000 or (2) the proposed servicing transfer costs set forth in the lowest bid solicited pursuant to Section 6.02(b) hereof, then the Back-up Servicer shall be relieved of its obligation under Section 6.02(a)(i) hereof, and MBIA, or if there is an MBIA Default, the Issuer shall appoint a successor Servicer. In such event, MBIA shall be reimbursed for any Transition Costs incurred solely pursuant to Section 6.02(b) hereof in the manner and to the extent provided for in Section 12.02(d)(ix) of the Standard Indenture Terms. 6.03 NOTIFICATION TO NOTEHOLDERS. The Servicer shall promptly notify the successor Servicer (if specified in the Specific Servicing Terms), Back-up Servicer, MBIA, the Issuer and the Indenture Trustee of any Servicer Event of Default upon actual knowledge thereof by a Servicing Officer. Upon any termination of, or appointment of a successor to, the Servicer pursuant to this Article 6, the Indenture Trustee shall give prompt written notice thereof to the Noteholders at their respective addresses appearing in the Note Register. 6.04 WAIVER OF PAST DEFAULTS. The Indenture Trustee shall, at the direction of MBIA or at the direction of the Noteholders representing more than 50% of the Outstanding Principal Amount of all Series, on behalf of all Noteholders, with the written consent of MBIA, so long as there is no MBIA default, waive any default by the Servicer in the performance of its obligations hereunder and its consequences, other than a default with respect to required deposits and payments in accordance with Article 3 or a default of the type set forth in clause (vii) or (viii) of Section 6.01 (a) hereof, which waiver shall require the consent of each Noteholder and MBIA. Upon any such waiver of a past default, such default shall cease to exist, and any Servicer Event of Default arising therefrom shall be deemed to have been remedied for every purpose of this Servicing Agreement. No such waiver shall extend to any subsequent or other default or impair any right consequent thereon except to the extent expressly waived. 23 27 6.05 EFFECTS OF TERMINATION OF SERVICER. (a) Upon the appointment of the successor Servicer, the predecessor Servicer shall remit any Scheduled Payments, Advance Payments, Overdue Payments and any other payments or proceeds that it may receive pursuant to any Lease Contract or otherwise to the successor Servicer after such date of appointment. (b) After the delivery of a Servicer Termination Notice, the outgoing Servicer shall have no further obligations with respect to the management, administration, servicing, enforcement, custody or collection of the Lease Contracts and the successor Servicer shall have all of such obligations, except that the outgoing Servicer will transmit or cause to be transmitted directly to the successor Servicer, promptly on receipt and in the same form in which received, any amounts held by the outgoing Servicer (properly endorsed where required for the successor Servicer to collect them) received as payments upon or otherwise in connection with the Lease Contracts. The outgoing Servicer's indemnification obligations pursuant to Section 5.0l hereof will survive the termination of the Servicer but will not extend to any acts or omissions of a successor Servicer. 6.06 NO EFFECT ON OTHER PARTIES. Upon any termination of the rights and powers of the Servicer pursuant to Section 6.01 hereof, or upon any appointment of a successor Servicer, all the rights, powers, duties and obligations of the other parties under this Servicing Agreement, the Indenture, and the Lease Acquisition Agreement shall remain unaffected by such termination or appointment and shall remain in full force and effect thereafter. 24 28 ARTICLE 7 THE BACK-UP SERVICER 7.01 REPRESENTATIONS OF BACK-UP SERVICER. The Back-up Servicer makes the following representations and warranties: (a) The Back-up Servicer has been duly organized and is validly existing as a national banking association in good standing under the laws of the United States of America, with power and authority to own its properties and to conduct its business as such properties shall be currently owned and such business is presently conducted. (b) The Back-up Servicer has the power and authority to execute and deliver the Servicing Agreement and the Insurance Agreement and to carry out its terms; and the execution, delivery, and performance of the Servicing Agreement and the Insurance Agreement shall have been duly authorized by the Back-up Servicer by all necessary corporate action. (c) The Servicing Agreement and the Insurance Agreement shall constitute a legal, valid, and binding obligation of the Back-up Servicer enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors' rights in general and by general principles of equity, regardless of whether such enforceability shall be considered in a proceeding in equity or at law. (d) The consummation of the transactions contemplated by the Servicing Agreement and the Insurance Agreement and the fulfillment of the terms thereof shall not conflict with, result in any breach of any of the terms and provisions of, nor constitute (with or without notice or lapse of time) a default under, the articles of incorporation or by-laws of the Back-up Servicer, or any indenture, agreement, or other instrument to which the Back-up Servicer is a party or by which it shall be bound; nor result in the creation or imposition of any lien upon any of its properties pursuant to the terms of any such indenture, agreement, or other instrument; nor violate any law or any order, rule, or regulation applicable to the Back-up Servicer of any court or of any Federal or state regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Back-up Servicer or its properties. (e) There are no proceedings or investigations pending or, to the Back-up Servicer's best knowledge, threatened before any court, regulatory body, administrative agency, or other governmental instrumentality having jurisdiction over the Back-up Servicer or its properties (i) asserting the invalidity of the Servicing Agreement or the Insurance Agreement, (ii) seeking to prevent the consummation of any of the transactions contemplated by the Servicing Agreement or the Insurance Agreement, (iii) seeking any determination or ruling that might materially and adversely affect the performance by the Back-up Servicer of its obligations under, or the validity or enforceability of, the Servicing Agreement or the Insurance Agreement. 25 29 7.02 MERGER OR CONSOLIDATION OF, OR ASSUMPTION OF THE OBLIGATIONS OF, BACK-UP SERVICER. Any Person (a) into which the Back-up Servicer may be merged or consolidated, (b) which may result from any merger or consolidation to which the Back-up Servicer shall be a party, or (c) which may succeed to the properties and assets of the Back-up Servicer substantially as a whole, which Person in any of the foregoing cases executes an agreement of assumption to perform every obligation of the Back-up Servicer hereunder, shall be the successor to the Back-up Servicer under the Servicing Agreement without further act on the part of any of the parties to the Servicing Agreement. In the event that the resulting entity does not meet the eligibility requirements for the Indenture Trustee set forth in the Indenture, the Back-up Servicer, upon the written request of MBIA, shall resign from its obligations and duties under this Servicing Agreement. 7.03 BACK-UP SERVICER RESIGNATION. The Back-up Servicer shall not resign from its obligations and duties under this Servicing Agreement or the Insurance Agreement except (i) as provided in Section 7.02 above, or (ii) upon determination that the performance of its duties shall no longer be permissible under applicable law (any such determination permitting the resignation of the Back-up Servicer shall be evidenced by an Opinion of Counsel to such effect delivered to the Indenture Trustee and MBIA). Upon the Back-up Servicer's resignation or termination pursuant to Sections 7.02 or 7.03 hereof, the Back-up Servicer shall comply with the provisions of this Servicing Agreement until the acceptance of a successor servicer. 7.04 OVERSIGHT OF SERVICING. (a) Prior to each Payment Date, the Back-up Servicer shall review the Monthly Servicer's Report related thereto and shall determine the following: (i) that such Monthly Servicer's Report is complete on its face; (ii) that the amount credited to and withdrawn from any ACH Account maintained with the Back-up Servicer is the same as the amount set forth in the Monthly Servicer's Report as so credited; and (iii) that the amounts credited to and withdrawn from the Collection Account, Advance Payment Account and the Cash Collateral Account, and the balance of such account, as set forth in the records of the Indenture Trustee, are the same as the amount set forth in the Monthly Servicer's Report. (b) The Back-up Servicer shall, within 30 days of the receipt thereof, load the Computer Tape received from the Servicer pursuant to Section 4.01 hereof, make sure such Computer Tape is in readable form and shall calculate and check the following: (i) the Aggregate IPB as of the most recent Calculation Date; (ii) the Principal Distribution Amount for the most recent Payment Date; and (iii) the Annualized Default Rate and the Delinquency Rate for the related Due Period as set forth in the most recent Monthly Servicer's Report. 26 30 In addition, the Back-up Servicer shall confirm that the items set forth in the Monthly Servicer's Report, other than the items listed in the section entitled "Amounts Remitted by Servicer" are accurate based solely on a comparison to the Computer Tape referred to above. (c) In the event of any discrepancy between the information set forth in subparagraphs; (a) and (b) as calculated by the Servicer from that determined or calculated by the Back-up Servicer, the Back-up Servicer shall promptly notify the Servicer, the Indenture Trustee and MBIA of such discrepancy. If within 30 days of such notice being provided to the Servicer, the Back-up Servicer and the Servicer are unable to resolve such discrepancy, the Back-up Servicer shall promptly notify the Rating Agencies and the Holders of the Notes of such discrepancy. (d) Based solely on the information included in the Series Lease Schedule delivered on the Acquisition Date and the computer disks or tapes provided each Payment Date thereafter, the Back-up Servicer shall determine that any Substitute Lease Contracts delivered under Section 3.10 hereof satisfy the substitution criterion set forth in Section 3.04(b) of the Lease Acquisition Agreement and that the acquisition of such Substitute Lease Contracts do not violate the Concentration Limits set forth in the Specific Lease Acquisition Terms. (e) The Back-up Servicer will make a site visit to the offices of the Servicer within 60 days of the end of each calendar year for the purpose of reviewing the operations of the Servicer, commencing December 31, 1994. The reasonable out-of-pocket costs and expenses of the Back-up Servicer incurred in connection with the Servicing Agreement, including without limitation, the site visit referred to in the preceding sentence will be reimbursed to the Back-up Servicer by the Issuer or the Servicer. (f) Other than as specifically set forth elsewhere in the Servicing Agreement, the Back-up Servicer shall have no obligation to supervise, verify, monitor or administer the performance of the Servicer and shall have no liability for any action taken or omitted by the Servicer. (g) The Back-up Servicer shall consult fully with the Servicer as may be necessary from time to time to perform or carry out the Back-up Servicer's obligations hereunder, including the obligation to succeed at any time to the duties and obligations of the Servicer as servicer under Section 6.02 hereof. 7.05 BACK-UP SERVICER COMPENSATION. As compensation for the performance of its obligations as Back-up Servicer under the Servicing Agreement the Back-up Servicer shall be entitled to receive the Back-up Servicer Fee. 7.06 DUTIES AND RESPONSIBILITIES. (a) The Back-up Servicer shall perform such duties and only such duties as are specifically set forth in this Servicing Agreement, and no implied covenants or obligations shall be read into this Servicing Agreement against the Back-up Servicer; and (b) In the absence of bad faith or negligence on its part, the Back-up Servicer may conclusively rely as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Back-up Servicer and conforming to the 27 31 requirements of this Servicing Agreement; but in the case of any such certificates or opinions, which by any provision hereof are specifically required to be furnished to the Back-up Servicer, the Back-up Servicer shall be under a duty to examine the same and to determine whether or not they conform to the requirements of this Servicing Agreement. 28 32 ARTICLE 8 MISCELLANEOUS PROVISIONS 8.01 TERMINATION OF THE SERVICING AGREEMENT. (a) Except with respect to a particular party under Sections 5.02, 5.04, 6.01, 7.02 or 7.03 hereof, the respective duties and obligations of the Servicer, the Issuer, the Back-up Servicer and the Indenture Trustee created by the Servicing Agreement shall terminate upon the discharge of the Indenture in accordance with its terms; and the respective duties and obligations of the Indenture Trustee shall terminate with respect to the Indenture Trustee in the event the Indenture Trustee resigns or is replaced under Section 7.09 of the Standard Indenture Terms; provided, however, that no resignation or removal of the Indenture Trustee and no appointment of a successor Indenture Trustee shall become effective until the acceptance of appointment by the successor Indenture Trustee under Section 7. 10 of the Standard Indenture Terms. Upon the termination of the Servicing Agreement pursuant to this Section 8.01(a), the Servicer shall pay all monies with respect to the Lease Assets held by the Servicer and to which the Servicer is not entitled to the Issuer or upon the Issuer's order. (b) The Servicing Agreement shall not be automatically terminated as a result of an Event of Default under the Indenture or any action taken by the Indenture Trustee thereafter with respect thereto, and any liquidation or preservation of the Trust Estate by the Indenture Trustee thereafter shall be subject to the rights of the Servicer to service the Lease Receivables and to collect servicing compensation as provided hereunder. 8.02 AMENDMENTS. (a) The Servicing Agreement may be amended from time to time by the Issuer, the Servicer, the Back-up Servicer, and the Indenture Trustee, with the consent of MBIA but without the consent of any of the Noteholders, to cure any ambiguity, to correct or supplement any provisions herein that may be inconsistent with any other provisions herein and therein, as the case may be, or to add or amend any other provisions with respect to matters or questions arising under this Servicing Agreement; PROVIDED, HOWEVER, that such action shall not, as evidenced by an Opinion of Counsel, adversely affect in any material respect the interests of any Noteholder. (b) The Servicing Agreement may also be amended from time to time by the Issuer, the Servicer and the Back-up Servicer, with the consent of the Indenture Trustee, MBIA and the Holders of not less than 50% of the Outstanding Principal Amount of all Series, for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Servicing Agreement; PROVIDED, HOWEVER, that no such amendment shall, without the consent of each Noteholder, (i) alter the priorities with which any allocation of funds shall be made under the Servicing Agreement; (ii) permit the creation of any lien on the Trust Estate (other than the lien of the Indenture) or any portion thereof or deprive any such Noteholder of the benefit of this Servicing Agreement with respect to the Trust Estate or any portion thereof; or (iii) modify this Section 8.02 or Sections 3.03, 5.02, 5.04 or 6.01 hereof. (c) Promptly after the execution of any amendment, the Servicer shall send to the Indenture Trustee, MBIA, each Holder of the Notes and each Rating Agency a conformed copy of each such amendment. 29 33 (d) It shall not be necessary, in any consent of Noteholders under this Section 8.02, to approve the particular form of any proposed amendment, but it shall be sufficient if such consent shall approve the substance thereof. The manner of obtaining such consent and of evidencing the authorization of the execution thereof by Noteholders shall be subject to such reasonable regulations as the Indenture Trustee may prescribe. (e) Any amendment or modification effected contrary to the provisions of this Section 8.02 shall be void. 8.03 GOVERNING LAW. The Servicing Agreement shall be construed in accordance with the internal laws of the State of New York without regard to conflict of laws principles and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with such laws. 8.04 NOTICES. All demands, notices and communications hereunder shall be in writing and shall be delivered or mailed by registered or certified United States mail, postage prepaid, and addressed, in each case as provided in the Specific Servicing Terms. All notices and demands shall be deemed to have been given either at the time of the delivery thereof to any officer of the Person entitled to receive such notices and demands at the address of such Person for notices hereunder, or on the third day after the mailing thereof to such address, as the case may be. 8.05 SEVERABILITY OF PROVISIONS. If one or more of the provisions of the Servicing Agreement shall be for any reason whatever held invalid, such provisions shall be deemed severable from the remaining covenants and provisions of the Servicing Agreement, and shall in no way affect the validity or enforceability of such remaining provisions, the rights of any parties hereto, or the rights of the Indenture Trustee, MBIA or any Noteholder. To the extent permitted by law, the parties hereto waive any provision of law which renders any provision of the Servicing Agreement prohibited or unenforceable in any respect. 8.06 BINDING EFFECT. All provisions of the Servicing Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the parties hereto, and all such provisions shall inure to the benefit of the Noteholders. The Servicing Agreement may not be modified except by a writing signed by all parties hereto. 8.07 ARTICLE HEADINGS AND CAPTIONS. The article headings and captions in the Servicing Agreement are for convenience of reference only, and shall not limit or otherwise affect the meaning hereof. 8.08 LEGAL HOLIDAYS. In the case where the date on which any action required to be taken, document required to be delivered or payment required to be made is not a Business Day, such action, delivery or payment need not be made on such date, but may be made on the next succeeding Business Day. 8.09 ASSIGNMENT FOR SECURITY FOR THE NOTES. The Servicer and the Back-up Servicer understand that the Issuer will assign to and grant to the Indenture Trustee a security interest in all its right, title and interest to this Servicing Agreement. The Servicer and the Back-up Servicer consent to such assignment and grant and further agree that all representations, warranties, 30 34 covenants and agreements of the Servicer and the Back-up Servicer made herein shall also be for the benefit of and inure to the Indenture Trustee and all Holders from time to time of the Notes. 8.10 NO SERVICING ASSIGNMENT. Notwithstanding anything to the contrary contained herein, except as provided in Sections 5.02 and 5.04 hereof, this Servicing Agreement may not be assigned by the Issuer or the Servicer (except with respect to the appointment of a subservicer) without the prior written consent of MBIA and the Holders of Notes representing not less than 50% of the Notes Outstanding. 8.11 MBIA DEFAULT. If an MBIA Default occurs, MBIA's right to consent hereunder and to direct the Indenture Trustee shall be voided and, in such event, in all provisions of the Servicing Agreement wherein MBIA's consent or direction is required or permitted, the consent or direction of the Holders of Notes representing more than 50% of aggregate Notes Outstanding shall be required or permitted. 8.12 THIRD PARTY BENEFICIARY. MBIA is an express third party beneficiary to the Servicing Agreement. 31 EX-10.22 12 SPECIFIC TERMS AND CONDITIONS OF SERVICING 1 Exhibit 10.22 -------------------------------------------------------------------------- ROTHSCHILD ASSET-BACKED FINANCE CONDUIT V --------------------------------------- SPECIFIC TERMS AND CONDITIONS OF SERVICING among BLT FINANCE CORP. III ("Issuer") and BOYLE LEASING TECHNOLOGIES, INC. ("Servicer") and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION ("Back-up Servicer") and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION ("Indenture Trustee") --------------------------------------- Dated as of November 1, 1994 -------------------------------------------------------------------------- 2 SPECIFIC TERMS AND CONDITIONS OF SERVICING, dated as of November 1, 1994, by and among BLT Finance Corp. III, a Massachusetts corporation (the "Issuer"), Boyle Leasing Technologies, Inc., a Massachusetts corporation, as the Servicer hereunder (the "Servicer"), Norwest Bank Minnesota, National Association, a national banking association (the "Back-up Servicer") and Norwest Bank Minnesota, National Association, a national banking association, as trustee (the "Indenture Trustee") under the Indenture (defined below). PRELIMINARY STATEMENT This Specific Terms and Conditions of Servicing (the "Specific Servicing Terms") is intended to incorporate by reference all of the provisions of the Standard Terms and Conditions of Servicing attached hereto as Appendix 1 (the "Standard Servicing Terms"). Together the Specific Servicing Terms and the Standard Servicing Terms are intended to form the Servicing Agreement entered into in connection with the financing described below. The Issuer has entered into an Indenture dated as of November 1, 1994, (the "Indenture"), with the Indenture Trustee, the Back-up Servicer and the Servicer, pursuant to which the Issuer intends to issue one or more Series of Warehouse Notes and Term Notes (the "Notes"). The Issuer and Leasecomm Corporation (the "Company") have entered into a Lease Acquisition Agreement dated as of November 1, 1994 (the "Lease Acquisition Agreement"), providing for, among other things, the contribution and sale, from time to time, by the Company to the Issuer of all of its right, title and interest in and to certain Lease Assets which the Issuer is and will be pledging with the Indenture Trustee, and in which the Issuer will be granting to the Indenture Trustee a security interest, as security for the Notes. As a precondition to the effectiveness of such Lease Acquisition Agreement, the Lease Acquisition Agreement requires that the Servicer, the Issuer, the Indenture Trustee and the Back-up Servicer enter into this Agreement to provide for the servicing of the Lease Assets. In order to further secure the Notes, the Issuer is granting to the Indenture Trustee a security interest in, among other things, the Issuer's rights derived under this Servicing Agreement and the Lease Acquisition Agreement, and the Servicer agrees that all covenants and agreements made by the Servicer herein with respect to the Lease Assets shall also be for the benefit and security of the Indenture Trustee and all holders from time to time of the Notes. For its services under the Servicing Agreement, the Servicer will receive a Servicer Fee as provided herein and in the Indenture. For its services hereunder the Back-up Servicer will receive a Back-up Servicer Fee as provided herein and in the Indenture. 1 3 SECTION 1. SPECIFIC DEFINITIONS AND DESIGNATIONS "ACH Bank": None. "Back-up Servicer": shall initially mean Norwest Bank Minnesota, National Association. "Company": shall mean Leasecomm Corporation. "Indenture Trustee": shall initially mean Norwest Bank Minnesota, National Association. "Initial Net Worth Standard": shall mean that the Reported Companies' total net worth, consisting of stockholders' equity and subordinated notes, as reflected in the most recent Reported Companies' Financial Statements, is equal to at least $2,500,000. "Issuer": shall mean BLT Finance Corp. III. "Reported Companies": shall mean Boyle Leasing Technologies, Inc., Leasecomm Corporation, and their affiliates on a consolidated basis and in addition, any successor Servicer appointed pursuant to the Servicing Agreement. "Servicer": shall initially mean Boyle Leasing Technologies, Inc. "Servicer State of Incorporation": is Massachusetts. SECTION 2. THE SERVICER FEE The Servicer Fee shall be equal to $2.00 per Lease Contract, per Scheduled Payment; provided, however, that if the Servicer is anyone other than Boyle Leasing Technologies, Inc. or one of its affiliates, (i) the Servicer Fee shall be equal to the lesser of (a) $2.00 per Lease Contract, per Scheduled Payment or (b) the fee provided for in Section 6.02 of the Standard Servicing Terms and (ii) such successor Servicer shall be entitled to any Additional Servicer Fee as provided in the Standard Servicing Terms. SECTION 3. COMMENCEMENT OF INDEPENDENT ACCOUNTING REPORTS The annual independent accountants' reports referred to in Section 4.03 of the Standard Servicing Terms shall commence with the fiscal year ending on or after the date that the sum of the Aggregate Implicit Principal Balance and the balance in the Cash Collateral Account, if any, less the Notes Outstanding is less than the Required Collateralization Amount. SECTION 4. MODIFICATION OF CERTAIN STANDARD SERVICING TERMS (a) Notwithstanding the provisions of Section 3.03 of the Standard Servicing Terms, the Servicer shall remit collections to the Trustee for deposit in the Collection Account as described in Section 3.03 of the Standard Servicing Terms by 12:00 noon Minneapolis time on each Monday, or if such day is not a Business Day, on the next Business Day thereafter. 2 4 (b) The following sentence shall be added at the end of Section 6.04: Any default by the Servicer, other than a default with respect to required deposits and payments in accordance with Article 3 or a default of the type set forth in clause (vii) or (viii) of Section 6.01 (a), that is cured and for which no notice of default is received within 30 days shall automatically be deemed waived without necessity of a written waiver or consent. (c) The following sentence shall be added at the end of Section 7-04(e): The Back-up Servicer agrees that any site visit it makes pursuant to this Section will coincide with any site visit to be made by it to the Servicer or the Company pursuant to similar provisions under other servicing agreements to which they are a party. SECTION 5. BACKUP SERVICING AND REPLACEMENT EQUIPMENT (a) In consideration of the Servicing Fe e to be received by it pursuant to the Servicing Agreement, Boyle Leasing Technologies, Inc. hereby agrees to assume the lessor's obligation to provide replacement equipment under any "loss damage waiver" provision of a Lease Contract. (b) In consideration of the Back-up Servicer Fee to be received by it pursuant to the Servicing Agreement, Norwest Bank Minnesota, National Association hereby agrees that it will, upon the, occurrence of a Servicer Event of Default with respect to Boyle Leasing Technologies, Inc., assume the lessor's obligation to provide replacement equipment under any "loss damage waiver" provision of a Lease Contract. (c) Section 6.02(d) of the. Standard Servicing Terms is amended to add the following sentence at the end thereof Notwithstanding the foregoing, the Back-up, Servicer shall not be relieved of its obligations under Section 5(b) of the Specific Servicing Terms. (d) Section 7.04(e) of the Standard Servicing Terms is amended to add the following proviso at the end of the first sentence thereof: provided, however, that any such site visit shall be scheduled to coincide with the annual site visit required pursuant to the Servicing Agreement dated as of May 1, 1993, among BLT Finance Corp. II, Boyle Leasing Technologies, Inc. and Norwest Bank Minnesota, National Association. SECTION 6. ADDRESSES FOR NOTICES All demands, notices and communications referred to in Section 8.04 of the Standard Servicing Terms shall be addressed as follows: (a) if to the Issuer, at 950 Winter Street, Waltham, Massachusetts 02154, Attention: President; 3 5 (b) if to the Servicer, at 950 Winter Street, Waltham, Massachusetts 02154, Attention: President; (c) if to the Back-up Servicer, at 6th & Marquette Avenue, Minneapolis, Minnesota 55479-0069, Attention: Corporate Trust Department; (d) if to the Indenture Trustee, at 6th Street & Marquette Avenue. Minneapolis, Minnesota 55479-0069, Attention: Corporate Trust Department; (e) if to any Noteholder, at its address for notices specified in the Note Register; (f) if to the Rating Agencies, at Standard & Poor's, 26 Broadway, New York, NY 10004 and Moody's Investor Service, Inc., 99 Church Street, New York, NY 10007. Any of the Persons in subclauses (a) through (f) above may change the address for notices hereunder by giving notice of such change to the other Persons. Any change of address shown on the Note Register shall, after the date of such change, be effective to change the address for such Noteholder hereunder. SECTION 7. SERVICING AGREEMENT COMPRISED OF SPECIFIC SERVICING TERMS AND STANDARD SERVICING TERMS This Specific Servicing Terms incorporates by reference all of the provisions of the Standard Servicing Terms attached hereto as Appendix 1, which together form the Servicing Agreement. Notwithstanding the foregoing, if any provision of the Standard Servicing Terms conflicts with the provisions of the Specific Servicing Terms, the provisions of the Specific Servicing Terms shall control. SECTION 8. COUNTERPARTS This Servicing Agreement may be executed in one or more Counterparts all of which together shall constitute one original document. 4 6 IN WITNESS WHEREOF, the Issuer, the Servicer, the Back-up Servicer and the Indenture Trustee have caused this Servicing Agreement to be duly executed by their respective officers thereunto duly authorized as of the date and year first above written. NORTHWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Indenture Trustee By: /s/ Thomas S. Maple -------------------------------- Name: Thomas S. Maple Title: AVP NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Back-up Servicer By: /s/ Thomas S. Maple -------------------------------- Name: Thomas S. Maple Title: AVP BLT FINANCE CORP. III Issuer By: /s/ JG Hines -------------------------------- Name: JG Hines Title: VP BOYLE LEASING TECHNOLOGIES, INC. Servicer By: /s/ JG Hines -------------------------------- Name: JG Hines Title: VP 5 7 Exhibit A [Form of Monthly Servicer Report] 6 8 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================ To Norwest Bank Minnesota, National Association, as Trustee and Backup Servicer Determination Date: __________ MBIA as the Financial Guarantor Rothschild Inc., as Placement Agent Calculation Date: __________ __________ Dear Sirs: In accordance with Section 4.01 of the Standard Terms and Conditions of Servicing, dated November 1, 1994, by and among Boyle Leasing Technologies, Inc. as Servicer, Norwest Bank Minnesota, N.A., as Indenture Trustee and Backup Servicer and BLT Finance Corp. III, as Depositor ("W"), this letter constitutes the Monthly Servicer's Report for the Payment Date occurring on _______________ 16, 1994. Unless otherwise expressly noted, all data contained herein has been calculated as of the related Calculation Date and with respect to the related Due Period. Reference is also made to the Standard Terms and Conditions of Indenture, dated as of November 1, 1994 ("IN") and the Specific Terms & Conditions of Indenture, dated November 1, 1994 by and among the Depositor and the Servicer and the Indenture Trustee and Back-Up Servicer ("IN-SUP"). ACH ACCOUNT Beginning Balance maintained in the ACH Account: $____________ (equals Ending Balance from prior Servicer Report) Plus Credits to the ACH Account pursuant to the National Automated Clearing House System Scheduled and Overdue Payments $____________ Any other payments received under Lease Contracts $____________ Less amounts reversed out of the ACH Account $____________ Current ACH balance, net of reversals $____________ ____________ DEPOSITS INTO COLLECTION ACCOUNT FOR PRIOR DUE PERIOD DEPOSITS BY OR ON BEHALF OF THE SERVICER: Scheduled and Overdue Payments Received under the Lease Contracts directly by the Servicer $____________ Prepayments $____________ Residual Proceeds $____________ Recoveries $____________ Purchase Price received $____________ Guaranty Amounts $____________ Insurance Proceeds $____________ Servicer Advances $____________ Other amounts received by Servicer $____________ TOTAL $ ============ 9 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================ TRANSFERS MADE BY TRUSTEE TO THE COLLECTION ACCOUNT Transfer from Advance Payment Account (per 3.03(c)(ii) of SV) $____________ Advance Payment Account Investment Earnings (per 3.03(c)(i) of SV) $____________ Transfer from Cash Collateral Account (per 12.03(d)(i) and (d) (iii) of IN) $____________ Collection Account Investment Earnings $____________ Transfer from ACH Account (per 3.03(b) of SV) $____________ TOTAL $____________ Amounts from other sources (e.g. Depositor reimbursement of losses on eligible investments) $____________ TOTAL DEPOSITED INTO THE COLLECTION ACCOUNT $ (OTHER THAN PAYMENTS FROM MBIA) ============ Disbursements from Collection Account: PRIOR TO PAYMENT OF PRINCIPAL AND INTEREST DUE Service Fee $____________ Reinvestment Income (Collection Account and Advance Payment Account to Servicer) $____________ Reimburse Servicer and Back-up Servicer pursuant to Section 3.09 of SV (for costs associated with Defaulted Leases) $____________ Pay Servicer any tax amounts deposited in ACH account or Collection Account pursuant to Section 3.07 of SV $____________ Unreimbursed Servicer Advances now collected Nonrecoverable Servicer Advances $____________ Trustee Fee $____________ Backup Servicer Fee $____________ MBIA Warehouse Premium $____________ MBIA Premium (starting on November 16, 1995) $____________ Total $____________ TOTAL BALANCE AVAILABLE FOR NOTEHOLDER PAYMENTS $____________ DISBURSEMENTS TO NOTEHOLDER Total Interest Due (current and overdue) $____________ Warehouse Note Int ____________ @ ____________% Term Notes Series ___ Int ____________ Term Notes Series ___ Int ____________ 10 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================ Principal Distribution Amount $____________ Warehouse Note Prin ____________ Term Notes Series ___ Prin ____________ Term Notes Series ___ Prin ____________ Portion covered by MBIA Policy, (for every Payment Date before stated Maturity Date, only Interest Due; for Stated Maturity Date, Interest due plus outstanding Note Amount) $____________ Amounts received under the MBIA Policy (Article 8 of IN) $____________ TOTAL BALANCE AVAILABLE FOR OTHER PAYMENTS $____________ OTHER DISBURSEMENTS Deposit to the Cash Collateral Account to its Cash Collateral Account Required Balance (see below) $____________ Any Insurance Premiums pursuant to 12.02(d)(viii) of IN Unpaid MBIA amounts, if any $____________ Additional Servicer Fee, if any $____________ Successor Servicer, MBIA and Trustee Transition Costs specified in 12.02(d)(x) of IN $____________ Note Principal, if a Trigger Event has occurred (per 12.02(d)(xi) of IN) $____________ Warehouse Note Prin ____________ Term Notes Series ___ Prin ____________ Term Notes Series ___ Prin ____________ To the Servicer amounts specified in 12.02(d)(xii) of IN $____________ To the Servicer any unreimbursed Servicer Advances $____________ To MBIA, amounts specified in the Insurance Agreement $____________ To Trustee and Back-up Servicer, amounts specified in 12.02(d)(xiv) of IN $____________ To the Warehouse Lender, excess costs pursuant to 12.02(d)(xv) $____________ To the Depositor, any excess amount remaining in the Collection Account $____________ ENDING BALANCE IN THE ACH ACCOUNT, AFTER TRANSFER TO COLLECTION ACCOUNT $____________ ENDING BALANCE IN THE COLLECTION ACCOUNT $____________ SERVICER ADVANCES Amount of Scheduled Payments not received (includes both Scheduled Payments on Delinquent Leases as well as leases which have become Defaulted Leases in the current Monthly Period) $____________ Cumulative unreimbursed Servicer Advances as of the previous Servicer Remittance Date $____________ Plus Servicer Advances for the current Monthly Period $____________ Less Aggregate amount of Servicer Advance reimbursements for the current Monthly Period $____________ Cumulative unreimbursed Servicer Advances $____________ 11 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================ SERIES INITIAL IMPLICIT PRINCIPAL BALANCE 1994-A Series Initial IPB $24,849,171.25 _____________ 1994-B Series Initial IPB $_____________ Total Initial Series IPB $_____________ _____________
Series 1994-B NOTE INFORMATION Series 1994-A Warehouse Notes Total -------------- --------------- ----- Initial Note Balance $18,885,370.15 $____________ ___________ _____________ Less Principal Payment $_____________ $____________ ___________ Plus Warehouse Fundings since last Servicer Report $_____________ $____________ ___________ Ending Note Balance $_____________ $____________ ___________ MINIMUM REQUIRED COLLATERALIZATION AMOUNT: Required Collateralization Amount, as last calculated plus Warehouse Funding IPB times Holdback Rate, if any, on Payment Due $5,963,801.10 ____________ REQUIRED COLLATERALIZATION AMOUNT Floor Percentage 5.0% --- Collateralization Percentage 26% --- a) Minimum Required Collateralization Amount $____________ b) the greatest of A, B, or C $____________ A) Collateralization Percentage multiplied by the Aggregate Implicit Principal Balance $____________ B) Implicit Principal Balance of the 3 largest Customers $____________ C) Floor Percentage multiplied by the Initial Aggregate Implicit Principal Balance $____________ Required Collateralization Amount equals the lesser of a) or b) $___________ Actual overcollateralization amount: (Implicit Principal Balance plus Cash Collateral Account balance) minus the Outstanding Note Amount $___________
12 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================
CASH COLLATERAL ACCOUNT Beginning Balance $____________ Less Amount transferred to Collection Amount $____________ Plus Amount transferred from Collection Amount $____________ Investment Earnings on Cash Collateral Account $____________ Less amounts in excess of Cash Collateral Account Required Balance $____________ transferred to Depositor pursuant to Section 12.02(d)(ii) of IN $____________ Ending Balance $____________ Cash Collateral Account Factor 1.0067 Cash Collateral Account Required Balance: Sum of Product of (a) Required Collateralization Amount (see below) - (Implicit Principal Balance - ending Note balance) and (b) Cash Collateral Account Factor or zero if a Trigger Event has occurred + initial Deposit $____________ ADVANCE PAYMENT ACCOUNT Beginning Balance $____________ Plus amount received during the Monthly Period and Remitted by Servicer $____________ Plus Investment Earnings on Advance Payment Account $____________ Less amount transferred by Trustee to Collection Account $____________ Ending Balance $____________ IMPLICIT PRINCIPAL BALANCE DECREASE (As of Calculation Date, for all leases acquired through Implicit Determination Date) Principal Balance # of Contracts ----------------- -------------- Beginning Aggregate Implicit Principal Balance $24,849,171.25 14,552 -------------- ------------ Less Authorization of Scheduled Payments $_____________ ____________ Less Unamortized Implicit Principal balance of: Defaulted Contracts $_____________ ____________ Matured Contracts $_____________ ____________ Casualty Contracts (to Extent of Insurance Proceeds) $_____________ ____________ Plus IPB of Substitute Contracts transferred into the Trust $_____________ ____________ Less IPB of Substitute Contracts transferred out of the Trust $_____________ ____________ Less IPB of Contracts repurchased by the Seller of Transferor or purchased by the Servicer during the current Due Period $_____________ ____________ Other $_____________ ____________ Aggregate Implicit Principal Balance Decrease $_____________ ____________ Implicit Principal Balance prior to New Warehouse Fundings $_____________ ____________ Plus IPB of Lease Contracts acquired through Warehouse Fundings $_____________ ____________ Ending Aggregate Implicit Principal Balance $_____________ ____________
13 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================
TRIGGER EVENT CALCULATIONS: CALCULATE ANNUALIZED DEFAULT RATE: # of months after Servicer Advance made to declare Defaulted Lease: five Implicit Principal Balance of Defaulted Lease Contracts during current Due Period (including repurchased and Substitute Contracts) $____________ Less Recoveries received during the current Due Period $____________ Less Residuals $____________ Total $____________ Current Month Annualized Default Rate ______________ DETAIL ON DEFAULTED CONTRACTS (INCLUDING REPURCHASED OR SUBSTITUTED CONTRACTS): Implicit Principal Balance # of Contracts ------------------ -------------- Servicer did not make Advance $______________ ____________ Prior Advance Deemed Unrecoverable $______________ ____________ Prior Advance not Reimbursed by Deadline $______________ ____________ Total Defaulted Contracts $______________ ____________ CALCULATE DELINQUENCY RATE: Implicit Implicit Number of Delinquencies Principal Balance Principal Balance Contracts ----------------- ----------------- --------- 31-60 days delinquent $_____________ ____________ ____________ 61-90 days delinquent $_____________ ____________ ____________ 91-120 days delinquent $_____________ ____________ ____________ 121-150 days delinquent $_____________ ____________ ____________ 151-180 days delinquent $_____________ ____________ ____________ 180 + days delinquent $_____________ ____________ ____________ Delinquency Rate $_____________ ____________ ____________
14 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================
CHECK NOTE DEFAULT AND DELINQUENCY TRIGGERS: Monthly Period Sum of Current & Prior to Average Immediately Immediately Immediately Past 3 Months Preceding Month Current Month Preceding Month Preceding Month ------------- ---------------- ------------- --------------- --------------- Annualized __________ __________ __________ __________ __________ Default Rate __________ __________ __________ __________ __________ Delinquency Rate __________ __________ __________ __________ __________ Curr Mo + Current 3 Mo Avg. Last Mo Month --------- ------- ----- WAREHOUSE FUNDING PERIOD TRIGGER EVENTS: Max. Def. Rates: 6.0% ---- Max. Delinq. Rate: 12.0% ---- OVERALL TRIGGER EVENTS: Max. Def. Rates: 7.0% 21.0% 21.0% ---- ---- ---- Max Delinq. Rate: 14.5% ---- NET WORTH: Warehouse Funding Period New Worth Minimum $4,600,000.00 ------------- Overall Net Worth Minimum $4,000,000.00 ------------- Boyle Leasing Technologies, Inc.'s Net Worth $__________ (as of _________, 1994 (un)audited) DETAIL ON SUBSTITUTIONS AND PURCHASES: Cumulative Implicit Cumulative Principal Balance Implicit Implicit Divided by Initial Principal Balance Principal Balance Implicit Principal Balance ----------------- ----------------- -------------------------- Leases Terminated or Prepaid and Substituted per 4.04(d) of IN $_____________ $_____________ ___________% (<10%) Delinquent Lease Contracts, Substituted or Purchased per 4.04(d) of IN $_____________ $_____________ ___________% (<20.0%) Defaulted Lease Contracts, Substituted or Purchased per 4.04(d) of IN $_____________ $_____________ ___________% (<6.5%)
15 ================================================================================ BOYLE LEASING TECHNOLOGIES, INC. DEAL #: 1994-A MONTHLY SERVICER REPORT MONTH: ______, 19___ ================================================================================ TRANSITION COSTS: Cumulative Transition Costs Paid to Date pursuant to 12.02(d)(x) of IN $____________ Explanatory Notes: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Contact: _______________________ Phone: _______________________ The undersigned officer of the Servicer hereby certifies that the information contained in this Monthly Servicer Report is true and accurate in all respects. __________________________ Servicer By: ______________________ Name: Title: EX-23.1 13 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of our report dated February 27, 1998, on our audits of the consolidated financial statements of Microfinancial Incorporated. We also consent to the references to our firm under the captions "Experts," "Summary Consolidated Financial Operating Data," and "Selected Consolidated Financial and Operating Data." /s/ PRICEWATERHOUSECOOPERS LLP July 31, 1998 Boston, Massachusetts -----END PRIVACY-ENHANCED MESSAGE-----